Useful definitions
Abort Fees
Fees related to a potential transaction which in the end is not finalized. These fees are generally borne by the private equity investor.
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Affectio Societatis
Bind which unites partners of a company or a project through the sharing of profits and losses, risks and rewards. In case of a listed company, this bind is weak given that any partner/shareholder can exit at anytime. It is much stronger in case of a shareholding by a private equity investor.
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Anvar
The Agence Nationale de Valorisation de la Recherche is a French public institution in charge of advising, accompanying and financing innovative projects. The assistance proposed by ANVAR is a zero interest rate loan which is to be repaid only in case of success, as well as assistance in project management.
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BIMBO (Buy-In Management Buy-Out)
Buyout led both by existing and new managers. For example, the founder-owner of a company who would agree to stay for a transition period with his successor or to focus on specific aspects like acquisitions, export etc.
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Bridge financing
Financing supplied for a short period of time in order to finance a specific short term need.
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Business angel
Individual having substantial amounts of money at his/her disposal allowing him/her to invest in and help start up companies. Most business angels are former managers who have sold their company and want to help younger firms to reach the next level using their personal networks.
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Business plan
Document which describes and explains the strategy of a company over a minimum period of three years, including financial projections. This document is essential to secure financing and convince equity investors to invest in a project.
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Buy or sell
Clause between shareholders which compels one of the parties (A) to determine a share price and the other party (B) to sell its shares to A or to buy all of the shares from A at this price. This clause is particularly useful when investors roughly have a similar portion of the equity or if one of them is a financial investor and the other an industrial.
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Buy-out
See LBO.
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Carried interest
Profit sharing for private equity fund managers, generally around 20% above a rate called “hurdle rate”.
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Carve-out
Operation where a division or an economic entity integrated within a larger group is separated. Carve-outs make spin-off transactions very complex.
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Cash in/Cash out
Cash invested / cash recuperated.
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Closing
Moment or operations through which a transaction is finalized and physical flows (money/share transfers) are executed.
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Commitment
Payment or subscription commitment taken by an investor.
The amount of total commitments sets the size of a private equity fund.
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Covenant
Clause of a loan contract which, if not respected, can entail early repayment of the loan. In a leveraged transaction like an LBO, the bank covenants correspond to financial ratios which have to be respected by the borrower. The most well known indicators are net debt/EBITDA and interest charge/EBITDA. Covenants allow the lender to require the early repayment of the loan in case the company does not reach its financial targets, even if the repayment schedule was respected that far.
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Data room
Physical room which is set up to contain all documents needed to be reviewed by a potential investor in order to assess an investment opportunity. Very often used by M&A advisors to canalise the various information requests of potential buyers and to limit their access to the management of the company to be sold.
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Deal
Investment opportunity.
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Deal flow
Deals proposed to a private equity investor. Allows the fund to measure its commercial efficiency vs peers.
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Default
Happens when a bank covenant is not respected and early repayment of the loan can be requested by the lender.
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Development capital
Type of transaction where private equity investors bring equity in mid-cap companies. The transaction is generally carried out through a capital increase in order to allow for additional growth, either internal or external. These transactions occur generally in case of high growth companies but which are already well established.
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Downside/upside
Risk/opportunity in an investment.
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Due Diligence
Analysis conducted in order to validate the assumptions of a business plan as well as the strengths and weaknesses, risks and opportunities of a deal. Due diligence are generally carried out by external advisors as well as the private equity firm.
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Early stage
Financing of a product at a testing or first production phase. The project is generally less than 30 months old and generates or is about to generate its first revenues.
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Earn out
Portion of the acquisition price paid to the seller after closing and whose payment is conditional upon achievement of certain performances (set out at closing) by the company. This variable part is generally paid within a maximum of three years following the acquisition and is based on financial aggregates such as revenues, operating profit, net profit. This mechanism often allows an arbitrage between a seller's aspirations who would believe his company is under-valued vs its potential, and a buyer who'd have trouble assessing the risk associated to the investment.
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Equity
One of the three main financing means of a company along with mezzanine and bank debt. Equity value represents the value of the shares of a company in opposition to the Enterprise value which represents the value of the assets (Equity value + net debt).
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Equity kicker
Financial instruments giving access to a company's capital. Used by mezzanine lenders under the form of warrants or convertible bonds.
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Exit
Exit of an investment.
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Hands-on/Hands-off
Defines the way an investment is monitored by an investor. The hands-on approach suggests a tighter control and a more active presence in the company vs hands-off, which at the extreme is a sleeping partner position.
