Private Equity Terminology

Private Equity Terminology

Private equity has a well-established vocabulary that can be opaque to finance professionals entering the sector for the first time, to management teams of businesses being acquired by PE firms, and to advisers working alongside PE transactions. This glossary covers the key terms used in UK private equity — from fund structure and economics through to deal mechanics and portfolio management — with definitions written for senior finance professionals rather than investment bankers. Adrian Lawrence FCA, founder of FD Capital and a Fellow of the ICAEW, leads our senior finance recruitment practice. For PE-experienced CFO and Finance Director recruitment, call 020 3287 9501.

Fund Structure and Economics

GP (General Partner)

The private equity fund manager — the firm that raises capital, makes investment decisions, manages portfolio companies and ultimately distributes returns to investors. The GP typically commits 1–2% of the fund’s total capital from its own balance sheet alongside LP capital, aligning its interests with investors. The GP earns a management fee (for operating the fund) and carried interest (for generating returns above the hurdle rate). See: Carried Interest.

LP (Limited Partner)

The institutional investors who commit capital to a PE fund — pension funds, insurance companies, sovereign wealth funds, endowments, family offices and, in some cases, high-net-worth individuals. LPs have limited liability (their maximum loss is their committed capital) and limited involvement in investment decisions. They receive detailed quarterly LP reports on portfolio performance, valuations and cash flows, which the fund CFO is responsible for producing.

Carried Interest (Carry)

The performance fee earned by the GP — typically 20% of profits above the hurdle rate. This is the primary wealth creation mechanism for senior PE investment professionals. See our dedicated Carried Interest page for a full explanation of how carry is structured, calculated, distributed and taxed in the UK.

Management Fee

The annual fee paid by LPs to the GP for managing the fund — typically 2% per annum on committed capital during the investment period (usually 5 years), stepping down to 1.5–1.75% on invested capital during the harvest period. The management fee covers the GP’s operating costs. It is not performance-related.

Hurdle Rate (Preferred Return)

The minimum annual return that LPs must receive before the GP is entitled to carried interest — typically 8% per annum, compounded. Once the hurdle rate is cleared, most fund structures include a catch-up mechanism allowing the GP to receive 100% of profits until its total share equals 20% of the fund’s total profit to date.

Vintage Year

The year in which a PE fund made its first investment (or, in some conventions, the year in which the fund’s commitments were called). Vintage year is used to compare fund performance consistently — a fund’s IRR is meaningfully compared only to other funds of the same vintage, because entry valuations and exit market conditions vary significantly across economic cycles.

J-Curve

The characteristic shape of a PE fund’s net cash flow over its life — early years show negative cash flows as capital is called and management fees are paid before exits generate returns, creating a curve that dips below zero before rising as the portfolio matures. The J-curve is why PE investments show negative or minimal returns in years 1–3 before performance metrics become meaningful.

Dry Powder

Capital committed to PE funds by LPs but not yet deployed into investments. High levels of industry-wide dry powder increase competition for deals and push up entry multiples. At the fund level, monitoring dry powder against the remaining investment period is a key treasury management responsibility for the fund CFO.

Returns and Performance Metrics

IRR (Internal Rate of Return)

The annualised return on a PE investment or fund, accounting for the timing of cash flows — capital calls and distributions. IRR is the standard performance metric for PE because it captures both the magnitude and timing of returns. A fund that returns 3× invested capital over 10 years will have a significantly lower IRR than one that achieves the same return in 5 years, because of the time value of money.

MOIC (Multiple on Invested Capital)

The total value returned by an investment divided by the total capital invested — expressed as a multiple (e.g. 3.0×). MOIC does not account for the timing of returns; a 3× MOIC achieved in 3 years is far superior to a 3× achieved in 8 years when measured by IRR. MOIC is most useful as a quick cross-comparison of gross return magnitude across investments or funds.

DPI, RVPI, TVPI

The three metrics used to report fund performance to LPs. DPI (Distributed to Paid-in Capital) measures actual cash returned to LPs relative to their invested capital — the only realised performance measure. RVPI (Residual Value to Paid-in Capital) measures the estimated remaining value of unrealised investments relative to invested capital. TVPI (Total Value to Paid-in Capital) is DPI plus RVPI — the total return metric, including both realised and unrealised value.

Deal Mechanics and Structure

LBO (Leveraged Buyout)

The acquisition of a company using a combination of equity (PE capital) and debt (bank loans, bonds, mezzanine finance), where the acquired company’s cash flows service the debt. The use of leverage amplifies equity returns when the investment succeeds — a business acquired at 8× EBITDA with 4× EBITDA of debt has a significantly higher equity return per unit of value creation than an all-equity purchase at the same price. The finance team of an LBO target takes on substantially greater financial reporting complexity post-acquisition, including debt covenant monitoring and bank reporting.

MBO (Management Buyout)

A transaction in which the existing management team of a business acquires it — typically with PE backing. The management team usually contributes a meaningful proportion of the equity alongside the PE investor. MBOs often incorporate management incentive structures including sweet equity and EMI schemes.

Secondary Buyout (SBO)

A transaction in which a PE-backed business is sold by one PE firm to another PE firm, rather than to a trade buyer or through IPO. SBOs are the most common exit route in UK mid-market PE. The incoming PE firm typically resets the leverage structure, appoints new non-executive directors, and may bring in new senior management or require upgrades to the finance function. See our Private Equity FD page.

Add-on Acquisition (Buy-and-Build)

A strategy in which a PE-backed portfolio company acquires smaller businesses in its sector to build scale, expand geography or add capability. Buy-and-build significantly increases the demands on the portfolio company’s finance function — the CFO or FD must manage multiple acquisition processes simultaneously, integrate acquired businesses quickly, and maintain consolidated reporting that satisfies the PE sponsor’s monitoring requirements. See our M&A Specialist recruitment page.

