Private Equity terms

90
terms

LBOs and private equity16

Add-on acquisition (bolt-on, tuck-in): A smaller company bought by a PE-owned platform to add products, customers, or regions. Add-ons are often bought at lower multiples than the platform, which can lift returns when the combined company is sold.ExampleA platform bought at 10x EBITDA acquires a competitor with $10m of EBITDA at 6x, for $60m. If the combined company sells at 10x, that $10m of EBITDA is worth $100m at exit.See also Portfolio company, Multiple expansion
Carried interest (carry): The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner
Dividend recapitalization (dividend recap): A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout
Growth equity: Investments, often minority stakes, in fast-growing companies that are profitable or close to it, using little or no debt. It sits between venture capital and buyouts in both risk and return.ExampleA growth fund puts $50m into a profitable software company growing 40% a year, for a 20% minority stake and a board seat, with no debt in the deal.See also Venture capital, Leveraged buyout, Private equity
Hurdle rate (preferred return): The minimum annual return, often 8%, that a fund's limited partners receive before the general partner earns carried interest.ExampleLPs commit $100m with an 8% hurdle. Before the GP earns any carry on a five-year deal, they need back about $147m, since 1.08 to the fifth power is about 1.47.See also Carried interest, Limited partner, Internal rate of return
Internal rate of return (IRR): The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO
Leveraged buyout (LBO, buyout): Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO
Multiple expansion: Selling a company at a higher valuation multiple than you paid, such as buying at 10x EBITDA and exiting at 12x. Careful LBO models assume the exit multiple equals the entry multiple so returns do not depend on it.ExampleBuy at 10x $50m of EBITDA for $500m; sell at 12x the same $50m for $600m. The $100m gain came from the multiple alone, with no growth in the business.See also Leveraged buyout, EV/EBITDA multiple, Add-on acquisition
Multiple of invested capital (MOIC, cash-on-cash): Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout
Paper LBO: A simplified LBO done with pen and paper in an interview, in a few minutes. You get the purchase price, leverage, growth, and exit assumptions, then estimate the equity value at exit and the IRR by hand.Example$50m EBITDA at 10x is $500m, half debt. EBITDA grows to $70m, exit at 10x is $700m, and $150m of debt repaid leaves $100m. Equity goes from $250m to $600m: 2.4x in five years, about 19% IRR.See also Leveraged buyout, Internal rate of return, Multiple of invested capital, Technical interview
Portfolio company (portco): A company a PE or VC fund owns a stake in. A firm's portfolio companies are where its value creation work and its eventual returns happen.ExampleA mid-market fund owns 12 portfolio companies. Its operating team helps one cut procurement costs by $5m a year, which at a 10x exit multiple adds $50m of value.See also Sponsor, Add-on acquisition
Rollover equity: Equity that sellers, often the founder or management, reinvest in the company under its new owner instead of taking all cash. It keeps them aligned with the buyer and reduces the cash the buyer has to put in.ExampleA founder sells for $300m and rolls 20%, or $60m, into the new company. The sponsor needs $60m less cash, and the founder keeps a stake in the next exit.See also Sources and uses, Leveraged buyout
Secondary buyout: One PE firm selling a portfolio company to another PE firm. It is a common exit route, especially when the IPO market is slow.ExampleFund A bought a business at 8x EBITDA and grew it for five years. It sells to Fund B at 11x, and Fund B starts its own plan with new debt and a new management incentive pool.See also Leveraged buyout, Portfolio company
Sources and uses: The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity
Sponsor (financial sponsor): A private equity firm or similar investor that buys companies with its funds' capital plus debt. Banks run sponsor coverage groups because PE firms are among their largest fee payers.ExampleA sponsor buying a $1.5bn company calls three banks for the debt financing. Those leveraged finance fees, plus the sale fee when it exits years later, are why banks staff sponsor coverage teams.See also Private equity, Leveraged buyout, Coverage group
Take-private: A buyout of a public company, after which its shares stop trading. The buyer usually pays a premium to the share price before the deal was announced, often 20% to 40%.ExampleA public company trades at $20 before the news. A sponsor offers $26, a 30% premium; with 50m shares outstanding, the equity purchase price is $1.3bn.See also Leveraged buyout, Precedent transactions

