Glossary of Investment Terms

Asset

Any item of economic value that is owned by an individual or entity.

Asset-Backed Securities

A security whose value and income payments are derived from, and collateralized by, a specified pool of underlying assets, such as loans, leases, credit cards, and royalties.

Asset Classes

Categories of investments that share certain characteristics and exhibit similar patterns of return.

Benchmark

The performance objective or standard used to define the return against which another portfolio is to be evaluated.

Buyout

The purchase of a controlling interest in a corporation in order to take over assets and/or operations.

Capital Gain

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

Commodities

Bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products.

Derivatives

A security whose price is dependent on, or derived from, one or more underlying assets. The derivative itself is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes. Most derivatives are characterized by high leverage.

Diversification

A strategy of reducing exposure to risk by combining a wide variety of investments within a portfolio.

Emerging Markets

Investment markets in countries which are not fully developed and where there may be a higher risk of default.

Fixed Income

Securities representing debt obligations and usually having fixed interest payments and maturities. Different types of fixed income securities include government and corporate bonds, mortgage-backed securities, asset-backed securities, and may also include money market instruments.

General Partner

The managing partner in a limited partnership. The general partner manages the operations of the limited partnership based on terms included in the partnership agreement. The general partner has unlimited liability for the debts and obligations of the limited partnership and receives a management fee and a percentage of the profits.

Illiquid

An asset that cannot be easily converted into cash such as real estate, thinly traded securities, and any investments that require a long time to mature (such as private equity investments).

Initial Public Offering (IPO)

The first sale of stock by a private company to the public.

Investment Risk

The degree of uncertainty and/or the amount of possible loss on an investment.

Leveraged Buyout (LBO)

See Buyout.

Limited Partner

An investor in a limited partnership that generally has limited liability and is not involved in the day-to-day operations. Limited partners receive income and capital gains.

Limited Partnership

A legal structure used by most venture and private equity funds that usually consists of a general partner and limited partners.

Liquidity

A measure of the ease and relative time in which assets can be turned into cash without an impact on the price.

Mezzanine Financing

A hybrid of debt and equity financing that is often used to finance the expansion of existing companies. Mezzanine financing is debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders.

Portfolio

A grouping of financial assets.

Private Equity

Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an initial public offering (IPO) or sale to a public company.

Public Equity

Shares that trade on public exchanges or “over-the-counter.”

Secondary Funds

Private equity partnerships set up to acquire limited partner interests in private equity or venture capital funds, or in direct investments in companies.

Special Situations

As related to private equity, special situations are distressed credit opportunities, mezzanine capital, credit opportunities, and secondary funds.

Stock

Ownership of a corporation represented by shares that are claims against the corporation’s net earnings and assets.

Trustee

An individual who holds or manages assets for the benefit of another.

Venture Capital

Equity financing of early, expansion, and later-stage emerging small businesses. Venture capital companies grow from start-up to medium-size businesses and are then either sold to the public through an IPO or are sold to a strategic or financial buyer.

Volatility

Volatility of returns is the measurement used to define risk. It describes the variation of price of a financial instrument over time. The greater the volatility, the higher the risk.