Reference

Private equity glossary

The vocabulary used on a deal team, defined the way a practitioner would explain it. Grouped by where each term shows up in the lifecycle.

Returns

IRR: Internal rate of return. The annualised discount rate at which the deal's cash flows net to zero. Time sensitive, so an earlier exit at the same multiple produces a higher IRR. Practice this
MOIC: Multiple on invested capital. Total value returned divided by equity invested. Ignores timing entirely, which is why it is always quoted alongside IRR. Practice this
DPI: Distributions to paid-in capital. Cash actually returned to limited partners divided by capital drawn. The realised half of a fund's track record.
RVPI: Residual value to paid-in capital. The unrealised value still held in the portfolio, expressed against capital drawn.
TVPI: Total value to paid-in capital. DPI plus RVPI. The headline multiple a fund reports before everything is sold.
Cash-on-cash return: Cash received divided by cash invested over a period. Used when a sponsor wants a realised figure rather than a marked valuation.
Value bridge: An attribution of equity value creation across EBITDA growth, multiple change, and debt paydown. The standard way a sponsor explains where returns actually came from. Practice this
Multiple expansion: Exiting at a higher valuation multiple than entry. Real when the business has genuinely improved, and a red flag in a model when it is assumed without cause.

Capital structure

Leveraged buyout: The acquisition of a company using a significant amount of borrowed money, where the target's own cash flow services the debt. Practice this
Sources and uses: The table showing where transaction funding comes from and what it pays for. Every LBO model starts here because it fixes the sponsor equity check.
Leverage multiple: Total debt divided by EBITDA. The shorthand for how aggressively a deal is capitalised.
Senior debt: The most secured layer of the capital structure. Lowest cost, first in line for repayment, and usually carrying maintenance covenants.
Mezzanine debt: Subordinated debt sitting between senior lenders and equity. Higher coupon, often with warrants or equity participation.
Unitranche: A single blended debt facility replacing separate senior and subordinated tranches, typically provided by a private credit fund.
PIK: Payment in kind. Interest that accrues to the principal balance instead of being paid in cash, preserving liquidity while increasing the amount owed at exit.
Cash sweep: A provision applying surplus free cash flow to repay debt early. The main driver of deleveraging in an LBO model.
Covenant: A contractual condition in a loan agreement. Maintenance covenants are tested periodically, incurrence covenants only on specific actions.
Dividend recapitalisation: Raising new debt to pay the sponsor a dividend before exit. It pulls returns forward and raises leverage without selling the asset.
Rollover equity: Equity the existing owner or management team reinvests into the new capital structure, aligning them with the incoming sponsor.
Enterprise value: The value of the whole business regardless of how it is financed. Equity value plus net debt.
Equity value: What the shareholders own. Enterprise value less net debt.
Net debt: Total debt less cash and cash equivalents.

Deal process

Deal sourcing: The origination of investment opportunities, through intermediaries, proprietary outreach, or sector mapping.
Teaser: A short anonymised summary of a business for sale, used to gauge buyer interest before an information memorandum is shared. Practice this
Confidential information memorandum: The seller's detailed marketing document covering the business, market, financials, and growth plan. Written to sell, so it is read sceptically.
Letter of intent: A non-binding offer setting out price, structure, and exclusivity before confirmatory diligence begins.
Quality of earnings: A diligence report testing whether reported EBITDA is sustainable and repeatable, adjusting for one-off, non-recurring, and owner-specific items.
Adjusted EBITDA: EBITDA after add-backs for items the seller argues are non-recurring. The single most negotiated number in a mid-market deal.
Investment committee: The internal body that approves or rejects an investment. Deal teams present a thesis, a price, key risks, and a walk-away point. Practice this
Working capital adjustment: A price adjustment at closing that trues up delivered working capital against an agreed normalised target.
Earnout: Deferred consideration payable only if the business hits agreed performance targets after closing. Used to bridge valuation gaps.

Fund economics

Carried interest: The share of fund profits paid to the general partner, commonly 20% above a preferred return. Practice this
Hurdle rate: The preferred return limited partners receive before the general partner participates in profits. Frequently 8%. Practice this
Distribution waterfall: The order in which fund proceeds are split between limited partners and the general partner. European waterfalls pay carry at the fund level, American waterfalls deal by deal. Practice this
Catch-up: The waterfall tier where the general partner receives an outsized share of profits after the hurdle is met, until the agreed profit split is restored.
Capital call: A request for limited partners to transfer committed capital when the fund needs it for an investment or fees.
Dry powder: Committed capital a fund has raised but not yet deployed.

Operating

Rule of 40: A software benchmark where revenue growth rate plus profit margin should exceed 40%. Used to judge whether growth is being bought at an acceptable cost. Practice this
Value creation plan: The specific operational initiatives, with owners and timelines, that a sponsor intends to use to grow EBITDA during the hold period. Practice this
Buy and build: Acquiring a platform company and then adding smaller businesses, aiming to grow EBITDA and arbitrage the multiple difference between small and large assets.
Add-on acquisition: A smaller acquisition made by an existing portfolio company rather than by the fund directly.
Hold period: The time between acquisition and exit, historically around five years. Shorter holds raise IRR at the same MOIC.

Learn the vocabulary by using it

Definitions stick once you have run the numbers. Six free practice desks cover the paper LBO, deal screening, returns, Rule of 40, value bridge, and carry waterfall.

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Educational practice only. Not investment advice. Assumptions are simplified for interview preparation.