Recruiting16

Buy side: Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund
Coffee chat (informational interview): A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
Diversity program: An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
Exploding offer: An offer with a short deadline, sometimes only days, meant to get you to decide before you hear from other firms. Asking politely for more time is normal; the worst answer is usually just no.ExampleA bank makes an offer on Monday with a Friday deadline, and another bank's superday is next Tuesday. Telling the second bank about the deadline often gets its process moved up.See also Return offer, On-cycle
Fit interview (behavioral interview): The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
Headhunter: A recruiting firm that PE funds and hedge funds pay to fill associate roles. For on-cycle recruiting, headhunters reach out to investment banking analysts, often within their first year on the job.ExampleThree months into the analyst job, a headhunter emails about a large-fund associate role starting in two years and asks for a resume and a call this week.See also On-cycle, Off-cycle, Private equity
Megafund: The largest private equity firms, whose flagship buyout funds raise $10 billion or more, such as Blackstone, KKR, Apollo, Carlyle, and TPG. They recruit associates mostly through on-cycle.ExampleA $20bn flagship fund writing $1bn equity checks can do only about 20 deals over its life, so it looks at hundreds of companies to close three or four a year.See also Private equity, On-cycle, Buy side
Middle market: Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending
Networking: Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
Off-cycle: Recruiting or internships outside the usual timeline, such as a fall or spring internship, or a fund hiring one associate whenever it needs one. Many smaller firms recruit only this way.ExampleA student takes a fall semester internship at a 15-person M&A boutique that hires whenever a deal needs help, then uses it to apply for a junior summer analyst role.See also On-cycle, Headhunter
On-cycle: The fast, coordinated private equity associate recruiting process that megafunds and other large funds run through headhunters, often barely a year into an analyst's job. Interviews and offers can happen within a day or two.ExampleA first-year analyst gets a headhunter's call Monday, does two interviews and a modeling test Tuesday, and has an offer by Wednesday night for a job starting 18 months later.See also Headhunter, Megafund, Off-cycle, Exploding offer
Return offer: A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
Sophomore program: An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst
Summer analyst: The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
Superday: The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
Technical interview: Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting15

Accounts receivable: Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
Accrual accounting: Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
Amortization: The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
Balance sheet: A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
Capital expenditures (capex, CapEx): Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
Cash flow statement: Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
Depreciation: Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
EBITDA: Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
Goodwill: What an acquirer pays above the fair value of the target's identifiable net assets. It sits on the balance sheet, is not amortized by US public companies, and is tested at least once a year for impairment.ExampleA buyer pays $500m for a company whose identifiable assets are worth $400m at fair value and whose liabilities are $150m. Net assets are $250m, so goodwill is $250m.See also Amortization, Balance sheet
Gross margin: Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
Income statement: Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
Levered free cash flow (LFCF, free cash flow to equity, FCFE): Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
Net income: The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
Net working capital (NWC): Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue
Operating income (EBIT): Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow

Credit and restructuring10

Covenant: A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio
Covenant-lite (cov-lite): A loan with no maintenance covenants, only incurrence covenants. It is now standard for large leveraged loans, which gives borrowers more room and lenders less early warning.ExampleEBITDA falls 30% at a covenant-lite borrower. Nothing is breached, so lenders cannot step in; they get a say only when the company tries to borrow more or misses a payment.See also Covenant, Direct lending
Direct lending: Loans made straight to companies, often PE-owned middle market businesses, by private credit funds instead of banks. Lenders earn higher spreads in exchange for holding loans that are hard to sell, and deals close faster with fewer parties.ExampleA private credit fund lends $250m to a PE-owned software company at SOFR + 5.5% and closes in three weeks. A syndicated bank loan might price lower but take longer and need ratings and a marketing process.See also Unitranche, Covenant-lite, Sponsor
High-yield bond (junk bond, HY): A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout
Interest coverage ratio: EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA
Leverage ratio (debt/EBITDA): Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA
Mezzanine debt (mezz): Debt that ranks below senior loans but above equity. It pays a higher rate, often partly in kind, and sometimes comes with warrants. It fills the gap when senior lenders will not lend enough.ExampleSenior lenders will fund 4.0x EBITDA of a deal that needs 6.0x of debt. A mezzanine fund provides the other 2.0x at 12% cash interest plus 2% PIK, with warrants for 5% of the equity.See also Payment in kind, Unitranche, Absolute priority rule
Payment in kind (PIK): Interest paid by adding it to the loan balance instead of paying cash. A $100 million note with 10% PIK interest owes $110 million after a year. It saves the borrower cash today at the cost of a growing debt.ExampleA $200m note at 12% PIK, compounding annually, owes $224m after one year and about $281m after three, with no cash interest paid along the way.See also Mezzanine debt, Direct lending
Revolving credit facility (revolver, RCF): A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital
Unitranche: One loan that combines senior and junior debt into a single facility at a blended rate, usually provided by a direct lender. Borrowers like the simplicity and speed of one lender group.ExampleInstead of a $200m first-lien loan at SOFR + 4% and a $100m second-lien loan at SOFR + 8%, a direct lender provides one $300m unitranche loan at SOFR + 5.5%.See also Direct lending, Mezzanine debt

