Average IRR — The arithmetic mean of the internal rates of return. 

Balanced — A venture fund investment strategy which includes investment in portfolio companies at a variety of stages of development (Seed, Early Stage, Later Stage, Leveraged Buyouts).

Buyout — The purchase of a controlling interest in a company with the use of debt and equity by an outside investor (leveraged buyout) or by the company’s management (management buyout).

Capital Account — The value of a partner's ownership interest in a partnership as determined by the general partner.

Capital Call I Drawdown I Takedown — A request by the general partner for money (capital) from the limited partners. The general partner will make several requests for money, generally over a 5-7 year period, until the limited partners' commitments are fulfilled.

Capital Weighted Average IRR — The average IRR weighted by fund size.

Carried Interest — The performance incentive for the general partner. Typically, the general partner receives 20% of the capital gains generated by the investments in the partnership.

Catch-up — A feature in the limited partnership agreement that allows the general partner to receive a majority of the distributions until the agreed upon split of profits has been achieved.  Generally, this situation arises when the general partner makes all distributions to the partners according to their Contribution percentage, plus a specified rate of return (Hurdle Rate or Preferred Return, see below), before the general partner participates in any distributions.  Once this point has been reached, the general partner receives a priority in distributions until it has obtained its share of the Preferred Return.  Then, all profits are split according to the Carried Interest arrangement.

Clawback — The clawback gives limited partners the right to reclaim a portion of distributions to a general partner, if at the end of the partnership’s life, the general partner has received more than its agreed upon share of the profits from the Carried Interest.  This situation can arise if the partnership has a large success early in the partnership’s life and distributes a portion of the profits to the general partner.  For simplicity, if the rest of the investments in the partnership turn out to be worthless, then the limited partners have a right force the general partner to return its previous distribution to the limited partners.  There may also be a general partner clawback, if for example there was a lawsuit pertaining to a former company in the partnership.  If this company was sold, with proceeds distributed to the limited partners, and a judgment was found in favor of the plaintiff, then the limited partners would have to return part or all of that distribution.

Commitment — A limited partner's obligation to provide a certain amount of capital to a partnership.

Committed Capital — Generally, the aggregate amount of capital committed by all partners.

Contribution — The amount(s) of capital that has (have) been called by the general partner over the life of the partnership for the limited partners to fulfill their Commitment obligation.

Direct Investment — An investment in the securities of a portfolio company.

Discount/Premium — The difference between the net asset value of a Limited Partner’s Interest, reported by the General Partner, and the amount a buyer is willing to pay for it.

Distribution — Cash or a company's stock disbursed to the limited partners of a venture fund.

Due Diligence — The investigation and evaluation of a management team's characteristics, investment philosophy, and terms and conditions prior to committing capital to the fund.

Early Stage — A stage in a company’s development where its product or service is in development and management is in various stages of initial marketing, manufacturing and sales activities.

Exiting Strategy — A partnership's intended method for liquidating its holdings, while achieving the maximum return possible.

Expansion Stage — A stage in a company’s development where its product or service is commercially available and generating meaningful revenue for the company.  The challenge at this stage is building and managing growth.

Fund — A verb meaning to invest capital into either a partnership or a company; or a noun meaning another name for a partnership.

Fund-of-Funds — A partnership formed to invest in other funds/partnerships.  It provides investors with a diversified portfolio of private equity partnerships and streamlines the administrative and reporting process.

Fund Age — The age of a fund (in years) from its first takedown to the time an IRR is calculated.

Fund Focus (Investment Stage) — The indicated area of specialization of a venture capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage or Leveraged Buyout (LBO).

Fund Size - The total amount of capital committed by the limited and general partners of a fund.

Hurdle Rate/Preferred Return — A agreed upon rate of return that the limited partners must obtain before the general partner can participate in the profits of the partnership.

In-kind Distribution — The distribution of a portfolio company's stock directly to a limited partner. In most cases the stock is public, but in some cases it may not be.

