Resources

Private Equity and Entrepreneurship Glossary

Parent company guarantee (PCG)

A commitment from the parent company to meet liabilities on behalf of its subsidiary company in event of a default.

Pari passu

A legal term referring to the equal treatment of two or more parties in an agreement. For example, a venture capitalist may agree to have registration rights that are pari passu with the other investors in a financing round.

Participating dividends

The right of holders of certain preferred stock to receive dividends and participate in additional distributions of cash, stock or other assets.

Participating preferred stock

A unit of ownership composed of preferred stock and common stock. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company.

Patent

A legal right to sue any person or company that attempts to use, manufacture or sell the patented product or process. Patents typically have a 20 year term.

Pay to play

A clause in a financing agreement whereby any investor that does not participate in a future round agrees to suffer significant dilution compared to other investors. The most onerous version of “pay to play” is automatic conversion to common shares, which in essence ends any preferential rights of an investor, such as the right to influence key management decisions.

PEIGG

Acronym for Private Equity Industry Guidelines Group, an ad hoc group of individuals and firms involved in the private equity industry for the purpose of establishing valuation and reporting guidelines. With the implementaion of FAS 157 in 2007, the group's mission was essentially complete. Several of its members then joined IPEV, which is viewed by U.S. VCs as the international successor to PEIGG.

PE ratio

See Price earnings ratio.

Personal guarantee (PG)

A commitment made by an entrepreneur to personally repay any debts on which his/her company defaults.

Piggyback rights

Rights of an investor to have his or her shares included in a registration of a startup’s shares in preparation for an IPO.

PIPEs

See Private investment in public equities.

Placement agent

A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund. Sometimes a private equity fund will hire a placement agent so the fund partners can focus on making and managing investments in companies rather than on raising capital.

Portfolio company

A company that has received an investment from a private equity fund.

Positive covenant

A clause in an agreement that requires a specific action by one of the parties. For example, a loan agreement might contain positive covenants requiring that the borrower maintain certain working capital levels within a certain time frame or provide quarterly financial statements.

Post-money valuation

The valuation of a company including the capital provided by the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post-money valuation of $7 million.

PPM

See Private placement memorandum.

Preemptive rights

The rights of shareholders to maintain their percentage ownership of a company by buying shares sold by the company in future financing rounds.

Preference

Seniority, usually with respect to dividends and proceeds from a sale or dissolution of a company.

Preferred return

A minimum return per annum that must be generated for limited partners of a private equity fund before the general partner can begin receiving a percentage of profits from investments.

Preferred stock

A type of stock that has certain rights that common stock does not have. These special rights may include dividends, participation, liquidity preference, anti-dilution protection and veto provisions, among others. Private equity investors usually purchase preferred stock when they make investments in companies.

Pre-money valuation

The valuation of a company prior to the current round of financing. For example, a venture capitalist may invest $5 million in a company valued at $2 million pre-money. As a result, the startup will have a “post-money” valuation of $7 million.

Price earnings ratio (PE ratio)

The ratio of a public company’s price per share and its net income after taxes on a per share basis.

Primary shares

Shares sold by a corporation (not by individual shareholders).

Private equity

Equity investments in non-public companies, usually defined as being made up of venture capital funds and buyout funds. Real estate, oil and gas, and other such partnerships are sometimes included in the definition.

Private Equity Council (PEC)

An advocacy, communications and research organization for the buyout industry in the United States.

Private investment in public equities (PIPEs)

Investments by a private equity fund in a publicly traded company, usually at a discount and in the form of preferred stock.

Private placement

The sale of a security directly to a limited number of institutional and qualified individual investors. If structured correctly, a private placement avoids registration with the Securities and Exchange Commission.

Private placement memorandum (PPM)

A document explaining the details of an investment to potential investors. For example, a private equity fund will issue a PPM when it is raising capital from institutional investors. Also, a startup may issue a PPM when it needs growth capital. Also known as an Offering memorandum.

Private securities

Securities that are not registered with the Securities and Exchange Commission and do not trade on any exchanges. The price per share is negotiated between the buyer and the seller (the “issuer”).

Pro-forma

Used to refer both to: i) the presentation of financial information with 'normalized' performance, removing the impact of one-off, exceptional items; and ii) forward looking financial information that has been prepared using assumptions. Pro-forma accounts need not comply with GAAP.

Promote

See Carried interest.

Prospectus

A formal document that gives sufficient detail about a business opportunity for a prospective investor to make a decision. A prospectus must disclose any material risks and be filed with the Securities and Exchange Commission.

Prudent man rule

A fundamental principle for professional money management which serves as a basis for the Prudent Investor Act. The principle is based on a statement by Judge Samuel Putnum in 1830: “Those with the responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income.” In the 1970s a favorable interpretation of this rule enabled pension fund managers to invest in venture capital for the first time.

Public-to-private transaction

See Going-private transaction.

Purchase method

A merger accounting treatment whereby a buyer purchases the assets (and liability obligations) of a company at their market price and then records the difference between the purchase price and the book value of the assets as goodwill. This goodwill need not be amortized but must be valued annually and any decreases or increases in value must be reflected in the buyer’s financial statements.