Valuation9

Comparable companies analysis (trading comps, comps): Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field
Discounted cash flow (DCF): Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value
Enterprise value (EV, TEV): The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
Equity value (market capitalization, market cap): The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio
EV/EBITDA multiple (EV/EBITDA): Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis
Exit multiple method: Estimating a DCF's terminal value by applying a multiple to the last projected year, such as 10x final-year EBITDA. It is quick and grounded in market pricing, but it assumes today's multiples still hold years from now.ExampleFinal-year EBITDA of $80m at a 9x exit multiple gives a terminal value of $720m. Discounted five years at a 10% WACC, that is $720m / 1.61, about $447m today.See also Terminal value, Perpetuity growth method, Discounted cash flow
Precedent transactions (transaction comps, precedents): Valuing a company by the multiples buyers paid in past acquisitions of similar businesses. The values usually come out higher than trading comps because acquirers pay a control premium.ExamplePeers trade at 10x EBITDA, but past acquisitions in the sector were done at 12x. A target with $50m of EBITDA is worth about $500m on comps and $600m on precedents.See also Comparable companies analysis, Football field, Take-private
Terminal value: The value of all cash flows after the projection period in a DCF, calculated with the perpetuity growth or exit multiple method. It often makes up more than half of a DCF's total value, so its assumptions deserve the hardest look.ExampleA DCF with $400m of discounted projection-period cash flows and $600m of discounted terminal value gets 60% of its $1bn enterprise value from the terminal value.See also Discounted cash flow, Perpetuity growth method, Exit multiple method
Unlevered free cash flow (UFCF, free cash flow to firm, FCFF): Cash the business generates before paying lenders or shareholders: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. It is the cash flow a DCF discounts at WACC.ExampleEBIT of $100m at a 25% tax rate gives $75m, plus $20m of D&A, minus $30m of capex and a $5m increase in NWC: unlevered free cash flow is $60m.See also Discounted cash flow, Weighted average cost of capital, Capital expenditures, Net working capital

M&A and deals9

Confidential information memorandum (CIM): The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room
Data room (virtual data room, VDR): A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process
Due diligence: The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent
Indication of interest (IOI): A non-binding first-round bid in an auction, usually a valuation range with the key assumptions behind it. The seller uses IOIs to decide which buyers move on to the second round.ExampleTen buyers send IOIs for a software company, ranging from $350m to $500m. The seller invites the five highest, all above $425m, to management meetings and the data room.See also Letter of intent, Sell-side process
Initial public offering (IPO): A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering
Letter of intent (LOI): A document in which a buyer states the price and main terms it intends to sign on, usually after the final round of diligence. Most of it is non-binding, though exclusivity and confidentiality clauses often bind.ExampleAfter diligence, a buyer signs an LOI at $420m with 45 days of exclusivity. The price is not binding, but the exclusivity is: the seller cannot talk to other buyers for those 45 days.See also Indication of interest, Sell-side process, Due diligence
Sell-side process (auction process): A bank running the sale of a company for its owner. A typical auction goes teaser and NDA, CIM, first-round IOIs, management meetings and data room access, final bids with LOIs, then a signed purchase agreement.ExampleWeek 1: teasers go to 60 buyers, 30 sign NDAs and get the CIM. Week 6: 12 IOIs arrive and 5 get the data room. Week 14: 3 final bids come in and the best one signs a purchase agreement.See also Teaser, Confidential information memorandum, Indication of interest, Letter of intent
Synergies: Extra value created by combining two companies. Cost synergies come from removing overlap, like duplicate offices; revenue synergies come from selling more together and are harder to deliver, so buyers discount them.ExampleTwo merging companies close a duplicate headquarters and save $30m a year. At a 10x multiple those cost synergies are worth about $300m, which is how a buyer justifies paying a premium.See also Accretion/dilution analysis, Due diligence
Teaser: A one or two-page anonymous summary of a company for sale, sent to a long list of potential buyers to test interest before anyone signs an NDA.ExampleA two-page teaser for Project Atlas describes a Midwest packaging business with $250m of revenue and 18% EBITDA margins, and goes to 80 buyers without naming the company.See also Confidential information memorandum, Sell-side process

Funds and investing6

Capital call (drawdown): When a PE or VC fund asks its limited partners to send part of the money they committed, usually to fund a specific deal. LPs commit up front but wire cash only as it is called.ExampleAn LP commits $50m to a buyout fund. In year one the GP calls 15%, or $7.5m, to fund two acquisitions, and the LP wires it within ten business days.See also Limited partner, Dry powder
Dry powder: Capital a fund has raised from investors but not yet invested. When there is a lot of it across the industry, competition for deals tends to push prices up.ExampleA $5bn fund that has invested $2bn in its first two years has $3bn of dry powder, and pressure to put it to work before its investment period ends.See also Capital call, Private equity
General partner (GP): The firm that manages a private fund: it makes the investments and earns the management fee and carried interest. GPs also put in some of their own money, often 1% to 5% of the fund.ExampleA GP raising a $2bn fund commits 2%, or $40m, of its partners' own money alongside the LPs, charges the management fee, and makes every investment decision.See also Limited partner, Carried interest, Management fee
Limited partner (LP): An investor in a private fund, such as a pension, endowment, sovereign wealth fund, or family office. LPs commit capital and pay fees but do not choose the investments.ExampleA state pension commits $100m to a buyout fund. It wires money when called, gets quarterly reports, and receives distributions as companies are sold, but has no vote on what the GP buys.See also General partner, Capital call, Hurdle rate
Management fee (2 and 20): The annual fee a fund charges on assets or committed capital to cover salaries and costs, traditionally 2%. Paired with 20% carried interest or performance fee, that is the classic 2 and 20.ExampleOn a $1bn fund, a 2% management fee is $20m a year whether returns are good or bad. Carry at 20% only pays once profits clear the hurdle.See also Carried interest, Assets under management, General partner
Private equity (PE): Firms that buy companies, usually controlling stakes funded partly with debt, improve them, and sell them in roughly three to seven years. Buyouts are the core; growth equity and private credit are related strategies many of the same firms run.ExampleA fund buys a regional HVAC services company for $400m, adds three smaller competitors, lifts margins two points, and sells the combined business five years later for $900m.See also Leveraged buyout, Sponsor, Growth equity, Megafund

