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Glossary of Terms

Set out below is a Glossary of standard transactional terminology for private equity and corporate finance transactions. Use the filter menu if you are looking for a specific term, or to navigate the Glossary alphabetically.

Equity financingFinancing business operations by selling share capital in the company as opposed to taking on debt. The shareholders may be entitled to dividends. This is higher risk than lending and consequently the returns are usually greater.

Mezzanine financingThis type of financing is used to bridge the gap between the secured debt a company can support, the available equity and the purchase price. As mezzanine financing is higher risk that senior debt the interest charged is higher. It also often carries warrants to subscribe to ordinary shares.

Debt financingThe use of borrowed money to finance a business. Different forms of debt can be used to raise money for working capital or capital expenditure such as overdrafts, bank loans, lease financing, commercial mortgage, invoice finance, asset finance or bonds. The loan can be secured or unsecured, short or long-term. The lender receives interest at an agreed rate and if the loan is not repaid may be entitled to take control of or sell assets which are owned by the company.

Private equityA term which covers a range of transactions in which the source of finance is usually a fund established to invest specifically in unquoted companies rather than in publicly quoted shares. It includes forms of venture capital and MBO financing.

Bridging loanA form of short-term financing used until longer-term financing can be achieved.

Business angelsIndividuals who provide start up finance for entrepreneurs in return for equity. In addition to cash they can also provide industry knowledge and contacts.

IBOAn institutional buy-out is when a private equity house acquires the majority stake within a management buy-out. It can also be when the private equity house purchases the business in total and then allocates a minority stake to the current or incoming management.

MBO 'Management buy-out'Some or all of the existing management team, often with the support of a new investor, buys control of the business form the existing shareholders. This is seen as less risky for private equity investment as the management team are already established and know the business.

RatchetA mechanism whereby management's equity stake may be increased or decreased on the occurrence of future events. The equity allocation varies depending on the performance of the company and the return the institutional investor achieves.

RecapitalisationThis is a change in the way a company is financed. It is a result of an injection of capital through either equity or debt.

Secondary buy-outThis is a common exit strategy for private equity suppliers. The management team along with a different private equity funder acquire the business allowing the current private equity supplier to exit from its investment.

Venture capitalEquity finance in an unquoted, young company which allows it to start-up, expand or restructure. It is cheaper that bank finance but does involve handing over some control of the company.