Exhibit-Glossary

 

Here are private equity terms you need to be familiar with to understand private equity, leveraged buyouts, and alternative investments such as hedge funds. The industry has its own language and metrics to confuse its customers and the public in general. We hope this glossary will help you unveil the mystery.

 

Alternative Investments (alts): Nontraditional investments such as hedge funds, commodities, distressed debt, leveraged buyouts (LBOs), real estate (property) and venture capital (start-up companies). Since the 2008 financial crisis, alternative investments have soared to 26% of pension endowments as pension funds desperately seek yield in a zero percent interest rate environment.

 

Additional Tier 1 bonds (AT1s) Sometimes described as a high investment with a hand grenade attached, AT1s became popular in Europe after 2008 as a way to recapitalize banks. Another complex investment, Additional Tier 1 bonds can be converted into equity it times of financial stress.  Dangers of AT1 bonds can be cataclysmic, when Credit Suisse collapsed in March 2023 more than $17 billion in AT1 bonds were wiped out, leaving investors with billions of losses. 

 

Add-on (Bolt-on) Acquisition. The add on or bolt on process where the main private equity firm, which is also known as a platform company, acquires another company to add to the existing portfolio. A form of mergers and acquisition, add on acquisitions is a way to increase additional products, markets, customer base, revenue and potentially monopolize a given market or industry.

 

Administration. British like equivalent of American bankruptcy. Administration in United Kingdom law is the main kind of procedure in United Kingdom insolvency law when a company is unable to pay its debts. The management of the company is usually replaced by an insolvency practitioner whose statutory duty is to rescue the company, save the business, or get the best result possible. 

 

Alpha The is the amount of investment return produced by the active manager of the investment.

 

American Investment Council www.investmentcouncil.org The Equity Growth Capital Council (PEGCC), is ultra powerful lobbying arm, advocacy, and research organization based in Washington, D.C. that was launched by a consortium of private equity firms in February 2007. The lobbying group focuses on defending and promoting the private equity and growth capital investment industry to lawmakers and the public at large  to preserve tax loop holes such as  capital gains treatment of profit-sharing income known as carried interest, tax deductions such as unlimited interest deductions and so on.  Member firms include Apollo Global Management, Bain Capital, Blackstone Group, Brookfield Asset Management, The Carlyle Group, Crestview Partners, CVC Capital, Encap, Goldman Sachs, GTCR, HarbourVest Partners, Investcorp, The Jordan Company, Kohlberg, Kravis & Roberts (KKR), KPS Capital Partners, L Catterton, Providence Equity Partners, Silver Lake, TA Associates, Thomas H. Lee, Thoma Bravo, TPG (Texas Pacific Group), Warburg Pincus, WCAS (Welsh Carson Anderson & Stowe.) 

 

Asset-based Lending. This is the type of borrowing secured by the assets of the borrowing company, often the portfolio company itself which is the target of the private equity firm. 

 

Asset-based purchase. This is when the assets of a company are being acquired, but not necessarily the company itself. For instance, the real estate or other hard assets of a company can be carved out and sold to a third party.

 

Asset class: an investment category such as stocks(equities), bonds (fixed income), cash (money market), real estate (property)

 

Asset-stripping. This is the process when private equity/buyout firms take advantage of loose rules backing collateral backing debt agreements to move valuable assets out of the reach of lenders in case of bankruptcy, default, or foreclosure. This strategy is  used in the leveraged buyouts of J Crew, Neiman Marcus, and PetSmart. Both J Crew and Neiman Marcus filed for bankruptcy. In the case of PetSmart, when the company was struggling under the massive debt load from acquiring Chewy, its online distributor, BC Partners which acquired PetSmart in 2015, took on additional debt in 2018 to acquire the company, placed Chewy’s assets beyond the reach of creditors. Asset-stripping can also occur under sale leaseback agreements, dividend recapitalizations and other types of fee extraction.

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Assignment for the Benefit of Creditors (ABC) is a legal process that allows a financially distressed company  to transfer its assets to a third party for liquidation and distribution to creditors. Another private equity sleight of hand legal maneuver to avoid bankruptcy. It's a common law tool and an alternative to bankruptcy proceedings

 

Bankruptcy Portfolio companies controlled by private equity firms frequently end up in bankruptcy after being owned by private equity firms after companies cannot sustain horrific debt loads. With bankruptcy not only are there tremendous monetary losses, but the human costs in lost jobs, benefits and other gainful employment create enormous collateral damage, frequently dumping financial obligations onto the taxpayer.

 

Bankruptcy-Texas Two-Step is a strategy under U.S. bankruptcy law in which a solvent parent company spins off liabilities into a new company, and then has that new company declare bankruptcy. A form of financial engineering frequently used by private equity firms to dump liabilities on the bankruptcy court, and lets the private equity sponsor keep valuable components of the company. Examples of Texas Two-Step bankruptcies include Koch Industries spinning off its Georgia Pacific division with asbestos claims in 2017 to a new division Bestwall, and putting Bestwall into bankruptcy into three months later in North Carolina. Another example is Johnson & Johnson became the largest two-step bankruptcy when it put LTL Management LLC, to hold its asbestos containing talc powder liabilities in 2021, and had the company declare bankruptcy in the same year in North Carolina.