Venture and startups5

ARR (annual recurring revenue, MRR): Annual recurring revenue: the yearly value of subscription contracts in force today. Software companies and their investors use it instead of reported revenue because it shows the run rate at a point in time.ExampleA startup billing $50k a month in subscriptions (its MRR) has $600k of ARR.See also Net revenue retention, Burn rate, Series A
Cap table (capitalization table): The list of who owns a company's shares, options, SAFEs, and notes, and what each would own once everything converts (fully diluted). Every round and exit payout is worked out from it.ExampleFounders 8m shares, seed investors 2m, option pool 1.5m, Series A 3.5m: 15m fully diluted shares, so the founders hold 53%.See also Dilution, Option pool, Liquidation preference
Liquidation preference (liq pref): The right of preferred shareholders to get their money back, or a multiple of it, before common holders when the company is sold or wound down. With a standard 1x non-participating preference, the investor takes the greater of its money back or its ownership share.ExampleAn investor paid $10m for 20%. Sold for $30m, 20% would be $6m, so it takes its $10m back first. Sold for $80m, it converts and takes 20%, or $16m.See also Series A, Cap table, Term sheet
Term sheet: A short document setting out the main terms of an investment: valuation, amount, liquidation preference, board seats, and investor rights. It is mostly non-binding, but the final legal documents follow it closely.ExampleA term sheet for an $8m Series A: $32m pre-money valuation ($40m post, so 20% to investors), a 1x non-participating liquidation preference, one board seat for the lead, and pro rata rights.See also Venture capital, Pre-money valuation
TVPI and DPI (TVPI, DPI): Two fund performance multiples. DPI (distributions to paid-in) is the cash returned to investors divided by what they paid in. TVPI (total value to paid-in) adds the estimated value of what the fund still holds. DPI is realized; TVPI is partly on paper.ExampleInvestors paid in $100m, have received $40m, and the remaining holdings are marked at $110m: DPI is 0.4x and TVPI is 1.5x.See also Multiple of invested capital, Internal rate of return, Limited partner

Consulting3

Benchmarking: Comparing a client's costs, prices, or performance with peers or best in class to find where it is out of line. It turns a vague goal like cut costs into a specific gap to explain.ExampleA retailer spends $1.2m a year to run each store against a peer median of $0.9m. Across 400 stores, closing that gap is worth $120m a year.See also Profitability framework, Hypothesis-driven approach, Issue tree
Commercial due diligence (CDD): A consulting study of a target's market, competitors, and customers, done in a few weeks for a buyer, often a PE firm, before it bids. It answers whether the growth story in the seller's plan holds up.ExampleA PE firm bidding for a pet grooming chain hires consultants for a three-week CDD. They survey 1,000 pet owners, interview 20 competitors, and find the seller's 12% growth plan is closer to 7%.See also Due diligence, Private equity, Market sizing
Porter's five forces (five forces): A way to judge how profitable an industry can be: rivalry among existing players, the threat of new entrants, the threat of substitutes, the bargaining power of buyers, and the bargaining power of suppliers. Strong forces squeeze margins.ExampleAirlines face fierce rivalry, powerful suppliers (two big plane makers, unionized pilots), price-shopping buyers, and substitutes like trains on short routes, which helps explain thin margins.See also Value chain, Market sizing, Commercial due diligence

Markets and macro1

Secured Overnight Financing Rate (SOFR): The benchmark US overnight rate, based on Treasury repo trades and published by the New York Fed. It replaced LIBOR, so most US floating-rate loans now pay SOFR plus a spread.ExampleA leveraged loan pays SOFR + 3.25%. With SOFR at 4.30% the borrower pays 7.55%; if SOFR falls to 3.80%, the rate drops to 7.05% with no new paperwork.See also Repo, Interest rate swap, Federal funds rate

