Acquisition
Any deal where the bidder ends up with 50% or more of the target is called an acquisition. A bidder is the entity that makes the purchase or the offer to purchase. The target is the entity being purchased, or the entity in which a stake is being purchased. The vendor is the entity that sells or disposes of the target entity.

BIMBO
A combination of management buyout and buyin where the team buying the business includes both existing management and new managers.

Bridge finance
A short-term investment made by the private equity investor in a portfolio company pending syndication of the investment or agreement of debt financing.

Buyout fund
A limited partnership set up for the purposes of funding institutional or management buyouts.

Carried interest or carry
Equivalent to a performance fee, this represents the share of a private equity fund's profit that will accrue to the General Partners (see also Hurdle Rate).

Debt
This may include bank loans, overdrafts, and lease financing and may be long or short term, secured or unsecured. The lender receives interest at an agreed rate and in the event that this is not paid may be entitled to take control of and sell certain assets owned by the company. A lender does not, however, generally have a share in the ownership of the business.

Development capital
Also known as expansion capital. This is financing used for expansion of an already established company.

Due diligence
This is one of the main processes which takes place before a transaction (e.g. MBO/MBI) is completed. The aim is to ensure that there is nothing which contradicts the financier's understanding of the current state and potential of the business. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountants report (trading record, net asset and taxation position), legal due diligence (implications of litigation, title to assets and intellectual property issues), management due diligence and environmental due diligence.

EBIT
Earnings before interest and tax.

EBITDA
Earnings before interest, tax, depreciation and amortisation. EBITDA may be a measure of cash flow. By excluding interest, taxes, depreciation and amortisation the amount of money a company is bringing in can be clearly seen prior to considering the company's financial structure.

Equity
Equity is the term used to describe shares in a business conveying ownership of that business. The shareholders may be entitled to dividends. If a business fails, the shareholders will only receive a distribution on winding up after the lenders and creditors have been paid. An equity investment, therefore, has a higher risk attached to it than that facing a bank lender and thus the return that the shareholders expect on their money is typically higher.

Exit (Realisation)
The point at which the institutional investors realise their investment. Private equity investors may, depending on the business and their own situation, look to achieve an exit in anything from a few months to 10 years. Exits generally occur via trade sales, secondary management buy-outs and flotation on the stock market or by write-off if the investment ends in receivership.

General Partners
These are the private equity firms, who select investments, structure deals, monitor investments and design the appropriate exit strategies on behalf of the Limited Partners (see Limited Partnership).

Goodwill
The difference between the price which is paid for a business and Net Asset Value.

Hurdle rate
This is the minimum return to investors to be achieved before carried interest becomes payable to the General Partner. A hurdle rate of 8% means that the private equity fund needs to achieve a return of at least 8% per annum before the profits are shared according to the carried interest arrangement.

Institutional buyout (IBO)
This is when a private equity house acquires a business directly from the vendor, following which the incumbent and/or incoming management will be given or acquire a stake in the business.

Information memorandum
A document circulated to potential investors setting out the strategy and other important commercial features of the target company and used for marketing the target company to potential acquirers.

IPO
Initial Public Offer. Shares in a company have been placed on a stock exchange. An IPO is always just the first time a company's shares are listed - if a company has a listing on another market or in another country, then the listing is not an IPO, merely a secondary, or additional, listing.

IRR
Internal rate of return. The average annual compound rate of return received by an investor over the life of their investment. This is a key indicator used by institutions in appraising their investments. A second indicator would be the money multiple.

Joint Venture
Two or more companies that form a new venture.

Limited Partnership
Most private equity firms structure their funds as limited partnerships. Investors represent the limited partners and private equity the general partners.

Management buyin (MBI)
In a management buyin, funds are provided to enable an external manager or group of managers to buy into a company. They will have expertise in that particular industry but not have been running the business up to that point.

Management buyout (MBO)
In a management buyout, funds are provided, typically by a private equity house and bank to enable current operating management to acquire a business or a division of that business.
A management buyout creates opportunities for both existing owners or prospective new management. For existing owners it is a proven method of releasing capital in a business or of disposing of a non-core division. For ambitious managers it creates a chance for them to have a financial stake in the business.