 

Blank Check Company (See Special Purpose Acquisition Company-SPAC).

 

Blocker Corporation: A type of C corporation in the United States  has been used by tax exempt individuals to protect their investments from taxation when they participate in private equity, venture capital or hedge funds. In addition to tax exempt individuals, foreign investors have also used blocker corporations.

 

Bolt On Acquisition (see Add-On Acquisition)

 

Book runner. When private companies go public for the first time or are recycled and brought public again in an initial public offering (IPO), various banks sell shares of the new company through an underwriting syndicate of investment banks. The book runner can function as the lead manager of the IPO process and are also known as co-managers. Book runners generally help formulate the original market price of the stock and collects all orders for shares. 

 

Branding/rebranding: Branding, by definition, is a marketing practice in which a company creates a name, symbol or design that is easily identifiable as belonging to the company. This helps to identify a product and distinguish it from other products and services. Branding is important because not only is it what makes a memorable impression on consumers, but it allows your customers and clients to know what to expect from your company. It is a way of distinguishing yourself from the competitors and clarifying what it is you offer that makes you the better choice. Your brand is built to be a true representation of who you are as a business, and how you wish to be perceived. Private equity firms frequently incorporate branding into their business models.

 

Buyout (See Leveraged Buyout)

 

Capital call: A capital call is when the general partner or private equity manager notifies its investors or limited partners that they must provide capital for an investment. All investors make commitments of capital to a private equity fund. In a private equity deal, not all capital is required at once, but generally overtime. 

 

Captive Reinsurance: a form of self-insurance whereby, instead of diversifying risk its risk  and liquidity  by insuring part of its liabilities with a third-party insurer, the insurer creates a wholly-owned in-house subsidiary or affiliate to insure part of its liabilities. Captive reinsurance companies do not publicly file their financial statements as is required of all other U.S. insurers.

 

Capital gains tax: A tax charged on the profit realized on the sale of an asset that was purchased at a lower price. Common capital gains taxes are paid on the sale of stocks, bonds, real estate, sale of a business and precious metals.

 

Carried interest/Profit Sharing:  This is one of the greatest loopholes in the U.S. and European tax law today and how the extremely rich get turn into billionaires. Also  simply known  as “carry” or profit-sharing component of private equity arrangement. Frequently, when private equity firms hedge funds, venture capitalists and real estate managers create or acquire a company or large real estate asset, their goal is to sell this asset at a substantial profit. Carried interest is the profit-sharing component of the profit or gain when the company or real estate is later sold. Generally, profit sharing is 20% of the gain, but some managers such as Bain Capital have charged as much as 30%. According to a survey released by the Pew Research Center, roughly 63 percent of US adults said taxes on large businesses and corporations should be raised according to a survey performed on 5,000 in early 2025. In the United Kingdom, effective April 6, 2025, carried interest tax rate will increase to 32% up from 28% for U.K. taxpayers. However, this is still lower than the 45% rate on earnings over 125,140 pounds. 

 

Carve-out- A private equity carve-out is when a private equity manager carves out a division or subsidiary out of a major company but does not acquire the entire company itself. Carve-outs frequently happen with current listed public companies. 

 

Club deals. Frequently, private equity firms join forces to complete a large financial transaction which they could not do on their own. A club deal is when two or more private equity firms partner together to pursue a deal and purchase a company. 

 

Co-Co Bond (Contingent Convertible Bond) are hybrid securities  mainly used by banks that behave like normal bonds paying a fixed interest (coupon). However, in times of financial stress, when bank’s regulatory capital drops, the bond automatically converts to equity shares. Theoretically they decrease bank bailouts by the taxpayer.  However, these bonds while having higher yields, can also have higher risk and market volatility. 

 

Collateralized Loan Obligations: A collateralized loan obligation (CLO) is a single security backed by a pool of debt. The process of pooling assets into a marketable security is called securitization. Collateralized loan obligations (CLO) are often backed by corporate loans with low credit ratings or loans taken out by private equity firms to finance  leveraged buyouts. A collateralized loan obligation is like a collateralized mortgage obligation (CMO), except that the underlying debt is of a different type and character—a company loan instead of a mortgage.

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Committed Capital-Frequently private equity firms make their limited partners pay asset management fees on the entire capital commitment even when the capital has not been deployed. For example, say an insurance company agrees to invest $50 million with a private equity fund. The company will be charged an annual management fee on the $50 million capital irrespective if the amount of money has been invested or not. 

 

Continuation Funds: A private equity continuation fund is a new fund created by a private equity fund to acquire investments from an existing fund, allowing them to continue managing various portfolio companies.  Essentially the private equity fund is both the seller and buyer of a portfolio investment, and continues to enjoy both the management fees and profit-sharing fees. Notable portfolio companies that have filed for bankruptcy under the continuation fund strategy include Clearlake Capital’s Wheel Pros which filed for bankruptcy in September 2024 after being sold to a continuation fund in 2021. Another bankruptcy was Enviva, the wood pellet company owned by private equity firm Riverstone filed for bankruptcy in March 2024. Riverstone moved Enviva Holdings into a $1 billion continuation fund in 2020 according to Buyouts magazine. 