Private Equity terms

90
terms

LBOs and private equity16

Add-on acquisition (bolt-on, tuck-in): A smaller company bought by a PE-owned platform to add products, customers, or regions. Add-ons are often bought at lower multiples than the platform, which can lift returns when the combined company is sold.ExampleA platform bought at 10x EBITDA acquires a competitor with $10m of EBITDA at 6x, for $60m. If the combined company sells at 10x, that $10m of EBITDA is worth $100m at exit.See also Portfolio company, Multiple expansion
Carried interest (carry): The general partner's share of a fund's profits, typically 20%, paid after investors get their money back plus a hurdle return. It is where most senior PE wealth comes from.ExampleA $1bn fund returns $2bn. LPs get their $1bn back plus the hurdle, and with a full catch-up the GP ends up with 20% of the $1bn profit: $200m of carry.See also Hurdle rate, Management fee, General partner
Dividend recapitalization (dividend recap): A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout
Growth equity: Investments, often minority stakes, in fast-growing companies that are profitable or close to it, using little or no debt. It sits between venture capital and buyouts in both risk and return.ExampleA growth fund puts $50m into a profitable software company growing 40% a year, for a 20% minority stake and a board seat, with no debt in the deal.See also Venture capital, Leveraged buyout, Private equity
Hurdle rate (preferred return): The minimum annual return, often 8%, that a fund's limited partners receive before the general partner earns carried interest.ExampleLPs commit $100m with an 8% hurdle. Before the GP earns any carry on a five-year deal, they need back about $147m, since 1.08 to the fifth power is about 1.47.See also Carried interest, Limited partner, Internal rate of return
Internal rate of return (IRR): The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO
Leveraged buyout (LBO, buyout): Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO
Multiple expansion: Selling a company at a higher valuation multiple than you paid, such as buying at 10x EBITDA and exiting at 12x. Careful LBO models assume the exit multiple equals the entry multiple so returns do not depend on it.ExampleBuy at 10x $50m of EBITDA for $500m; sell at 12x the same $50m for $600m. The $100m gain came from the multiple alone, with no growth in the business.See also Leveraged buyout, EV/EBITDA multiple, Add-on acquisition
Multiple of invested capital (MOIC, cash-on-cash): Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout
Paper LBO: A simplified LBO done with pen and paper in an interview, in a few minutes. You get the purchase price, leverage, growth, and exit assumptions, then estimate the equity value at exit and the IRR by hand.Example$50m EBITDA at 10x is $500m, half debt. EBITDA grows to $70m, exit at 10x is $700m, and $150m of debt repaid leaves $100m. Equity goes from $250m to $600m: 2.4x in five years, about 19% IRR.See also Leveraged buyout, Internal rate of return, Multiple of invested capital, Technical interview
Portfolio company (portco): A company a PE or VC fund owns a stake in. A firm's portfolio companies are where its value creation work and its eventual returns happen.ExampleA mid-market fund owns 12 portfolio companies. Its operating team helps one cut procurement costs by $5m a year, which at a 10x exit multiple adds $50m of value.See also Sponsor, Add-on acquisition
Rollover equity: Equity that sellers, often the founder or management, reinvest in the company under its new owner instead of taking all cash. It keeps them aligned with the buyer and reduces the cash the buyer has to put in.ExampleA founder sells for $300m and rolls 20%, or $60m, into the new company. The sponsor needs $60m less cash, and the founder keeps a stake in the next exit.See also Sources and uses, Leveraged buyout
Secondary buyout: One PE firm selling a portfolio company to another PE firm. It is a common exit route, especially when the IPO market is slow.ExampleFund A bought a business at 8x EBITDA and grew it for five years. It sells to Fund B at 11x, and Fund B starts its own plan with new debt and a new management incentive pool.See also Leveraged buyout, Portfolio company
Sources and uses: The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity
Sponsor (financial sponsor): A private equity firm or similar investor that buys companies with its funds' capital plus debt. Banks run sponsor coverage groups because PE firms are among their largest fee payers.ExampleA sponsor buying a $1.5bn company calls three banks for the debt financing. Those leveraged finance fees, plus the sale fee when it exits years later, are why banks staff sponsor coverage teams.See also Private equity, Leveraged buyout, Coverage group
Take-private: A buyout of a public company, after which its shares stop trading. The buyer usually pays a premium to the share price before the deal was announced, often 20% to 40%.ExampleA public company trades at $20 before the news. A sponsor offers $26, a 30% premium; with 50m shares outstanding, the equity purchase price is $1.3bn.See also Leveraged buyout, Precedent transactions

