We have provided in alphabetical order some of the complex terms and explanations referred to by private market professionals in their promotional and legal documentation. We are of course on hand to answer any questions about these terms and how they relate to your investments: email@example.com
Capital Call / Drawdown
The private equity model for investing involves fund managers "calling" capital from investors every time they need it to purchase an asset, typically with deadlines of 10 business days. This is in contrast to investing in the public markets, where 100% of an investor's capital is typically invested at day 1. To manage this process better for investors, we call a minimum of 25% of an investor's capital Commitment (see below) at day 1, so that we can provide cash to the fund manager easily when they need it to purchase an investment. We then call the remaining capital from investors at periodic intervals thereafter, again so that we have cash ready to meet Capital Calls from fund managers. The investment period of funds is typically 4 years, over which the fund manager calls capital from investors to invest in assets.
Carried Interest - "Carry"
Carry is another term for profit share, specifically the percentage of profit that goes to the fund manager as an incentive for them to achieve higher returns for investors. Carry is usually 20% of generated profits and is not paid out to fund managers until investors achieve a level of return. This Preferred Return is typically set at 8%, so investors need to have earnt an 8% return before fund managers are allowed to receive their share of profits. The Preferred Return is therefore a tool to protect investors, which is defined in the fund's legal documentation.
Closings refer to the different stages that capital is raised from investors by fund managers. A First Close is the stage where the first lot of capital is raised by a fund from investors, and marks the legal point in which the fund can start investing. A Final Close refers to the point where the last lot of capital is raised by a fund from investors and marks the point where no more investors can invest in the fund formally - see Secondaries below, for an explanation of how investors can access a private fund after the Final Close. Between the First and Final Closes a fund can hold Interim Closes, to enable funds to raise capital from investors. Closes are legal and regulatory events unique to private funds, and allow for investors to be legally registered and allocated shares in funds.
When a fund manager finds an asset that is too large for its fund to invest in it all, a fund manager will allow investors to come and invest in a piece of that asset. This is referred to as a Co-Investment, where investors invest in a single asset alongside a fund manager. Investors typically have a passive role to the fund manager in a Co-Investment deal, and will likely be offered lower fees to do so that they would normally be subjected to in a fund investment.
A Commitment is another term for investment, in which an investor pledges an amount they want to invest in a fund. It is referred to as a commitment rather than an investment, because an investor effectively commits to provide the pledged capital amount to a fund manager over the fund's investment period. We outlined above how investors fund their commitments over a multi year period, rather than providing all at day 1.
Cash is typically returned to investors when a fund manager sells an asset in its portfolio, which is what is generally referred to as a distribution. If a private fund's strategy is focused on income generating assets rather than increasing an asset's value, then a fund will distribute income from those assets to investors, typically on a quarterly basis.
This should be understood as an interest charge that new investors pay to existing investors in a fund, to receive the benefits of current assets in a fund. The scenario usually plays out in these steps: a fund manager raises money from investors to create a portfolio of x assets; new investors are welcomed into the fund; new investors pay a % interest charge on their pro rata share of capital invested by the fund manager to date, applied to the period of when those first investments were made and when the new investors were welcomed into the fund.
Feeder Fund - "Feeder"
This refers to the legal entity that we structure to aggregate our investors into the client fund. We do this so that we present our client fund with a single investor ticket, rather than 100s of small investor tickets, which would be too hard for fund managers to manage on top of their other investor commitments.
This is the process by which fund managers raise capital from investors to purchase investment assets. Fundraising usually occurs during a defined period, typically 1 or 2 years. See "Closing" for a description of the different stages of fundraising that fund managers undergo. This period is the main formal mechanism by which investors can get access to a fund.
General Partner - "GP"
For all intents and purposes this is the fund manager. Partners is a legal term defining the relationship between investors and the fund manager, both of which are Partners in closed ended funds (otherwise legally referred to as Limited Partnerships). The distinction between these partners is that a General Partner takes an active role in managing the fund, i.e investing it, whereas the investors take a passive role and hence are Limited Partners.
This is the level of investment that an investor intends to make in a fund. It is called a Commitment, because an investor contractually commits to providing a fund manager with x amount of capital over the investment period of the fund. If an investor commits £25,000 to a fund as per the minimum amount via our platform, they are in reality providing c.£6,000 of that commitment every year for 4 years - which is the typically investment period for private funds. Some private funds have accelerated investment periods of 2 years, in which investors will provide c.£12,500 of their commitment each year. What may seem like a large amount therefore, becomes more affordable given that all of the commitment is not funded by the investor at day 1, allowing for long term savings plans to be developed.
This is the legal limit of equity that a fund is allowed to raise from investors as stated in the fund's documentation. It is set so that fund managers remain disciplined and do not raise too much equity beyond what they can sufficiently invest. This is another tool to protect investors.
