PE Dictionary

Accounting Standards refers to a set of assumptions and rules that forms the basis for- and regulate the presentation of a set of accounts.

Accounts following different standards may appear quite different and it is important to understand the characteristics of different accounting standards if you are trying to compare performance in two companies which present their accounts by different standards. It would probably make markets more efficient if all companies presented their accounts in accordance with the same accounting standards. However, legislators fail to agree, and US GAAP for example, differs from IFRS on a number of points.

The amount by which the value of an Investment exceeds, or is less than, the Acquisition Cost.

The Capital Gain/(loss) loss may be realised or unrealised. Realised principally means that the asset has been sold and the value of that transaction is known. An unrealized value change refers to the difference between the Acquisition Cost and the value at the time of valuation.

In Norway, subject to certain conditions, there is zero tax on capital gains realised by a company (sktl. § 2-38).

The term GAAP is typically preceded by a national code, US GAAP, Norwegian GAAP. The term then refers to the Generally Accepted Accounting Principles in that jurisdiction.

The IFRS standards were first published in 2001 by the International Accounting Standards Board. It replaced the older IAS standard. IFRS is an attempt to set an international standard and is particularly important for companies that have dealings in several countries and need to align accounts across jurisdictions. Also of course, analysts may more easily compare the performance of different companies.

IFRS is often thought of as meaning accounts based on fair values but one may also present IFRS accounts based on historic cost.

The abbreviation refers to a company incorporated outside Norway, which is not a separate tax subject but where each shareholder or partner is individually responsible for his or her share of the annual taxable result of the company. A typical example is a limited partnership (Norw. ex.: indre selskap og kommandittselskap).

The tax reporting of investments in such companies will often be complex because different elements of income may be taxed at different rates in the country of the investor. It is necessary to analyse the accounts of the UDLS quite thoroughly to arrive at the correct taxable result for each investor.

VAT is a general consumption tax on the value that is added to the goods or services in each production stage or trade part of the domestic supply chain.

By each stage, goods and services which will form part of the final product are purchased with VAT added to the purchase price. The suppliers receive payment including VAT and submit this amount to the state. At the same time they recover VAT paid to their suppliers further down the value chain.

In the end, the consumer pays the entire VAT. In Norway, the general rate is 25 percent, some type of goods and services are subject to a lower rate.

In general, withholding tax refers to the obligation an employer paying salaries or a company paying dividend, have to “hold back” and pay an estimated amount of tax to the national tax office on behalf of employees or shareholders.

Withholding tax may be refunded if it is later determined that the recipient’s tax liability was lower than the tax withheld. In some cases the withholding tax is treated as discharging the recipient’s tax liability, and no tax return or additional tax is required.

Withholding tax may be levied on income from securities owned by a foreign shareholder, i.e. deducted before distributions are made and money transferred out of the country. By such regulation, countries means to ensure that domestic profits are taxed domestically.

Whether or not withholding tax must be deducted, and the level thereof, depends on the status of the recipient and also on anti-double taxation treaties between countries. Following such agreements rates of 25-30% will typically be reduced to 15% or less.

Norway – Corporate shareholders resident in the EEA may be entitled to a full refund of withholding tax under the participation exemption method of the Norwegian Tax Act.

A Capital Call or a Drawdown is issued as a written notice to investors, requiring them to pay into the fund a portion of their Commitment. The Limited Partnership Agreement will state a minimum number of days notice period, normally 10 days.

The amount of money received from a capital gain event, as opposed to interest on a loan or return of loan principal. With reference to a fund, Capital Proceeds is typically money received following the sale of shares in a Portfolio Company. A portfolio company may also distribute dividends which, depending on the nationality of the Beneficial Owners, may be subject to Withholding Tax.

The fund will return money to its investors (Limited Partners and General Partner), in accordance with the Waterfall regulation of the Limited Partnership Agreement. A Distribution is preceded by a Distribution Notice which may give some background to the Distribution but also typically categorizes the money returned in relation to the Waterfall mechanism of the fund (return of Outstanding Capital, Outstanding Preferred Capital, interest, Capital Proceeds).

Distributions In Specie are distributions from the fund which are not in the form of cash. It will often be a distribution of shares in an underlying Portfolio Company. As any other distribution, a Distribution in Specie must also be made proportionally to all limited partners.

Distributions of listed or otherwise liquid shares would normally not cause difficulty for the investors who may themselves decide when to sell the shares. Often however, the shares so distributed are not easy to realise and in general Distributions in Specie are not popular among investors.

There are a number of clauses and Side Letter issues related to such distributions. The GP may have to consult the Investor Committee (IC) before making such distributions, and the IC may even be able to influence the valuation of such a distribution. That in turn will impact on the performance figures and Carried Interest calculation.

Some investors may refuse to accept Distributions in Specie and request a Side Letter stating that the GP upon such occurrence must realise the asset on their behalf and distribute cash. This may or may not have an effect of the valuation of the distribution.

Distributing assets in specie may be necessary in order to terminate the fund on time. It may also be in the investors’ interest when an early sale would imply dumping the share at a low price.

Escrow generally refers to money held by a third party, normally in a bank, on behalf of transacting parties. The funds are held by the escrow service provider until it receives the agreed instruction to release the funds. In the case of a legal dispute, the final instruction may be in the form of a court order.

An escrow account may last for a limited period of time, the funds held following an agreed date to be distributed in accordance with initial agreement.

The LPA for some funds provide for early compensation to the GP of carried interest. The terms may include that part of such amounts are to be held in escrow accounts for a period of time or until certain conditions are met (see Claw Back).

