CEPRES RESOURCES

Private equity glossary

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Private equity and private market investing have a unique lexicon. TVPI, IRR, NAV, DPI and more. With so many abbreviations and metrics, it's easy to get lost. CEPRES's private equity glossary explores all the terminology private equity investors utilize.

Average The simple average (arithmetic mean) of the performance measures of all the funds/deals in a selected universe.

Average Best-Performer The mean of the upper quartile (top 25% best performing) funds/deals in a selected universe (observations that are higher than the upper quartile value). For instance, the TVPI average best-performer is calculated by dividing the sum of all TVPIs of the upper quartile funds/deals by the number of funds/deals selected.

Average Worst-Performer The mean of the lower quartile (25% worst performing) funds/deals in a selected universe (observations that are lower than the lower quartile). For example, the TVPI average worst-performer is calculated by dividing the sum of all TVPIs of the lower quartile (25% worst performing) funds/deals by the number of funds/deals selected.

Adjusted Funds from Operations Adjusted funds from operations (AFFO) is a real estate investment measure of cash flow generation available for distribution. It is calculated as funds from operations plus rent increase minus capital expenditure and maintenance.

Adjusted Valuation The adjusted valuation within CEPRES is calculated by adding all contributions and subtracting all distributions that occurred in the year after the last available valuation.

Board Representation Board representation identifies whether the GP has any members on the board of the investee company to represent their interests. Observer rights are not considered as board representation.

Break-Even The time (measured in years) it takes for the sum of distributions to be equal to the sum of contributions.

Brownfield Brownfield is a type of infrastructure project where the invested infrastructure assets are pre-existing and typically in need of improvement.

CAGR Compound annual growth rate (CAGR) represents an annualized measure of the growth rate of a balance from its initial value to its ending value with an annual compound. When the investment period is less than one year, CAGR is annualized.

CAPEX Capital expenditure (CAPEX) is the value of purchases of fixed assets such as property, industrial plants and equipment to support a firm’s new projects or expansion.

Capital Gain The total gains made on investment, including unrealized value.

Carried Interest Carried interest (or carry) is the performance fee paid to the fund manager (GP) as their share of profits paid out in compensation. Carried interest is typically based on a payout waterfall often including preferred returns, hurdle rates, claw-back provisions, catch up, etc. Historically the most common absolute value of carry was 20%.

Contribution On the fund net level, a contribution is an investment cash flow from the LP investor to the GP investment manager; whereas on the deal level, a contribution is the investment cash flow from the GP to the invested asset or portfolio company.

Cost of Debt Service The last twelve months cost of debt service is the cost of meeting the specific interest and principal payments on a debt, along with any administration charges borne by the borrower.

Cumulated Contribution The cumulative amount of contributions (including the current year).

Cumulated Distribution The cumulative amount of distributions (including the current year).

Cumulative Net The cumulative amount of total net cash flows with both contributions and distributions (including the current year).

Current Interest The simple coupon rate on the nominal value of the debt.

Downside Deviation Downside deviation is a measure of downside risks. In CEPRES, it represents the standard deviation of the observations that fall below the mean. For example, if the mean is 10%, then the downside deviation of returns is calculated as the standard deviation of returns that are lower than 10%.

Default Rate In CEPRES, the default rate is the percentage of deals that are designated as being defaulted investments. Calculated as total numbers of deals have TVPI below 1 divided by total number of deals.

DPI The distribution to paid-In capital (DPI) is the ratio of total distributed capital to total invested (paid-in) capital. This is also referred to as the “realization multiple”. This ratio gives a clear indication as to how much of an investment’s return was “realized” or paid back to investors or managers.

Default An investment (fund or direct deal) is considered a default, if the current TVPI<1.

Dry Powder Dry powder is the amount of undeployed capital that there is a contractual commitment for LP investors to provide to GP fund managers when requested. Thus representing the total available capital that could still be deployed at any given time.

Debt Service Coverage Ratio (DSCR) Debt service coverage ratio (DSCR) is typically used in income-generating assets such as real estate and infrastructure. It measures the ratio of cash flow available to pay current debt obligations. In CEPRES, it is expressed as a ratio of NOI divided by the total cost of debt service. A DSCR above 1 indicates there is sufficient cash flow from income to cover all debt costs and below 1 indicates there is an insufficient amount of income available to cover debts.

Default or Defaulted Investment On CEPRES, this is a financial default, i.e. a designation that an investment (fund or direct asset) has lost money for the investor, i.e. when the current TVPI is below 1 distribution. On the fund net level, distribution is an investment cash flow from the GP investment manager back to their LP investors. On the deal level, distribution is the investment cash flow from the invested asset or portfolio company back to the GP.