 

Covenants. In legal and financial terminology, a covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out or that certain thresholds will be met. Covenants in finance most often relate to terms in a financial contract, such as a loan document or bond issue stating the limits at which the borrower can further lend.

 

Covenant-Lite Loans: A covenant-lite loan is a type of financing that is issued with fewer restrictions on the borrower and fewer protections for the lender. By contrast, traditional loans have protective covenants built into the contract for the safety of the lender, including financial maintenance tests that measure the debt-service capabilities of the borrower. Covenant-lite loans, on the other hand, are more flexible regarding the borrower's collateral, level of income, and the loan's payment terms. Covenant-lite loans are also popularly referred to as "cov-lite" loans.

 

Credit-bid. Also known as credit bidding. The right of a secured creditor under the bankruptcy code   to use its secured claims against a debtor as currency in an auction of its collateral in a debtor's Section 363 sale (363(k) Bankruptcy Code). In most jurisdictions, the secured creditor can offset up to the full-face amount of its claim against the purchase price of the collateral. This mechanism allows a secured creditor to acquire the assets of the debtor on which it holds a  lien in exchange for a full or partial cancellation of the debt, allowing it to acquire the assets without paying any actual cash for them. Credit bidding can be used as a defensive strategy by lenders to protect the value of their collateral from falling asset prices. It can also be used as a defensive loan-to-own  strategy by investors to acquire distressed assets at below-market prices.

 

Debt-for-equity Swap, Debt exchange: Not all troubled private equity deals saddled with enormous debt end up in bankruptcy court. Frequently if a company is highly indebted, and the controlling private equity firm, can no longer meet its operating, debt servicing and other ongoing fixes costs, it may choose to swap its equity shares out to existing debt holders for the control of that company. It can be advantageous for both sides; control of the company goes smoothly passes to debt holders and avoids lengthy court hearings of bankruptcy and other legal costs. With less fanfare, in a debt for equity swap, essentially the general partner or private equity firm agrees to give up its stake in the target company it acquired and gives control of the company to the bondholders. Like bankruptcy, equity stakeholders get wiped out and takeover of the company by creditors and bondholders. However, often private equity firms acquire debt obligations of the portfolio company as it approaches insolvency and ends up owning the company it had just put into a perilous state.

 

Default-When a company fails to fulfill an obligation, especially to repay a loan or appear in a court of law.

 

Disclosure: Disclosure is the act of making known or the fact that is made known. 

 

Distressed debt: Often portfolio companies owned by private equity firms have debt which has lost much of its value after being taken over in a leveraged buyout. This debt is frequently known as “distressed debt” since the par value of the bonds are now trading as a substantial discount, which could be 20 to 80% of its original value. Private equity firms will frequently purchase distressed debt as a way of taking over a company in case of default or bankruptcy. In normal bankruptcy, equity shareholders are wiped out of their value, and debt holders take over the company. However, in a Faustian bargain, private equity firms, which are generally the largest equity shareholder of a portfolio company, will purchase the distressed debt of the company they are sponsoring—so that in the event of bankruptcy or a debt-for-equity swap, private equity firms will take control of the company they just put in bankruptcy. This was the case for CEVA Logistics, Cengage Publishing, and others.

 

Dividend recapitalization or dividend recaps: A common technique used by bankers and private equity titans to extract profits out of a portfolio company by ladling on additional debt onto a company balance sheet and extracting a debt-funded dividend. New debt is issued and incurred by the company to pay special dividends to investors and shareholders. 

 

Dual class shares. Dual-class stock or shares is a stock structure where a company issues different classes of shares with different voting rights. Class A and Class B shares are where Class A shares have one vote per share, and Class B shares have more or multiple votes per share. Super voting shares are often given to founders, executives and their families and give them substantially more voting power than the general public.

 

Dry powder: Dry powder is capital committed to funds that has not yet been invested. Data providers calculate “dry powder” differently, but assets managed by private equity hit record highs in 2020. 

 

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) EBITDA approximates a company’s cash flow, and is a common measure or metric used for buyout evaluations. A multiple of EBITDA or company’s cash flow is often used for the sale price of a company or an alternative measure of a company’s overall financial performance.

 

Exit strategy is the process of cashing out of the investment generally by selling the portfolio company to another greater entity, or by bringing the company  public through an initial public offering (IPO). Private equity investors do not have long period time horizons in ownership of their portfolio companies. 

 

Family office. A family office is an entity set up by a wealthy family to manage investments and assets of the family.

 

Flipping: The process of buying and selling an equity or company within a short period of time to quickly realize profits.

 

Funding agreement: A funding agreement is a deposit-type contract sold by insurance companies to investors whereby the investor provides a lump sum payment in return for a guaranteed rate of return over a specified period of time. Due to their short-term nature, FAs can present a real threat to liquidity.

 

General Partner. The general partner of a private equity fund is the entity or person who which manages the fund. Like building a home, the General Partner is the main go-to contract entity overseeing the acquisition of a company. In most leveraged buyouts, the general partners are private equity firms. General partners make minimal capital contributions to the fund. Frequently they can be minor investments of only 1 or 2 percent of total capital raised. 

 

Going Private: Private equity funds acquire companies or divisions of companies by buying a controlling share of a company, or by buying up all the shares of a company listed on a stock exchange or market. The target company then has a single shareholder of the target company—the buyout fund. In the case of a club deal, the target company is owned by two or more shareholders, with other private equity firms or other significant investors.