Recallable distributions to the investors in a fund are distributions which in accordance with the Limited Partnership Agreement may be subject for a second Capital Call. In other words, such distributions increase the amount of Remaining Commitment. Why recallable distributions – a couple of examples:

Example 1 – Excess capital called – The General Partner (GP) may have called capital for a transaction which for some reason did not happen. The GP wish to return the capital to the limited partners, but as the money was never put to use within the investment strategy of the fund, the distribution will be recallable. In other words, the GP gets another chance to investing the money.

Example 2 – Early exit – The GP makes an investment which for some reason is realised very quickly. The GP will normally have secured the right to recall such almost immediate returns, however, the capital element only, not the potential profit element of the distribution.

Other examples may be money tied to bridge investments, guarantees, warranties or underwriting of investments.

Many funds are set up as legal structures where all or part of the fund capital may be kept by the investor until needed and therefore called (Capital Call) by the fund. The term Commitment is used to describe that the investor has made a commitment to finance the fund up to and including a certain amount of money (see GP and LP Commitment).

Refers to the amount the GP commit to invest in the fund. The Limited Partners (LP’s) typically request that the GP’s invest substantially in the fund they are raising. Usually, the GP commitment needs to be at least one percent of the total committed capital.

Refers to the amount the LP has committed to invest in a fund. The liability of the Limited Partner is typically limited to their Commitment, as opposed to the liability of the General Partner which is normally without limit. In practice therefore, the General Partner is normally set up as a limited liability company.

It is not uncommon that the General Partner of the fund may have the authority to draw an additional amount over and above the stated commitment and may also request returned amounts previously distributed. If so, the conditions for such actions will be detailed in the LPA.

Having Committed Capital to a fund structure, an investor will upon the receipt of a Capital Call notice, in accordance with the Limited Partnership Agreement (LPA), be required to pay money into the fund up to an amount equalling his Commitment. The Outstanding Commitment, is the amount paid inn to the fund at any given time, less repayments of capital and distributions.

Private equity funds will normally operate with low cash balances and will not draw down the total amount committed from investors at once. The investor is free to invest the remaining part of his Commitment elsewhere, always keeping in mind that the fund may issue Capital Calls at relatively short notice. The General Partner will also want to keep Outstanding Capital low because the waterfall mechanism typically stipulates that the investor shall receive an annual return (Hurdle Rate) calculated on his Outstanding Commitment from time to time, before the General Partner may receive any Carried Interest.

In relation to an Investor, the amount of its Commitment which, at any particular time, remains available for drawdown.

Strictly speaking, Advisory Fee is paid for advice received from a consultant or a fund manager, while a Management Fee or General Partner’s Share is received for taking on a responsibility to act on behalf of another, typically a fund entity. The fund entity may be set up in such a way that it does not in itself have a “legal personality”, it is not set up to act in its own name. In jurisdictions like Jersey or Guernsey, the funds are often Limited Partnerships which are acting through a General Partner (No. Indre Selskap eller Kommandittselskap som virker ved henholdsvis Hovedmann og Komplementar).

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The distinction between Advisor and Manager may not always be clear and the “Advisor” may have such authority that the term management fee would be more appropriate.

The Management fee and General Partner’s Share typically changes over time. The final fee structure is often a result of negotiations between the managers/General partners and the investors during the fund raising period. The better track record the stronger the position of the General Partner, but it is common to find some sort of mechanism which reduces the fee over time and/or corresponding to the value of the portfolio.

Fees collected by the General Partner from third parties, as a result of conducting the business of the fund, e.g. transaction fees, finders fees, co-investment fees and underwriting fees, are typically deducted from the General Partner’s Share.

In Norway, Managing a fund is a service which is VAT exempt while giving financial advice is not. This is important as most investment companies will not be VAT registered and therefore will not be able to recover VAT.

Carried interest is a term for an the extraordinary profit element due to the General Partner if the performance of the fund exceeds a certain annual return, often termed the Hurdle Rate. The carry element will typically be in the region of 10 – 30 % of the return above the Hurdle Rate, and is in disproportion to the amount the GP has invested in the fund.

Commonly, Carried Interest is calculated based on total fund performance. This is the most LP friendly scheme and Carried Interest is not paid until the amount paid-in to the fund and the Hurdle Rate element have been distributed to the investors.

The most GP friendly scheme on the other hand is a strict “deal by deal” Carried Interest under which the General Partner would receive carry following the successful realisation of one investment even though the remaining portfolio at that time may have a value which if realised would represent losses for the investors. A number of intermediate solutions exist, all designed to balance GP motivation and LP return.

The term is perhaps most easily explained with an example. The fund invest 100, one year later 110 is realised. The fund has an 8 % hurdle clause and 20 % carry.

Without catch-up the LP will receive the original 100 invested + 8 being the agreed hurdle and 80 % of the remaining 2, in total 109,6. The GP will receive carry, 20 % of the 2 being 0.4. 

With full catch-up the LP will receive the original 100 invested + 8 being the agreed hurdle. The remaining 2 will go to the GP, the result being that the full return of 10 has been split 80/20 between the GP and the LP. By skewing the distribution, following the distribution of hurdle to the Limited Partner, in favour of the General Partner, the General Partner has «caught-up» with the Limited Partner as far as return is concerned.

The Clawback terms of the LPA describes the process and terms under which the fund may recover money which have been paid to the General Partner. The reason for such recovery is typically that some event has occurred which reduces the performance of the fund compared to what has previously been used as a basis for paying carried interest or management fees.

A number of issues to pay attention to regarding clawback provisions:

– The GP may have paid tax on the amounts received – unrecoverable tax is normally not subject to clawback.

– How do you deal with clawback when the fund has made distributions in-kind?

– How do you deal with clawback following ownership changes in the fund?

The hurdle rate is a minimum rate of annual return on net capital paid into the fund, which is due to the investor before the General Partner may have a right to Carried Interest. In other words, if the performance of the fund falls below the hurdle rate, there will be no Carried Interest to the General Partner.

