Resources
Glossary
Plain-English definitions of terms you may come across in private capital, real estate and energy investing.
0-9
- 1031 Exchange
- A transaction under Section 1031 of the Internal Revenue Code in which real property held for business or investment is exchanged for other like-kind real property. When strict IRS timing and reinvestment rules are met, recognition of capital gains may be deferred. Tax outcomes depend on individual circumstances and should be reviewed with a qualified tax advisor.
A
- Accredited Investor
- An individual or entity that meets the financial or professional criteria in Rule 501 of Regulation D. For individuals, this generally means a net worth above $1 million (alone or with a spouse or spousal equivalent, excluding the primary residence), income above $200,000 ($300,000 jointly) in each of the last two years with a reasonable expectation of the same this year, or holding certain securities licenses. Many private offerings are limited to accredited investors.
- Alternative Investment
- An investment outside traditional publicly traded stocks, bonds and cash. Examples include private equity, private credit, real estate, energy assets and hedge funds. Alternatives are often less liquid and less transparent than public markets.
- Asset Class
- A group of investments with similar characteristics that tend to behave alike in the market, such as equities, fixed income, real estate or commodities.
B
- Bridge Financing
- Short-term funding used to cover a gap until longer-term financing or a liquidity event is in place.
C
- Capital Call
- A request from a fund manager or sponsor for investors to contribute part of the capital they previously committed, usually when an investment is ready to be made.
- Capitalization Rate (Cap Rate)
- A real estate measure calculated by dividing a property’s net operating income by its value or purchase price. It is commonly used to compare properties and is not a measure of total return.
- Capital Raise
- The process a company or sponsor uses to secure funding from investors, lenders or partners, through equity, debt or a combination of both.
- Capital Stack
- The layers of capital that fund a company or project, ranked by priority of repayment. Senior debt is typically repaid first, followed by mezzanine debt, preferred equity and common equity.
- Carried Interest
- A share of an investment’s profits paid to the general partner or sponsor, usually after investors receive their capital back and any preferred return. Also called “carry.”
- Common Equity
- Ownership in a company that typically carries voting rights and a claim on profits after all debt and preferred equity holders are paid. It sits at the bottom of the capital stack.
- Convertible Note
- A short-term loan to a company that can convert into equity at a later date, often at a discount or subject to a valuation cap, instead of being repaid in cash.
D
- Debt Financing
- Raising capital by borrowing money that must be repaid with interest, without giving lenders ownership in the business.
- Dilution
- A reduction in existing owners’ percentage of a company that occurs when new shares or ownership units are issued.
- Distribution Waterfall
- The order in which cash from an investment is paid out to investors and the sponsor, as set out in the governing documents. A typical waterfall returns capital first, then pays any preferred return, then splits remaining profits.
- Diversification
- Spreading capital across different investments, asset classes, sectors or geographies to reduce exposure to any single risk. Diversification does not guarantee a profit or protect against loss.
- Due Diligence
- The investigation and review of a business, asset or offering before an investment or transaction, covering areas such as financials, legal matters, operations and management.
E
- EBITDA
- Earnings before interest, taxes, depreciation and amortization. A common measure of a company’s operating profitability, often used in business valuation.
- Enterprise Value
- A measure of a company’s total value, generally calculated as equity value plus debt, minus cash. It is often used to compare companies with different capital structures.
- Equity
- An ownership interest in a company or asset. Equity holders share in profits and losses and are paid after creditors.
- Exit Strategy
- The planned way an owner or investor expects to realize the value of an investment, such as a sale, merger, recapitalization, refinancing or public offering.
F
- Family Office
- A private firm that manages the investments and financial affairs of a wealthy family. A single-family office serves one family; a multi-family office serves several.
- Form D
- A notice filed with the Securities and Exchange Commission (SEC) by companies selling securities under a Regulation D exemption. It is generally due within 15 days after the first sale.
G
- General Partner (GP)
- The party that manages a partnership or fund, makes investment decisions and typically has unlimited liability for the partnership’s obligations. Often the sponsor of a deal.
H
- Hurdle Rate
- The minimum return an investment must reach before the sponsor or manager earns a share of profits. Often used interchangeably with preferred return.
I
- Illiquid Investment
- An investment that cannot be easily sold or converted to cash without significant time or loss in value. Most private investments are illiquid and may require a multi-year holding period.
- Internal Rate of Return (IRR)
- A measure of an investment’s annualized return that accounts for the timing and size of cash flows in and out. Projected IRRs are estimates and are not guaranteed.
- Investment Thesis
- The reasoning behind an investment: why an opportunity is attractive, what must go right and what the key risks are.
L
- Letter of Intent (LOI)
- A document outlining the main terms of a proposed transaction before final agreements are drafted. Most terms in an LOI are typically non-binding.
- Leverage
- The use of borrowed money to finance an investment. Leverage can increase potential gains and also magnifies potential losses.
