The AIF Dictionary

The set of assumptions and rules that govern how a set of accounts is prepared and presented.

Accounts prepared under different standards can look very different, so understanding each standard's characteristics is essential when comparing the performance of two companies. Markets would arguably be more efficient if everyone reported on the same basis - but legislators have not agreed, and US GAAP differs from IFRS on a number of points.

The amount by which the value of an investment exceeds, or falls short of, its acquisition cost.

The gain or loss may be realised or unrealised. Realised generally means the asset has been sold and the transaction value is known; an unrealised change is the difference between acquisition cost and value at the time of valuation.

In Norway, subject to certain conditions, capital gains realised by a company are tax-exempt (sktl. § 2-38).

Usually preceded by a national code - US GAAP, Norwegian GAAP - referring to the generally accepted accounting principles of that jurisdiction.

First published in 2001 by the International Accounting Standards Board, replacing the older IAS standard. IFRS aims to set a single international standard, which is especially valuable for companies operating across borders that need to align accounts between jurisdictions, and which lets analysts compare companies more easily.

IFRS is often associated with fair-value accounting, but IFRS accounts may also be presented on a historic-cost basis.

A company incorporated outside Norway that is not itself a tax subject; instead each shareholder or partner is individually liable for their share of the company's annual taxable result. A limited partnership is a typical example.

Tax reporting for such investments is often complex, because different elements of income may be taxed at different rates in the investor's country. The accounts of the UDLS must be analysed thoroughly to arrive at the correct taxable result for each investor.

A general consumption tax on the value added to goods or services at each production or trade stage of the domestic supply chain.

At each stage, inputs are purchased with VAT added; suppliers receive payment including VAT and remit it to the state, while recovering the VAT they paid further down the chain. Ultimately the consumer bears the full VAT. In Norway the general rate is 25 percent, with lower rates for some goods and services.

The obligation of an employer paying salaries, or a company paying dividends, to "hold back" an estimated amount of tax and pay it to the tax office on behalf of employees or shareholders.

Withholding tax may be refunded if the recipient's actual liability turns out to be lower. In some cases it is treated as discharging the liability entirely, with no further return required.

It may be levied on income from securities owned by a foreign shareholder - deducted before distributions leave the country - so that domestic profits are taxed domestically. Whether it applies, and at what rate, depends on the recipient's status and on double-taxation treaties; typical rates of 25-30% are often reduced to 15% or less. In Norway, corporate shareholders resident in the EEA may be entitled to a full refund under the participation exemption method.

A written notice to investors requiring them to pay into the fund a portion of their commitment. The Limited Partnership Agreement sets a minimum notice period, normally 10 days.

Money received from a capital-gain event, as distinct from interest on a loan or return of loan principal. For a fund this is typically the proceeds of selling shares in a portfolio company. A portfolio company may also pay dividends which, depending on the beneficial owners' nationality, may be subject to withholding tax.

The fund returns money to its investors (Limited Partners and General Partner) in line with the waterfall provisions of the LPA. A distribution is preceded by a distribution notice, which gives background and typically categorises the money returned against the fund's waterfall (return of outstanding capital, outstanding preferred capital, interest, capital proceeds).

Distributions that are not in cash - most often shares in an underlying portfolio company. Like any distribution, they must be made proportionally to all limited partners.

Distributions of listed or otherwise liquid shares rarely cause difficulty, as investors can decide when to sell. Often, though, the shares are hard to realise, and in-specie distributions are generally unpopular with investors.

Numerous clauses and side-letter issues attach to them. The GP may have to consult the Investor Committee before distributing in specie, and the IC may even influence the valuation - which in turn affects performance figures and carried-interest calculations. Some investors refuse them outright and use a side letter requiring the GP to realise the asset and distribute cash instead. Distributing in specie can nonetheless be necessary to wind a fund up on time, and may serve investors' interests where an early forced sale would mean dumping shares at a low price.

Money held by a third party, normally a bank, on behalf of transacting parties. The funds are released only on the agreed instruction; in a dispute, that final instruction may be a court order.

An escrow account may run for a limited period, with funds held until an agreed date or condition. Some LPAs provide for early payment of carried interest to the GP, with part of those amounts held in escrow for a period or until conditions are met (see Clawback).