The market standard is a Hurdle Rate of 8 %, but rates from 5 – 12 % may occur. In theory, the Hurdle Rate should be lower in periods of low interest rates and vice versa. In practice the level has been remarkably stable. In this regard, it is important to note that the fund’s lifetime is typically 10-15 years and the level of interest rates will fluctuate over time.

A subscription fee is a fee charged at the time of subscription to the fund, payable at first Close. It is typically calculated based on Committed Capital to the fund and is used to cover the establishment costs of the fund. The size of the fee tend to be dependent on the expected size of the fund as establishment costs are not necessarily linearly related to the amount of Committed .

Fees directly referable to the making of an Investment.

The Limited Partnership Agreement will typically include a provision that any Transaction Fees received by the Investment Advisor or General Partner, from a third party, related to a transaction of the fund, should be deducted from the Advisory fee for the period.

Underwriting fees is collected by banks, financial institutions, private equity funds etc. from having “guaranteed” the sale of eg. a new issue of shares in a certain number and at an agreed offer price. If the market does not subscribe to the shares in sufficient numbers, the underwriter is obliged to purchasing the shares.

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The Limited Partnership Agreement will typically include a provision that any Underwriting Fees received by the Investment Advisor or General Partner, from a third party, related to the commitment of the fund’s assets, should be deducted from the Underwriting fee for the period.

In private equity, the term waterfall refers to the distribution mechanism. The waterfall clause in the Limited Partnership Agreement states who shall receive the first money to be distributed and so on – until all the fund’s assets have been distributed and the fund closed.

A typical waterfall clause states that after all costs are covered, first in line for distributions up to the amount paid into the fund, are the Limited Partners and the GP in the role of investor. Secondly, assuming there are funds available, the Limited Partner and GP as investor, will receive the Hurdle rate return. If the LPA has a Catch-Up mechanism, then this follows, before finally the remaining assets, as realised and distributed, are divided between the LPs and the GP as recipient of Carried Interest (see Carried Interest).

The waterfall mechanism may be complicated by various clauses addressing the element of time. The General Partner wish to be able to receive carried interest as early as possible, and the Limited Partners may have accepted this under certain conditions. The conditions typically include escrow and clawback stipulations, obliging the General Partner to return all or parts of such early distributions if the performance of the fund is negatively impacted by later events.

In accordance with the AIFM Directive, an Alternative Investment Fund is a “Collective Investment Undertaking which raises money from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors” – and which is not a UCITS fund.

The definition fits a number of different vehicles and schemes. An AIF may be structured as a limited liability company or a partnership, legal structure does not matter. It is unclear how many investors are required for an undertaking to be considered “Collective”, probably more than two but a large number is not required.

A requirement to invest for the benefit of its investors disqualifies charities.

In a Blind-pool investment fund, the investor will before making a commitment not know exactly which investments a fund will make. There will be Investment Restrictions limiting the mandate of the fund manager, but within those parameters the investor is otherwise blind.

The degree of “blindness” is very important, particularly to large investors with a varied portfolio. They may want to enter a particular market segment and will look hard at the Investment Restrictions section of the limited partnership agreement.

In hedge funds, visibility will often be very low as these funds tend to have a very wide investment mandate.

A Buy-Out fund invests in shares in existing companies with a view to assist in the further development of these companies, and thereafter realise the investment at a profit.

The Buy-out fund manager uses a number of strategies to develop the company. It may further strengthen the management of the company, implement product and market penetration strategies, strengthen balance sheet, provide further funding and so forth.

The Buy-out fund manager seeks control. If unable to acquire a majority of the shares in the company, control may be sought through shareholders agreements, board representation or shareholder alliances. A level of control is particularly important with regards to exit from the investment.

A Fund-of-Funds is a fund which purchases shares in other funds. It may be a Primary Fund-of-Fund participating as an investor in new funds from day one, or it may operate in the Secondary market investing in limited partnership shares in existing funds (see Primary- and Secondary Funds).

A Fund-of-Funds will by its nature be a highly diversified investment. Visibility into the underlying fund structures and the direct investments made at that level will typically be somewhat limited and poses some particular challenges with regards to portfolio- and tax reporting.

The term refers to the time in a company’s or a technology’s life cycle that a fund may invest (see Investment Restrictions).

A Buy-out fund is typically invested in companies which have developed a certain size and presence in the market but which needs assistance to grow and expand. The main risk is related to how to develop the company further. The downside risk tends not to be bankruptcy but low or negative value development over the funds lifetime.

In a Venture- or Seed Capital fund the investor must accept that the companies in the portfolio are trying to develop new technology, new working methods, new medicines etc. The risk of never getting into the marketplace is significant.

A “National fund” (No. Nasjonale Fond) does not meet the full requirements of the UCITS regulation but are specifically regulated under national law. In Norway, these funds are regulated under the Norwegian Securities Trading Act (No. Verdipapirhandelloven kap. 7). Typically, the deviation from the UCITS regulation is related to marketing and investment profile.

A National Fund cannot without a special permit, be marketed in another country.

A Primary Fund is a first time investor. The fund buys shares in an existing company (private equity fund managers do not typically establish companies), and works to develop that company further by strengthening management, work on product and market penetration strategies, strengthen balance sheet, by providing capital and so forth.

The term Primary Fund is mostly used when in context it is necessary to distinguish Primary- from Secondary Funds. Otherwise, it is generally implied that a Venture-, Buy-Out-, Seed- and Early Stage fund is a Primary Fund.

Having a right to redeem shares means that investors, normally at certain predetermined intervals, may request that their shares are redeemed in compensation for (normally) cash. Having given investors such rights, does impose some constraints on the operation of the fund. Among them the difficulty of deciding, if large net redemptions are called, which assets to sell in order to be able to compensate shareholders wishing to redeem shares. The difficulty lies in properly assessing how to share assets equally and consistently between shareholders requiring redemption of their shares and remaining shareholders.

