Essential Vocabulary for Private Equity

When it comes to understanding private equity, financiers love their jargon.  We have put together a list of some frequently used terms to help you navigate your way through:

Alternative Investment

Alternative investments is a broad term that captures everything not in traditional markets i.e. not listed equity, bonds, or cash. Real Estate, commodities, venture capital, bitcoin and even private equity, are all alternative assets. Alternative investments can be regulated differently than traditional assets and are generally less liquid and held longer (although that is not always the case).

Capital Call

Fund managers usually have a particular strategy when constructing a fund. Perhaps, the fund manager is going to buy perhaps it is to buy certain technology companies. However, it is unlikely on day one of the fund the fund manager will know all the companies it will ultimately buy.  Therefore, when seeking funds from investor, a fund manager does not need all the capital at once.  Therefore, capital call describes the trigger point at which a fund manager requires investors to pay a portion of, or in some cases all of, the money they committed to paying to the fund manager. This is to allow the fund manager to complete an investment purchase (i.e. buy a property or company, depending on the investment thesis of a fund). Investment capital can be "called upon" in this fashion because not all investments will need to have the committed investment funds supplied upfront 


Distributions are basically what investor get paid for being an investor in a fund. The distribution will depend on the investment but are often the capital gains from a sale, dividend income, interest, and principal. Some assets will have minimum or mandatory distributions at certain time periods or lump sum cash distributions. 

Investment Period

Some funds will have a defined time frame of open and close dates and do not accept new investors outside this investment period. The investment period usually aligns with the availability of assets in the underlying investment and is set to ensure investor capital is available to deploy into assets as they become available.

Internal Rate of Return (IRR)

The IRR describes the annualised growth rate that is expected to be generated by an investment. It is a useful tool for comparing investments' annual rates of return over time.


Private equity may follow a trendline in the shape of Capital "J".  It follows a pathway that traces the fund value as capital deployment occurs, the fund's value lowers until the investment generates returns (red), followed by a break-even (blue) and dramatic gain (green).


The ease or efficiency with which an asset, investment, or security can be converted into ready cash without affecting its market price. Cash is the most liquid asset. Tangible items, such as houses, art and cars, are less so. Market liquidity relates to the ease of sale of an asset (is there a market for the goods).

Loss Rate (Loss Ratio)

Loss Rate is a risk measure that describes the percentage of invested capital lost over total invested amount net of any recovered proceeds.
Say a fund makes equal investments from $100 into five companies (see the image above). If "Company 1" went broke and the other four companies have no losses, then the portfolio has a loss rate of 20%. 

Low Correlation

Correlation is the strength of the relationship between two variables. Low correlation indicates that the variables are weakly related. A negative correlation will mean that when one variable moves in one direction (positive), while the other will move in the opposite direction (negative).  Alternative investments often have low correlation or negative correlation with traditional listed assets, and this attribute provides valuable diversity to a portfolio with both. 

 Joint Venture / Limited Partners / General Partners

JV - Private equity is typically capitalised via a Joint Venture (JV) entity (two or more parties will agree to pool their resources to accomplish a specific task). 
GP / LP - The two types of members of the JV agreement are a General Partner (GP), typically a fund manager, and the Limited Partner(s) i.e. investors who commit their money. Limited partners are commonly pension funds, institutional investors, and High Net Worth Individuals (HNWIs).  
Graphic courtesy of

 Private Debt (private credit)

Is the investment of capital to acquire the debt of private companies as opposed to an equity stake. So, rather than becoming a company's owner (by taking equity) investors provide credit.  Companies typically borrow from private debt investors to grow their businesses. Investors who provide private debt take the view that by providing the capital, they enable that growth and, all things being equal, will receive a return on their investment of the debt capital.

Private Equity

Is a type of alternative investment that describes investing capital into a private company not listed on a public exchange. Private equity investors may also buy out public companies and delist them, thus removing open public access to investment. Private equity is offered to investors by these companies to make acquisitions, fund innovation, expand working capital, and improve a target's balance sheet.

Private Market

Describes the unlisted investment activity of investors that purchase or sell equity and/or debt of privately-owned companies. The private market is not openly available or centrally exchanged, and private equity and private debt arrangements are often made directly between the owners of the asset and those who wish to invest.

Secondary Market

When dealing in alternative assets, the secondary market is where investors can buy and sell investments within the community of existing owners and buyers of that particular asset. As alternative investments are not listed they cannot be bought and sold like securities on a stock exchange.

Tenure (sometimes Maturity)

Tenure is used to describe the amount of time designated to a particular investment for it to achieve its goals.


The total value to paid in ratio (TVPI) is a measurement of the fund's performance. The TVPI describes the total of both the fund's residual value to paid-in ratio (RVPI) and its distributed to paid-in ratio (DPI). Therefore, TVPI = RVPI + DPI. Let's break these down to understand better.
o  The PI or "paid-in" describes how much capital called into a fund for investment and to cover fees at any given time.
o  The D "distributed" is the capital that has been returned to fund's investors following the sale of a fund's stake in a portfolio assets/companies.
o   The RV "residual value" is the fair value of its portfolio of assets/companies. This is measured by the net asset value (NAV).
This means: 
RVPI is the fair value of a fund's investments (NAV) divided by its capital calls on the valuation date. RVPI is the unrealised portion of a fund's value and will be higher at the beginning, when the majority of fund value resides in active portfolio investments. RVPI will decrease to zero with time, and assets are exited.
RVPI = NAV / LP Capital called
o   DPI is the total capital returned to investors divided by the capital calls at the valuation. DPI is the realised, cash-on cash returns generated by the investments. DPI is zero until the fund starts exiting investments and will be highest towards the end of its life.
DPI = sum of proceeds to fund LPs / LP capital called
In simple terms, TVPI is (Distributions + Net Asset Value) divided by Paid-In capital

Venture Capital

A subset of private equity, where financing is provided to small businesses (startups) believed to have significant growth potential. Venture Capital investment relies on the investor learning about the particular aspirations of a business and making an assessment of its capability to achieve the investor's targeted return on investment.


The information in this article is prepared by WeReach Alternatives Pty Ltd (ACN 652 305 658 AR 001 293 245), trading as Reach Alternative Investments, who is an authorised representative of Cache Investment Management Pty Ltd (ACN 624 306 430 AFSL 514 360) (Cache). Any financial products described in this email will be issued by Melbourne Securities Corporation Limited (ACN 160 326 545 AFSL 428 289), as disclosed in the relevant Information Memorandum.  All information is general information only and does not take into account your personal circumstances, financial situation or needs. Before making a financial decision, you should read the relevant Information Memorandum and consider whether the product is right for you and whether you should obtain advice from a professional financial adviser. 


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