Distributions that, under the LPA, may later be subject to a second capital call - in other words, they increase remaining commitment.

Example 1 - Excess capital called: the GP called capital for a transaction that did not proceed and returns it; because the money was never put to work within the strategy, the distribution is recallable. Example 2 - Early exit: an investment is realised very quickly and the GP recalls the capital element (not the profit element). Other cases include money tied to bridge investments, guarantees, warranties or underwriting.

Many funds are structured so that all or part of the fund capital stays with the investor until needed and is then called. "Commitment" describes the investor's promise to finance the fund up to a certain amount (see GP and LP Commitment).

The amount the GP commits to invest in the fund. Limited Partners typically expect the GP to invest substantially in the fund being raised - usually at least one percent of total committed capital.

The amount an LP has committed to invest. The LP's liability is generally capped at its commitment, unlike the General Partner's, which is normally unlimited - which is why the GP is usually a limited-liability company.

The GP may have authority to draw an additional amount above the stated commitment, and to recall amounts previously distributed; any such conditions are detailed in the LPA.

Once committed, an investor must, on receiving a capital call, pay money into the fund up to its commitment. Outstanding commitment is the amount paid in at any given time, less repayments of capital and distributions.

Private equity funds run low cash balances and do not draw down the full commitment at once; the investor can invest the remainder elsewhere, bearing in mind calls may come at short notice. The GP also wants outstanding capital kept low, because the waterfall typically pays the investor an annual hurdle return on outstanding commitment before any carried interest is due to the GP.

The amount of an investor's commitment that, at any particular time, remains available for drawdown.

Strictly, an advisory fee is paid for advice from a consultant or manager, while a management fee or GP's share is paid for taking on responsibility to act on behalf of another - typically a fund entity that may have no legal personality of its own and acts through a General Partner (e.g. Jersey or Guernsey limited partnerships).

The distinction between adviser and manager is not always clear; an "adviser" may hold enough authority that "manager" would be more accurate. The fee structure typically changes over time and results from negotiation during fund-raising - the better the track record, the stronger the GP's position - usually with a mechanism that reduces the fee over time or in line with portfolio value.

Fees the GP collects from third parties in the course of the fund's business (transaction, finder, co-investment and underwriting fees) are typically deducted from the GP's share. In Norway, managing a fund is VAT-exempt while giving financial advice is not - important, as most investment companies are not VAT-registered and cannot recover VAT.

The extraordinary share of profit due to the GP when the fund's performance exceeds a certain annual return, often the hurdle rate. Carry is typically 10-30% of the return above the hurdle and is disproportionate to the amount the GP has itself invested.

Carry is commonly calculated on total fund performance - the most LP-friendly scheme - and is not paid until paid-in capital and the hurdle element have been distributed to investors. The most GP-friendly scheme is strict "deal by deal" carry, where the GP earns carry on one successful exit even if the rest of the portfolio would, if realised, show losses. Many intermediate solutions balance GP motivation and LP return.

Best shown by example. A fund invests 100; a year later 110 is realised, with an 8% hurdle and 20% carry.

Without catch-up the LP receives the 100 invested + 8 hurdle + 80% of the remaining 2 = 109.6, and the GP receives 0.4. With full catch-up the LP receives 100 + 8, and the remaining 2 goes entirely to the GP, so the whole 10 return is split 80/20 - the GP has "caught up" with the LP after the hurdle is paid.

The LPA's clawback terms set out how and when the fund may recover money already paid to the GP - typically because an event has reduced the fund's performance below the basis on which carried interest or fees were paid.

Points to watch: tax the GP has already paid is normally not subject to clawback; how clawback works after in-kind distributions; and how it works following ownership changes in the fund.

The minimum annual return on net capital paid into the fund that is due to the investor before the GP can earn carried interest. If performance falls below the hurdle, there is no carry.

The market standard is 8%, though rates of 5-12% occur. In theory it should be lower when interest rates are low and vice versa; in practice it has been remarkably stable, which matters given a typical 10-15 year fund life over which rates fluctuate.

A fee charged at subscription, payable at first close, typically calculated on committed capital and used to cover the fund's establishment costs. Its size tends to depend on the expected fund size, as set-up costs are not necessarily linear with committed capital.

