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If you work in private equity, venture capital, or investment banking then this dealmaking glossary is for you.
Dealmakers are required to know and understand a wide variety of terminologies used within finance and investing, but not all of them are intuitive. Some firms will attribute different meanings to the same words. Terms you’ve heard used in other fields or everyday language may not have the same definitions or implications as they do in business.
The world of finance and investment can seem daunting when you’re not fluent in the language, but this guide of must-know private equity and investment banking terms for dealmakers is here to help. While the below list is by no means exhaustive or comprehensive, it’ll give you deeper insight into some of the most frequently used and important words you need to know. Read on for some key definitions you can bookmark and return to as often as needed!
A financial accelerator is a type of program that aims to stimulate small changes in the economy through the actions of financial markets.
An add-on acquisition refers to a smaller company that is acquired and integrated into a larger company within a firm’s existing portfolio.
Alpha is a strategy that is typically described as having an advantage over the market. It’s also known as having an "edge." You may hear alpha referred to as an abnormal rate of return.
An alternative asset is a type of financial asset that doesn't fit into the traditional categories of equity, income, and cash. It can be in private equity, venture capital funding, hedge funds, or real estate.
This type of partner is a cornerstone or large institutional investor that holds shares in a company that is about to go public.
Angel investors are high-net-worth individuals who provide financial backing to start-up companies.
An asset acquisition is the act of obtaining a company's assets instead of its stock. The person who owns the stock is called a stakeholder and is eligible to claim a portion of the company's earnings.
An asset allocation involves dividing your finances and investments among various types of accounts. Choosing to allocate assets is a personal decision and can be influenced by various factors, such as the individual’s financial situation and tolerance for risk.
An asset class is a group of investments that have similar characteristics. Some of these include stocks, bonds, real estate, and commodities.
Assets Under Management (AUM)
AUM refers to the total assets under the management of a mutual fund. This includes the returns that the fund has earned and the amount of capital that it has at its disposal.
Bolt-on acquisitions are often referred to generally as “add-ons,” and provide enhanced technology and market opportunities for larger platform companies. Unlike tuck-ins or roll-ups, bolt-ons usually retain their own identities and also benefit from strategic cross-selling initiatives with the platform company.
Conceived as a way to maintain more control over a company, bootstrapping is a process that involves investing only the entrepreneur's personal finances to jumpstart the business. See also “pre-transacted.”
A broker is an intermediary that acts on behalf of investors for securities exchanges.
The burn rate is the amount of money that a company is spending before it generates any positive cash flow. It's calculated simply by adding up the amount of money that the company is spending each month.
Buy and Build
A buy and build strategy is a process utilized by private equity firms to expand their operations and increase returns. It involves acquiring a platform company that can be further built upon over time through add-ons and other strategies.
The buy-side of the market is mainly composed of investment firms that acquire and invest in securities. Click to learn more about buy side and sell side M&A dynamics.
A buyout is a type of acquisition that's commonly used to acquire a controlling interest in a company. If the deal is financed by debt, it's considered a leveraged buyout.
If you sold an asset that's more than your adjusted basis, you'll have a capital gain. However, if the sale price is less than your adjusted basis, you'll have a capital loss.
The carried interest of private equity and hedge funds is a portion of the fund's profits that the general partners receive regardless of how they contribute.
Committed capital is the amount that an investor has agreed to put toward an investment fund.
Conference intelligence refers to capturing data from both in-person and online conferences, trade shows, and business events in order to improve sourcing strategies. Conference intelligence platforms offer cross-referenced information on specific conference sectors, exhibitor lists, locations, and other key data points.
Customer Relationship Management (CRM)
A CRM is a platform that is used to house data about an organization’s current and potential customers, from contact information to every interaction to relationship details.
Custom Scoring helps teams find investment targets that match their thesis criteria and sector strategy by assigning weights to various data points and ranking companies accordingly.
The cumulative distribution function is a statistical formula that measures the likelihood that a given variable will be less than or equal to its independent variable.
A data warehouse is a powerful repository where all the data within an organization can be stored, integrated, and analyzed by data scientists and analysts.
Debt Capital Markets (DCM)
The debt capital market is a type of financial market that enables companies and governments to raise funds through the sale of debt securities.
Deal flow is a term used by venture capitalists and investment bankers to describe the influx of potential investment opportunities. Click Here to learn more about venture capital deal flow.
Deal Flow Process
Deal flow process refers to the series of steps that an investment opportunity goes through on its way to becoming a closed deal.
Also referred to as deal sourcing, deal origination is the generation of investment opportunities.
Also referred to as deal origination, deal sourcing is used by finance professionals to identify potential acquisition targets.
Direct sourcing occurs when firms actively seek and identify potential investment opportunities, rather than waiting for them to come inbound.
Drawdown is a measure of volatility. It's commonly quoted as a percentage.
Due diligence is a process used by financial professionals to thoroughly investigate a potential acquisition. It involves analyzing a company's financial records to confirm the details of a deal. If you’re interested in how to find private company financials we cover it thoroughly here.
Equity Capital Markets (ECM)
An equity capital market is a network of financial institutions and markets that help companies raise capital. It enables them to expand their operations and improve their financial condition.
A founder is a person responsible for creating, establishing, and growing a startup company. They may not necessarily be the owner, hence the term founder-owned which is used to describe someone who is both a founding member and direct owner of a company.
General partners manage funds for private equity firms, from determining the size of the fund to choosing which companies to invest in. They are often referred to as fund managers. Click to learn more about fund structure.
A hurdle rate is the minimum return that a company or investor must receive in order to make an investment or start a project.
A financial intermediary is a middleman that acts as the point of contact between two parties during a financial transaction.
