A Private Equity Real Estate Glossary of Terms
Accrued interest: securities or bonds since the last interest payment date.
Acquisition: the means of acquiring, possession, or possession of a real estate asset, holding company, or partial ownership interest in the entity with underlying assets or an operating company.
Advisory board: is an appointed selection of experts that is external to the private equity real estate firm or company meeting on an informal basis to offer various advices or opinions, to a specific real estate fund or to the private equity real estate firm. Advice ranges from operating strategy, valuation, legal, marketing or future acquisitions.
Allocation: the number of securities assigned to an accredited or non-accredited investor, underwriter, or broker during the private placement process. The value of the allocation, because of marketplace demand, may be similar to or less compared to amount indicated by the investor throughout the subscription and offering process.
Alternative assets: is a non-traditional asset class, which include private equity, private equity real estate, venture capital, hedge funds, and real estate. Alternative assets may have a higher risk profile than traditional assets however, they have been shown to outperform the stock market in general.
Amortization: accounting method that steadily reduces the book value of an asset periodically charging expenses to the income.
Anchor investor: an investor whose duty is to attract other investors into the real estate fund.
Assets under management (AUM): The total sum of all the assets being managed (that is to say those intended for investment and those already invested) by an investment private equity real estate deals.
Best Efforts: Is a private placement offering where the investment banker consents to sell as much of the securities offering as the market demands, any units or shares that remain unsold are returned to the fund sponsor.
Blind Pool: All private equity real estate funds are funds in which capital is raised under an investment thesis with no assets explicitly identified prior to closing. This method eliminates conflicts of interest where principals are compensated by increasing the going in purchase price of the asset, raising the valuation, and subsequently selling securities to purchase that higher priced asset. Blind pools greatly increase management alignment where managers are compensated with carried interest.
Blocker: See ‘Feeder fund’
Brokers: Private individuals or firms (exempt market dealers, brokerage firms, banks) retained by funds to raise equity in exchange for a fee.
Break-up Fee: Monetary penalties charged to the party terminating a binding agreement, referred to as “break-up” or “break fees” regarding cancelling by the seller and a reverse break-up fees in the case of termination by the buyer of the asset.
Carried Interest: Is the share of the profit that was generated by the General Partner from an investment that was sold for a profit. The “carry” to the GP is normally about 20% of the profits earned through the fund.
Catch-up: Is a private equity real estate mechanism entitling the general partner (GP) to recover the pro rata from the hurdle rate accumulated by the limited partners. Example: a 8% preferred return to LPs and a 80/20 profit share (carried interest), would be 80% to the LPs and 20% to the GP. LPs receive their preferred return first (7%), then 20% of the total amount of the LPs preferred return is allocated as a catch up to the GP, then the remaining profit is split 80/20. In some cases, larger funds would return a portion of the LPs initial equity, in smaller funds this narrows the future acquisition purchasing capital and capital is returned at the windup.
CPC: Is a unique Canadian structure, and The Capital Pool Company is a corporate finance instrument for emerging or start-up companies in which the shares are offered from the TMX Venture Exchange. Using a reverse merger the CPC that holds no assets other than cash in a certain amount of time buys a private company, the principals of the CPC are paid out in cash or shares at the time of the merger. The resulting entity is listed on the Venture Exchange or if certain thresholds are met- on the senior board of the TMX.
Chapter 11: Is the part of the US Bankruptcy Code which offers for reorganization of the bankrupt entities assets.
Chapter 7: Is the part of the US Bankruptcy Code that provides the liquidation of the entities assets. Since Corona the majority of small businesses do not claim bankruptcy, rather the owners just winddown the entity.
Closed-end Fund: A fund with a predetermined number of shares or Units outstanding, which can be made available from a the initiation of a subscription period, quite like a IPO. Following the subscription period the offering is closed, and the shares or Units are traded with an exchange amongst investors, like a regular stock. The market cost of a closed-end fund fluctuates because of investor demand as well as changes in the overall values of its holdings or its NAV. Unlike open-end mutual funds, closed-end funds don’t stand all set to issue and redeem units or shares over a continuous basis.
Co-investing: Pension funds or Life insurance companies that invest side by side using a PE fund specifically within an operating company.
Co-investment Funds: are generally structures set up by the GP to take a position alongside with primary and parallel funds to get a percentage of one particular investment. The co-investment is usually furnished by one or more of a fund’s LPs at generally no fee and carried interest terms; sometimes the funds may be drawn upon from an external party.