Enterprise Value vs Equity Value

Enterprise Value (EV) is the total value of the business — what an acquirer pays for the whole enterprise including net debt. Equity Value is what the equity holders (shareholders) receive — enterprise value less net debt. In a typical PE acquisition, the price agreed is the enterprise value; the equity invested by the PE firm is the enterprise value less the acquisition debt. Understanding this distinction is essential for management teams evaluating their sweet equity and for Finance Directors advising on exit mechanics.

Valuation and Financial Analysis

EBITDA

Earnings Before Interest, Tax, Depreciation and Amortisation — the primary profit metric used in PE valuation. Entry and exit prices in PE transactions are typically expressed as multiples of EBITDA (e.g. “acquired at 8× EBITDA”). EBITDA is preferred over statutory profit figures because it provides a closer approximation of operating cash generation, excludes the effects of financing structure, and allows comparison across businesses with different capital structures and accounting policies.

EBITDA Normalisation (Quality of Earnings)

The process of adjusting a business’s reported EBITDA to reflect the underlying sustainable earnings of the business — removing one-off costs, owner remuneration adjustments, non-recurring items and pro-forma adjustments for acquisitions made during the period. Normalised EBITDA is the basis on which acquisition price and carried interest are calculated. The CFO or FD’s ability to construct and defend a credible normalised EBITDA is one of the most commercially significant skills in an exit process. See our Exit-Ready CFO & FD page.

Entry/Exit Multiple

The EBITDA multiple at which an investment was acquired (entry multiple) versus the multiple at which it was sold (exit multiple). Multiple expansion — buying at a lower multiple and selling at a higher one — is one of the three levers of PE value creation alongside EBITDA growth and debt repayment (deleveraging). Finance Directors who understand how multiple expansion works are better positioned to support the value creation plan.

Management Equity and Incentives

Sweet Equity

Ordinary shares in a PE-backed business acquired by the management team at a low price relative to the PE investor’s preferred equity, structured so that the management team participates in exit upside above a return threshold. Sweet equity is the primary mechanism by which PE investors align management teams with the objective of growing the business for a successful exit. For a full explanation see our Sweet Equity page.

Ratchet

A provision in a PE management equity structure that adjusts the proportion of equity held by management up or down depending on the financial performance of the business — typically the IRR or equity multiple achieved at exit. An upward ratchet rewards management with a higher equity share if the business outperforms; a downward ratchet reduces management’s share if it underperforms. Ratchets are less common in UK deals than straight sweet equity structures but appear in some mid-market and lower mid-market transactions.

Drag-Along and Tag-Along Rights

Drag-along rights allow the majority shareholder (typically the PE investor) to require minority shareholders (management and other equity holders) to sell their shares on the same terms as the majority in an exit — preventing a small minority from blocking a sale. Tag-along rights protect minority shareholders by giving them the right to participate in a sale on the same terms as the majority, preventing the controlling shareholder from selling without offering the same price to minorities.

Leaver Provisions

The terms on which departing management shareholders are required to sell their equity — distinguishing between “good leavers” (resignation with notice, retirement, redundancy, death, serious illness) who typically receive fair market value, and “bad leavers” (summary dismissal, resignation in breach, departure to a competitor) who typically receive a lower price or cost price for their shares. Understanding leaver provisions is essential for management teams negotiating their equity terms at the point of the investment.

Exit and Transaction Terms

Working Capital Mechanism

The adjustment to the sale consideration at completion that reflects the difference between the actual working capital delivered by the seller and the normalised working capital target agreed in the sale and purchase agreement. One of the most frequently contested financial elements of a PE exit and a common source of post-completion value leakage for vendors. See our Exit-Ready CFO & FD page.

Locked Box

An alternative to completion accounts for determining the final consideration — the price is fixed at signing based on a historical balance sheet (the “locked box” date) rather than adjusted at completion. The seller retains the economic benefit of the business from the locked box date, subject to agreed “permitted leakages” (e.g. management salaries). Locked box structures are increasingly common in competitive auction processes because they provide price certainty for both parties.

Earn-Out

A mechanism in which part of the acquisition consideration is contingent on the acquired business achieving agreed financial targets post-completion, typically over 1–3 years. Earn-outs are more common in trade sales than PE transactions but appear in PE deals where there is uncertainty about near-term performance. The Finance Director of a business in an earn-out period has additional reporting and compliance obligations to the acquirer.

Data Room (VDR)

The secure virtual data room in which a vendor shares financial, legal, operational and commercial due diligence information with potential acquirers during a sale process. The CFO or FD is responsible for preparing and managing the financial content of the data room — the quality, completeness and consistency of financial information in the data room has a direct impact on buyer confidence and, ultimately, price.

100-Day Plan

The structured plan developed by the incoming PE investor (often with management) for the initial 100 days post-completion — identifying the key strategic, operational and financial priorities to be addressed in the period immediately following the acquisition. For Finance Directors joining a PE-backed business, a well-structured 100-day plan provides the framework for establishing credibility with the sponsor quickly.

Value Creation Plan (VCP)

The medium-term strategic and operational plan developed by the PE firm and management team that maps out how EBITDA growth, working capital improvement, add-on acquisitions and multiple expansion will combine to deliver the target exit return. The Finance Director’s role in the value creation plan is to build the financial model that underpins it, track progress against it, and report on it to the board and LP.

Related Private Equity and Finance Services

Related pages: Carried Interest | Sweet Equity | Private Equity FD | Private Equity Finance | EMI Scheme | Exit-Ready CFO & FD | Business Exit Preparation | Fractional CFO | CFO Executive Search | M&A Specialist