 

Hedge funds: An alternative investment or a pool of money managed by either a single or multiple manager process. Hedge funds can invest in anything and try to boost investment returns by using debt to multiply or amplify investment returns. Hedge funds invest  financial instruments such as commodities, derivatives, equities, options, currencies and so on. Hedge funds are separate and distinct investment class separate from private equity. 

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HCTC (Health Care Tax Credit): The Health Coverage Tax Credit (HCTC) is a refundable tax credit that pays 72.5% of qualified health insurance premiums for eligible individuals and their families. Taxpayers may elect to receive the credit through their federal tax return or through advance monthly payments paid directly to their Health Plan Administrator. This is subsidy covers health costs for employees. Individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation (PBGC).

 

Illiquidity premium refers to the extra premium an investor requires for an investment being illiquid and considered a major tenet of the private equity leveraged buyout model.

 

Initial Public Offering (IPO) (Floatation in the United Kingdom) An exit strategy of private equity and venture capital firms where they take companies which are private, non-listed entities and raise money on stock exchanges to bring companies public by selling stock to the public.  Today a majority of initial public offering funds are provided by mutual funds from retail investors retirement savings in 401(k)s, and IRAs., which today is a majority time to mutual funds, who secure their capital via retirement accounts such as 401(k)s. This is not just private equity firms, but a source of new companies from venture capital such as Google, Facebook, and others. POs can also be done with Blank Check companies which are also known as SPAC (special purpose acquisition company). 

 

Infrastructure Investments are some of the hottest areas in private equity today where investment firms acquire normally owned utility investments by governments are acquire by private investment funds. Appeal is annuity income, and monopoly position. Examples of infrastructure investments include airports, parking garages, toll roads, government housing, fixed line telecommunications networks and utilities such as water and sewer services. Dominant pioneer in infrastructure investments is Macquarie of Australia, Morgan Stanley’s takeover of Chicago’s parking, and KKR & Co. takeover of the fixed line telephone system of Telecom Italia (FiberCop). However, giant problems lie under the surface with Thames Water in the U.K, and Fibercop, with debt and operational problems.

 

Institutional Investor are generally state and municipal pension funds, sovereign wealth funds, corporations, insurance companies, foundations, and endowments. Institutional investors invest through limited partnership interests.

 

Institutional Limited Partners Association (ILPA). The IPLA is a trade organization which promotes the interests of limited partners. 

 

Interest Deduction:  U.S. tax law, interest used to purchase companies, buy back stocks, acquire additional debt to finance debt-funded dividends etc. is tax-deductible, and the taxpayer is directly subsidizing this enormous tax subsidy.

 

Interest Rate Swaps: Private equity asset managers used billions of debt to purchase real assets such as real estate, companies and infrastructure. Anything that can be done to reduce interest expense of the debt will also boost returns, including financial engineering.  Private equity firms can securitize, and issue bonds backed by things like future cash flows to reduce cost of debt. 

 

Internal Rate of Return (IRR) Used in leveraged buyouts and other private equity investments, the IRR is a series of rates of return relating to the cash flow of a fund. An extremely complicated metric, and subject to significant criticism, IRR can either be gross or net rate of return. A very confusing metric, IRR does not generally include management fees, carried interest (profit sharing) or other fund expenses. A moving target, IRR, can be over a short period or over the total life of the fund. The final IRR can only be determined when the fund is completely cashed out, liquidated and funds are sent back to the original limited partner investors. 

 

Investment Banking/Loan Syndication/Mergers & Acquisitions: Bankers make fortunes in fees providing debt, merger and acquisition advice and other services to the private equity industry. Raising funds and syndicating loans and bonds is a hugely profitable business for banks. Investment banks also manage municipal and government finances by raising funds for bond issuance. 

 

Junk Bonds (High Yield Bonds):  A bond is a promise to pay something in interest payments. High-interest rate bonds, which have a higher yield than normal bonds or savings plans but are called junk because they generally have little or no collateral to protect the purchaser of this type of debt in the case of default. Junk bonds fueled the hostile corporate takeover business in the 1980s and have become the weapon of choice in leveraged buyouts. Junk bonds have been rebranded ‘high yield’ to make them more palatable for investors to digest. Junk bonds below investment grade have a higher yield rated below investment grade yet have a higher risk of default than most bonds issued by governments or corporations. 

 

Leverage: Leverage is an investment strategy of using borrowed money, using various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.

 

Leveraged buyout (LBO):  A leveraged buyout, or simply a “buyout” is when an individual, or another entity such as a private equity firm or corporation acquires control of an operating company which may either be private or publicly listed. A significant portion of the purchase price of the acquisition is financed with debt, and this is why they are called “leveraged buyouts”

 

Leveraged Loans: The global chase for yield has created a new asset class known as leveraged loans.  Slices of leveraged loans are traded like securities. But because leveraged loans are loans, the SEC does not regulate them. No one really regulates them. The market for leveraged loans is very illiquid, even during good times. Since slices are illiquid, and take a long time to trade, the problem gets worse when they cannot find buyers, prices can collapse. 

 

Liability Management Exercises (LMEs) are exercises to raise fresh capital or extend debt maturities in various overleveraged businesses frequently involved in leveraged buyouts.  