EBITDA Earnings before interest, Taxes, depreciation and amortization (EBITDA) is an important metric to measure a company’s financial performance in terms of its operating income generation. It is calculated by first finding a company’s operating profit (EBIT) before subsequently removing the expenses garnered from depreciation and amortization.

EV Enterprise value is the total value of a company, including both equity value and net debt.

Expected Holding Years The number of years that an investor plans on owning their investment.

First Distribution The time (measured in years) from the date of an initial investment until the first cash distribution takes place.

Free Cash Flow Free cash flow (FCF) measures how much cash an asset generates through operations after subtracting the cost of expenditures. This cash can be used for expansion, dividends, reducing debt or other purposes. It is calculated by funds from operations minus capital expenditure.

Fully Realized An investment where any remaining value has been distributed and thus has no outstanding value remaining (including warrants, options, and so on) is said to be an investment that has been fully realized.

Funds from Operations (FFO) Funds from operations (FFO) refers to the cash generated by real estate investment trusts (REITs) to measure operational performance. It is calculated by net income plus depreciation and amortization then minus capital gains from property sales.

Gross An analysis at the ‘gross’ level is based on cash flows of only underlying deals without accounting for any fund net cash flows such as management fees, fund expenses amongst others.

Gross Asset Value (GAV) The gross value of real asset investments including both equity and any debt.

Gross Rent Income Gross rent income is the amount collected in rent and other related funds from rental properties before deducting any expenses such as insurance, maintenance and any other expenses.

Greenfield Greenfield is a type of infrastructure project where no pre-existing infrastructure assets are present and a full development project is required.

Hurdle Rate The minimum required rate of return on an investment based on cost of capital, returns for similar investments, risk and others. Typically, this is the rate of return that the general partners must achieve to investors before they can collect carried interest.

IQR Interquartile range (IQR) is a measure of the difference between the upper (first) quartile and lower (third) quartile. For example, if there are 100 data points in the sample, the IQR of a metric would be the difference between the value of the 25th data point and the 75th data point.

IRR Internal rate of return (IRR) is a metric commonly used to evaluate the returns on an illiquid investment. It is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. IRR is a standard performance measure for private equity because it captures both timing (cash flow pace) and returns.

Invested Capital Invested Capital is the total money “drawn down” by investment managers/investors into a deal/fund. Invested capital only refers to the sum of a fund’s own committed money; in the context of a leveraged buyout, the external borrowed debt would be considered as part of any invested capital.

Investment Manager Main Office The investment manager main office refers to the regional headquarter of a firm. For instance, the main office of a global firm, XYZ Capital would be categorized regionally as XYZ Capital (U.S.), XYZ Capital (Canada), XYZ Capital (Asia), etc. to reflect their specific geographic locations.

Kurtosis Kurtosis measures the relative distribution of outliers of a distribution curve. In CEPRES, kurtosis is expressed in relation to normal distribution which has a Kurtosis of 3. A kurtosis less than 3 indicates a ‘tighter’ distribution with fewer outliers and smaller ‘tails’. A kurtosis greater than 3 indicates a broader distribution with greater outliers and larger ‘tails’.

Loss given default Loss given default tells how much capital is lost if the investment turns default. It is expressed as actual loss as a percentage of total invested capital.

Loss Rate Loss rate is calculated as the ratio of loss in investments on defaulted deals (deals with TVPI of less than 1) and total contributions to all deals.

Loan to Value (LTV) LTV = total debt / gross asset value (GAV). The loan-to-value (LTV) ratio is a financial term used to express the ratio of a loan to the value of an asset financed. It is calculated as total debt divided by GAV. The lower the LTV, the greater the owner’s equity in the property and less of a chance that the owner will default on the loan. LTV is expressed as a percentage. For example, when someone takes out a mortgage to purchase a property, the LTV is the ratio between the mortgage amount and the overall value of the property.

Loss Rate (Loss Given Default) Loss rate is the ratio of lost capital to total invested capital for Defaulted Investments, i.e. where the TVPI is below 1. It is calculated as the sum of distributions and valuation minus contributions for all deals that have TVPI below 1 then divided by all deals contributions amount.

Lost Capital The total value that has been lost on investment or the current loss on investment. Calculated as the sum of distributions and valuation minus contributions.

Lower Quartile The lower quartile is the relevant value that represents the 25th percentile of a sorted dataset. For example, given 100 investment records, the lower quartile IRR would be the value of IRR for the 25th record with 24 investments having lower IRR values and 75 investments having higher IRR values.