Merger
A true merger is actually quite rare. Many acquisitions are described as mergers but in a true merger, there is a one-for-one share swap, for shares in the new company. If the swap is not on equal terms then this is an acquisition.

Mezzanine finance
This is often used to bridge the gap between the secured debt a business can support, the available equity and the purchase price. Because of this, and because it normally ranks behind senior debt in priority of repayment, unsecured mezzanine debt commands a significantly higher rate of return than senior debt and will derive return from a yield and may have an equity interest. It ranks behind more formal borrowing contracts and is thus referred to as 'subordinated' or 'junior' debt.

Money multiple
The multiple of initial funds invested, compared with the funds realised.

Net Asset Value
This is the value of the company based on the valuation of the assets less any liabilities that it has in its balance sheet.

Newco
A new company formed to effect a buyout by acquiring the operating subsidiaries.

Ordinary shares
Ordinary shareholders carry full rights to participate in the business through voting in general meetings. They are entitled to payment of a dividend out of profits and ultimately repayment of capital in the event of liquidation, but only after other claims have been met. As owners of the company the ordinary shareholders bear the greatest risk, but also enjoy the fruits of corporate success in the form of higher dividends in the business and growth in equity value.

PBIT
Profit before interest and tax.

PE ratio
The Price Earnings ratio is one of the most commonly used measures of value in financial circles. It expresses the value in terms of a multiple of post tax profits. For any company quoted on the Stock Exchange this figure is published daily in the Financial Times.

Portfolio company
A company in which the limited partnership invests.

Preference shares
Non equity shares ranked after debt and before equity. They usually carry no voting rights and have preferential rights over ordinary shareholders regarding dividends and ultimate repayment of capital in the event of liquidation.

Private equity
Private equity is medium to long-term finance provided in return for an equity stake in unquoted companies. Private equity is committed, long-term and risk sharing. A strong private equity partner will provide a company with strategic and financial support in order to maximise shareholder value. Private equity makes managers into owners, giving them the freedom, focus and finance to enable them to revitalise their companies and take them onto their next phase of growth.

Privatisation
A government, council or other state-owned entity sells a company or stake in a company that it owns to private (non government) investors. The company, or part of the company, moves from public to private ownership.

Public to private (P-2-P)
This involves the management or a private equity provider making an offer for the shares of a publicly quoted company, then taking the company private.

Rescue/turnaround
To finance a company in difficulties or to rescue it from receivership.

Reverse takeover
An unlisted company acquires a smaller listed company, thus achieving a stock market listing 'through the back door'. The acquisition is carried out by the listed company issuing new shares in order to acquire the unlisted company.

Secondary buyout
When a private equity firm acquires existing shares in a company from another private equity firm or from another shareholder or shareholders.

Senior debt
Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up.

Start-up capital
Capital used to establish a company from scratch or within the first few months of its existence.

Subordinated loan
Loans which rank after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender's point of view. Mezzanine finance is an example of a subordinated loan.

Sydicated investment
Where a lead investor may work with other financiers to share the investment. This process is known as syndication.

Trade sale
A common method of exit is a sale to a trade buyer. This can either allow management to withdraw from the business, or it may open up the prospect of working in a larger enterprise.

Vendor finance
Can either be in the form of deferred loans from, or shares subscribed by, the vendor. The vendor may well take shares alongside the management in the new entity. This category of finance is generally used where the vendor's expectation of the value of the business is higher than that of management and the institutions backing them.

Venture capital
Equity finance in an unquoted, and usually quite young, company to enable it to start up, expand or restructure its operations entirely.

Warranties and indemnities
Legal confirmation given by the seller, regarding matters such as tax or contingent liabilities, to assure the buyer that any undisclosed liabilities that subsequently come to light will be settled by the seller.

Yield
The annual return on investment from interest and dividends, excluding any capital gain element. Calculated by dividing the gross dividend by the share price and expressed as percentage.