Recruiting16

Buy side: Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund
Coffee chat (informational interview): A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
Diversity program: An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
Exploding offer: An offer with a short deadline, sometimes only days, meant to get you to decide before you hear from other firms. Asking politely for more time is normal; the worst answer is usually just no.ExampleA bank makes an offer on Monday with a Friday deadline, and another bank's superday is next Tuesday. Telling the second bank about the deadline often gets its process moved up.See also Return offer, On-cycle
Fit interview (behavioral interview): The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
Headhunter: A recruiting firm that PE funds and hedge funds pay to fill associate roles. For on-cycle recruiting, headhunters reach out to investment banking analysts, often within their first year on the job.ExampleThree months into the analyst job, a headhunter emails about a large-fund associate role starting in two years and asks for a resume and a call this week.See also On-cycle, Off-cycle, Private equity
Megafund: The largest private equity firms, whose flagship buyout funds raise $10 billion or more, such as Blackstone, KKR, Apollo, Carlyle, and TPG. They recruit associates mostly through on-cycle.ExampleA $20bn flagship fund writing $1bn equity checks can do only about 20 deals over its life, so it looks at hundreds of companies to close three or four a year.See also Private equity, On-cycle, Buy side
Middle market: Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending
Networking: Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
Off-cycle: Recruiting or internships outside the usual timeline, such as a fall or spring internship, or a fund hiring one associate whenever it needs one. Many smaller firms recruit only this way.ExampleA student takes a fall semester internship at a 15-person M&A boutique that hires whenever a deal needs help, then uses it to apply for a junior summer analyst role.See also On-cycle, Headhunter
On-cycle: The fast, coordinated private equity associate recruiting process that megafunds and other large funds run through headhunters, often barely a year into an analyst's job. Interviews and offers can happen within a day or two.ExampleA first-year analyst gets a headhunter's call Monday, does two interviews and a modeling test Tuesday, and has an offer by Wednesday night for a job starting 18 months later.See also Headhunter, Megafund, Off-cycle, Exploding offer
Return offer: A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
Sophomore program: An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst
Summer analyst: The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
Superday: The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
Technical interview: Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting15

Accounts receivable: Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
Accrual accounting: Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
Amortization: The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
Balance sheet: A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
Capital expenditures (capex, CapEx): Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
Cash flow statement: Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
Depreciation: Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
EBITDA: Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
Goodwill: What an acquirer pays above the fair value of the target's identifiable net assets. It sits on the balance sheet, is not amortized by US public companies, and is tested at least once a year for impairment.ExampleA buyer pays $500m for a company whose identifiable assets are worth $400m at fair value and whose liabilities are $150m. Net assets are $250m, so goodwill is $250m.See also Amortization, Balance sheet
Gross margin: Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
Income statement: Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
Levered free cash flow (LFCF, free cash flow to equity, FCFE): Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
Net income: The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
Net working capital (NWC): Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue
Operating income (EBIT): Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow

Credit and restructuring10

Covenant: A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio
Covenant-lite (cov-lite): A loan with no maintenance covenants, only incurrence covenants. It is now standard for large leveraged loans, which gives borrowers more room and lenders less early warning.ExampleEBITDA falls 30% at a covenant-lite borrower. Nothing is breached, so lenders cannot step in; they get a say only when the company tries to borrow more or misses a payment.See also Covenant, Direct lending
Direct lending: Loans made straight to companies, often PE-owned middle market businesses, by private credit funds instead of banks. Lenders earn higher spreads in exchange for holding loans that are hard to sell, and deals close faster with fewer parties.ExampleA private credit fund lends $250m to a PE-owned software company at SOFR + 5.5% and closes in three weeks. A syndicated bank loan might price lower but take longer and need ratings and a marketing process.See also Unitranche, Covenant-lite, Sponsor
High-yield bond (junk bond, HY): A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout
Interest coverage ratio: EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA
Leverage ratio (debt/EBITDA): Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA
Mezzanine debt (mezz): Debt that ranks below senior loans but above equity. It pays a higher rate, often partly in kind, and sometimes comes with warrants. It fills the gap when senior lenders will not lend enough.ExampleSenior lenders will fund 4.0x EBITDA of a deal that needs 6.0x of debt. A mezzanine fund provides the other 2.0x at 12% cash interest plus 2% PIK, with warrants for 5% of the equity.See also Payment in kind, Unitranche, Absolute priority rule
Payment in kind (PIK): Interest paid by adding it to the loan balance instead of paying cash. A $100 million note with 10% PIK interest owes $110 million after a year. It saves the borrower cash today at the cost of a growing debt.ExampleA $200m note at 12% PIK, compounding annually, owes $224m after one year and about $281m after three, with no cash interest paid along the way.See also Mezzanine debt, Direct lending
Revolving credit facility (revolver, RCF): A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital
Unitranche: One loan that combines senior and junior debt into a single facility at a blended rate, usually provided by a direct lender. Borrowers like the simplicity and speed of one lender group.ExampleInstead of a $200m first-lien loan at SOFR + 4% and a $100m second-lien loan at SOFR + 8%, a direct lender provides one $300m unitranche loan at SOFR + 5.5%.See also Direct lending, Mezzanine debt