Conversion Rights: It is the right but not the obligation of preferred shareholders to exchange their preferred (pref) shares to common shares; the rate of conversion can be any ratio but is generally one to one.
Convertible Debt: A type of debt instrument that can be converted into equity or cash.
Covenants: Financial covenants (covs) are a assurance from the borrower that certain activities will (affirmative covenants) or will not (negative covenants) be undertaken within the loan structure. This acts as protection for the lenders who default on their loan obligations. In real estate construction financing, covenants often rechecked on a tiered basis (maintenance covenants). Other covs are only inspected on the occurrence of a specific occurrence (incurrence covenants).
Data Room: A dataspace that is either virtual or physical that is set up by a potential acquisition company and includes all the documentation and material that is relevant to a sale. Also set up by funds for investors to look at relevant offering documents.
Deal Flo: Are investment prospects available to a Private equity real estate firm. If a land or asset deal is found by the firm without intermediaries, it is called a “proprietary” deal but if found through an agent or outside person to the firm, it is termed an “intermediated” deal.
Deal-by-deal Structure: With “deal-by-deal” structure, the investor can invest in a single asset. The risk is that the investment is not diversified and inherently creates a conflict of interest as the firm must secure and finance the land or real estate asset prior to offering it to investors. This gives the firm the opportunity to increase the price of land and “sell” it to the investors, creating a us vs them situation where fiduciary responsibility is neglected.
Deemed Management Fee: The total or partial amount of the management fee is waived. Due diligence: An independent and detailed analysis process, realized by or for the investors, on the selected company. This consists of a detailed analysis of the theory of the business plan, in addition to examining material facts (client accounts, contracts, bills, etc.) and opinions.
Earnings Before Interest and Taxes (EBIT): This measure is calculated in the profit and loss statement of the company. With respect to the accounting techniques, it may be calculated from the turn-over which inputs including expenses of products and services sold are deducted within the entity: wages; marketing, G&A overhead; and depreciations and amortizations. Also see ‘EBITDA’ definition.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): This measure is calculated in the profit and loss statement of a company. Depending on the accounting methods, it can be calculated from the turn-over of which the inputs such as costs of goods and services sold are deducted: wages; marketing, general and administrative expenses. Depending on the financial structure and the activity of the company, it can be relevant
to use a multiple of EBIT (or EBITA for telecom companies) or EBITDA, or any other financial instrument of measurement (EBITDAR – R standing for rental of aircrafts – for airlines for example).
Environment, Social and Governance (ESG) Management: Actively and systematically manage these environmental, social & governance aspects by establishing methodized E.S.G. programs with E.S.G. policies and procedures brought into place. Trebuchet Capital Partners ESG policy
European-style Waterfall: Also known as all capital first waterfall: a GP is entitled to carried interest only after all capital contributed by investors over a fund’s life has been returned and any capital required to satisfy a hurdle rate or preferred return has been distributed.
Family Office: a SEC registered advisory firm that invests and gives advice on the portfolios of their clients, generally high net worth or Accredited individuals.
Feeder Funds: Entities that “feed” capital commitments from a single investor or a ground of investors into the primary Limited Partnership.
Form 10-K: This is the annual report that most reporting companies file with the Commission. It possesses a thorough overview of the of the registrant’s business entity. The 10-K has to be filed within ninety days after the company’s fiscal year end.
Form 10-KSB: This is the annual report filed by reporting by SMB’s or small business issuers. It gives a wholistic view of a company’s business, although its requirements call for slightly less detailed information than required by Form 10-K. The report must be filed within 90 days after the end of the company’s fiscal year.
Form SB-2: This is the form that can be used be small business to register securities to be sold for cash. This form requires less detailed information about the issuer’s business than Form S-1.
Fee offset mechanism: Distributions from portfolio companies (for example dividends, service fees, Board attendance fees) are often not tax efficient if made to the fund. But in other cases the fess are not technically payable to the GP, as they have earned fees via their management fees. The mechanism is hence set up to direct the distributions to the general partner, and these distributions will be compensated to the fund by reduced management fees.
Feeder fund: Local or often offshore legal structure used by limited partners to invest in a limited partnership, often for tax and regulatory purposes.
Finder’s fund: Small fund used to source investment opportunities for the account of the limited partners.