IRR (Internal Rate of Return) — The discount rate that equates the net present value (NPV) of all investment's cash inflows with its cash outflows.

Interest — See Limited Partnership Interest below.

J-Curve — A graphic representation of the return profile of a typical private equity partnership measured in terms of multiple of cost.  Since the valuations of private companies remain unchanged for a long period of time, perhaps one to two years, the investment return in the early life of a partnership is usually negative.  The reason for this is that the main variable affecting the return during this period is operating expenses, which are not offset by valuation increases.  After a few years the investments in the portfolio begin to mature, valuations begin to rise, and the partnership turns profitable. 

Later Stage — A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume.

Limited Partnership— A legal entity composed of a general partner and a number of limited partners.  The general partner makes and manages the investments and is liable for the actions of the partnership, while the limited partners are generally limited to the amount of their investment.  The general partner receives a management fee and a percentage of profits (see Carried interest), while the limited partners receive ordinary income and capital gains.

Limited Partnership Interest — Similar to a share of stock, this represents an investor's (limited partner’s) ownership position in a partnership.

Liquidation — The sale of the assets of a portfolio company to one or more acquirors when venture capital investors receive some of the proceeds of the sale.

Lower Quartile — The point at which 75% of all returns in a group are greater and 25% are lower.

Management Fee — Compensation for the management of a venture fund's activities, generally paid quarterly from the fund to the general partner or management company.

Maximum — The highest return level for a group of funds.

Median — The mid-point of a distribution, with half of the sample less than or equal to the median, and half of the sample greater than or equal to the median.

Mezzanine — A fund investment strategy involving subordinated debt (the level of financing senior to equity and below senior debt) with some equity participation under certain circumstances.

Minimum — The lowest return level for a group of funds.

Paid-in Capital — The amount of committed capital a limited partner has actually transferred to a venture fund. Also known as the cumulative takedown amount.

Partnership Interest — See Limited Partnership Interest above.

Pooled IRR — A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cashflow and calculate IRR on portfolio cashflow. This is different from Capital Weighted IRR in that the Pooled IRR is based on actual capital invested by the limited partners as opposed to the amount Committed by them.

Portfolio Company — One of many companies in a partnership in which the general partner has invested the partnership's capital.

Preferred Return — See Hurdle Rate above.

Premium/Discount — See Discount/Premium above.

Primary — The investment in a newly formed partnership.

Quartile — Segment of a sample representing a sequential quarter (25%) of the group. (First 10 out of 40 funds — first quartile, etc.)

Right of First Refusal — A clause in a partnership agreement that gives the limited partners, and sometimes the general partner, the right to buy a current limited partner’s interest before it can be sold to an outside party.  In some cases the limited partners or general partner need only match the offer from the outside party.

Secondary — The purchase or sale of a limited partnership interest in a partnership that has been in existence for a number of years.

Secondary Direct — The purchase/sale of company from a partnership.  Many times this occurs towards the end of a partnership’s life when the general partner is trying to wind up the affairs of the partnership.  In this instance the general partner will try to sell its remaining positions to another investor.

Seed Stage — A development stage in which a company has not yet fully established commercial operations, an may also involve continued research and product development.

Takedown Schedule — The plan stated in the offering memorandum providing for the actual transfer of funds from the limited partners' to the general partners' control.

Upper Quartile — The point at which 25% of all returns in a group are greater and 75% are lower

Value Ratio — The distributions (D) received by the limited partners, plus the current value of their capital account (CA), divided by the amount of capital invested (CI) by the limited partner. The higher this ratio is above 1.0, the better the partnership is performing. Early in the life of a partnership, however, the Value Ratio is typically below one, due to the “J-curve” effect. (See “J-curve” above.).

Value Ratio = (D + CA) / CI

Vintage Year — The year of a fund's formation and first takedown of capital.

Write-down — A reduction in the value of an investment.

Write-off — The write-down of a portfolio company's holdings to a valuation of zero and the venture capital investors receive no proceeds from their investment.

Write-up — An increase in the value of an investment.