Author: Gert-Tom Draisma / www.TristanFinance.com
First published: 24th of September 2026
Latest update: 24th of September 2026
Acquisition
The purchase of a company, business, asset or ownership interest. In private equity, an acquisition is typically made by a fund, directly or through one or more acquisition or holding companies, and may be financed using a combination of equity and debt.
Add-on Acquisition
An acquisition made by an existing portfolio company, usually as part of a buy-and-build strategy. Add-on acquisitions may be used to increase scale, enter new markets, add products or capabilities, consolidate competitors or create operating synergies.
Agency Problem
The potential conflict that arises when one party makes decisions using capital belonging primarily to another party. In private equity, LPs provide most of the capital while the GP controls most investment decisions. GP commitment, carried interest, governance and other mechanisms are used to align their interests.
Alpha
Return attributable, conceptually, to investment skill or manager-specific value creation rather than general market movements or systematic exposure. In private equity, separating genuine manager alpha from leverage, market movements and multiple expansion can be difficult.
Alternative Investment Vehicle (AIV)
A separate legal vehicle used to make a particular investment when investing through the main fund would create legal, tax, regulatory or other difficulties. Economically, the AIV may form part of the same investment programme even though it is legally separate.
Assets Under Management (AUM)
The amount of assets or capital managed by an investment manager. Different organisations and data providers may calculate AUM differently, so the definition should be understood before comparing managers.
Benchmark
A reference against which investment performance is compared. Private equity benchmarks commonly distinguish between vintage year, strategy, geography and sometimes fund size.
Beta
Exposure to broad market or systematic factors rather than manager-specific investment skill. The distinction between alpha and beta is conceptually useful in considering whether private equity returns arose from manager actions or favourable external conditions.
Bid-Ask Spread
The difference between the price at which a buyer is prepared to buy an asset and the price at which a seller is prepared to sell it. Private assets do not normally have continuously observable bid and ask prices, but a significant economic spread can exist during negotiations.
Blocker
A legal entity inserted into an investment structure, commonly for tax, regulatory or legal reasons.
Broken-Deal Costs
Costs incurred in pursuing a transaction that is ultimately not completed. These may include legal, accounting, commercial, tax and other due-diligence expenses. Their allocation between the fund, GP and other parties depends upon the applicable agreements and policies.
Buy-and-Build
A value-creation strategy in which a portfolio company makes additional acquisitions to create a larger business. The original investment is sometimes referred to as the platform, with subsequent purchases called add-ons or bolt-ons.
Buyout
The acquisition of a controlling or substantial interest in an established business. Many private equity buyouts use a combination of equity and debt and are therefore leveraged buyouts.
Capital Account
An accounting record representing an investor's economic or accounting interest in a partnership or fund. A capital account should not automatically be confused with the complete economic history required for performance or carried-interest calculations.
Capital Account Statement
A periodic statement provided to an investor showing movements in and the balance of its capital account. It may include contributions, distributions, allocations of income or loss and closing balances. It does not necessarily contain all information required to calculate performance or carried interest.
Capital Allocation
The process of deciding how available capital or cash should be used—for example for organic investment, acquisitions, debt repayment, distributions or other purposes.
Capital Call
A request by the GP for LPs to fund part of their previously agreed commitments. Private equity capital is normally called progressively rather than contributed entirely when the commitment is made.
Capital Commitment
The amount an LP contractually agrees to make available to a fund. A commitment is not the same as paid-in capital because it may be drawn over several years.
Capital Structure
The combination of debt, equity and potentially other financial instruments used to finance a company or transaction.
Carried Interest / Carry
The GP's or carry participants' contractual participation in investment profits after the conditions specified in the relevant fund and carry arrangements have been satisfied. Carried interest is an important mechanism for aligning the economic interests of the GP with those of LPs.
Catch-Up
A stage in certain carried-interest waterfalls following satisfaction of a preferred return during which the GP receives a larger proportion of distributions until a specified economic allocation has been achieved. Detailed mechanics depend on the governing documents.
Cash Conversion
The ability of a business to convert accounting earnings, particularly EBITDA, into actual cash flow. Working capital, capital expenditure, taxes and other cash requirements can cause cash generation to differ materially from EBITDA.
