Private equity is believed to have originated in the 1940s with the formation of American Research and Development Corporation (ARDC), which is considered the first true venture capital firm.

You should read last week’s newsletter for everything you need to know that happened across IB, AM, S&T, PE, HF & VC most recently.

IN THIS ARTICLE

• Private Equity

• Leveraged Buyout

• Secondaries

• Mezzanine Financing

• Venture Capital

• J-Curve Effect

• Limited Partners (LPs)

• General Partners (GPs)

• Fund of Funds (FoFs)

• Carried Interest

• Co-Investments

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10 Private Equity Terms Simplified And Explained In Basic English

1. Private Equity:

Private equity is the opposite of public equity. Public equity means you can invest in publicly traded companies like Tesla or Apple.

Private equity, on the other hand, focuses on investing in private companies that aren't accessible to the general public.

2. Leveraged Buyout:

Leverage involves borrowing money to increase the size of your investment.

A leveraged buyout is when an investment firm acquires an existing company using lots of borrowed money.

3. Secondaries:

Private equity investments usually span 5-20 years.

But if an investor wants to exit earlier, they can turn to the secondary market to sell their stake.

4. Mezzanine Financing:

Imagine a ladder with debt at the top and equity at the bottom. Mezzanine financing sits in the middle, combining elements of both.

It allows a company to convert debt into equity if needed, striking a balance between the advantages of both.

5. Venture Capital:

Venture capital involves risky investments in startups and scale-ups. The funding is provided in exchange for equity.

The high risk nature of these investments is accompanied by the potential for substantial returns.

6. J-Curve Effect:

This illustrates the path of returns in a private equity fund over time.

Picture a J-shaped curve - it starts low, then dips due to initial costs, and eventually rises as private equity investments mature. That's the 'J-curve'.

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7. Limited Partners (LPs):

Limited Partners are the individuals or institutions that contribute capital to a private equity fund.

They have limited liability and share in the profits and losses of the fund.

8. General Partners (GPs):

General Partners manage the day-to-day operations of the fund.

They identify, source, and transact deals, ensuring the fund's success and generate returns for the limited partners.

9. Fund of Funds (FoFs):

Fund of Funds invest in multiple private equity funds.

Each fund within the FoF invests in multiple private equity deals.

10. Carried Interest:

Carried interest, also known as 'carry', is the performance fee that the General Partners receive.

It's a percentage of profits that the private equity firm earns for managing the fund.

Bonus. Co-Investments:

Co-Investments involve limited partners investing outside of a fund, and directly alongside the private equity firm in specific private equity deals (companies).

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