As the name suggests, a Secondary Fund is specialising in becoming the «second owner». A secondary fund of funds for example, invests in existing funds by buying shares in such funds from limited partners which for some reason want to exit before the fund has run its full term. As the funds typically live for up to fifteen years, the reasons for wanting to exit early are many. Investors may just want to exit an illiquid investment, but more commonly they want to restructure their portfolio. Bank and pension funds which are under strict regulation as to the liquidity of their asset base, may in times when the value of unlisted assets change differently, typically more slowly, than listed assets, need to rebalance their portfolios.

A Secondary Fund may also take over a Tail-End portfolio in its entirety. The situation here is typically that a fund is coming up towards its agreed end-date, still with a portfolio of investments which for some reason have not yet been realised. The reasons for non-exit are varied; market slump, ownership structure or disagreements over strategy, product or market development behind plan and so forth are typical reasons. A Secondary Fund, which can offer additional time to developing the portfolio, offers in these cases a full exit opportunity for the fund.

A Special Fund is a higher risk sub-category of a National Fund. In Norway it is subject to regulation under the Norwegian Securities Trading Act (No. Verdipapirhandelloven kap. 7).

A Special Fund is exempt from parts of the UCITS fund regulation. The funds may leveraged, it may invest in a broader category of assets, it may weight its investments and in doing so take a higher risk, it may invest in less liquid assets and does not have to publish the funds value on a weekly basis. Hedge funds are typically Special Funds.

A Special Fund does not have to allow exit from the fund as often as UCITS funds, but without an exemption from the Norwegian regulatory authority (No. Finanstilsynet), investors must be offered an exit at least once a year.

Special Funds are always subject to the investment criteria of the fund and not less than twice a year the fund must report on adherence to these criteria and the development of the value of the fund.

Special Funds are subject to particular marketing regulation.

Overlapping terms used to describe funds which invest in early stage technological development. Typically these companies are relatively small, the technology is not yet proven, at least not outside the laboratory, and time to market will be uncertain at best. The upside potential if successful however, is extraordinary, but a large number of the companies in this sector will not succeed.

From an investor protection perspective it is an enigma that the EuVECA directive (see EuVECA), lowers barriers to entry for investing in this type of fund compared to funds in other and lower risk sectors.

The term vintage refers to the year of the first close of a fund entity. From this date the fund will be in investment mode, it has funds available.

Looking back, the vintage of a fund will say something about the investment conditions of the fund during its investment period. Investing just prior to a financial downturn for example, will often result in a late realisation of fund assets as they may have been acquired at inflated values and will take longer time to recover and to show increased values.

An fund advisor is needed when the governing body of a fund, typically the General Partner, does not itself have the competence or the time and organisation to find and execute transactions. Still, the GP wish to have control and instead of signing a management agreement with more extensive powers, it signs an advisory agreement which states that the advisor shall produce investment advice in accordance with certain standards and restrictions and present them to the GP for its consideration.

Most offshore funds are formed with GPs which consider investment advice and make their decisions upon seeing these. The GP is not active in the market trying to find and structure transactions but are experts at considering the content and compliance of investment advice presented by a competent advisor.

The Instrument of Adherence is set up in the form of an application made by the investor that wish to be accepted as a Limited Partner in the fund. It is part of the KYC procedure of the General Partner which is obliged to consider both whether or not the investor can be accepted as an investor in the fund but also whether or not to invest in the fund is suitable for the particular investor.

The Instrument or Deed of Adherence of a fund is signed by the Limited Partners and states the details of their commitment, their bank account to be used for distributions, communication lines for reporting and so forth. The Limited Partner also states for the record what type of investor it is, a pension fund, bank, “family company”, trust and so forth.

US and Canadian investors are typically obliged to submit particular information required for later reporting. As particularly tax reporting for investors with cross border investments is becoming more complicated, the Instrument of Adherence will also develop.

A Legal Opinion is a form of legal statement produced by a legal firm or body, expected to have particular competence about the issue in question. Legal opinions are legal statements of the considered and contemplated variety – they are not quick and easy and normally expensive.

Legal opinions may also be quite standard in form. With regards to establishing funds and applying for licenses to manage, regulatory agencies in a number of jurisdictions may instead of going through all the documentation themselves, choose to rely on a Legal Opinion from a reputable law firm which in quite standard language states that all required documents have been produced and are in line with law and regulations. This reduces processing time to a minimum.

A Limited Partnership Agreement is an agreement between all Limited Partners and the General Partner of a fund. It defines the authority of the General Partner and the rights and obligations of all Partners. The LPA states the terms under which the General Partner shall manage the Partnership, herunder investment restrictions, management fee (General Partner Share), other financial terms (Hurdle rate, Carried Interest, Clawback, Catch-up etc.) and also the names of the people the General Partner shall secure will be working for the benefit of the fund, the Keymen.

The LPA is the most important document when it comes to establishing a fund.

(see Confidential Information)

The Private Placement Memorandum is a marketing document explaining the details of an investment opportunity to potential investors. Private equity funds issue a comprehensive PPM as part of the documentation required by investors.

The PPM includes management biographies, market presentations, manager track record, financial statements, detailed description of the business or the fund, legal terms, tax consequences, a presentation of common risk factors etc. It is a substantial document which must be clearly aligned with the LPA.

In many jurisdictions, the PPM and the LPA will be subject to a legal review in order for a Legal Opinion to be developed before registration or licencing of the fund.

A Side Letter or side agreement is a part of a collective agreement under which one or more participants require special treatment. A typical case would be that one of many limited partners in an LPA, wish to state more clearly the terms under which it shall have the right to be excused from participating in an investment (see Excused Investor).