Cash Sweep
A debt provision under which some portion of excess cash flow must be used to repay debt.
Clawback
A mechanism requiring the return of carried interest that was distributed earlier but exceeds the amount ultimately due after later fund results are taken into account.
Closed-End Fund
A fund with a generally fixed commitment period and finite life in which investors commit capital, the manager invests it over a defined period and investments are subsequently realised and proceeds distributed.
Co-Investment
An investment made by an LP or another investor directly alongside the main private equity fund in a particular portfolio company. Co-investments may have different management-fee and carried-interest economics from the main fund.
Commitment Period
See Investment Period.
Completion
The point at which an agreed acquisition or disposal legally completes and ownership transfers, subject to the transaction documentation. Signing and completion may occur simultaneously or at different times.
Completion Accounts
A mechanism for determining or adjusting the final purchase price based on specified financial information measured at or around completion.
Concentration Risk
Risk resulting from a large proportion of a fund or portfolio being exposed to one investment, sector, geography, customer, financing source or other common factor.
Continuation Vehicle
A new investment vehicle established to acquire one or more assets from an existing fund, generally allowing existing investors a liquidity option while enabling continued ownership of the underlying asset. Such transactions are commonly part of the GP-led secondary market.
Contribution
Capital actually paid into the fund by an investor, generally following a capital call. Contributions should be distinguished from the investor's total commitment.
Covenant
A contractual obligation or restriction contained in financing documentation. Covenants can require a borrower to maintain certain financial conditions or restrict specified actions.
Covenant-Lite
A financing structure containing fewer or less restrictive ongoing financial maintenance covenants than traditional leveraged financing.
Credit Facility
An arrangement under which a lender makes borrowing capacity available subject to agreed conditions. Private equity structures may contain credit facilities at portfolio-company, fund or other levels.
Day-Count Convention
A methodology specifying how days are counted when calculating interest or other time-dependent amounts.
Debt Capacity
The amount of debt a company can reasonably support given its cash flow, volatility, capital requirements, assets, business model and other risks.
Debt-for-Equity Swap
A restructuring in which some or all creditor claims are exchanged for ownership interests in the borrower.
Debt Paydown / Debt Reduction
Reduction of outstanding debt during the investment holding period. If enterprise value remains unchanged, reducing net debt increases equity value.
Defaulting LP
An LP that fails to satisfy its obligations under the fund documents, particularly its obligation to fund a valid capital call. Fund documents normally prescribe consequences for default.
Denominator Effect
A portfolio-allocation phenomenon in which declines in the value of liquid assets cause illiquid private-market holdings to represent a larger percentage of an institutional investor's total portfolio, potentially exceeding allocation targets.
Discount to NAV
A situation in which a fund interest or portfolio is transacted at a price below its reported Net Asset Value.
Distributed to Paid-In Capital (DPI)
A private equity performance measure representing cumulative distributions relative to paid-in capital:
DPI measures value that has actually been distributed rather than value that remains unrealised.
Distribution
Cash or assets transferred by a fund to its investors. A distribution may arise from investment realisations, income, refinancing or other sources. Some distributions may be recallable depending on the fund documents.
Distribution Waterfall
The contractual sequence according to which proceeds are allocated among investors and the GP or carry vehicle. Waterfalls can contain return-of-capital tiers, preferred returns, catch-ups and carried-interest allocations. The detailed subject is covered elsewhere in The Carried Interest Bible.
Dividend Recapitalisation / Dividend Recap
A transaction in which a portfolio company incurs additional debt and uses some or all of the proceeds to make a distribution to shareholders. It can return capital before an exit but increases or restores leverage at the portfolio company.
Due Diligence
The investigation and analysis performed before completing an investment or transaction. It can include financial, commercial, legal, tax, operational, technological, environmental and management due diligence.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation. A commonly used measure of operating performance and valuation in private equity. EBITDA is not the same as cash flow.
EBITDA Margin
EBITDA expressed as a percentage of revenue:
Enterprise Value (EV)
The value attributed to the operations of a business irrespective of how they are financed. In simplified form:
Entry Multiple
The valuation multiple at which an investment is acquired, commonly expressed as Enterprise Value divided by EBITDA.
Equalisation
A mechanism used to place investors entering a fund at different closings into an appropriate economic position relative to one another. It can involve catch-up contributions, interest or other adjustments.