Min The lowest value of the performance measures of all the funds/deals in a selected universe.

Max The highest value of the performance measures of all the funds/deals in a selected universe.

Market Value/ Property Size Market value/ property size measures the gross price per unit of total property size, e.g. price per sqft/sqm/acre/hectare.

Market Value / Building Size Market value/ building size measures the gross price per unit of building size, e.g. price per sqft/sqm/acre/hectare of a building.

Mean The simple average (arithmetic mean) of the performance measures of all the funds/deals in a selected universe.

Median The midpoint of all the performance measures of all the funds/deals in a selected universe. Half of the measures have a higher value and half have a lower value.

Net A net value means that it is being presented after all relevant deductions. Fund level metrics are often presented based on net figures so investors can see their true performance after subtracting any management fee, expenses, carried interest and all other related fees.

Net Effective Rent Income Net effective rent income is a measure of the expected income from a tenant. It is the NPV of all rental payments over the lease period, as well as any abatements (tax exemptions or reductions) or incentives that add or subtract these payments. For example, the landlord offers a month’s free rent for any new lease that is signed for a period of 12 months. In this case, the actual rental period is 13 months; if the lease rate is $200,000/month, then the total annual rental paid to the owner is $200,000 x 12 = $2,400,000, therefore the net effective rent income per month is $2,400,000/13 = $184,615.

Net p.a. Net cash flow (difference between a company’s inflow and outflow) per annum (year).

Net Profit Net profit is a measure of the profitability of a company or asset after accounting for all costs and taxes. It is calculated as revenue minus cost of goods sold, operating expenses, other expenses, interest and taxes from revenue.

Net Operating Income Net operating income is the expected income to be collected from the operations of properties after deducting all operation-related expenses. It expresses the profitability of real estate investments that generate income. It is calculated as real estate revenue minus operating expenses.

Number of Financing Rounds The total number of contributions made to a portfolio company or asset over the life of an investment.

Omega Omega is a risk-return performance measure of an investment asset. It measures the probability of gains versus losses for some threshold return target. Calculated as cumulative probability of upside returns divided by the cumulative probability of downside returns. For example, the target return is 8%. Omega = 0.5 means the cumulative probability of upside returns (>8%) equals half of the cumulative probability of downside returns (<8%). Omega = 2 means the cumulative probability of upside returns (>8%) is twice the cumulative probability of downside returns (<8%).

Occupancy Rate The percentage of rented or used space to the total amount of available units. It helps provide an indication of anticipated cash flows. For example, a shopping center that only has a 25% occupancy rate, means that tenants are leasing just 25% of the available spaces.

Outstanding/Open Commitment (Dry Powder) IN CEPRES, Outstanding commitment is the portion of committed funds that is yet to be invested. Committed funds can be called upon to make investments and those making the commitments typically receive a portion of the return said investment brings. It is calculated as committed capital minus net invested capital.

Pooled A pooled metric (e.g. IRR or TVPI, etc.) is derived by pooling all investments in a given data set and calculating the metric based on the aggregation of cash flows associated with that set of investments. Pooled performance measures are generated correspondingly. For example, to obtain the pooled IRR of venture deals in Asian Healthcare, CEPRES combines all cash flows, together with all valuations of every deal in the selected universe and applies the IRR calculation methodology as if you had invested in all the deals. This provides a unique and highly valuable way to assess and compare whole market segments in aggregate.

PME-Nasdaq (pooled) A simulated cashflow for an investment in Nasdaq is generated corresponding to a private equity investment. IRR of this cashflow is then calculated.

PME-MSCI (pooled) A simulated cashflow for an investment in MSCI is generated corresponding to a private equity investment. IRR of this cashflow is then calculated.

Payment-In-Kind (PIK) Payment-in-kind refers to a financial instrument that pays interest or dividends to investors with additional debt or equity securities instead of cash. For example, a GP offers a PIK note worth $2M to a company with 10% interest. Each year, the note incurs 10% compounding interest, but instead of the company being required to pay cash interest, it is rather added to the debt “in-kind”. Thus after the first year, the company owes $2.2 million, and after the second year $2.42 million, etc. This amount then continues to grow until the loan matures, at which time the total principal and interest become due. PIK notes typically have higher income rates, so can drive greater returns, but also have an inherently higher risk because if the company defaults, higher losses could occur.

Public Markets Equivalent (PME) Public markets equivalent (or PME) evaluates the performance of a private equity investment against a public benchmark or index. CEPRES generates certain cash flow patterns for public market investments that mimic private market investments. By using the cash flow information for each deal/fund, a purchase (sale) of shares in the benchmark is simulated when a negative (positive) cash flow occurs for the underlying investment.