In principle, the Side Letter carries equal weight to the main agreement. In such cases where the side letter is not known to all the participants of an agreement and/or when it renders part of the main contract without sense, Side Letters may from time to time be disregarded or at least ranked behind the main agreement.

The term refers to the situation when two or more investors are sharing ownership of an investment.

The reason for undertaking a co-investment may be one of necessity. A fund or an investor may have limited resources or may for reasons of building a diversified portfolio not want to undertake the full investment. Using one or more co-investors reduces exposure and makes it possible to take a part of a transaction which would otherwise be out of reach.

Large fund investors may also negotiate the right to be offered co-investment opportunities during the investment period of a fund. The amount of funds they can invest as a co-investment and not as part of the fund, will normally be without- or with low fees, and participating in a co-investment allows them to employ capital without large fees and carried interest on high returns. The fees averaged over the fund commitment and the co-investments entered into as a result of participating in the fund, will be lower than on the fund commitment only.

An evergreen fund is not limited in time. It does not have a due date by which the investments must be terminated, following which the fund is also terminated and operation seize. Evergreen funds may be listed, in which case an exit is meant to always be possible – it may be constrained by low liquidity in the share. Unlisted evergreens normally have a periodic right of redemption and subscription.

An entity established to collect a number of investors who pools their resources in a common investment vehicle.

Feeder funds will often be established for smaller investors who may make a larger investment from a common vehicle than would otherwise be possible. The most successful fund managers tend to operate funds with high minimum commitments which makes it impossible for many private investors to participate alone.

Feeder funds may also be established in order to collect investors of a certain nationality who for reasons of regulation and law may benefit from being investors in a larger vehicle.

The General Partner of the partnership is responsible over and beyond his Commitment and makes all decisions on behalf of the partnership. The General Partner normally makes the investment decisions on behalf of the partnership, coordinates its operation and is responsible for compliance and risk management.

See “Limited Partner (LP) – Norsk: Stille deltaker”

The Investment Advisor is appointed by the General Partner to the fund. The advisor will not be able to make any decisions on behalf of the fund but will find, evaluate and propose for the fund to make investments and thereafter advice on how to manage and at the end of the day how to realise the investment.

An Investor Committee is made up by a representative group of the Limited Partners who have invested in the fund. Their mandate is not to make decisions on investments, on the contrary, the LPA tends to be quite adamant that giving input on investment decisions is outside the scope of the IC. That is after all, what the investors pay the GP and the advisor to do.

The IC is normally given a more comprehensive report on the operation of the fund than the other participants.

The IC is consulted on conflict of interest issues should such arise and other issues where the GP wants to consult with representatives of the investors in order to secure a good solution on a particular issue.

The operation of the Investor Committee is described in the LPA which will stipulate some situations where the IC will have to meet and make decisions. One such issue is following a keyman event, whether or not to accept the proposal for a replacement(s).

The Investor Committee is working for all investors and is charged with promoting the interests of all.

A limited partner in a partnership is in Norway also referred to as a “silent partner” which is a quite fitting description. The limited partner will fund the partnership in accordance with the terms of the LPA and up to the amount of his Commitment, but will not in any way participate in the operation of the fund. The liability of the Limited Partner is capped at his Commitment to the partnership.

It is common in a number of jurisdictions that the Limited Partners’ identity will remain hidden from the public at large, and quite often only the General Partner will know the identity of all Limited Partners.

The term refers to one or several additional legal structures acting in parallel and on substantially the same terms and conditions as the main- or original structure. Parallel funds will normally make exactly the same investments, in proportion to their size, as the main funds and other parallel funds.

As with Feeder funds, the reasons for setting up parallel structures will normally be to group investors with the same obligations, typically they may be from the same legal jurisdiction and subject to certain regulation which requires them to undertake investments in a particular way or which makes them subject to certain reporting or tax regulations.

Investors may also invest through parallel structures because they share the same investment restrictions and will not be able to participate in all the investments a fund may undertake. A fund with a world-wide investment mandate for example, may have a parallel structure for investors who wants to invest with the fund but which can not accept exposure to Asia. The parallel fund then will participate pro rata in all investments the main fund undertakes, except for those made in Asian companies.

The term refers to a form of legal entity in which there is typically an underlying agreement which states the rights and obligations of the partners or partner groups. Investment funds are often established as partnerships with a General Partner undertaking the day-to-day operation of the fund and having unlimited responsibility for the obligations of the fund, and passive Limited Partners who are only exposed for the amount of their commitment.

As different partners have different roles and since the success of the Partnership is subject to all partners making their individual contributions as planned, transferring ownership is normally regulated. Often transfer requires the consent of the General Partner who should only consent having established that the new owner will be able to undertake all the obligations of the Limited Partner wishing to sell.

The General Partner itself is normally subject to severe financial penalties should it wish to withdraw from the Partnership, and withdrawing also requiring the consent of a large majority of limited partners. Depending on how and where the fund is set up and also upon the jurisdiction of investors, the withdrawal of the general partner may change the status of the limited partnership and may also have tax consequences in investors’ home jurisdiction.

Any new partner must sign onto the Limited Partnership Agreement.

Due to the administrative work and due diligence related to accepting a new Limited Partner, making the change normally incurs a EUR 2500- 5000 fee in order to cover the fund’s cost of transfer.

A fund with a fixed commitment of capital may for various reasons run out of funding before the fund manager is able to- or willing to sell an investment. At the same time, the fund raising period of the fund is over and there may also be other obstacles to obtaining funding. The Limited Partnership Agreement may not allow leverage, banks may not want to provide funding and so forth.

A Top-up may be set up to provide those existing investors wanting to provide funding, as well as new investors, the opportunity to provide “top-up” financing. It may be structured in a number of ways, depending sometimes on the wording of the LPA and the strength of the investors in the Top-up fund relative to the investors of the original fund.