- Limited Partner (LP)
- An investor in a partnership or fund who contributes capital but does not take part in day-to-day management. A limited partner’s liability is generally limited to the amount invested.
- Liquidity
- How quickly and easily an asset can be converted to cash without materially affecting its price.
- Lock-Up Period
- A set period during which investors cannot sell, transfer or redeem their investment.
M
- Mezzanine Financing
- A hybrid of debt and equity financing that ranks below senior debt and above equity in the capital stack. It often carries higher interest rates and may include rights to convert to equity.
- Mineral Rights
- The legal right to explore for, extract and benefit from minerals, oil or natural gas beneath a property. Mineral rights can be owned separately from the land surface.
N
- Net Operating Income (NOI)
- A property’s income from operations after operating expenses, before debt payments, income taxes and capital expenditures.
- Non-Disclosure Agreement (NDA)
- A contract in which parties agree to keep shared information confidential, commonly signed before detailed deal materials are exchanged.
O
- Operating Agreement
- The governing document of a limited liability company (LLC) that sets out ownership, management, voting rights and how profits and losses are allocated.
P
- Pari Passu
- Latin for “on equal footing.” Investors or obligations that are pari passu share equally in payment priority.
- Preferred Equity
- An ownership interest that ranks ahead of common equity for distributions and repayment, but behind debt. It often carries a fixed or preferred return.
- Preferred Return
- A threshold return that investors are entitled to receive, as set out in the governing documents, before the sponsor shares in profits. A preferred return is a priority of payment, not a guarantee of performance.
- Private Equity
- Capital invested in companies that are not publicly traded, often with the goal of growing or improving the business over a multi-year period before an exit.
- Private Placement
- A sale of securities directly to a limited group of investors rather than through a public offering, typically relying on an exemption from SEC registration such as Regulation D.
- Private Placement Memorandum (PPM)
- The offering document for a private placement. It describes the business, terms of the offering, use of proceeds, risks and other information investors should review before investing.
- Pro Rata
- In proportion. A pro rata distribution or right is allocated according to each investor’s share of ownership.
Q
- Qualified Purchaser
- A higher investor standard defined under the Investment Company Act of 1940. For individuals, it generally means owning at least $5 million in investments. Some private funds are limited to qualified purchasers.
R
- Real Estate Syndication
- A structure in which multiple investors pool capital to acquire a property or portfolio, usually led by a sponsor who manages the investment.
- Recapitalization
- A change to a company’s mix of debt and equity, often used to provide liquidity to existing owners, reduce debt or prepare for growth.
- Regulation D
- A set of SEC rules that allows companies to raise capital through private offerings without registering the securities, provided certain conditions are met.
- Royalty Interest
- In oil and gas, the right to receive a share of production revenue from a property without paying the costs of drilling or operating the well.
- Rule 506(b)
- A Regulation D exemption that allows an unlimited amount to be raised from accredited investors and up to 35 non-accredited but sophisticated investors. General solicitation and advertising are not permitted.
- Rule 506(c)
- A Regulation D exemption that permits general solicitation and advertising, provided all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status.
S
- Securities Act of 1933
- The federal law that governs the offer and sale of securities in the United States. It requires registration of securities offerings unless an exemption, such as Regulation D, applies.
- Soft Circle
- An informal, non-binding indication of how much an investor may commit to an offering, given before final documents are signed.
- Sponsor
- The firm or individual that sources, structures and manages an investment opportunity on behalf of investors. The sponsor often invests alongside investors.
- Subscription Agreement
- The document an investor signs to purchase an interest in a private offering. It includes the amount invested and the investor’s representations, such as accredited status.
- Succession Planning
- The process of preparing for the transfer of ownership or leadership of a business, whether to family members, management, partners or an outside buyer.
T
- Term Sheet
- A summary of the key terms and conditions of a proposed investment or financing, used as the basis for final legal documents. It is typically non-binding.
U
- Upstream, Midstream and Downstream
- The three segments of the oil and gas industry. Upstream covers exploration and production; midstream covers transportation, processing and storage; downstream covers refining and distribution to end users.
V
- Valuation
- An estimate of what a business, asset or ownership interest is worth, based on methods such as comparable transactions, discounted cash flow or asset value.
W
- Working Capital
- A company’s current assets minus its current liabilities. It reflects the funds available to run day-to-day operations.
- Working Interest
- In oil and gas, an ownership share in a well or lease that carries the right to a share of production along with responsibility for a proportional share of drilling and operating costs.
These definitions are general, simplified and provided for educational purposes only. They are not investment, legal or tax advice and are not an offer to sell, or a solicitation of an offer to buy, any security. Terms may have different meanings in specific offering documents, which control. See our Important Disclosures.
Next Step
Have a question we did not cover?
Our team is glad to walk you through how these concepts apply to your situation.