PME-S&P 500 (pooled) A simulated cashflow for an investment in S&P 500 is generated corresponding to a private equity investment. IRR of this cashflow is then calculated.

Q1- Upper This is a 75th percentile of the performance measure and it splits off the highest 25% of data from the lowest 75%.

Q2- Median This is a 50th percentile of the performance measure and it splits off the data in half.

Q3- Lower This is a 25th percentile of the performance measure and it splits off the lowest 25% of data from the highest 75%.

Range Range represents the difference between the largest value and the lowest value of the performance measures of all the funds/deals in a selected universe. It typically shows the breadth of distribution in the performance measure.

Recovery Rate Recovery rate is the ratio of the total value over invested capital for defaulted investments (investments for which the TVPI is less than 1). This is a key measure of manager discipline since all managers are likely to lose money on some deals, but some managers will have tighter covenants or work out teams that are able to recover more value on the investments. Calculated as total distributions plus valuation for those deals have TVPI below 1 then divided by total contributions for those deals have TVPI below 1.

Risk Free Rate US The rate of return an investor can achieve on a 3-month U.S. Treasury bill. The investor incurs essentially minimal risk because of the bill’s stability. This allows investors to evaluate the return of investments given the additional risk.

Risk Free Rate EU The rate at which the largest banks operating in the European Union lend money to each other — also known as the "Euro Interbank Offered Rate" or "EURIBOR". Similar to the LIBOR or U.S. Treasury bill, it is an essentially risk-free rate of return that allows investors to evaluate the return of investments given the additional risk.

Risk Free Rate In theory, the risk-free rate is the minimum return an investor expects for any investment, where the additional risk is not accepted unless the potential rate of return is greater than the risk-free rate.

RVPI The residual balue to paid-in (RVPI) is the ratio of unrealized valuation to total invested (paid-in) capital. This ratio gives the private equity investor an idea as to how much of the return was "unrealized".

Skewness Skewness is the asymmetry in a statistical distribution. This is where the curve appears skewed either to the left or right. Symmetric data has a skewness near zero (close to the normal distribution). Given a data sample of performance measures (for example IRR) negative skewness indicates that the IRR distribution is skewed to left, where there are more downside returns than upside. Whilst a positive skewness indicates that the IRR distribution is skewed to right, where there are more upside returns.

Semivariance Semivariance can be used to estimate the potential downside risk of an investment portfolio. In other words the dispersion of all observations that fall below the mean or target value. It is calculated by dividing the sum of the squared differences between the mean (and the data points that are below the mean) by the total number of data points below the mean.

Sharpe Ratio Sharpe Ratio is calculated by subtracting the risk-free rate from the return of the portfolio and dividing the result by the standard deviation of the portfolio’s excess return. The Sharpe Ratio adjusts a portfolio’s past performance or expected future performance for the excess risk that was taken by the investor. A higher Sharpe Ratio is better when compare to similar portfolios with lower return as it shows a higher risk-adjusted return.

Sortino Ratio Sortino Ratio measures the risk adjusted return of an investment. It is a modification of the Sharpe Ratio but only those returns falling below the target or required rate of return – the downside risk. It is calculated by dividing the excess return (Mean of performance measures less Risk Free Rate) by Downside Deviation. Because the Sortino ratio focuses only on the negative deviation of a portfolio’s return from the mean, it is thought to give a better view of a portfolio’s risk-adjusted performance since positive volatility is a benefit.

Standard Deviation A statistical measure of the dispersion (spread) of a dataset from the mean. It is also known as the historical volatility and is used as a gauge for the expected amount of volatility. Standard Deviation is calculated as the square root of the Variance.

Syndicated Transaction A syndicated transaction is one where multiple Investment Managers are invested into the same investment concurrently. Typically it is a temporary financial alliance formed for the purpose of handling a large transaction that would be hard or impossible for a single Investment Manager to handle individually.

TVPI Total Value to Paid In capital (TVPI) is the ratio of total distributed capital and remaining unrealized value to total invested capital. TVPI is also more commonly known as the performance multiple and measures the total value created by a fund or deal.

Termination Income Termination Income is the expected total amount of fines received from tenants when they terminate their rental contract before the end of the contract. The amount of termination income is generally specified in the rental contract.

Total Interest Total interest is calculated as the sum of Current Interest and PIK Interest.

