9 plain-language definitions covering fund characteristics for alternative investment funds — including AIF - Alternative Investment Fund, Blind-pool Investment Fund, Buy-out Fund, Fund-of-Funds.
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.