Data room is a secure location, these days normally online, used for sharing of confidential information. It is an important part of the marketing process for new funds, but is used in most transactions to document information sharing.

In the data room, the manager presents the company and team information in more detail, track record break-downs is important and the fund marketing documentation is also available. Having signed an NDA, potential investors log in to find documentation for their initial table top due diligence.

The online data rooms typically offers functionality which makes it possible for the “owner” of the data room, typically the supplier of information, to decide whether or not documents may be downloaded or printed, and the owner will also be able to see by who and when documents have been used.

Fund raising is the process of marketing the fund towards potential investors and obtaining commitments.

(see Placement agent)

The term National Private Placement Regulation is a reference to the regulation in place in every country – regardless of the AIFMD.

As an example, as long as Guernsey has not been approved for the Passfort for Marketing under the AIFM Directive, marketing a Guernsey fund in Germany requires a separate application to the German regulatory authorities. If you want to market in Denmark, you must apply to the Danish authorities and so on.

The plan is to create a unified regulatory regime throughout the EEA and to make the National Private Placement Regulation obsolete. If so, a fund would either be allowed marketing access throughout the EEA or not at all.

Following the introduction of AIFMD, EU fund managers licensed in their home countries may, by following a simple notification procedure to their national financial supervisory authority and receiving confirmation, market to professional investors in the European Economic Area (EEA).

As Norway is yet to implement the full extent of the directive and the EuVECA, Norwegian fund managers can not yet request the use of the marketing passport.

The EU is planning to extend the marketing passport to non-EU fund managers. The jurisdictions of USA, Hong Kong, Singapore, Switzerland, Guernsey and Jersey have already been assessed by ESMA, and in July 2015 Guernsey and Jersey were recommended by ESMA for extension of the passport mechanism. Final approval is still uncertain.

In order to expand market presence and to quality assure the fund raising process and marketing material, fund managers may use Placement Agents for assistance through the fund raising period. These companies specialise in raising funds for various types of investments and develop and nurture a large network of potential investors. Placement agents are normally compensated through a mix of fixed fees and a percentage of the committed capital they assist in raising for the fund.

Use of placement agents is expensive, but the best offer an inroad into new markets and introductions to new potential investors. They will also offer up to date assistance in the developing and presentation of marketing material to investors.

It is common that the fund manager in cooperation with the Placement Agent establish a list of potential investors, or geographical areas, which will not be part of the basis for fees for the placement agent. A Norwegian manager may for example say that Norwegian investors shall not be included. Normally also, repeat investors are kept out of the fee calculation.

A common reference to the investment professionals working for the fund manager.

Track record refers to past performance. Ideally perhaps, the track record of a team which has worked together before. Because people change jobs, it is also common to show the performance of individual team members.

Being able to document previous success, is important when raising new funds. Investors always want to review a fund manager- or an investment manager’s track record before making commitments to a new fund.

In a private equity setting, a “cash on cash” multiple is from the investors point of view the amount of cash they have received- plus the remaining value of the fund, divided by the amount of cash they have paid into the fund. Cash received 50 and remaining value 70, cash paid inn 100, will give a CoC multiple expressed as 1.2x. One would expect that the ratio would equal the TVPI multiple (capital distributions + remaining value in the fund/capital called, see TVPI), but this will not be the case if the fund is netting calls and distributions. If so, the amount stated as capital called will not equal the amount the investor has paid from his bank account, ditto for distributions (see Recallable Distributions).

Unlike IRR, multiples are performance measures which do not include a time element in the calculation. They are relatively unsophisticated measures, but they easy to understand and calculate and they are widely used in the private equity industry (eg. CoC, DPI, TVPI, RVPI).

The DPI multiple refers to the cumulative amount a fund has distributed to its investors relative to the total capital contributions the investors have made to the fund. DPI is net of fees and carried interest, and investors’ focus on this measure is understandable as they anticipate return of and return on investments.

Unlike IRR, multiples are performance measures which does not include a time element in the calculation. They are relatively unsophisticated measures, but they easy to understand and calculate and they are widely used in the private equity industry (eg. CoC, DPI, TVPI, RVPI).

FMV refers to the price a given asset would fetch in the marketplace, assuming a knowledgeable and willing buyer and seller and no particular outside pressures to make a transaction, eg. regulative pressures or financially stressed seller. A reasonable period of time must be given for the transaction to be completed.

An estimate of FMV is subjective in so far as it will be influenced by time and place, comparable transactions and the evaluation principles used.

In private equity, the term normally refers to the value of the fund’s investments without considering other assets and liabilities of the fund. (See NAV).

Funds normally show both gross and net IRR.

Gross IRR is the total annual rate of return on an investment before the deduction of fees, carried interest and expenses of operating the fund itself. It is a measure for the return on the portfolio investments.

Net IRR is the same calculation but including fees, carried interest and operating expenses of the fund. Clearly, for the investors the net IRR is the important measure.

Unlike multiples, the internal rate of return includes the time element in the calculation. All other parameters being equal, i.e. same purchase- and sales price and costs unchanged, the measure will be reduced over time.

The Net Asset Value of a fund is the total value of all assets less liabilities. In private equity, the measure NAV refers to the value of the fund as a whole (see FMV).

The ratio of contributions to date compared to total Committed Capital.

RVPI is a measure for the current value of all remaining holdings within the fund compared to the total amount contributed to date by the investors. Any reinvested capital should be included in the denominator of this ratio.

Unlike IRR, multiples are performance measures which do not include a time element in the calculation. They are relatively unsophisticated measures, but they easy to understand and calculate and they are widely used in the private equity industry (eg. CoC, DPI, TVPI, RVPI).