Equity
The residual ownership interest in a company after liabilities and senior claims have been taken into account. Equity generally absorbs losses before debt and participates disproportionately in upside after debt claims have been satisfied.
Equity Contribution
The amount of equity capital used to finance an acquisition, as distinct from the debt financing used in the transaction.
Equity Cure
A mechanism under certain financing arrangements allowing shareholders to contribute additional equity to remedy or help remedy a covenant breach, subject to the terms of the financing documents.
Equity Value
The value attributable to shareholders after deducting net debt and other relevant senior claims from enterprise value.
Escrow
Money or assets held by a third party or in a restricted arrangement until specified conditions are satisfied. In carried interest, escrow may be used to retain part of carry against possible future clawback obligations.
Excuse Right
A contractual right allowing or requiring an LP not to participate in a particular investment under specified circumstances, for example because of legal, regulatory, tax or policy restrictions.
Exit
The realisation of a private equity investment through sale, IPO, secondary transaction or another liquidity event.
Exit Multiple
The valuation multiple at which a portfolio company is ultimately sold or valued at exit.
Exit Window
A period during which market, financing and buyer conditions are sufficiently favourable for a portfolio company to be sold on acceptable terms.
Fair Value
An accounting valuation of an asset determined under the applicable accounting and valuation framework. For unrealised private equity investments, fair value is an estimate rather than a realised cash amount.
Feeder Fund
A vehicle through which investors invest into another fund or investment vehicle, commonly for structural, tax, regulatory or administrative reasons.
Financial Engineering
A broad and sometimes imprecise term describing the use of financing, capital structure, leverage and other financial techniques to affect investment economics. It should be distinguished from operational value creation.
Follow-On Investment
Additional capital invested in an existing portfolio company after the original acquisition.
Fund Administrator
An external or affiliated service provider performing fund accounting, investor reporting, capital-account maintenance and other administrative functions. As discussed in the later Carry Data chapter, conventional fund administration and carried-interest administration do not necessarily require the same data or economic interpretation.
Fund-of-Funds
A fund that invests primarily in other investment funds rather than directly in portfolio companies.
Fund Term
The contractual life of a private equity fund, generally subject to possible extensions under the governing documents.
General Partner (GP)
The party responsible for managing the private equity fund and its investment programme. In common industry usage, “GP” may also refer more broadly to the private equity manager or sponsor.
GP Commitment
Capital committed to the fund by the GP, its affiliates and/or its principals. It creates direct exposure to the fund's gains and losses and is an important alignment mechanism.
GP-Led Secondary
A secondary transaction initiated or organised by the GP, often involving the transfer of one or more portfolio assets into a continuation vehicle while providing existing LPs with liquidity or rollover choices.
Gross IRR
IRR calculated before specified fund-level fees, expenses and carried interest. The exact methodology should always be understood when comparing reported figures.
Gross MOIC
MOIC measured before specified fund-level fees, expenses and carried interest.
Growth Capital / Growth Equity
Private equity investment in businesses seeking capital to expand, generally without necessarily acquiring full control or using the leverage typical of traditional buyouts.
Hard Hurdle
A carried-interest hurdle structure under which carry applies only to returns exceeding the specified hurdle, depending on the precise contractual mechanics.
Headroom
The amount of financial capacity remaining before a limit is reached, for example the distance between current leverage and a covenant threshold or the amount of unused borrowing capacity.
Holding Period
The period between acquisition of an investment and its realisation.
Hurdle Rate
See Preferred Return. Depending on the structure, the hurdle may determine when or to what extent carried interest becomes payable.
Illiquidity
The absence of a continuous, guaranteed and low-cost mechanism for converting an investment into cash at an observable market price. Illiquidity does not mean an asset cannot be sold; it means that sale requires time, negotiation and transaction effort.
Information Asymmetry
A situation in which one party possesses materially more information than another. In private equity, the GP generally has substantially more detailed information about portfolio companies than LPs.
Initial Public Offering (IPO)
The process through which shares in a privately owned company are first offered to public-market investors and become publicly traded.
Internal Rate of Return (IRR)
A money-weighted return measure incorporating the amount and timing of cash flows. It is the discount rate at which the net present value of the relevant cash flows equals zero.