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Hurdle rate
Average annual return rate above which the private equity fund managers receive a portion of the capital gain realized on the fund. The rate is generally fixed and is close to the no risk rate. Currently around 8% per year.
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IPO (Initial Public Offering)
Introduction of a company on the stock exchange.
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IRR (Internal rate of return)
Average yearly return on an investment. Remains the principal instrument of selection between investment opportunities for a private equity investor.
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Key man insurance
Insurance over key managers subscribed by the company for the benefit of the lenders. Common in LBO transactions.
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LBO (Leveraged Buy-Out).
Acquisition of a company with significant recourse to bank debt, generally subscribed in a holding company specially created for the purpose of acquiring the shares of the target company.
Generic word for transactions carried out by private equity investors with: an existing (MBO), new (MBI) or combined (BIMBO) management team; with the owner (OBO); with a view to acquire further companies (Build-up)
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MBI (Management Buy-In)
LBO on a company led by one or several external managers backed by private equity investors.
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MBO (Management Buy-Out)
LBO on a company led by its management team and backed by private equity investors.
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Mezzanine
Form of financing completing or replacing senior debt under the form of instruments potentially giving access to capital (eg. convertible bonds).
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Multiples
Coefficients applied to certain financial indicators of a company (EBIT, net income, etc.) in order to value the company.
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NDA (Non disclosure agreement)
Agreement to be signed by any investor who is willing to start negotiations with a seller, previously to the delivery of any information whose diffusion is strategic. This agreement will display and list the information considered as confidential by the seller as well as the conditions in which the investor has access to them.
If the two parties finalize the transaction, the confidentiality agreement ends and is replaced by more complex agreements like the shareholders' agreement. On the opposite, if the transaction fails within the initially expected period of time, the investor will remain bound by the confidentiality agreement.
If the investor fails in its obligations, the sanctions will be the claim of damages, but which in reality are not always easy to obtain by the seller.
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Open Bid
Auction organized by a seller and/or an M&A advisor to sell a company. Potential buyers are carefully selected and the sales process is strictly defined.
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Pre-emption right
Priority right of a shareholder to buy the shares of another shareholder who plans to sell them. When a significant shareholder intends to exit a company, another shareholder can exercise its pre-emption right, avoiding the entry of a third party investor. This right is negotiated in the shareholders' agreement.
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Private equity
Generic word for all kinds of equity investing carried out by professional investors (funds, business angels). This word thus combines venture capital, development capital, turnaround capital and LBOs.
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Public to private (P to P)
Acquisition of a significant portion of the equity of a public company followed by an exit of the stock exchange.
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Reps & warranties
Guarantees given by the seller to the buyer.
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Seed capital (Seed money)
Financing of a project or a product at a very early stage (generally up to 18 months of existence), when the project is not fully operational yet.
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Senior debt
Bank debt repayable over 5-7 years
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Shareholders' agreement
Agreement binding the various shareholders of a company. Includes clauses regarding the management of the company, financial control procedures, conditions of capital increases, exit mechanisms etc.
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Sleeping partner
Passive partner not much involved in the monitoring of its investment.
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Spin-off
Buyout of a subsidiary or an economic entity of a larger group
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Start-up
Newly created innovative and high growth potential company.
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Stock-options
“Calls” which allow managers to buy shares of a company under advantageous conditions.
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Syndication
Financing (equity or debt) ensured by a pool of operators (equity investors and/or banks).
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Teaser
Quick and anonymous presentation of a company or a project in order to draw appetite of potential investors.
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Underwriting
Underwriting is the act when a financial operator (equity investor or bank) guarantees alone the full amount of financing needed for a transaction. The operator then has the possibility to syndicate 100% of the amount or keep some of it for itself.
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Vendor loan
Portion of the price paid to the seller after closing and which serves as a counter-guarantee to the reps and warranties
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Venture capital
Equity investment in projects or companies with high potential growth and profitability, usually with a technological or innovative concept. A few years ago, venture capital investors have distinguished themselves by investing massively in Internet-related projects.
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Warrants
Warrants give the right to buy shares of a company at a pre-determined price (the exercise price or strike price) until a pre-determined exercise date. They are generally issued at the moment of bonds or shares issuances. In French, one talk of O.B.S.A. (Obligations à Bons de Souscription d'Actions), or A.B.S.A., (Action à Bons de Souscription d'Actions).
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