Fund administrator: Specialist institution dedicated to the certification of cash flow movements of funds. It acts as a trusted third party to guarantee that the general partner handles the cash of a private equity fund in a specific way.
Fiduciary Duties: Highest standard of care between a fiduciary and beneficiary.
Financial Distress: Situation when a company cannot meet or has difficulty meeting its financial obligations.
First Closing: Private Equity Real Estate firms can raise capital for a investment real estate fund through securing investor capital called “capital commitments”. It is done through a number of “fund closings”. A first closing happens when the first ceiling, of “capital Commitments” is achieved and then the real estate fund can start to invest the capital they have raised. First Lien Term Loan: Typically, senior secured loans with a first priority on payment.
Fund manager: See ‘General partner’ or ‘Fund Sponsor’
Fund Sponsor: Is the manufacturer of the real estate investment fund, generally the same management group as the General Partner (GP)
Fund size: The sum of the commitments of all investors in a given fund. Fundraising A process during which the general partner accumulates the commitment of limited partners to create a private equity fund. These funds are raised from private investors, institutions and companies, which become fund investors (or limited partners) of the fund which will be invested in by the general partner
General Partners (GPs): A real estate investment must have a GP if it is a Limited Partnership. The GP is accountable for all aspects related to managing a real estate investment fund. The GP has a fiduciary duty to behave in the best interest of the LP’s. A GP, when raising large amounts of capital, will conduct a ‘capital call’ to the limited partners in the fund and then deploy the capital as agreed upon by the LPs in the limited partnership agreement (LPA). To protect the liability of the LPs the GP makes all day-to-day decisions concerning; operations, reporting and investment/divestment decisions for the real estate fund. The investors generally want the GP to place large amounts of capital into the fund, but this is capped at 9.9%, any more is considered material interest, most contribute 1-2% of the total amount. More investment caps the actual business expansion for the private equity real estate firm. Unlike the LPs, the GP is the last to get its capital back and gets up to 65% of its earned profit sharing escrowed- if in case the fund is upside down or underperforming the LPs take the GPs profit share. On the preferred return it is not unusual for the GP not to earn any interest or partake in any distribution. The GP also accepts unlimited liability for any outside debt incurred during the fund’s life as well as any unpaid tax, even after the fund windup.
Hurdle rate: See ‘Preferred return rate’.
Indemnification Agreement: an agreement between the LPs and the GP to give protection, security and in some cases, compensation for unexpected circumstances that might occur throughout the limited partnership’s life.
Investment Committee (IC): Is a board of directors on the Limited Partners side of the LP that has decision making authority into the investment and divestment choices that the LP makes. This committee is chosen from investors in the fund and is delegated under the authority of the General Partner of the real estate fund. This IC board does not run the company day to day nor is like a board of a directors at a corporation, where directors can be liable for certain aspects of their decisions.
Investment Manager: An investment manager is the one who conducts the day-to-day actions of the Private equity real estate fund; it assesses potential investment prospects, provides advisory services towards the fund’s portfolio companies, and handles the fund’s audit & reporting processes.
Investment Period: The timeframe where a real estate fund can draw down limited partner capital commitments to make investments. In the majority of funds this process lasts 2 to 5 years calculated from the funds first close. In non-intuitional funds, the capital can be called at first close, this way smaller funds do not have issues with LPs not contributing on time. In small sub $250m funds, committed capital is deployed very quickly.
IRR: Internal rate of return: a popular way of measuring the return earned by investors from a fund. It symbolizes the discount rate that renders the net present value (NPV) for a series of cash flows.
J-curve: The J-curve in Private Equity Real Estate represents a limited partners cumulative net cash position inside a real estate fund over the fund time period. The curvature starts off with a progressively negative net cash position because investment capital is drawn down throughout the investment periods before reversing direction as limited partners start obtaining distributions and or profit sharing from a maturing portfolio of assets.
Limited Partners (LPs): Are investors called LPs, they participate in private equity real estate funds as investors, with no participation in the fund’s day-to-day procedures, by having an individual limited partners liability solely limited to their capital commitment to the real estate fund. Limited partners by contract invest in the fund to supply capital for real estate investment when it’s drawn down (or “called”) from the private equity real estate fund. They get distributions of on a regular basis called a preferred return and also receive an agreed upon share of profits when real estate investments are sold by the GP on behalf of the real estate fund.