For a simple one-investment, one-distribution example:
IRR should generally be considered together with measures such as DPI and TVPI and in the context of fund maturity and an appropriate benchmark.
Investment Committee (IC)
The body within a private equity manager responsible for approving or rejecting proposed investments and, depending on governance arrangements, other significant investment decisions.
Investment Period
The period during which the GP is generally permitted to make new investments using committed capital, subject to the fund documents.
J-Curve
The characteristic pattern in which private equity fund economics may initially be negative or weak because capital is being invested and costs are incurred before investments mature and distributions occur. Over time, successful realisations can cause performance and cumulative cash flows to improve, producing a shape resembling the letter J.
The J-curve is fundamental to understanding why annual P&L and simple ROI measures are inadequate for assessing private equity fund performance.
Key-Person Provision
A fund provision linked to the continued involvement of specified important investment professionals. A key-person event may suspend or restrict the investment period or trigger other rights under the LPA.
Leverage
The use of borrowed money to finance an investment or business. Leverage increases the sensitivity of equity returns to changes in enterprise value and can amplify both gains and losses.
Leveraged Buyout (LBO)
The acquisition of a business using a significant combination of debt and equity financing, with the acquired business generally supporting the debt through its assets and cash flows.
Limited Partner (LP)
An investor that commits capital to a private equity fund while delegating day-to-day investment management to the GP.
Limited Partner Advisory Committee (LPAC)
A committee generally comprising representatives of selected LPs that performs governance functions specified by the fund documents, often including consultation or approval regarding conflicts of interest. It should not be confused with the GP's Investment Committee.
Limited Partnership Agreement (LPA)
The principal governing agreement of many private equity funds. It establishes the contractual rights and obligations of the GP and LPs and can address capital commitments, distributions, fees, governance, investment restrictions, carried interest and numerous other matters.
Liquidity
The ability to convert an asset into cash relatively quickly and at low transaction cost without materially affecting its price.
Locked Box
A transaction pricing mechanism under which the equity purchase price is based on a historical balance sheet at an agreed locked-box date, generally with protections against value leakage between that date and completion.
Loss Ratio
A measure or analytical concept describing the proportion of invested capital, investments or deals that resulted in losses. Definitions vary and should be specified when used.
Maintenance Covenant
A financing covenant requiring the borrower to maintain specified financial metrics on an ongoing or periodic basis.
Management Buyout (MBO)
An acquisition in which the existing management team participates in buying the business, often alongside a private equity sponsor.
Management Fee
A recurring fee paid to the investment manager or related entity for managing the fund and maintaining the investment organisation. Its calculation base may change over the fund lifecycle.
Management Fee Step-Down
A reduction in the management-fee rate or calculation base after a specified stage of the fund's life, commonly after the investment period.
Margin Improvement
An increase in profitability relative to revenue, often achieved through pricing, procurement, operating efficiency, product mix, organisational changes or other improvements.
Mezzanine Debt
Financing ranking below senior debt and above common equity in the capital structure, typically carrying greater risk and therefore requiring a higher expected return than senior debt.
MOIC / Multiple of Invested Capital
A measure comparing value or proceeds with the capital invested:
Unlike IRR, MOIC does not incorporate the time required to generate the return.
Multiple Arbitrage
Value created or captured by acquiring a business at one valuation multiple and subsequently selling it, or the combined business, at a higher multiple. In buy-and-build strategies this may include acquiring smaller companies at lower multiples than the larger platform's valuation.
Multiple Contraction
A decline in the valuation multiple applied to a business between entry and exit.
Multiple Expansion
An increase in the valuation multiple applied to a business between entry and exit. It may result from changes in market conditions, company quality, scale, growth expectations or other factors.
NAV Facility
A credit facility secured by or underwritten against the net asset value of a fund's portfolio rather than primarily against uncalled LP commitments.
Net Asset Value (NAV)
The value of a fund's assets less its liabilities at a specified date. For private equity funds, NAV often contains significant unrealised investment valuations.
Net Debt
Interest-bearing debt less cash and cash equivalents, subject to the precise definition used in the relevant analysis or transaction.
Net IRR
The IRR experienced by investors after the relevant fund-level fees, expenses and carried-interest effects.
