Private Market Glossary: 120 Must-Know Terms for First-Time LPs

The private markets use a vocabulary that can be intimidating for first-time LPs. This glossary defines 120 essential terms across fund structure, economics, legal, performance metrics, and strategy — everything you need to navigate conversations with GPs, read LPAs, and evaluate fund opportunities with confidence.

FUND STRUCTURE & MECHANICS

Limited Partner (LP)

An investor in a private equity or venture capital fund. LPs provide the capital but do not participate in day-to-day management decisions. They enjoy limited liability, meaning their loss is capped at the amount invested.

General Partner (GP)

The fund manager who makes investment decisions, manages the portfolio, and operates the fund. GPs typically contribute 1-2% of total capital and earn management fees plus carried interest.

Closed-End Fund

A fund with a fixed life (typically 7–12 years) and a set amount of capital raised during a limited fundraising period. Unlike mutual funds, investors cannot redeem shares on demand.

Vintage Year

The year in which a fund made its first investment or the year the fund was launched. Used to compare performance across funds that deployed capital under similar market conditions.

Fund Life

The total duration of a private equity fund, typically 10 years with optional 1–2 year extensions. Divided into an investment period (first 3–5 years) and a harvesting period.

Investment Period

The initial phase (usually years 1–5) during which the GP actively identifies and makes new investments. After this period, capital can only be used for follow-on investments in existing portfolio companies.

Commitment Period

The timeframe during which LPs are obligated to contribute capital when called by the GP. Usually runs concurrent with the investment period.

Hard Cap

The maximum amount of capital a fund will accept from investors. Once reached, the fund is closed to new investors regardless of demand.

First Close

The initial closing of a fund where a minimum threshold of capital commitments is reached and the GP can start investing. Additional closes may follow until the final close or hard cap.

Final Close

The last date on which new investors are accepted into a fund. After this date, the fund is closed to new commitments.

CAPITAL CALLS & DISTRIBUTIONS

Capital Call

A notice from the GP requesting LPs to transfer a portion of their committed capital. Also called a "drawdown." LPs typically have 10–14 business days to fund a capital call.

Committed Capital

The total amount an LP has agreed to invest in a fund over its lifetime. This capital is drawn down gradually via capital calls, not paid upfront.

Contributed Capital

The actual amount of committed capital that has been drawn down (called) and transferred by an LP to the fund. Also referred to as "paid-in capital."

Uncalled Capital

The portion of committed capital that has not yet been drawn down. Also called "dry powder" at the fund level.

Distribution

Cash or securities returned to LPs from the fund, typically from exits, dividends, or asset sales. Distributions reduce the NAV of the fund.

Distribution Waterfall

The contractual order in which proceeds from investments are distributed between LPs and GPs. Most common structures are American (deal-by-deal) and European (whole-fund) waterfalls.

Clawback Provision

A clause requiring GPs to return previously received carried interest if overall fund performance falls below the hurdle rate. Protects LPs from GPs taking carry on early winners if later investments perform poorly.

Return of Capital

The portion of a distribution that represents the return of the LP's original invested capital (not profit). LPs receive all invested capital back before the GP earns carried interest.

Preferred Return

See Hurdle Rate. The minimum return an LP must receive before the GP is entitled to carried interest. Typically set at 8% per annum.

Recycling

The practice of reinvesting returned capital (from early exits) into new investments rather than distributing it to LPs. Allows the GP to deploy more capital without additional calls.

FEES & ECONOMICS

Management Fee

An annual fee paid to the GP to cover operating costs. Typically 1.5–2% of committed capital during the investment period, stepping down to 1–1.5% of invested capital thereafter.

Carried Interest (Carry)

The GP's share of profits from the fund, typically 20% of returns above the hurdle rate. The primary performance incentive for fund managers. Subject to clawback provisions.

Hurdle Rate

The minimum annualized return (usually 8%) that must be achieved before the GP earns carried interest. Also called the "preferred return." Calculated on contributed capital.

Catch-Up Provision

After LPs receive their preferred return, a catch-up clause allows the GP to receive 100% of additional profits until the GP has received their full 20% carry share on all profits.

2-and-20

Shorthand for the standard fee structure: 2% annual management fee and 20% carried interest. Fee compression has pushed many managers toward lower structures like 1.5-and-17.5.

Transaction Fee

A fee charged by GPs when acquiring, monitoring, or exiting investments. Typically offset against management fees (fee offset) to reduce the net cost to LPs.

Monitoring Fee

Annual fees charged by GPs to portfolio companies for strategic oversight. Usually offset against management fees. Subject to increasing LP scrutiny.

Fee Offset

A mechanism that reduces management fees by a percentage (often 80–100%) of transaction, monitoring, and other fees earned from portfolio companies.