 

Life insurance company: An insurance company that provides insurance coverage against disability or death, such as through an annuity  that guarantees a stream of income for life or other defined period.

 

Limited Partners (LP)-These are the investors who put up money to fund a leveraged buyout, venture capital, commodities bet, real estate purchases, infrastructure investment and so on. Limited partners include wealthy individuals, sovereign wealth funds, foundations, college endowments  and public pension plans. State pension plans such as CalPERS, CalSTRS, New York, Texas, Oregon, Washington State, Florida, Washington State and others are the largest limited partner investors in the U.S. , contributing about 30% of the overall limited partner money. Sovereign wealth funds, from the Middle East, Singapore and others contribute roughly an additional 19%. 

 

Limited partnership agreement: This is the legal agreement between the limited partners (LPs) and the general partner of a private equity fund (GP). In the limited partnership agreement, conditions and rights of the investment are set up, and general address management fees, carried interest (profit sharing), who pays fund expenses, the length of the fund or fund life, which typically last ten years, and sometimes as high as 15 years. 

 

Liquidity event: A liquidity event is when an investment is realized, liquidated, and sold. A common liquidity event would be when the investment is sold for cash by a larger entity, brought public through an initial public offering (IPO) or merged with another portfolio company.

 

Lock up/Lock up Period:  When a company goes public on stock exchanges in an initial public offering (IPO), investment banks, who are the underwriters and bring the company public, require a “lock up” period after the initial IPO before insiders sell their shares to public markets. A common lock up period is six months or 180 days.

 

Management Buyout/MBO: A leveraged buyout where company founders, inside executives and inside managers participate in the leveraged buyout generally with the assistance of a private equity firm, but not always.

 

Management Fee:   Private equity managers, hedge fund managers, venture capital firms and other money managers, receive, amongst other fees, a 1%-2% ongoing management fee regardless of investment performance. [Some firms have charged as much as 3%]. Sometimes management fees are offset by other fees the general partner may collect such as monitoring fees, director fees, transaction fees, breakup fees and so on.

 

Management Fee Waiver-Changing Ordinary Income into Capital Gains. Private equity fund advisors earn income in different ways, including via management fees and profits interests. Strategic planning techniques — such as opting to waive the management fee — can help private equity firms potentially defer income or take advantage of more preferential capital gains  tax rates.

 

Mergers & Acquisition: This is when two or more companies combine to form a new entity.

 

Minimum commitment. Generally private equity firms have a minimum commitment on an investment typically $5 or $10 million, or more which would qualify them as limited partners within the buyout or other private equity fund.

 

Modified Co-Insurance (“ModCo”): A type of reinsurance  whereby the insurer (or ceding company) does not transfer the assets but reportedly transfers its regulatory capital requirements  and asset risks to the reinsurer.  Although the assets and the liabilities are held at the ceding company, the reinsurer is responsible for those liabilities. 

 

Monitoring Fees/Accelerated Monitoring Fees. In addition to charging management fees which could also be realistically considered monitoring fees, private equity titans frequently charge additional fees known as monitoring fees which are payments for ongoing services such as management or advisory fees. Accelerated monitoring fees is when a private equity firm charges a company for services it would have paid if it still owned the company.  For example, say a private equity firm has an agreement with the portfolio company to provide services to a company for five years, but the portfolio company is quickly sold after two years of ownership. Under an accelerated monitoring fee arrangement, the private equity firm could collect and charge a company the monitoring fees as a condition for the sale. That is like selling a rental property and getting 3 extra years of rent after the company is sold! Apollo Global Management was fined $52.7 million by the SEC in August 2016 for misleading and not disclosing this practice to investors, and a Blackstone LP, paid a $39 million fine that its accelerated monitoring fee practice was not disclosed to investors.

 

Multistrategy Hedge Funds: Unlike traditional hedge funds, which generally focus on a single investment strategy, multistrategy hedge funds may combine multi tactics such as long or short equity, arbitrage or global macro. These funds are managed by teams, theoretically reducing volatility and a more balanced approach. A primary argument for multistrategy funds is diversification, however they are also a source of huge fees for hedge funds through passthrough fee arrangements. See Passthrough Fees.

 

Mutual fund/retail investors: Wall St and private equity titans are constantly looking to exit their investments, selling an acquired company to a greater entity, or some could say, “the greater fool.” The greatest greater fool today is the retail investor, who ends up owning shares of portfolio companies. Today most companies, including publicly listed private equity firms such as Apollo Global Management, The Carlyle Group, Ares Management, BlackRock, Blackstone, Goldman Sachs and others largest shareholders are mutual funds, whether they be passively or actively managed. 

 

Mutual Funds, Bank Loans: Bank Loan Funds (BLF) are mutual funds that buy loans made by banks or other financial institutions. Bank loans are usually senior secured debt and are mostly rated below investment grade because the borrower's ability to repay may be viewed as speculative. Such loans are used for general corporate purposes as well as to refinance debt and fund acquisitions, leveraged buyouts or recapitalizations. BLFs are also called floating rate funds because the underlying loans typically pay interest based on a floating rate. A floating rate is not a fixed rate, but rather a rate that adjusts periodically based on a publicly available, short term, referenced interest rate. A BLF's income may not match the underlying reference rate due to delayed rate reset periods, as well as interest rate caps and/or floors.