TVPI is the ratio of the value of remaining investments and other assets within a fund (NAV) and the total value of all distributions to date, relative to the total amount of capital paid into the fund to date. Any Recallable Distribution should be included in the numerator of this ratio, and any reinvested capital should be included in the denominator. TVPI = RVPI + DPI.

Unlike IRR, multiples are performance measures which do not include a time element in the calculation. They are relatively unsophisticated measures, but they easy to understand and calculate and they are widely used in the private equity industry (eg. CoC, DPI, TVPI, RVPI).

The EU directive regulating the operation of fund managers for alternative investment funds (AIFMD) has become law in most European countries. Under AIFMD, the fund manager is responsible for securing that there is a depository function appointed for each alternative investment fund.

The depository is a separate and independent control entity with focus on safekeeping of fund assets, liquidity management and forecasting and monitoring of the funds activities to secure that they are within the mandate of the fund and in line with fund agreements.

AIFMD is an EU directive governing the operations of managers of alternative investment funds. The trigger was EU concern over an unregulated and very large hedge-fund industry, the end product is wide reaching European legislation regulating the activities of managers of all funds not previously regulated, large and small.

The directive regulates the marketing of alternative investment funds to professional investors in EU countries. On the positive side, once a manager has been licensed in one country, marketing in another EU country is subject only to a simple notification procedure. This so called “passport of marketing” is available upon notification to the financial regulatory authority in the home country which in turn notifies the relevant authorities across Europe. As Norway has not fully implemented all aspects of the directive, Norwegian managers can not yet request the marketing passport, some EU states may deny access and require the Norwegian manager to follow the relevant National Private Placement Regulations.

The directive was transformed into law in most European countries in July 2013. In Norway, the law was introduced with effect from 1 July 2014.

AML/KYC is regulation in place to prevent transactions in which proceeds from crime are included in order to establish a legitimate origin for such funds (No. Hvitvaskingsloven).

The Norwegian Anti-Money Laundering Act was introduced in 2009. In accordance with law, firms are required to comply with a number of obligations:

• Secure up to date certified proof of identity for new clients.
• Customer information shall be retained and stored securely.
• The reporting entities are required to undertake independent research and to report appropriate authorities if they uncover circumstances which may indicate a connection with criminal activity.
• The reporting entities shall establish proper and functional internal control and communication procedures ensuring compliance.

The practical AML/KYC procedures adopted in various countries and industries are different but the essence is shown in the examples below:

Where a client/customer/investor is a Legal entity, it is identified by an up to date certified certificate of registration. The person(s) who have signatory rights must provide a certified copy of their passport and a proof of address, normally a utility bill is acceptable. Mobile phone bills, even if they contain an address, are normally not accepted.

The owners of the company are identified by a certified register of shareholders or equivalent document. If the company has a shareholder which is also a company and which holds more than 25 % of the shares, then this entity must provide a certified copy of its register of shareholders, and so on. The procedure is designed to identify the ultimate owners of the investment vehicle, often termed Beneficial Owners.

Shareholders who are private citizens must provide a certified copy of their passport and utility bill.

Various jurisdictions may have different requirements to the exact text of the certification.

The Beneficial Owners are the ones who benefit from the operation of the company. Most commonl, the Beneficial Owners will be private individuals, but it may also be an organization, thrust etc. Increasingly, financial institutions require visibility to the Beneficial Owners, and the ID process in a fund structure may be somewhat complex.

The term compliance or to be in compliance, refers to the business organisation operating in adherence with formal laws and regulations. In companies with a separate compliance function, the compliance office will report directly and independently to the board of the company.

The International Compliance Association refers to a secondary level of compliance which is that the function shall also secure that the organization is operating in line with internally set systems of control which are self-imposed in order to secure compliance with formal laws and regulations. Often this second level controls may functionally be the responsibility of the Risk Management function.

ESMA is an independent EU authority working to safeguard the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence amongst securities regulators.

Introduced at the same time as AIFMD, EuVECA represents a less onerous regulation for fund managers investing in the SMB market (small and medium sized businesses). The regulation started with a narrower focus on the venture capital market, hence the name.

EuVECA is regulating the operation of managers of funds which invest in companies which at the time of investment have (1) less than 250 employees and (2) either an annual turnover of less than Euro 50 mill. or a balance sheet total which does not exceed EUR 43 million.

In Norway, EuVECA is expected to be included in its entirety as a regulation (forskrift) under the AIF law. While most European states introduced EuVECA at the same time as AIFMD, in Norway the introduction has been delayed. The reason is that the introduction of EuVECA requires Norway to accept a European institution as the final authority to resolve conflicts and this is in conflict with the Norwegian constitution.

EVCA represents the private equity community across Europe. EVCA engages proactively with European and global policymakers to ensure the conditions are right to encourage the industry’s ability to transform businesses through patient capital. EVCA has developed a number of guidelines for the industry. These include the principles of good corporate governance, reporting and valuation. EVCA have endorsed the IPEV guidelines for Investor reporting and valuation.

On a national level EVCA have sister organizations that support the interests of the venture capital and private equity industry in each country: In Norway – NVCA, in Sweden – SVCA and in Denmark DVCA.

FATCA is a US legislation that gives the United States a greater opportunity to find and tax US citizens and companies that are tax resident or domiciled in the United States. FATCA requires that non-US financial institutions must provide information on US account holders and beneficial owners to US tax authorities.

From inception, FATCA was meant to regulate the operation of foreign financial institutions operating in the US or which had US clients. In certain cases FATCA conflicted with the national laws outside the US and the result has become a number of Intergovernmental Agreements (IGA’s) between the United States and a number of countries. The consequence being that most countries have accepted FATCA reporting, some have introduced similar legislation in their own countries.

The OECD, EU and G20 are working with an international agreement on automatic exchange of tax information. While FATCA applies only to Americans, the new agreement will cover a number of countries.