Limited Partnership Agreement (LPA): Every LP needs a LPA. This LPA outlines the terms conditions and applicable to all investors in a real estate fund, in particular a fund’s general partner and limited partners. The LPA discloses, among other things, the GPs legal rights and duties associated with fundraising, investment capital calls, profit shares/ distributions, how overhead and expenses are allocated, the fund governance, restrictions on investments and debt as well as real estate fund reporting, and fund windup.
Limited Partner Clawback: A common term in the private equity real estate partnership agreement. It’s intended to safeguard the GP against future claims, if the GP of the LP end up being the matter of legal action. Within this provision, a fund’s LPs agree to cover any legal judgment imposed upon the LP or the GP. Typically, this clause contains limitations in the timing or dollar amount of the judgment, such as it can’t exceed the LP’s committed capital towards the real estate fund.
Management Fee: An expense incurred by the Private equity real estate fund’s investment manager. This covers the managers overhead, employees, office, accounting, and other expenses related to obtaining and sourcing real estate assets or management of construction projects. Management fees range from 1% to 2.5% depending on the firm and the strategy of the fund. It can also depend on the leverage the Private equity real estate firm has during the fundraising period, but this is not always the rule. Debut funds can eliminate, reduce, or defer management fees. By deferring or waiving these earned fees, GPs can avoid paying GST on their fees. As a strategy to gain higher IRRs, managers will routinely waive fees or defer them to the windup of the fund where they can choose to take the earned fee or not. By deferring or using the management fee as a committed capital, managers can have substantially more capital to deploy to real estate assets thereby giving a cushion or competitive edge to the fund.
Management Fee Offset: Decrease in a fund’s management fee by a percentage of the fees collected from a fund’s portfolio assets.
Minimum LP Commitment: The majority of funds enforce restrictions on the minimum capital commitment that limited partners could make towards the real estate fund. Managers do this for a number of reasons, scale of economy being one, as external fund administrators charge per investor account, the costs incurred administrating and wiring out distributions cut into returns and IRRs making good funds look poor from an administrative percentage overhead. Most small funds have high overhead relative to large funds and are discriminated against by large investors or institutional investors.
Net Asset Value (NAV): Value of a real estate fund’s total assets minus any liabilities.
Net Debt: Net debts are reached by subtracting the value of a real estate fund’s liabilities from the worth of it’s liquid assets. The primary aspects of net debt are interest-bearing bank mortgages and cash. What other components of debt-like liabilities and on hand cash or equivalents that will be included in net debt is usually the topic of rigorous negotiation.
Net Invested Capital: Net invested capital contains contributed capital, less any capital returned from divestments as well as any write downs of investments, if any.
Non-disclosure Agreement (NDA): Binding legal agreement, also referred to as a ‘confidentiality agreement’, which restricts access for third parties to information that parties share. NDAs can be structured to protect a one-way or even a shared flow of information.
No-Fault Divorce Clause: A clause that can appoint a new general partner to manage the real estate fund in the event that the general partners is guilty of gross misconduct or breaches of material provisions within the LPA. However, these clauses are being used to enhance corporate governance as well as the security for limited partners. Most funds have this clause now were a majority of limited partners can vote to make changes to the general partner without cause. In these cases general partners are made whole with any management fees outstanding or deferred and any capital committed into the real estate fund is returned to the GP.
Offering Memorandum: An OM is a document issues by or on behalf of a private equity firm with the object of raiding money from the investment community. Sometimes referred to as a Private Placing Memorandum.
Oversubscription: In a public company placement this is called a ‘greenshoe’ and is generally 10% to 15% of the offering. In private equity real estate funds this happens when the investor demand for units exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements (PP), this occurs when a real estate fund offering is in demand from investors. This can happen for several reasons; if there is a larger well known anchor investor or large names are attached to the project or because of the potential growth characteristics of the real estate investment or the fund happens to be very investor friendly and overly generous with its profit sharing or lack of fees. Some offerings will be purposely undersized in order to create a pent up market demand or illusion of demand for their next fund offering.
Oversubscription Privilege: In a rights issue, it is an arrangement through which unitholders are granted the right but not the obligation to purchase any real estate fund units that are not purchased.
Partner: The partner within the management company or GP of a fund takes on unlimited liability to the debts incurred in the fund.
