Carried interest ("carry"): Carried interest or simply "carry" represents the share of a private equity fund's profit (usually 20%) that will accrue to the general partners.

Committed funds (or "raised funds" or "committed capital"): Capital committed by investors. This will be requested or "drawn down" by private equity managers on a deal-by-deal basis. This amount is different from invested funds for two reasons. Firstly, most partnerships will invest only between 80% and 95% of committed funds. Second, one has to deduct the annual management fee which is supposed to cover the cost of operation of a fund.

Distributions: Payments to investors after the realisation of investments of the partnership.

Divestments (or realisations or exits): Exits of investments, usually via a trade sale or an IPO (Initial Public Offering) on a stock market.

Draw downs: Payments to the partnership by investors in order to finance investments. Funds are drawn down from investors on a deal-by-deal basis.

Fund of funds: Private equity funds whose principal activity consists of investing in other private equity funds. Investors in funds of funds can thereby increase their level of diversification.

Gatekeepers: Specialist advisers that assist institutional investors in their allocation decisions to private equity. Most manage funds of funds.

Hurdle rate: Arrangement that caps the downside risk for investors. It allows investors to get preferential access to the profits of the partnership. In the absence of reaching the hurdle return, general partners will not receive a share of the profit (carried interest). A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% before the profits are shared according to the carried interest arrangement.

Interim return: The definitive rate of return of a private equity investment can, by definition, only be calculated when the fund is wound up. Most return calculations therefore produce interim IRRs which approach the definitive rate of return after approximately three to six years. This period is usually shorter for buy-out funds than for early stage and development funds.

Internal rate of return (IRR): The IRR method is the most appropriate method for calculating the returns of a private equity fund. In essence, the IRR represents the rate at which positive and negative cash flows are discounted so that the net present value of the fund amounts to zero.

Investment stage: In this report, the term investment stage refers to the fund's investment preferences. In accordance with the "cut-offs" used for The WM Company's annual BVCA performance survey, funds were divided into:

• "Early stage" funds - investing in companies in the seed (concept), start-up (within three years of a company's establishment) and early stage of development
• "Development" funds - investing in expansion stage companies, ie. established companies which raise private equity to make acquisitions, fund working capital, buy new plant, etc and small management buy-outs (MBO) and buy-ins (MBI) with less than £2 million of equity invested
• "Mid-MBO" funds - investing in MBOs and MBIs with £2-10 million of equity invested
• "Large MBO" funds - investing in MBOs and MBIs with more than £10 million of equity invested
• "Generalist" funds - investing in companies at a variety of stages of development.

J-curve: The J-curve illustrates the IRR pattern of a fund over time. During its first one or two years, a private equity fund will show a negative return. This is due to the impact of the start-up costs and the annual management fee which do not result in the creation of book-value. The fund's returns will start to rise as soon as the first realisations are made. After approximately three to six years, the fund's interim IRR will approach its final IRR.

Limited partnership: Most private equity firms structure their funds as limited partnerships. Investors represent the limited partners and private equity managers the general partners.

Secondary market: The secondary market enables institutional investors to sell their stakes in a private equity partnership before it is wound up.

Trade sale: Sale of the equity share of an investee company to another company.

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