Fees directly referable to making an investment. The LPA typically provides that any transaction fees the investment adviser or GP receives from a third party in connection with a fund transaction are deducted from the advisory fee for the period.

The distribution mechanism. The waterfall clause in the LPA sets out who receives the first money distributed, and so on, until all the fund's assets are distributed and the fund closed.

A typical waterfall: after costs, the LPs and the GP-as-investor are first in line up to the amount paid in; next, funds permitting, they receive the hurdle return; if there is a catch-up it follows; finally, remaining assets are split between the LPs and the GP as recipient of carried interest. Timing clauses can complicate matters - the GP wants carry as early as possible, and LPs may accept this subject to escrow and clawback conditions requiring repayment if later events hurt performance.

Under the AIFM Directive, a "collective investment undertaking which raises money from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors" - and which is not a UCITS fund.

The definition covers many vehicles and schemes; legal structure (company or partnership) does not matter. How many investors make an undertaking "collective" is unclear - probably more than two, but a large number is not required. The requirement to invest for investors' benefit excludes charities.

A fund where the investor, before committing, does not know exactly which investments will be made. Investment restrictions limit the manager's mandate, but within those parameters the investor is blind.

The degree of "blindness" matters greatly to large, diversified investors targeting a particular segment - they scrutinise the investment-restrictions section of the LPA. Hedge funds, with very wide mandates, offer low visibility.

Invests in shares of existing companies to support their further development and later realise the investment at a profit.

The manager uses various strategies - strengthening management, product and market penetration, balance-sheet repair, further funding - and seeks control. Where a majority stake is not possible, control may be sought through shareholder agreements, board representation or alliances; control matters especially for exit.

A fund that buys interests in other funds. It may be a primary fund-of-funds investing in new funds from day one, or operate in the secondary market buying LP interests in existing funds.

By nature highly diversified, a fund-of-funds typically has limited visibility into the underlying structures and their direct investments, which poses particular portfolio- and tax-reporting challenges.

The point in a company's or technology's life cycle at which a fund invests (see Investment Restrictions).

A buy-out fund typically invests in companies of some size and market presence that need help to grow; the main risk is how to develop the company further, and the downside is usually weak value development rather than bankruptcy. In venture or seed funds, investors accept that portfolio companies are developing new technology, methods or medicines, with significant risk of never reaching the market.

A first-time investor: the fund buys shares in an existing company and works to develop it - strengthening management, product and market strategy, balance sheet, providing capital, and so on.

The term is mostly used when context requires distinguishing primary from secondary funds; otherwise venture, buy-out, seed and early-stage funds are generally implied to be primary funds.

Specialises in becoming the "second owner". A secondary fund-of-funds, for example, buys interests in existing funds from LPs who want to exit before the fund's full term - driven by a wish to exit an illiquid holding or, more often, to restructure a portfolio. Banks and pension funds under liquidity regulation may need to rebalance when unlisted and listed asset values move differently.

A secondary fund may also take over an entire tail-end portfolio: a fund nearing its end date still holding unrealised investments (market slump, ownership issues, plans behind schedule). By offering more time to develop the portfolio, the secondary fund provides a full exit.

Overlapping terms for funds investing in early-stage technological development. These companies are usually small, the technology unproven outside the laboratory, and time to market uncertain. The upside if successful is extraordinary, but many such companies will not succeed.

From an investor-protection view it is paradoxical that the EuVECA directive lowers barriers to investing in this type of fund relative to lower-risk sectors.

The year of a fund's first close - the point from which it is in investment mode with capital available.

In hindsight, the vintage says something about the conditions during the fund's investment period. Investing just before a downturn, for example, often leads to late realisation, as assets bought at inflated values take longer to recover.

Needed when a fund's governing body - typically the GP - lacks the competence, time or organisation to source and execute transactions itself but still wants control. Rather than a full management agreement, it signs an advisory agreement requiring the adviser to produce investment advice to certain standards and restrictions for the GP's consideration.

Most offshore funds use GPs that consider investment advice and decide on that basis, rather than being active in the market themselves.

An application by an investor wishing to be accepted as a Limited Partner. It forms part of the GP's KYC process - the GP must judge both whether the investor can be accepted and whether the fund is suitable for that investor.