Organizational Expenses

One-time costs for establishing the fund structure (legal fees, filings, etc.), typically charged to the fund and subject to a negotiated cap.

Fund Expenses

Ongoing costs charged to the fund beyond management fees, including legal fees, auditing, tax preparation, and D&O insurance. Disclosed in the LPA and fund reports.

PERFORMANCE METRICS

IRR (Internal Rate of Return)

The annualized rate of return on invested capital, accounting for the timing of cash flows. The most commonly used performance metric in private equity, though it can be manipulated through leverage and fund timing.

MOIC (Multiple on Invested Capital)

Total value returned divided by total capital invested. A 2.0x MOIC means $2 returned for every $1 invested. Does not account for time.

TVPI (Total Value to Paid-In)

(Unrealized NAV + Realized distributions) ÷ Contributed capital. Measures total value created relative to capital called. Includes both realized and unrealized value.

DPI (Distributions to Paid-In)

Total distributions returned to LPs divided by contributed capital. The only realized performance metric — DPI above 1.0x means LPs have received more than they invested.

RVPI (Residual Value to Paid-In)

Unrealized NAV divided by contributed capital. Represents the value of assets still held by the fund. TVPI = DPI + RVPI.

PME (Public Market Equivalent)

Benchmarks private fund performance against a hypothetical investment in a public index (e.g., S&P 500) using the same cash flow timing. A PME > 1.0x indicates outperformance vs. the index.

NAV (Net Asset Value)

The current estimated value of all assets held in the fund minus liabilities. Used to value LP positions before realization. Subject to the GP's valuation methodology.

J-Curve

The characteristic pattern of early negative returns (from fees and losses before exits) followed by positive returns in later years. Most funds show negative performance in years 1–3.

Unrealized Gains

Paper profits on investments still held by the fund, based on current NAV. Not actual cash until the investment is exited.

Realized Returns

Actual cash proceeds from exited investments, after repayment of debt and transaction costs. The only returns that definitively count.

INVESTMENT STRATEGIES

Buyout

The acquisition of a majority stake in a company, typically using a combination of equity and debt (leveraged buyout). The most common private equity strategy targeting mature, cash-flow-positive companies.

Leveraged Buyout (LBO)

An acquisition financed substantially with debt, secured against the target company's assets and cash flows. Leverage amplifies returns but also increases risk.

Venture Capital (VC)

Investments in early-stage, high-growth startups in exchange for equity. Higher risk than buyouts but potential for outsized returns. Stages include seed, Series A, B, C, and growth.

Growth Equity

Minority investments in established, profitable companies seeking capital to accelerate growth. Bridge between VC and buyout — less risk than early-stage VC, higher growth potential than buyouts.

Distressed / Special Situations

Investments in financially troubled companies or their debt, seeking to profit from restructuring, turnaround, or liquidation at a discount to intrinsic value.

Mezzanine

Hybrid debt-equity financing sitting between senior debt and equity in the capital structure. Typically includes warrants; higher yield than senior debt but less upside than pure equity.

Infrastructure

Investments in physical assets like toll roads, airports, utilities, and pipelines offering stable, long-duration, inflation-linked cash flows.

Real Assets

Investments in tangible assets including real estate, commodities, timberland, and agriculture. Serve as inflation hedges and portfolio diversifiers.

Secondary Strategy

Purchasing existing LP interests or GP-led continuation vehicles in the secondary market, often at a discount to NAV. Provides faster distributions and lower J-curve effect.

Fund of Funds (FoF)

A vehicle that invests in multiple underlying PE/VC funds rather than directly in companies. Provides diversification but adds a layer of fees.

LEGAL & GOVERNANCE

Limited Partnership Agreement (LPA)

The governing legal document of the fund outlining rights, obligations, economics, and governance for both GPs and LPs. The most important document to review before committing capital.

Side Letter

A separate agreement between a GP and specific LP granting preferential terms (lower fees, co-investment rights, reporting enhancements). GP must disclose most-favored-nation (MFN) rights.

Most Favored Nation (MFN)

A clause entitling an LP to receive the best terms granted to any other LP in the same fund. Typically requires GPs to disclose and offer equivalent side letter terms.

Key Man Clause

A provision allowing LPs to suspend the investment period or trigger a vote to remove the GP if specified key individuals leave the fund. Protects LPs against GP team turnover.

Advisory Committee (LPAC)

A committee of selected LPs that advises the GP on conflicts of interest, valuations, and fund extensions. Does not have day-to-day management authority.

No-Fault Divorce

A provision enabling LPs to remove the GP and wind down the fund with a supermajority vote (typically 75–80%), without needing to prove misconduct. Stronger LP protection than cause-based removal.

For-Cause Removal

The ability to remove a GP for specified events such as fraud, criminal conviction, or material breach of the LPA. Easier to trigger but requires documented cause.