A metric that helps determine a fund’s performance by showing the fund’s total value as a multiple of its cost basis.
Initial Public Offering (IPO)
An initial public offering is a process that occurs when a private company sells shares to the public. This usually means that the company's ownership is changing from being private to being public.
Leveraged Buyout (LBO)
A leveraged buyout is a type of acquisition that involves borrowing money to fund the purchase of another company. The assets of the acquired company are often used as security for the loans.
A limited partner is a person who holds a limited amount of shares in a company. This type of investor is also referred to as a silent partner.
Learn more about private equity roles.
Mergers and Acquisitions (M&A)
A broad term used to describe when two companies are combined, either to form an entirely new company or to have one absorb the other. Click the link to read our deep dive into the M&A Pipeline.
Market intelligence is achieved by gathering and analyzing information about a particular company's sector and surrounding industry. Market intelligence allows firms to win more deals and help portfolio companies operate more competitively.
Market mapping is a common and critical yet traditionally tedious and time-consuming process in which dealmakers research all companies within a given sector and plot them on a map to gain a full picture of the entire ecosystem.
New School Dealmaking
New school dealmaking uses data, technology, and process to take a proactive, structured approach to finding and closing deals. Over time, it creates a virtuous cycle in which a firm is able to develop unique market expertise, build a differentiated reputation and brand, and land deals that add significant value to their network and portfolio.
Paid in Capital (PIC) Multiple
The amount of money that a company has paid in capital is the amount of assets that its owners put into the company.
In finance, the term pipeline refers to a series of steps that a company must take to reach a long-term goal. For private equity firms, the acquisition pipeline refers to a series of companies that they have identified as potential acquisition targets.
A platform investment is a portfolio company that is a leader in its space and a firm intends to further build and grow through add-on acquisitions.
Portfolio tracking involves monitoring news and events surrounding a competitor’s or a firm’s own portfolio companies.
Post-transaction marketing is a process that's used by banks to attract potential clients and increase their pipeline. It allows them to demonstrate their expertise and attract the attention of private equity firms using the success of recently closed deals.
The preferred return is a minimum annual return that top partners are entitled to receive before the general partners of the company receive their carried interest.
A private company is a type of business that's held under private ownership. Its shares are not listed on exchanges and are typically offered, owned, or exchanged privately.
Private Company Intelligence Platform
Private company intelligence platforms are tools used by deal teams to take a more strategic and data-driven approach to deal sourcing by identifying, monitoring, and connecting with privately held, pre-transacted companies.
Proprietary advantage is any competitive advantage that's gained by using technology, data, or processes that are unique to and owned by the firm.
In finance, public refers to the securities that are available on an exchange or over-the-counter market. Generally, publicly-listed companies are those that are listed on exchanges.
The realization multiple is the sum of the return that a private equity fund is expected to receive from its investors. It doesn't include inflation or the time value of the money.
The residual value of a fixed asset is often referred to as the value of it at the end of its lease or its useful life. This calculation provides a rough estimate of the future value of a good.
Return on Equity (ROE)
The return on equity is a measure of a company's financial performance, which is calculated by dividing its net income by its shareholders' equity.
A roll-up is a horizontal acquisition that’s consolidated into a larger company.
An RVPI multiple is the current market value of the fund's assets divided by the cash flows from its operations.
Sales Acceleration Platform
Sales acceleration tools help business development teams personalize communications and connect with investment targets at scale.
Screening allows investors to find companies that are likely to perform well based on various factors, such as their market capitalization, earnings per share, and price-to-sales ratio.
A search fund was conceptualized in 1984 to support entrepreneurs in their efforts to find, acquire, and grow a private company.
Seed funding is typically the first official funding stage for a startup. It refers to the initial capital that a company needs to start a business.
The sell-side is a financial industry that's involved in the promotion and sale of financial instruments such as bonds and stocks to the public market.
Series A/Series B/Series C
A series A round is a type of financing that's typically used for a company's first venture capital round. It involves the sale of preferred stock to investors in exchange for their money.
Series B is the second round of funding that is usually used for a company that has already met certain key performance and milestone requirements.
In series C rounds, investors typically inject more money into a company in an effort to receive more returns. They're focused on the company's growth and development.
Data signals are key data points dealmakers can use to help determine the growth trajectory and investment readiness of pre-transacted companies.
Performance targets are generally expressed as a combination of the company's and operating unit's shared goals. They can be relative or absolute and are usually expressed in terms of progression.
Target outreach is when firms reach out to high-value investment opportunities in hopes of sparking a conversation and ultimately closing a deal.
A term sheet is a non-binding agreement that sets the terms and conditions of an investment. It's very important for startups to have this type of document in order to attract potential investors.
Total Addressable Market (TAM)
The total addressable market is revenue opportunity for a particular product or service within a given market
A tuck-in acquisition occurs when a platform company absorbs a smaller business with highly valuable niche product functionality rather than building it from scratch.
The term unicorn was first coined by Aileen Lee in 2013. It refers to a startup company that has a valuation of more than $1 billion.
A valuation is a quantitative process used to evaluate the fair value of an asset or a company. It can be done on a relative basis or an absolute one. Click the link if you’re interested in a deeper understanding of relative vs absolute valuations.
Financial models are commonly used to determine the valuation of a company or to compare it to its peers. They also function as part of a company's strategic planning process. Click here for our explanation of what is a valuation model.
To be taken seriously as a dealmaker in today’s highly competitive market, it’s critical to be able to talk the talk. Understanding and adopting the vocabulary used across all major financial sectors can be a bit overwhelming at first, but with the help of this dealmaking glossary, you’ll be up to speed in no time.
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