 

National Association of Insurance Commissioners (“NAIC”): A non-profit organization created and governed by the chief insurance regulators of all 50 states, the District of Columbia, and U.S. territories to set the standards for the U.S. insurance industry.

 

NAV (Net Asset Value) Loans: A “net asset value (NAV) loan” is a type of loan where a private equity fund borrows money using the value of its investment portfolio as collateral, meaning that the loan is secured against the net asset value of the fund’s holdings, essentially letting private equity firms  have access to debt without selling their investments. A debt upon debt transaction, NAV loans are used to distribute dividends to limited partners, or can be used to inject needed cash into a portfolio company.

 

Non-recourse debt: This debt is when the creditors only have a potential claim specifically on those assets which the debt is collateralized.  A favorite type of debt for private equity firms, if trouble arises repaying the debt, it is not the investment fund or the general partner that is on the hook.

 

Passthrough Fees: Traditionally hedge funds and private equity have charged a 2% annual management fee on assets under management, and a 20% fee or profit sharing on investment gains.  As certain hedge funds get larger and larger, hedge funds are now charging their limited partner investors who come from pensions, endowments and philanthropies larger fees meaning that hedge fund managers can make more of the gains than their clients. A 2025 report released by French investment bank BNP Paribas found that clients only received $0.41 of the gains, while fund managers pocketed the lion share. Popular hedge funds known as multistrategy funds, are now charging clients for compensation, travel and meals, data and tech, employee gifts, performance-based compensation, severance arrangements, tuitions, relocation expenses, artificial intelligence, compliance costs and so on. Prominent hedge funds that charge clients passthrough fees include Millennium Management, Citadel, Point72 Asset Management, Balyasny Asset Management and ExodusPoint Capital Management, according to an analysis of Bloomberg filings in 2025.

 

Pension Benefit Guaranty Corporation (PBGC). The PBGC is the government entity that self-insures pension benefits for failed corporations by charging employers insurance premiums to cover pension shortfalls. Notable pension which have been dumped on the PBGC by private equity firms include Anchor Glass, Avaya Inc. , Collins & Aikman, Chrysler Automotive (10 separate pensions), Hostess Baking, Lehman Brothers, Delphi, Eddie Bauer, Harry & David, Friendly’s Restaurants, Hawker Beechcraft Aircraft,  Allied Systems, Aloha Airlines, Freedom Communications, Fluid Routing Solutions, A&P Markets, IndyMac Bank (now OneWest/CIT Financial), Marsh Supermarkets, Metaldyne, Diversified Machine, Noranda Aluminum, Remington Outdoor, Penn Traffic Corp., Tops Markets LLC, Sears and Warrior Met Coal. 

 

PIK Notes:  A PIK Note is the acronym for one of the riskiest types of junk bonds, known as Payment In Kind, or PIK notes. A PIK note pays either interest or in additional securities  or equity instead of cash. A PIK note is a promise to pay nothing, and are somewhat like the negative amortization subprime mortgages sold by Wall Street during 2007-2008. For example, in 2008, Apollo Global Management and Texas Pacific Group used $1.5 billion in PIK Notes paying 10.75% interest maturing in 2018 to acquire Caesars Entertainment in a $30 billion LBO. Caesars, which was paying more than $2 billion in annual interest, filed bankruptcy in 2015. In another situation,  Apollo Global sold $350 million in PIK notes in 2013 to finance a debt-funded dividend to portfolio company EP Energy Corp (NYSE: EPE). After going public in 2014 at $17.20 a share, EP Energy filed bankruptcy on October 3, 2019. 

 

Placement Agents:  A placement agent is an investment bank or other individual which specializes in raising capital for a private equity fund. Placement agents arrange meetings with potential limited partners and investors, create marketing materials and so on. Placement agents are generally paid a percentage of the funds that they raise. However, placement agents can be the focal point of corruption with private equity, leveraged buyouts and public pension funds such as the 2009 ARVCO Capital Research scandal of CalPERS pension fund involving Apollo Global Management. 

 

Platform Company:  The platform company is the company acquired by the private equity firm to become the foundation for further acquisitions. 

 

Portfolio company: This is the company in which a private equity or multiple private equity companies invest in.

 

Private Equity: The holding of stock in unlisted companies—companies that are not quoted on the stock exchanges such as NYSE, NASDAQ, etc. Specifically private equity refers to the way funds are raised, through private funds versus public funds. A private equity firm manages pooled investments of companies that are not publicly traded.

 

Private Equity Funds: The pools of capital invested by private equity funds. Private equity funds are generally operated limited partnership funds, or by a limited liability company which is controlled by the private equity firm who operates as the general partner. Most private equity funds are raised from institutional investors such as public pension plans, university endowments, sovereign wealth funds and  high net worth individual investors. Overall, private equity funds are lightly regulated as partnerships. With a private equity fund, you can have different investments within the private equity fund which make up the portfolio of the fund.