Successor Fund Restriction

Prevents GPs from raising a new fund until a specified percentage (typically 65–75%) of the current fund's capital has been invested or committed. Ensures focus on current portfolio.

Anti-Dilution Rights

Provisions protecting early investors from dilution in subsequent financing rounds by adjusting their ownership percentage or conversion price. Common in VC term sheets.

Tag-Along Rights

Minority shareholder rights to participate in a share sale on the same terms as the majority seller. Ensures minority investors (including LP co-investments) are not left behind.

DUE DILIGENCE & SELECTION

Due Diligence

The comprehensive investigation of a GP's team, strategy, track record, portfolio, and terms before making a commitment. Includes operational, legal, compliance, and reference checks.

Track Record

A GP's historical investment performance across prior funds. The most scrutinized element of GP due diligence. Audited track records are the gold standard.

Reference Check

Conversations with the GP's former colleagues, portfolio company executives, and other LPs to validate character, teamwork, and performance claims.

Operational Due Diligence (ODD)

An assessment of a GP's infrastructure, compliance, risk management, cybersecurity, and business continuity. Increasingly required by institutional LPs and regulators.

Vintage Year Analysis

Comparing a fund's performance against peers from the same vintage year to account for macroeconomic conditions affecting all funds in the same period.

Attribution Analysis

Breaking down a GP's track record to identify which investments drove returns, and whether success was repeatable vs. driven by one or two outlier deals.

Concentration Risk

The risk of overexposure to a small number of investments, sectors, or geographies. Assessed during portfolio construction review in LP due diligence.

Persistence of Returns

The tendency of top-quartile GPs to consistently generate above-market returns across multiple funds. Research suggests persistence is stronger in VC than in buyouts.

Blind Pool

A fund where LPs commit capital before knowing which specific investments will be made. All PE/VC funds are blind pools — LPs invest in the manager's judgment, not specific deals.

Proprietary Deal Flow

A GP's ability to source investment opportunities not widely marketed to competitors. Often a key differentiator in top-tier manager selection.

PORTFOLIO & VALUE CREATION

Portfolio Company

A company in which the fund has made an equity investment. The GP typically takes a board seat and actively works with management on value creation.

Value Creation Plan

A GP's roadmap for improving a portfolio company's operations, growth, and financial profile post-acquisition. May include leadership changes, M&A, cost reduction, and market expansion.

Add-On Acquisition (Bolt-On)

An acquisition made by a portfolio company to expand into adjacent markets, add capabilities, or realize synergies. Common in buyout strategies to drive growth during the holding period.

Platform Company

The initial portfolio company in a buy-and-build strategy, intended to serve as the foundation for subsequent add-on acquisitions.

Hold Period

The time between initial investment and exit. Buyout funds typically hold companies for 3–7 years; VC funds may hold for 7–12 years.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. The most common metric used to value private companies and assess debt capacity in buyout transactions.

Enterprise Value (EV)

The total value of a business, equal to equity value plus net debt. Used to compare companies without regard to capital structure.

Entry Multiple

The EV/EBITDA ratio paid at the time of acquisition. A key driver of buyout returns — buying at a lower multiple and exiting at a higher multiple (multiple expansion) creates value.

Multiple Expansion

An increase in valuation multiples between acquisition and exit, contributing to returns even without fundamental business improvement. Partially driven by market conditions.

Operational Alpha

The value created by the GP's active management and operational improvements, as distinct from market-driven multiple expansion or financial leverage effects.

EXIT STRATEGIES

Exit

The process by which a PE/VC fund realizes its investment in a portfolio company, generating returns for LPs. Common exits include trade sales, IPOs, and secondary sales.

Trade Sale

Selling a portfolio company to a strategic acquirer (another company in the same or adjacent industry). The most common exit route for private equity investments.

Initial Public Offering (IPO)

Taking a portfolio company public on a stock exchange. Typically the highest-profile exit but also the most time-consuming and market-dependent.

Secondary Buyout (SBO)

Selling a portfolio company from one PE fund to another PE fund. Common when additional value creation potential remains but the original fund needs to return capital.

Continuation Vehicle

A GP-led transaction where selected assets are transferred from an expiring fund into a new vehicle, allowing existing LPs to cash out while the GP continues managing the assets.

Recap (Recapitalization)

Restructuring a company's capital structure to return capital to investors, typically by adding debt to fund a dividend to shareholders.

Dividend Recap

A specific type of recapitalization where a portfolio company takes on new debt specifically to pay a dividend to the PE fund. Returns capital early but increases company leverage.

Lock-Up Period

A restriction preventing insiders (including PE-backed shareholders) from selling shares for a specified period (typically 180 days) after an IPO.

Drag-Along Rights

Provisions allowing majority shareholders to force minority shareholders to participate in a sale. Enables GPs to execute clean exits without minority holdouts.