Signed by the LP, it records the commitment, the bank account for distributions, reporting and communication lines, and the investor type (pension fund, bank, family company, trust, etc.). US and Canadian investors typically must supply additional information for later reporting, and the instrument evolves as cross-border tax reporting grows more complex.

The agreement between all Limited Partners and the General Partner. It defines the GP's authority and all partners' rights and obligations, and sets the terms on which the GP manages the partnership - investment restrictions, management fee (GP's share), hurdle rate, carried interest, clawback, catch-up - and names the keymen the GP must keep working for the fund.

The LPA is the single most important document in establishing a fund.

A marketing document explaining an investment opportunity to potential investors. Private equity funds issue a comprehensive PPM as part of the documentation investors require.

It covers management biographies, market presentations, manager track record, financial statements, a detailed description of the business or fund, legal terms, tax consequences and common risk factors. It is substantial and must align clearly with the LPA; in many jurisdictions both are legally reviewed for a legal opinion before the fund is registered or licensed.

A side agreement within a collective agreement under which one or more participants require special treatment - for example, an LP wanting to clarify when it may be excused from an investment.

In principle a side letter carries equal weight to the main agreement. Where it is unknown to other participants, or renders part of the main contract meaningless, it may sometimes be disregarded or ranked behind the main agreement.

Liable beyond its commitment, the GP makes all decisions on behalf of the partnership - typically the investment decisions - coordinates operations, and is responsible for compliance and risk management (see Limited Partner).

In Norway also called a "silent partner" - an apt description. The LP funds the partnership per the LPA up to its commitment but takes no part in operating the fund, and its liability is capped at that commitment.

In many jurisdictions LPs' identities remain hidden from the public, and often only the GP knows the identity of all LPs.

A vehicle that pools a number of investors into a common investment vehicle.

Feeders are often set up for smaller investors who can collectively make a larger investment than alone - useful since the most successful managers run funds with high minimum commitments. Feeders may also group investors of a particular nationality who benefit, for regulatory or legal reasons, from investing through a larger vehicle.

Where two or more investors share ownership of an investment.

The reason may be necessity - a fund or investor with limited resources, or building a diversified portfolio, may not want the full exposure; co-investors reduce exposure and make otherwise out-of-reach deals possible.

Large fund investors may also negotiate the right to be offered co-investment opportunities during the investment period, usually with no or low fees. Averaged across the fund commitment and the co-investments, their effective fees are lower than on the fund commitment alone.

A fund with no fixed life - no date by which investments must be terminated and the fund wound up. Listed evergreens aim to always allow an exit (though liquidity may constrain it); unlisted evergreens normally have periodic redemption and subscription rights.

A representative group of the fund's Limited Partners. Its mandate is not to make investment decisions - the LPA is usually emphatic that investment input is outside its scope; that is what the GP and adviser are paid for.

The IC normally receives a fuller report on the fund's operation than other participants, and is consulted on conflicts of interest and other matters where the GP wants investor input. It works for, and promotes the interests of, all investors.

One or more additional structures acting in parallel and on substantially the same terms as the main structure, making the same investments in proportion to their size.

As with feeders, parallel structures usually group investors with the same obligations - same jurisdiction, regulation or tax treatment - or with shared investment restrictions.

Funds usually show both gross and net IRR. Gross IRR is the total annual return before fees, carry and the fund's operating expenses - a measure of return on the portfolio. Net IRR includes fees, carry and operating expenses, and is the figure that matters to investors.

Unlike multiples, IRR includes the time element: all else equal, the measure declines the longer it takes to realise a given gain.

The total value of all assets less liabilities. In private equity, NAV refers to the value of the fund as a whole.

The cumulative amount a fund has distributed to investors relative to their total contributions. DPI is net of fees and carried interest, and investors focus on it as it reflects return of, and return on, investment.

Like other multiples it contains no time element - unsophisticated but easy to use and widely cited.

The value of remaining investments and other assets (NAV) plus total distributions to date, relative to total capital paid in. Recallable distributions should be in the numerator and reinvested capital in the denominator. TVPI = RVPI + DPI.

Like other multiples it ignores time - unsophisticated but easy to use and widely cited.