Placement agent: Intermediary specialized within the area of raising capital. A provider to GPs looking to raise capital for a a private equity real estate fund. Sometimes the “issuer” will hire a placement agent to help the PE fund partners raise investment capital so GPs can concentrate on management issues rather than on raising capital. The placement agent services is usually regulated. In Canada, this could be a licensed broker, wealth manager, Exempt Market Dealer (EMD), placement agent, or investment bank. In the United States., these companies are regulated by way of the NASD and SEC.
Private placement: it is the sale of a security straight to a limited quantity of investors.
Private placement memorandum (PPM): (also offering memorandum or OM) established document explaining the terms and characteristics of investments presented through private placement.
Private securities: are not traded on a stock market and the cost of the stock or unit is fixed by means of negotiations involving the seller or issuer and potential investor.
Portfolio Company: A firm that a Private Equity fund invests in. A PE fund will invest within a limited number of companies that represent its portfolio of companies. These firms are also referred to as investee companies or, pre-investment, as target firms.
Private Equity: Equity securities of firms that haven’t “gone public” (are not listed on an open exchange). Private equities are usually illiquid and regarded as a long-term investment. Since they are not listed on an stock exchange, any needing to sell their shares in a private company must has to locate a purchaser without a marketplace. Additionally, there are many transfer restrictions on private equity securities. Investors in private equity real estate securities typically obtain their return by means of one of three ways: an initial public offering (IPO), a sale or even a merger, or possibly a recapitalization.
Quartile: It is the part of a segment within a sample size representing a sequential quarter (25%). Therefore, the first Ten of 40 real estate funds of this segment are the 1st quartile.
Redemption: The withdrawal or returning of all of the investors equity.
Redemption Rights: Redemption rights provide the holder of an equity stake the right but not the obligation to divest the capital invested back to the issuer.
Representations and Warranties: Legal statements of fact and promises before sale and after the transaction that underpin certain elements of the transaction as stated in a sale agreement. Reps and warranties are principally used to give protection to a buyer any time a sellers statements of fact concerning the target asset prove to be false, to allocate a portion of overall performance risk at the target asset to the seller and to provide an chance of a purchaser to achieve more information on the asset.
Return on Capital: a financial metric that calculates the yield an investment achieves for investors.
Return on Investment (ROI): a financial metric that calculates the quantity of return on an investment compared to an investment cost, frequently expressed as a percent and then calculated as net profit and cost of that investment.
Revolving Credit Facility: a revolver is a non permanent line of credit extended to the borrower from a bank, used to fund working capital.
Sale and Purchase Agreement (SPA): A contract entered into between a buyer and a seller that governs the terms and conditions of the envisioned transaction and the acquisition process.
Search Fund: A new Investment entity through which investors fund a GP to assist find, buy and operate a company or asset.
Set-up costs: Expenses paid for by a real estate fund for its set-up. They usually include legal fees, placement agents fees and other expenses associated with this initial operation.
Special Purpose Vehicle (SPV): A legal entity set up for a special purpose and to isolate financial risk.
SBIC: A Small Business Investment Company. A company licensed by the SBA to obtain federal government leverage in order to raise investment capital to utilize in venture investing.
Secondary Market: The marketplace for the sale of limited partnership units in Private Equity Real Estate funds. Often LPs made a decision to divest their investment in a real estate fund, typically to improve cash on hand or simply because they can’t fulfill their requirement to invest when another capita call comes. A number of investment firms specialize in purchasing these units, usually at a discount to price.
Subscription Agreement: The application submitted by an real estate fund investor wanting to enroll in a limited partnership. Prospective real estate investors are approved by the GP before being admitted as a partner.
Succession Plan: The cornerstone for alteration of company control from the group of business owners to the new set, frequently while using assistance of private equity.
Syndicate: A group of Underwriters or even broker/dealers who offer the sale of a security from a real estate fund. (See Allocation)
Syndication: A number of investors presenting funds collectively as a group on the particular real estate deal. A lead investor usually coordinates such deal and represents the group’s members. Within the last couple of years, syndication amongst angel investors has become more prevalent, enabling them to fund larger deals closer to those to emulate a a small venture capital fund.
Standstill Provisions: Terms in an agreement which restrict the seller from getting with possible buyers over a specified period of time to safeguard the interests from the winning bidder, who is going to bear considerable transaction cost during the final phase of the process.
Stapled Secondary: A sale of the limited partnership interest combined with a commitment to purchase a General Partners next real estate fund.
Side letter Agreement: Is signed between the GP and LPs outside the LPA