Realized Multiple

The actual MOIC achieved at exit, as opposed to unrealized projections based on NAV. The definitive measure of deal-level performance.

SECONDARY MARKET

Secondary Market

A market where existing LP interests in private funds are bought and sold, providing liquidity to LPs who want to exit before the fund's end date.

Secondary Buyer

An investor that purchases LP interests from existing investors in the secondary market, typically at a discount to NAV.

Discount to NAV

The difference between the price paid for a secondary interest and the fund's reported NAV. Discounts were historically 20–30% but have tightened as the market has matured.

Premium to NAV

When a secondary interest trades above the fund's reported NAV. Occurs for high-performing funds from top-tier managers where demand exceeds supply.

GP-Led Secondary

A transaction initiated by the GP rather than an LP, including continuation vehicles, tender offers to LPs, or restructurings of the fund itself.

LP-Led Secondary

A transaction where an LP initiates the sale of their fund interest(s) to a secondary buyer. The most traditional form of secondary transaction.

Stapled Secondary

A secondary transaction where the buyer is required to also commit capital to the GP's new primary fund as a condition of purchasing the secondary interest.

Strip Sale

Selling a proportional share of interests across multiple funds managed by the same GP, rather than selling a single fund interest.

NAV Loan

A loan to a PE fund secured by the NAV of the portfolio, allowing the GP to provide early liquidity to LPs without selling assets.

Secondaries Denominator Effect

The tendency for LPs to be sellers of private market interests when public market declines cause their overall portfolio to fall, increasing their private market allocation above target.

VENTURE CAPITAL SPECIFIC

Pre-Money Valuation

The value of a company before a new round of investment. Post-money = Pre-money + new investment.

Post-Money Valuation

The value of a company immediately after a financing round, including the new capital invested.

Pro-Rata Rights

The right of an existing investor to participate in future financing rounds to maintain their percentage ownership. Critical for VCs wanting to double down on winners.

Liquidation Preference

In a downside scenario, preferred shareholders receive their investment back (plus any multiplier) before common shareholders receive anything.

Participating Preferred

After receiving their liquidation preference, participating preferred shareholders also share in remaining proceeds with common shareholders pro-rata.

Non-Participating Preferred

Preferred shareholders must choose between (a) their liquidation preference or (b) conversion to common and participation in upside. More founder-friendly.

Convertible Note

A short-term debt instrument that converts to equity at the next qualifying financing round, typically at a discount to the round price or with a valuation cap.

SAFE (Simple Agreement for Future Equity)

A Y Combinator-designed instrument (not a debt) that converts to equity at the next financing round. Simpler than convertible notes with no interest or maturity date.

Partner Fund

A follow-on investment from a larger fund managed by the same GP, used to deploy more capital into the top performers from a smaller early-stage fund.

Power Law Returns

The phenomenon in VC where the majority of fund returns are generated by a very small number of investments (often 1–2 deals). Drives the strategy of making many bets.

REGULATORY & COMPLIANCE

AIFMD (Alternative Investment Fund Managers Directive)

EU regulation governing alternative investment fund managers, covering authorization, capital requirements, disclosure, and cross-border marketing (passporting).

Form ADV

A disclosure document filed with the SEC by registered investment advisers, including GPs of private funds. Contains information on firm background, fees, conflicts, and disciplinary history.

Form PF

A confidential filing required by the SEC from registered investment advisers managing private funds, disclosing information about fund size, leverage, and strategies.

ERISA

US law governing pension plan investments. Funds with more than 25% of assets from ERISA investors may trigger onerous plan asset rules, limiting the GP's flexibility.

UBTI (Unrelated Business Taxable Income)

Income from activities unrelated to a tax-exempt organization's charitable mission. Relevant for university endowments and foundations investing in leveraged PE funds.

FATCA

US law requiring foreign financial institutions to report on US account holders. Drives extensive documentation requirements in PE fund subscription processes.

KYC/AML

Know Your Customer and Anti-Money Laundering requirements. GPs must verify investor identities and source of funds as part of the subscription process.

ILPA Principles

Best practice guidelines from the Institutional Limited Partners Association covering LP rights, fee transparency, governance, and alignment of interests.

Accredited Investor

A US regulatory definition of investors eligible to participate in private fund investments, typically requiring $1M+ net worth or $200K+ annual income.

Qualified Purchaser

A higher US regulatory standard for fund investors, typically requiring $5M+ in investments. Funds with exclusively qualified purchasers have broader regulatory exemptions.

This glossary covers the foundational vocabulary of private markets. As you deepen your LP journey, you'll encounter these terms repeatedly — across LPAs, quarterly reports, capital call notices, and GP presentations. Fluency with this language is the first step toward making informed, confident allocation decisions.