Valuation9

Comparable companies analysis (trading comps, comps): Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field
Discounted cash flow (DCF): Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value
Enterprise value (EV, TEV): The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
Equity value (market capitalization, market cap): The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio
EV/EBITDA multiple (EV/EBITDA): Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis
Exit multiple method: Estimating a DCF's terminal value by applying a multiple to the last projected year, such as 10x final-year EBITDA. It is quick and grounded in market pricing, but it assumes today's multiples still hold years from now.ExampleFinal-year EBITDA of $80m at a 9x exit multiple gives a terminal value of $720m. Discounted five years at a 10% WACC, that is $720m / 1.61, about $447m today.See also Terminal value, Perpetuity growth method, Discounted cash flow
Precedent transactions (transaction comps, precedents): Valuing a company by the multiples buyers paid in past acquisitions of similar businesses. The values usually come out higher than trading comps because acquirers pay a control premium.ExamplePeers trade at 10x EBITDA, but past acquisitions in the sector were done at 12x. A target with $50m of EBITDA is worth about $500m on comps and $600m on precedents.See also Comparable companies analysis, Football field, Take-private
Terminal value: The value of all cash flows after the projection period in a DCF, calculated with the perpetuity growth or exit multiple method. It often makes up more than half of a DCF's total value, so its assumptions deserve the hardest look.ExampleA DCF with $400m of discounted projection-period cash flows and $600m of discounted terminal value gets 60% of its $1bn enterprise value from the terminal value.See also Discounted cash flow, Perpetuity growth method, Exit multiple method
Unlevered free cash flow (UFCF, free cash flow to firm, FCFF): Cash the business generates before paying lenders or shareholders: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. It is the cash flow a DCF discounts at WACC.ExampleEBIT of $100m at a 25% tax rate gives $75m, plus $20m of D&A, minus $30m of capex and a $5m increase in NWC: unlevered free cash flow is $60m.See also Discounted cash flow, Weighted average cost of capital, Capital expenditures, Net working capital

M&A and deals9

Confidential information memorandum (CIM): The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room
Data room (virtual data room, VDR): A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process
Due diligence: The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent
Indication of interest (IOI): A non-binding first-round bid in an auction, usually a valuation range with the key assumptions behind it. The seller uses IOIs to decide which buyers move on to the second round.ExampleTen buyers send IOIs for a software company, ranging from $350m to $500m. The seller invites the five highest, all above $425m, to management meetings and the data room.See also Letter of intent, Sell-side process
Initial public offering (IPO): A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering
Letter of intent (LOI): A document in which a buyer states the price and main terms it intends to sign on, usually after the final round of diligence. Most of it is non-binding, though exclusivity and confidentiality clauses often bind.ExampleAfter diligence, a buyer signs an LOI at $420m with 45 days of exclusivity. The price is not binding, but the exclusivity is: the seller cannot talk to other buyers for those 45 days.See also Indication of interest, Sell-side process, Due diligence
Sell-side process (auction process): A bank running the sale of a company for its owner. A typical auction goes teaser and NDA, CIM, first-round IOIs, management meetings and data room access, final bids with LOIs, then a signed purchase agreement.ExampleWeek 1: teasers go to 60 buyers, 30 sign NDAs and get the CIM. Week 6: 12 IOIs arrive and 5 get the data room. Week 14: 3 final bids come in and the best one signs a purchase agreement.See also Teaser, Confidential information memorandum, Indication of interest, Letter of intent
Synergies: Extra value created by combining two companies. Cost synergies come from removing overlap, like duplicate offices; revenue synergies come from selling more together and are harder to deliver, so buyers discount them.ExampleTwo merging companies close a duplicate headquarters and save $30m a year. At a 10x multiple those cost synergies are worth about $300m, which is how a buyer justifies paying a premium.See also Accretion/dilution analysis, Due diligence
Teaser: A one or two-page anonymous summary of a company for sale, sent to a long list of potential buyers to test interest before anyone signs an NDA.ExampleA two-page teaser for Project Atlas describes a Midwest packaging business with $250m of revenue and 18% EBITDA margins, and goes to 80 buyers without naming the company.See also Confidential information memorandum, Sell-side process