 

Rebranding/Changing the Name. Frequently, bankers, private equity firms, and other financiers  change the name or rebrand  to enhance their “value creation” of portfolio companies by changing the name  or rebranding the company. A way of putting a company in a new package on old company, rebranding can also be a way to bury dead companies. For example, in 2006, Cerberus Capital Management, the New York private equity firm, acquired a 51% stake in the former General Motors finance arm known as GMAC in a $7.4 billion leveraged buyout from its parent General Motors. GMAC specialized in prime and subprime auto loans,  mortgages, and student loans. A financial disaster of biblical proportions, GMAC collapsed into bankruptcy, and the U.S. taxpayer put more than $17 billion in capital to keep GMAC  afloat.  In May 2010, GMAC, Inc. named was changed to Ally financial, Inc. GMAC ResCap, its residential mortgage division filed bankruptcy in 2012. Today, the old GMAC bank has been rescued, renamed, rebranded, morphed and refloated onto Ally Financial Inc. (NYSE:ALLY). 

 

Recapitalization: Recapitalization is when a company’s equity and debt structure is restructured.

 

Receivership: A process that occurs when an insurance carrier is unable to pay its liabilities. The domiciliary regulator takes control over the carrier’s assets to pay its debts.

 

Resolution Trust Corporation (RTC): After the Savings & Loan crisis in the 1980s, many private equity firms got their starts in areas such as real estate by buying real estate from government entities at highly discounted prices to dispose of properties. Among the first buyers of properties was Blackstone Group and Goldman Sachs in 1990 purchased of multi-family apartment blocks in Arkansas and East Texas. It was a huge eye watering return where Blackstone netted a 62 percent rate of return by the time it exited its investment, courtesy of Uncle Sam.

 

Reverse stock split. A reverse stock split is when a corporation consolidates the number of existing shares of stock into fewer shares. Also known as a stock consolidation, stock merge or share rollback, reverse stock decreases shares outstanding. For instance, a 1-for-10 reverse stock split would take 10 existing shares, and convert it into one share. Reverse stock splits are becoming more popular to raise share prices as many mutual funds or other institutional shareholders generally should not own stocks below $5 a share, and by using reverse stock splits, the share price of the stock is elevated, even though there has been no change in economic value. Reverse stock splits are another way Wall Street manipulates stocks.  Notable stock splits have been done by Citigroup and General Electric to keep share prices up, and dozens more.  

 

ROI. Roi is an acronym for return on investment.

 

Roll-up: A rollup  is when a private equity firm or other corporation purchases similar companies within an industry and creates various monopolies. Roll-ups are purchases of similar companies with complimentary business models to make business more competitive or monopolistic. Wall Street loves roll-ups because it creates a need for new debt and financing, and overall mergers and acquisitions. 

 

Sale-leaseback-real estate: One of the common ways a private equity company can extract value out of a company is through financial engineering. Frequently, a business is not just comprised of the business itself, but also the real estate underneath that business. By selling the underlying real estate of a business, the private equity manager can recapture much of the original equity put  into acquiring the business. However, this strategy, while letting the private equity firm “cash-out” by the sale of real estate, often burdens the business with higher rents—which can lead to the business eventual collapse. Notable sale-lease backs which have become insolvent and gone into bankruptcy under private equity ownership include  Southern Cross Healthcare (U.K.), HCRManorcare, Alaska Dispatch News, AMF Bowling Centers, Debenhams (U.K), Art Van Furniture, Friendly’s Restaurants, Toys ‘R Us, Jo-Ann Stores,  Red Lobster,  Joanne Fabrics, King’s Supermarkets & Balducci’s, Marsh Supermarkets, Mervyn’s Department Stores,  New England Confectionary Co (NECCO Wafers), Prospect Medical Holdings, Shopko,  Sears, Southeastern Grocers, Pipeline Health Systems  and Steward Healthcare. 

 

Secondary Buyout/Secondary LBO: An exit strategy whereby the portfolio company, instead of being brought public, or sold to another larger entity, is sold to another private equity firm. Like trading used cars, private equity titans often repurchase a company owned by other private equity investment managers, believing they can further maximize the profits or the value of a brand. According to Buyouts, secondary sales of LBOs reached an all-time high in 2019, for about $90 billion, up 25% over 2018. Secondaries are also a popular way to unload limited partnership stakes unto retail investors. According to Yieldstreet.com, general partner led secondaries were roughly $68 billion in 2021. However, secondaries are illiquid, have complex valuations and frequently have uneven cash flows. According to Harvard law professor John Coates, since 2018, secondaries have accounted for roughly half of all private equity exits.

 

Sophisticated Investor: A sophisticated investor is a high-net worth individual or institutional investor who is considered to have considerable depth of knowledge and experience to be able to benefit from types of complex investments such as private equity, hedge funds, venture capital and so on. However, there is no single definition which really fits the “sophisticated investor” bill. 

 

Sovereign wealth fund: A large, or large institutional investor from a country or specific geographic region. Notable large sovereign wealth funds are from Norway and Singapore.

 

Special Purpose Acquisition Company (SPACs) Also known as blank check company. SPACs, are pools of money that are established to purchase privately held firms and take them public, profiting from the IPO price. However, SPAC investors do not know which company will be acquired or when, and they may not make a return for years. SPACs provide liquidity but are another example of excessive financialization of the economy, which has grave and long-term disturbing implications. Another sign of Wall Street malevolence, more than 44 SPAC mergers have filed bankruptcy since 2021.