ILPA is a global, member-driven organization dedicated to advance the interests of private equity Limited Partners through industry-leading educational programs, independent research, best practices, networking opportunities and global collaborations. ILPA has established guidelines, the Private Equity Principles, which are commonly used in negotiations of partnerships agreements between Limited Partners and General Partners to align the interest of investors (Limited Partners) with those of the General Partner.

The IPEV association provides high quality, uniform, globally acceptable, best practice guidance for Private Equity and Venture Capital valuation and reporting purposes. The IPEV guidelines are the recognized standard for valuation and reporting globally.

IPEV Valuation and Investor Reporting guidelines are endorsed by EVCA.

Risk management is the process of identifying material risks, analysing and preparing for the possibility of such risks becoming a reality and upon an occurrence making sure that the company puts in motion the appropriate response.

Risk management is an iterative exercise in that new learning and experience should lead to changes in the operation of the business, particularly its control functions. Always present and material is the risk of breaking formal law and regulation (Compliance). Risk Management will however also address other material risks of the company, e.g. risks related to the quality of articles produces or services rendered.

In smaller companies, Risk Management and Compliance are often a combined function.

A bridge investment is, from the funds point of view, not in its final form with regards to its financing and it is short term by nature, typically 6-12 months. The bridge investment may for example be financed by equity only when it is meant to be leveraged. It may also be an investment which is outside the mandate of the fund and therefore subject to be sold. In both these examples, committed capital has been called from the Limited Partners but is not employed in accordance with the strategy of the fund and will be returned upon a sale or by leveraging the investment, without having been put to work in accordance with the funds investment mandate. The terms and conditions of the fund typically allow the fund manager to invest such early returned funds a second time.

Carve-out follows from a corporate reorganisation which triggers a partial divestiture of a business unit or segment. When undertaking a carve-out the company is not selling the business unit outright. Instead, they may sell an equity stake in that business or spin the business off on its own while retaining an equity stake itself or sell a segment of the business, for example the service department.

A carve-out allows a company to capitalise on a business unit or segment that may not be part of its core operations.

A co-investment is the situation that occurs when two or more investors are sharing ownership of an investment.

In private equity, co-investments will often made with existing large fund investors which are given the opportunity to take a direct stake at the fund. It is typical that such investors flag an interest in co-investments which means that they can employ capital without having to pay fees to the fund manager or carried interest on high returns.

Co-investors are typically passive investors, the fund manager seek control, but as an owner the co-investor may of course seek a more active role.

Where the funds resources are limited or when for reasons of diversification the fund seek to employ a limited amount of capital on a defined number of investments, co-investors make it possible for the fund manager to make larger investments than would otherwise have been possible for the fund. At the same time it is done without dedicating too much of the fund’s capital to a single transaction or sharing the deal with competing private equity firms.

A fund which makes a number of investments have diversified the risk. While one investment may perform poorly, overall performance of the fund will only be proportionally impacted. The overall risk to the fund related to the poor performance of individual investment is therefore reduced.

A fund with a narrow industry investment mandate, will not escape the inherent market risk of the segment but may offset company risk. A fund with a mandate to invest in the oil and gas sector will be impacted by fluctuations in oil price, whereas a fund with a mandate to invest in the energy sector may diversify the risk by making bets on also other sources of energy.

Diversification therefore reduces the overall risk of a portfolio of investments by selecting assets which are exposed to different risk factors.

A fund is bound by its investment strategy and mandate which translates to a number of investment restrictions which are normally found in the Limited Partnership Agreement.

Typical investment restrictions relate to geography, investment stage and strategy, degree of control sought, industry, direct or indirect investments, primary or secondary investments and so forth.

An investment vehicle is a general term for a legal entity used in the acquisition of an investment. Deciding on an appropriate investment vehicle will typically involve a consideration of the nature and number of owners, control, operation, jurisdiction and tax.

A partnership, company or other entity in which a fund has invested is typically referred to as a portfolio company. Private equity funds tend to seek a significant level of control in portfolio companies, control necessary to implement changes and develop the companies. Private equity funds typically make 5-15 investments in portfolio funds and therefore operate with a certain level of diversification.

Fund of funds invests primarily in other funds. Each of these underlying funds is referred to as a portfolio fund. As each portfolio fund will make a number of investments in accordance with its mandate, fund of funds will typically be well diversified.

A stapled deal is a pre-arranged financial package offered to potential bidders for shares. Stapled deals are typically arranged by an investment bank, and include all details of the lending package, including the principal, fees and loan covenants.

The investors in private equity funds typically subscribe for their interest during the Fund Raising period and are committed to the fund from the time of Closing. When an existing investor in a fund sells his interests in the fund to a third-party buyer, this is called a secondary transaction. The market for such “used” shares is the secondary market.

There may be a number of reasons for selling the original shares, realignment of portfolios is an important one, others may be changes in strategy and need to release resources for use in core activities.

The secondary buyer purchases from the seller its interests in one or more funds and typically assumes all unfunded obligations of the seller.

Secondary fund investments provide investors with a reduced blind pool risk, they will have some visibility to underlying investments. The J-curve will typically be steeper but shorter as a larger portion of committed capital is applied early.

“Tag along” and “drag long” rights are used by investors to regulate conditions of exit from an investment.

A “tag along” right gives an owner of shares the right, but not an obligation, to sell his shares along with another shareholder, normally on the same terms and conditions and to the same buyer. Minority shareholders often request tag along rights, as this allows them to then exit at the same time as majority shareholders.

A “drag along” right gives the shareholder who wish to sell his shares in a company, the possibility to negotiate the transaction with the knowledge that, given certain terms, the other shareholder(s) must sell at the same time to the same buyer.

Drag along rights is not by itself an obligation to negotiate for the sale of the shares of other shareholders but combined with tag-along rights a larger portion of shares and several shareholders will often be involved in such transactions.