Funds and investing6

Capital call (drawdown): When a PE or VC fund asks its limited partners to send part of the money they committed, usually to fund a specific deal. LPs commit up front but wire cash only as it is called.ExampleAn LP commits $50m to a buyout fund. In year one the GP calls 15%, or $7.5m, to fund two acquisitions, and the LP wires it within ten business days.See also Limited partner, Dry powder
Dry powder: Capital a fund has raised from investors but not yet invested. When there is a lot of it across the industry, competition for deals tends to push prices up.ExampleA $5bn fund that has invested $2bn in its first two years has $3bn of dry powder, and pressure to put it to work before its investment period ends.See also Capital call, Private equity
General partner (GP): The firm that manages a private fund: it makes the investments and earns the management fee and carried interest. GPs also put in some of their own money, often 1% to 5% of the fund.ExampleA GP raising a $2bn fund commits 2%, or $40m, of its partners' own money alongside the LPs, charges the management fee, and makes every investment decision.See also Limited partner, Carried interest, Management fee
Limited partner (LP): An investor in a private fund, such as a pension, endowment, sovereign wealth fund, or family office. LPs commit capital and pay fees but do not choose the investments.ExampleA state pension commits $100m to a buyout fund. It wires money when called, gets quarterly reports, and receives distributions as companies are sold, but has no vote on what the GP buys.See also General partner, Capital call, Hurdle rate
Management fee (2 and 20): The annual fee a fund charges on assets or committed capital to cover salaries and costs, traditionally 2%. Paired with 20% carried interest or performance fee, that is the classic 2 and 20.ExampleOn a $1bn fund, a 2% management fee is $20m a year whether returns are good or bad. Carry at 20% only pays once profits clear the hurdle.See also Carried interest, Assets under management, General partner
Private equity (PE): Firms that buy companies, usually controlling stakes funded partly with debt, improve them, and sell them in roughly three to seven years. Buyouts are the core; growth equity and private credit are related strategies many of the same firms run.ExampleA fund buys a regional HVAC services company for $400m, adds three smaller competitors, lifts margins two points, and sells the combined business five years later for $900m.See also Leveraged buyout, Sponsor, Growth equity, Megafund

Venture and startups5

ARR (annual recurring revenue, MRR): Annual recurring revenue: the yearly value of subscription contracts in force today. Software companies and their investors use it instead of reported revenue because it shows the run rate at a point in time.ExampleA startup billing $50k a month in subscriptions (its MRR) has $600k of ARR.See also Net revenue retention, Burn rate, Series A
Cap table (capitalization table): The list of who owns a company's shares, options, SAFEs, and notes, and what each would own once everything converts (fully diluted). Every round and exit payout is worked out from it.ExampleFounders 8m shares, seed investors 2m, option pool 1.5m, Series A 3.5m: 15m fully diluted shares, so the founders hold 53%.See also Dilution, Option pool, Liquidation preference
Liquidation preference (liq pref): The right of preferred shareholders to get their money back, or a multiple of it, before common holders when the company is sold or wound down. With a standard 1x non-participating preference, the investor takes the greater of its money back or its ownership share.ExampleAn investor paid $10m for 20%. Sold for $30m, 20% would be $6m, so it takes its $10m back first. Sold for $80m, it converts and takes 20%, or $16m.See also Series A, Cap table, Term sheet
Term sheet: A short document setting out the main terms of an investment: valuation, amount, liquidation preference, board seats, and investor rights. It is mostly non-binding, but the final legal documents follow it closely.ExampleA term sheet for an $8m Series A: $32m pre-money valuation ($40m post, so 20% to investors), a 1x non-participating liquidation preference, one board seat for the lead, and pro rata rights.See also Venture capital, Pre-money valuation
TVPI and DPI (TVPI, DPI): Two fund performance multiples. DPI (distributions to paid-in) is the cash returned to investors divided by what they paid in. TVPI (total value to paid-in) adds the estimated value of what the fund still holds. DPI is realized; TVPI is partly on paper.ExampleInvestors paid in $100m, have received $40m, and the remaining holdings are marked at $110m: DPI is 0.4x and TVPI is 1.5x.See also Multiple of invested capital, Internal rate of return, Limited partner

Consulting3

Benchmarking: Comparing a client's costs, prices, or performance with peers or best in class to find where it is out of line. It turns a vague goal like cut costs into a specific gap to explain.ExampleA retailer spends $1.2m a year to run each store against a peer median of $0.9m. Across 400 stores, closing that gap is worth $120m a year.See also Profitability framework, Hypothesis-driven approach, Issue tree
Commercial due diligence (CDD): A consulting study of a target's market, competitors, and customers, done in a few weeks for a buyer, often a PE firm, before it bids. It answers whether the growth story in the seller's plan holds up.ExampleA PE firm bidding for a pet grooming chain hires consultants for a three-week CDD. They survey 1,000 pet owners, interview 20 competitors, and find the seller's 12% growth plan is closer to 7%.See also Due diligence, Private equity, Market sizing
Porter's five forces (five forces): A way to judge how profitable an industry can be: rivalry among existing players, the threat of new entrants, the threat of substitutes, the bargaining power of buyers, and the bargaining power of suppliers. Strong forces squeeze margins.ExampleAirlines face fierce rivalry, powerful suppliers (two big plane makers, unionized pilots), price-shopping buyers, and substitutes like trains on short routes, which helps explain thin margins.See also Value chain, Market sizing, Commercial due diligence

Markets and macro1

Secured Overnight Financing Rate (SOFR): The benchmark US overnight rate, based on Treasury repo trades and published by the New York Fed. It replaced LIBOR, so most US floating-rate loans now pay SOFR plus a spread.ExampleA leveraged loan pays SOFR + 3.25%. With SOFR at 4.30% the borrower pays 7.55%; if SOFR falls to 3.80%, the rate drops to 7.05% with no new paperwork.See also Repo, Interest rate swap, Federal funds rate