 

Sponsor: The private equity firm controlling the portfolio company

 

Stalking horse bid:  A stalking horse bid is an initial bid on the assets of a bankrupt company chosen by the bankrupt company under a court-supervised auction. The stalking horse sets the low-end bidding bar so that other bidders cannot underbid the purchase price. In private and leveraged buyouts, often the stalking horse bidder is a division or other entity of the private equity firm that put the company into bankruptcy.

 

Subscription financing: Subscription financing is a line of credit supplied by banks to private equity firms to manage capital calls from limited partners. Generally limited partners must supply committed capital within ten days, but sometimes private equity firms need to act quicker, within just a few days. Banks will supply lines of credit quickly to private equity firms to secure investments, but subscription financing is secured by the capital commitment of the limited partners, not the private equity firm itself.

 

Surplus: In insurance,  surplus is a simple measure, total assets minus total liabilities.  It is the only buffer between an insurer’s solvency or insolvency. 

 

Syndication: Generally, when a company is purchased in a leveraged buyout, numerous banks will back chunks of bonds or other debt for the general partner, but the entire loan or debt amount maybe spread across several banks to share risk, hence a loan is syndicated. However, once a bond or equity sale is consummated, the syndicators will in turn bust up the debt, and sell  it to other investors in entities such as mutual funds, hedge funds and other investors.

 

Take-private: Taking private is the process of taking a publicly listed company and bringing it into private hands usually  through a leveraged buyout

 

Target Company: This is the company the private equity company acquires either in part or whole.

 

Two and Twenty (2 and 20): This is the common fee arrangement of private equity, venture capital, real estate and infrastructure investments where the investment manager, or the private equity firm, collects an annual management fee of 2% of assets under management, and collects a 20% profit sharing reward upon the sale of the business which is commonly known as carried interest.

 

Underwriter: An underwriter is either a single or group of investment banks which agree to bring a company public through an initial public offering or IPO.

 

Unicorn: A unicorn is a new start-up privately held company, or start-up is valued at $1 billion or more.

 

Unlocking value/value creation: Private equity firms position themselves as to be uniquely capable of “unlocking value” from a company and releasing it to investors in their funds by reducing expenses, increasing sales, creating growth by mergers and acquisitions, creating economies of scale and so on. By “going private” theoretically a company has less of a spotlight on the company which is publicly traded. In practice, unlocking value on a company often depends upon how much debt a private equity firm can ladle on a portfolio company to extract debt-funded dividends, selling real estate and so on. 

 

Venture Capital: A type of private equity capital typically funded by investors to fund new businesses from scratch, particularly businesses with high growth potential. Generally venture capital differs from private equity/leveraged buyout model since it does not rely on as much debt, though venture capitalists are increasingly using debt in their capital structure.

 

Vintage Year: Like fine bottles of wine,  private equity companies assign a vintage year as when a company was acquired in a leveraged buyout. For instance, a leveraged buyout boom was in the years 2005, 2006, 2007 and so on, leading up to the financial crisis. A company acquired in 2007 would have a vintage year of 2007.

 

Whole Business Securitization (WBS): A whole business securitization is a transaction in which an issuance of notes is secured by a pool of income generating assets that make up a substantial portion of business. The underlying cash flows generated by restaurant franchising and music licensing are examples of WBS. Quick service restaurants such as Wendy’s, Taco Bell, Zaxby’s, Dunkin’ Brands Group, and TGI Fridays are examples of WBS, which can lead to more debt, and bankruptcies such as TGI Fridays in 2024. Thames Water, the U.K.’s largest water utility has collapsed in 2024 by using WBS to extract more than $3.2 billion in debt fund funded dividends. Hooters, the restaurant chain will likely file bankruptcy with WBS.  In May 2024, Roark Capital Group placed the largest whole business securitization bonds when it financed the leveraged buyout of the Subway, the restaurant chain with 37,000 restaurants worldwide.  Investment banks such as Morgan Stanley and Barclays plc specialize in this new toxic form of debt.. 

 

ZIRP- Zero percent interest rate policy. (ZIRP). During the zero percent interest rate, which bailed out banks, private equity firms had a bonanza to acquire companies and assets with low interest rates. However, ZIRP hurt the economy for savers, caused massive inflation, hurt pension funds and other long term financial institutions such as life insurance companies.

 

Zombie Company (Zombie Funds). Zombie funds get their nickname since they are companies that tend to limp along, unable to earn enough to dig out from under their financial and debt obligations, but still have may have credit to roll over their debt. The company is either growing very slowly, or generally does not have enough cash flow to keep going. A zombie company or companies cannot be easily exited or liquidated. Zombie companies were commonly associated with Japan in the 1990s, post-crisis Europe or even China. By 2020, corporate America is choking on its debt where 10% of companies are considered zombies, according to Federal Reserve estimates in 2021. Worldwide, according to Kearney, a global consultancy based in London, the number of zombie companies worldwide reached 2,370, which has grown 9% annually since 2010. A living dead company which exists beyond its original limited partnership agreement of generally, 10 to 12 years.. Much controversy exists, however, as private equity firms have been known to collect management fees on zombie companies while sponsors have no clear exit strategy for the investment itself, where private equity can tie up zombie companies from 10 to 12 years.