This is a measure of return, otherwise referred to as Money On Investment Capital, Equity Multiple, and Cash Multiple. An example of this is 2.0x, which means that the fund has made a 100% return for investors, or has doubled investors' money.
Internal Rate of Return - "IRR"
The proper definition of the IRR is the discount rate that makes the net present value of an investment equal zero. In a practical sense, because private equity investing involves many different cashflows being sent between investors and fund managers, the IRR produces a return based on the weighted average of these cashflows. The IRR should therefore be understood as an annual return that the investor receives or is expected to receive from an investment.
This is a term used to describe the net returns to investors. Because it usually takes a few years for value to be created by fund managers for their portfolios, the costs usually outweigh the gains in early years. Thus the net returns start negative and end positive. The graph below illustrates this J-Curve shape effect nicely:
This is a legal term in the fund's documentation that refers to the key investment people that a fund has determined necessary to deliver its targeted returns. Key Person clauses are set to protect investors in the event that a fund's Key Persons leave. These clauses typically stipulate that a fund cannot make any new investments if these investment professionals leave.
For all intents and purposes these are the investors in a fund. Partners is a legal term defining the relationship between investors and the fund manager, both of which are Partners in closed ended funds (otherwise legally referred to as Limited Partnerships). The distinction between these partners is that a Limited Partner takes an passive role in the fund, i.e investing in it, whereas the fund manager takes an active role and hence are General Partners.
Limited Partnership Agreement - "LPA"
This is the legal document that governs the relationship between investors and the fund manager. It contains all the terms that investors abide by and also the processes which fund managers have to adhere to. Fund managers often produce condensed Term Sheets containing the key information from this document.
This is the fee that fund managers charge investors for managing the fund, which is expressed as an annual percentage rate but charged quarterly to investors. Fund managers may at times request capital from investors to pay this fee, but it is usually bundled in with a cash request (Capital Call) from investors to purchase an investment asset. For traditional private equity funds, this fee is typically 2.0%, but 1.5% for real asset and credit funds. Investors should be aware that this fee does not cover expenses, and that fund managers add fund related expenses on top of this fee, such as administration, travel, and legal costs related to investing. Fund managers also charge a performance fee, which is an important incentive to drive performance for investors - see Carried Interest. Investors through our platform should be aware that there are also fees and expenses that we charge on top of this for facilitating your investment, although we do not charge a performance fee.
Private Placement Memorandum - "PPM"
This is the official marketing document for the fund, where investors can find information on the fund's strategy, as well as key legal information and terms from the Limited Partnership Agreement. It also includes information that fund managers are obliged to disclose to investors for regulatory purposes, such as the risks involved with their investment.
This is a broad term relating to an investment strategy that involves the investment into an unlisted asset that is not listed on an exchange, therefore not easily available to the public. The converse of this is Public Markets, where listed assets like stocks and bonds are easily available to the general public. Private Markets includes strategies such as Private Equity, Venture Capital, Real Estate, Infrastructure, Private Credit/Debt, and niche Real Assets, such as whisky, wine, and fine art.
Private Equity is a sub strategy within Private Markets that essentially involves the purchase of private assets, like unlisted companies, but can also include real estate and infrastructure assets. The distinction between Private Equity and perhaps Venture Capital is that although they are both essentially investments into private companies, the former involves much more active management, and typically a lot of debt/leverage. Venture Capital on the other hand is much less active and involves no debt, as young companies often don't have the cashflow to sustain debt interest payments. Private Equity can therefore include real estate and infrastructure assets if the fund managers are taking an active role to develop or refurbish those assets with the use of debt for the purpose of generating capital growth. Traditional Real Asset strategies focused on real estate/property and infrastructure would be more interested in the income from those assets, and would not be taking an active role with a lot of debt to improve the quality of the assets.
Secondary Market - "Secondaries"
Private assets are typically illiquid, meaning that investors cannot exit their position and sell their fund/investment stake easily like with a stock or bond. The Secondary Market is a revelation that involves the private sale and transfer of investor stakes between buyers and sellers to help them exit positions that they typically would not be able to do so through the fund manager. The market has grown over the years with many brokers facilitating this process. Secondaries has even developed into its own investment strategy as a subset of Private Markets, with fund managers raising capital to buy fund stakes from investors needing an exit/liquidity. These fund managers make a profit from buying these stakes at a discount and holding them until they receive the projected distributions, hopefully more than what they paid for. The Mara platform will help investors sell their fund stakes to other platform users via our own Secondary Market, subject to holding their fund stakes for a 1 year period and also other investors actually wanting to buy their stakes, which may not always be the case.
Special Purpose Vehicle - "SPV"
These are shell entities that are used to house assets. SPVs are usually created to isolate financial risk of a particular asset away from other assets. They may also be created to give the asset preferential tax treatment.