Net MOIC
A multiple of invested capital measured after relevant fund-level fees, expenses and carried-interest effects.
No-Fault Divorce
A provision allowing LPs, subject to specified voting thresholds and consequences, to remove the GP or terminate/suspend its investment authority without establishing contractual cause.
Operating Partner
A professional associated with a private equity manager who focuses particularly on operational, strategic or organisational improvement within portfolio companies.
Operational Due Diligence
Analysis of a target company's operational capabilities, processes, infrastructure, risks and improvement opportunities before investment.
Overcommitment
An LP portfolio strategy in which total private equity commitments exceed the capital currently available for immediate investment, based on the expectation that commitments will be called gradually and distributions from older funds will partly fund newer calls.
Paid-In Capital (PIC)
Capital actually contributed to the fund by investors. Depending on the reporting convention, the precise definition should be confirmed.
Parallel Fund
A separate fund vehicle that invests alongside another fund in substantially the same investment programme, often for tax, legal or regulatory reasons.
PIK / Payment-in-Kind
Interest or return that is added to the outstanding principal or instrument rather than paid currently in cash. PIK therefore compounds the amount ultimately owed.
Platform Company
A portfolio company used as the foundation for a broader buy-and-build or consolidation strategy.
PME / Public Market Equivalent
A family of methodologies comparing private equity cash flows with a public-market benchmark while taking account of the timing of those cash flows. Different PME methodologies exist and can produce different analytical results.
Portfolio Company
A company in which a private equity fund has invested.
Preferred Equity
A form of equity with rights or economic priority over common equity, potentially including preferential distributions, liquidation rights or other contractual protections.
Preferred Return
A return that, under certain carried-interest waterfalls, must be allocated or distributed according to the governing documents before the GP participates fully in carried interest. The precise base, timing, compounding and other mechanics depend on the LPA.
Principal-Agent Problem
See Agency Problem.
Private Equity
Investment in privately held companies or private ownership interests, typically through specialist investment managers and long-duration investment vehicles. Private equity commonly involves active ownership, illiquidity, significant transaction friction and planned eventual realisation.
Proprietary Deal
A transaction sourced outside a broad competitive auction, for example through a manager's network or direct relationship with an owner.
Public Market Equivalent (PME)
See PME.
Recallable Distribution
A distribution that may subsequently be recalled by the fund under circumstances specified in the governing documents.
Recapitalisation
A material change in a company's capital structure, potentially involving new debt, repayment of existing financing, new equity or distributions to shareholders.
Recycling
The reinvestment of certain proceeds or returned capital into new or existing investments where permitted by the fund documents.
Refinancing
Replacing, restructuring or extending existing debt with new financing.
Refinancing Risk
The risk that debt cannot be refinanced on acceptable terms when it matures or otherwise needs replacement.
Residual Value
The estimated value of investments and other relevant assets remaining in the fund and not yet distributed to investors.
Residual Value to Paid-In Capital (RVPI)
A performance measure representing remaining NAV relative to paid-in capital:
RVPI represents unrealised rather than distributed value.
Return on Investment (ROI)
A general measure comparing gain with the amount invested. Simple ROI does not adequately reflect the timing and irregular cash flows characteristic of private equity funds and is therefore insufficient as a standalone measure of fund performance.
Revolving Credit Facility / Revolver
A facility allowing a borrower to draw, repay and redraw amounts up to an agreed limit during the availability period.
Second-Lien Debt
Debt secured by collateral but ranking behind first-lien or senior secured debt with respect to that security.
Secondary Buyout
The sale of a portfolio company from one private equity sponsor to another private equity sponsor.
Secondary Market
The market for transferring existing private-market exposures rather than making new primary commitments. It includes LP-led sales of fund interests and GP-led transactions such as continuation vehicles.
Senior Secured Debt
Debt ranking relatively high in the capital structure and secured over specified assets of the borrower or group.
Shadow Accounting
Additional accounting, economic or data records maintained alongside the official fund-administration records to support analyses or calculations not fully served by the official accounting environment. In carried interest, shadow accounting may become necessary where the administrator's data do not preserve all information required by the waterfall.
Side Letter
A contractual agreement between a fund or GP and a particular investor that modifies, supplements or clarifies specified terms applying to that investor.