Tranche Tranches are different securities linked to the financial structure of a company divided by seniority of claim on the financial assets of the company. In CEPRES underlying tranches are aggregated into categories of Senior (i.e. 1st Lien), Subordinated/Mezzanine (Subordinated instruments often with equity kickers), Unitranche/Mixed (1st and/or 2nd Lien with additional tranches all transacted concurrently) and Equity (pure Equity, often as a follow on kicker).

Upside Deviation Upside Deviation is a measure of upside opportunities. It represents the Standard Deviation of the observations that are larger than the selected target. For example, the upside deviation of returns is calculated as the standard deviation of returns that are smaller than the mean.

Upper Quartile The upper quartile is the relevant value that represents the 75th percentile of a sorted dataset. For example, giving 100 investment records, the Upper Quartile IRR would be the value of IRR for the 75th record with 74 investments having lower IRR values and 25 investments having higher IRR values.

Variance A statistical measure used for probability distribution. It captures the variability (volatility) of each data points from the mean and is a typical measure of risk. For example, variance for IRRs is calculated by dividing the sum of squared differences between each IRR and the arithmetic mean by the number of IRRs in the data set.

Valuation/Cost Ratio Valuation/Cost Ratio is an indicator of potential remaining upside. It is calculated as ratio of valuation to total invested capital.

Value Creation based on EBITDA Development - Enterprise Value at Entry It is the sum of the Enterprise Value at Entry for all the deals. Value Creation based on EBITDA Development is measured with Enterprise Value at Entry as a base.

Value Creation based on EBITDA Development - Revenue Growth It captures the value creation based on EBITDA Development that can be attributed to the effect of revenue growth over the lifetime of the deal. A positive number means the company has been able to expand their revenues. It is calculated by: Revenue Growth = (Revenue at Exit – Revenue at Entry) Entry EBITDA Margin Entry EBITDA Multiple

Value Creation based on EBITDA Development - Margin Expansion It captures the value creation based on EBITDA Development that can be attributed to changes on the EBITDA margin over the lifetime of the deal. A positive number means the company has been able to improve its operational efficiency and earn more of its revenue as EBITDA. It is calculated by: Margin Expansion = (EBITDA Margin at Exit – EBITDA Margin at Entry) Exit Revenue Entry EBITDA Multiple

Value Creation based on EBITDA Development - Multiple Expansion on Exit EBITDA It captures the value creation based on EBITDA Development that is due to the aggregated effects of revenue growth and changes on the EBITDA multiple over the lifetime of the deal. It is calculated by: Multiple Expansion on Exit EBITDA = (Exit EBITDA Multiple - Entry EBITDA Multiple) * Exit EBITDA

Value Creation based on EBITDA Development - Enterprise Value at Exit It is the sum of the Enterprise Value at Current / Exit for all the deals.

Value Creation based on Revenue Development - Enterprise Value at Entry It is the sum of the Enterprise Value at Entry for all the deals. Value Creation based on Revenue Development is measured with Enterprise Value at Entry as a base.

Value Creation based on Revenue Development - Revenue Growth It captures the value creation based on Revenue Development that can be attributed to the effect of revenue growth over the lifetime of the deal. A positive number means the company has been able to expand their revenues. It is calculated by: Revenue Growth = (Revenue at Exit – Revenue at Entry) * Entry Revenue Multiple

Value Creation based on Revenue Development - Multiple Expansion on Exit Revenue It captures the value creation based on Revenue Development that is due to the aggregated effects of revenue growth and changes on the revenue multiple over the lifetime of the deal. It is calculated by: Multiple Expansion on Exit Revenue = (Exit Revenue Multiple - Entry Multiple) * Exit Revenue

Value Creation based on Revenue Development - Enterprise Value at Exit It is the sum of the Enterprise Value at Current / Exit for all the deals.

Vintage Year In CEPRES, vintage year refers to the year in which a fund makes its initial investment.

Weighted Average The weighted average return is a type of average when each return in selected universe is multiplied by a predetermined weight before calculation. In CEPRES, the weight is determined by each deals invested capital.

Write-Offs Poor performing investments that are classified by the investment manager as unrecoverable and usually considered as a complete loss.

WAULT Weighted Average Unexpired Lease term (WAULT) is a real estate metric that is a measurement of the value of current rent contracts. It is denoted in years and is calculated as the sum of all future rent income currently under contract divided by the annual rent income of a specified year.

Write-Off Rate A Write-Off is an investment that has lost all value. Write-Off rate is the ratio of the number of write-offs divided by the total number of investments, thus those defaulting investments where the Recovery Rate is 0% and the Loss Rate is 100%.

Year Refurbished The year that a building/property was last renovated or improved.