The current value of all remaining holdings in the fund relative to the total contributed to date; any reinvested capital should be in the denominator.

Like other multiples it ignores time - unsophisticated but easy to use and widely cited.

The price an asset would fetch in the market, assuming a knowledgeable, willing buyer and seller, no outside pressure to transact, and a reasonable period to complete.

An FMV estimate is subjective - influenced by time, place, comparable transactions and the valuation principles used. In private equity it usually refers to the value of the fund's investments, ignoring the fund's other assets and liabilities.

An EU directive governing managers of alternative investment funds. Prompted by concern over a large, unregulated hedge-fund industry, it became wide-reaching legislation covering managers of all previously unregulated funds, large and small.

It regulates marketing of AIFs to professional investors in the EU. Once licensed in one country, marketing in another is subject only to a simple notification - the "passport of marketing." As Norway has not fully implemented the directive, Norwegian managers cannot yet use the passport and may have to follow national private placement rules. The directive became law in most of Europe in July 2013, and in Norway from 1 July 2014.

Regulation to prevent transactions that launder the proceeds of crime. Norway's Anti-Money Laundering Act was introduced in 2009; firms must keep up-to-date certified proof of identity for new clients, store customer information securely, research and report suspicious circumstances to the authorities, and maintain proper internal control and communication procedures.

In practice, a legal entity is identified by an up-to-date certified certificate of registration, with signatories providing certified passport copies and proof of address. Owners are identified via a certified shareholder register; any corporate shareholder holding more than 25% must provide its own register, and so on, to identify the ultimate beneficial owners.

Under AIFMD, the fund manager must ensure a depositary function is appointed for each alternative investment fund.

The depositary is a separate, independent control entity focused on safekeeping of fund assets, liquidity management, and monitoring the fund's activities to ensure they stay within its mandate and agreements.

Operating in adherence with formal laws and regulations. In companies with a dedicated compliance function, the compliance office reports directly and independently to the board.

The International Compliance Association also recognises a secondary level: ensuring the organisation operates in line with internally imposed control systems designed to secure compliance with formal law - often functionally part of risk management.

US legislation giving the United States greater ability to find and tax US citizens and companies. It requires non-US financial institutions to report on US account holders and beneficial owners to US tax authorities.

Originally aimed at foreign institutions operating in the US or with US clients, FATCA in some cases conflicted with national laws, leading to numerous Intergovernmental Agreements; most countries now accept FATCA reporting.

An independent EU authority safeguarding the stability of the EU financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets and enhancing investor protection, in particular by fostering supervisory convergence among securities regulators.

A global, member-driven organisation advancing the interests of private equity Limited Partners through education, independent research, best practices and collaboration. Its Private Equity Principles are commonly used in negotiating partnership agreements to align LP and GP interests.

A written notice to investors requiring them to pay into the fund a portion of their commitment. The Limited Partnership Agreement sets a minimum notice period, normally 10 days.

A partnership, company or other entity in which a fund has invested. Private equity funds tend to seek significant control to implement change and develop the company, typically making 5-15 investments and so operating with a degree of diversification.

Investors usually subscribe during the fund-raising period and are committed from closing. When an existing investor sells its interest to a third-party buyer, that is a secondary transaction; the market for such "used" interests is the secondary market.

Reasons for selling include portfolio realignment, strategy changes, or releasing resources for core activities. The buyer typically assumes all of the seller's unfunded obligations.

A fund is bound by its strategy and mandate, which translate into investment restrictions normally set out in the LPA.

Typical restrictions relate to geography, investment stage and strategy, degree of control sought, industry, direct or indirect investment, and primary or secondary investment.

By making a number of investments, a fund diversifies risk: one investment performing poorly affects overall performance only proportionally, reducing the fund's exposure to any single holding.

A fund with a narrow industry mandate cannot escape that segment's market risk but can offset company-specific risk.

"Tag-along" and "drag-along" rights regulate the conditions of exit from an investment.

A tag-along right lets a shareholder choose to sell alongside another shareholder, normally on the same terms and to the same buyer - often requested by minorities so they can exit when the majority does. A drag-along right lets a selling shareholder require the other shareholder(s) to sell at the same time to the same buyer on certain terms.