Signing
The point at which transaction documents are executed. Signing and completion may occur on the same date or be separated by a period during which conditions to completion are satisfied.
Soft Hurdle
A hurdle structure under which, once the specified threshold is achieved, the GP may participate more broadly in profits through the waterfall, depending on the precise contractual terms.
Sponsor
Another common term for the private equity firm or investment manager sponsoring an acquisition or fund.
Strategy Drift
Movement by an investment manager away from the strategy, market, geography, size range or risk profile originally presented to investors.
Subscription Credit Facility / Subscription Line
A fund-level credit facility generally supported primarily by the uncalled capital commitments of LPs. It can be used to bridge capital calls and other short-term funding requirements. Because it can delay LP contributions, it can affect reported LP IRR even when the underlying investment economics are unchanged.
Subsequent Closing
A fund closing occurring after the initial closing at which additional investors are admitted or existing investors increase commitments, subject to the fund documentation.
Successor Fund
A later fund raised by the same manager following an earlier fund in the same or a related investment strategy.
Term Loan
Debt advanced for a defined term and generally subject to agreed repayment, maturity and other contractual provisions.
Total Value
For private equity performance purposes, generally the combination of cumulative distributions and remaining residual value.
Total Value to Paid-In Capital (TVPI)
A private equity performance measure representing total distributed and remaining value relative to paid-in capital:
Transaction Friction
The time, cost, information requirements, negotiation, due diligence and execution complexity involved in acquiring or disposing of private assets.
Uncalled Capital / Unfunded Commitment
The portion of an LP's commitment that has not yet been called.
Underwriting
The process of analysing a proposed investment and determining whether its expected return, risk, financing and value-creation thesis justify committing capital.
Unrealised Investment
An investment that remains owned by the fund and has not yet been fully sold or otherwise realised.
Unrealised Value
Estimated value attributable to investments that have not yet been realised. Unlike distributions, unrealised value depends upon valuation assumptions.
Value Creation Plan (VCP)
A structured plan identifying the operational, strategic, financial or organisational initiatives through which a private equity owner intends to increase the value of a portfolio company.
Value Creation
The process through which the economic value of an investment increases. In private equity this may result from revenue growth, margin improvement, management and organisational improvement, acquisitions, strategic repositioning, cash generation, debt reduction and other factors.
Value Creation Bridge
An analysis decomposing the change in equity or enterprise value between acquisition and exit into components such as EBITDA growth, multiple movement and debt reduction.
Valuation Multiple
A ratio expressing the value of a business relative to a financial measure. In private equity, Enterprise Value / EBITDA is commonly used, although appropriate multiples depend upon the business and industry.
Vintage Year
The year assigned to a private equity fund for benchmarking and analytical purposes, commonly associated with the start of its investment activity or first capital call depending on the convention used. Vintage year is essential because funds investing in different periods encounter different economic, valuation and financing environments.
W&I Insurance / Warranty and Indemnity Insurance
Insurance used in M&A transactions to cover certain losses arising from breaches of warranties or indemnities in the transaction documents, subject to the terms and exclusions of the policy.
Waterfall
See Distribution Waterfall.
Whole-Fund Waterfall / European Waterfall
A carried-interest structure under which broader fund-level return-of-capital and other conditions generally need to be satisfied before significant carry is distributed to the GP. Exact mechanics are determined by the fund documents.
Deal-by-Deal Waterfall / American Waterfall
A carried-interest structure that may permit carry to be distributed based on realised individual investments before the entire fund has been realised, subject to loss-sharing, clawback and other provisions in the governing documents.
Working Capital
Short-term operating assets and liabilities required to run a business. Changes in working capital can materially affect cash generation even when EBITDA remains unchanged.
Write-Down
A reduction in the carrying or fair value of an investment.
Write-Off
Recognition that all or substantially all of an investment's carrying value has been lost.
XIRR
A calculation of internal rate of return using the actual dates of irregular cash flows rather than assuming equally spaced periods. It is commonly used when analysing private equity cash flows because contributions and distributions occur on specific dates.
Core formulas used throughout the introduction
For convenience, I would finish the glossary page with the small set of equations the reader will encounter repeatedly:
For real private equity funds with multiple irregular contributions and distributions, IRR is determined from the complete dated cash-flow series rather than from this simplified formula.
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