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Private Capital Fund Strategies

Industry Definitions

In this article



We define the private capital fund strategies across private equity & venture capital, private debt, real estate, and more.

Private equity and venture capital

BalancedInvests in companies at all stages of development, from early stage to buyout.
BuyoutInvests in established companies, often with the intention of improving operations and/or financials. Investment often involves the use of leverage.
Early StageType of venture capital fund that invests only in the early stage of a company’s life. Can be either Seed or Start-up.
Early Stage: Seed Allows a business concept to be developed – perhaps involving the production of a business plan, prototypes, and additional research – prior to bringing a product to market and commencing large-scale manufacturing.
Early Stage: Start-UpSupports a non-commercial company’s product development and marketing.
Expansion/Late StageInvests in companies towards the end of the venture stage cycle. Provides capital injections for expansion into a position of stable profit streams. Typical with venture capital deals, expansion/late-stage funds take short- to midterm, minority positions.
GrowthTypically takes significant minority positions in companies without the use of leverage. Targets profitable, but still maturing, investee companies with significant scope for growth. Investment horizons are mid-to-long term, similar to those seen with buyout funds.
HybridA fund that focuses on investing in private equity and also considers investing in another alternative asset class.
Private Investment in Public Equity (PIPE)Focuses on investments made by a private equity or venture capital firm in a public company, which remains public post-investment.
SecondariesAcquires stakes in private equity funds from existing LPs.
TurnaroundAims to revitalize companies with poor performance or those that are experiencing trading difficulties.
Venture Capital (General)Provides capital to new or growing businesses with perceived long-term growth potential.


Private debt

Blended/Opportunistic DebtA strategy that seeks attractive risk-adjusted returns throughout the fixed income universe by using a diverse set of investments.
Direct LendingThe practice of non-bank lenders extending loans to small and medium-sized businesses in return for debt securities rather than equity.
Distressed DebtDebt of companies that have filed for bankruptcy or have a significant chance of filing for bankruptcy in the near future.
Junior/Subordinated DebtSubordinated debt is a loan or security that ranks lower than other loans with regard to claims on assets or earnings. Subordinated debt is not repaid until after unsubordinated (senior) debt holders have been repaid in full and is consequently a riskier form of debt loan. Also known as a junior security or subordinated loan.
MezzanineInvestments in debt subordinate to the primary debt issuance and senior to equity positions.
Mid-Market Lending A form of direct lending typically to smaller and more-leveraged companies than traditional direct lending.
Senior DebtHighest on the capital structure, a loan to be repaid first if borrowing business failed.
Senior Subordinated DebtDebt that is subordinated in its rights to receive its principal and interest payments from the borrower to the rights of the holders of senior debt. Such loans are sometimes secured by significant collateral; the firm will principally rely on the borrower’s cash flow for repayment. Additionally, the manager often receives warrants to acquire shares of stock in connection with these loans.
Subordinated Junior Secured Term LoanSubordinated debt has a lower priority than senior debt holders in a company’s capital structure but is secured against some assets or collateral of the company.
Unitranche DebtA type of debt combining senior and subordinated debt into one instrument. This instrument was created to simplify debt structure.
Special Situations

Classification covering several areas including distressed and mezzanine, where loan decision or grade is defined by something other than underlying company fundamentals.

 

Real estate

CoreInvestment in low-risk real estate that provides relatively low returns. Investments are typically located in primary markets and in the main property types (office, retail, industrial, and residential). Properties are stable, well maintained, well leased, and often of the class A variety. Investments require little or no leverage (0-30%) or additional capital investment
Core-PlusInvestment in moderate-risk real estate that provides moderate returns. Investments are predominantly core but with an emphasis on a modest value-add approach. Focus is on the main property types, in both primary and secondary markets, in buildings of class A or lower quality that require some form of enhancement (i.e. repositioning and/or re-leasing). Investments typically utilize 30-55% leverage and some additional capital investment.
DebtThe origination or acquisition of loans secured by real estate. May include mezzanine debt, preferred equity, or senior loans. See ‘Real Estate Debt’.
DistressedInvestments in distressed assets. Investments can be made in a variety of ways, including providing debt or equity to owners with liquidity problems, or to those that are seeking to recapitalize properties.
OpportunisticInvestment in high-risk real estate that provides high returns. Investments are typically in lower-quality buildings in primary, secondary, or emerging markets across all property types, including niche sectors. Buildings often require significant enhancement to upgrade them to class A buildings (i.e. development and/or extensive redevelopment/repositioning/releasing). Investments typically utilize leverage of 60% or more, and significant capital investment, and will target an IRR in the high teens and upwards.
Value AddedInvestment in moderate-to-high-risk real estate that provides moderate-to-high returns. Investments are typically in lower-quality buildings, in both primary and secondary markets in the main property types. Buildings often require enhancement to upgrade them to class A buildings (i.e. redevelopment/repositioning/releasing). Investments require 50-70% leverage, and additional capital investment, and will acquire an expected internal rate of return (IRR) in the low double digits to the mid-teens.

 

Real estate debt

B-NoteFinancing that is secured by a shared first lien with cash flow subordinated via an inter-creditor agreement.
Bridge LoanInterim financing for an individual or business until permanent or the next stage of financing can be obtained. Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing.

Commercial Mortgage-Backed Security (CMBS)

A security backed by mortgages on commercial real estate.

Commercial Real Estate Collateralized Debt Obligation (CRE CDO)

A CDO backed primarily by commercial real estate assets. A CDO is a type of asset-backed security and structured credit product.

First MortgageA mortgage that has priority over all other mortgages.
Non-Performing LoanA loan that is in default or close to being in default.
Preferred EquityFinancing that is senior to sponsor equity. Can resemble a mezzanine loan.

Residential Mortgage-Backed Securities (RMBS)

A security backed by mortgages on residential real estate.
Senior LoanA form of debt that takes priority over other debt securities sold by the issuer.
Sub-Performing LoanA loan that is making payments but not the full principal and interest payments that the mortgage note demands.
Whole LoanA mortgage loan where the owner of the debt also owns the servicing rights.



Infrastructure

CoreStrategies target essential assets with no operational risk where the asset is already generating returns. These are typically secondary stage assets in developed countries with transparent regulatory and political environments. Key features of the underlying assets include monopoly position, demonstrated demand, and long-term stable cash flows that are forecastable with a low margin for error.
Core-PlusStrategies typically target assets that exhibit similar characteristics to core assets but are more affected by and correlated with the economic cycle, thus exposed to demand and market risk. These assets do however have features that act to limit the aforementioned risks, including long-term contracts, long-term government or regulatory price support and/or high barriers to entry for competitors.
Infrastructure DebtStrategies tend to be less risky than other infrastructure strategies, targeting assets and/or infrastructure developers/owners, that produce regulated revenues for essential services or user revenues from assets with a monopoly position, as well as contracted assets. The risk/return exposure of the strategy depends on the type of debt provided, though most infrastructure assets are typically financed by senior debt and have simple capital structures.
Opportunistic

Strategies have the highest-risk/return profile of infrastructure strategies, with less focus on stable cash flows and greater emphasis on capital growth via the value of the underlying assets. Assets will not typically have an existing cash flow.

Value Added

Strategies are deemed moderate- to high-risk, targeting assets where enhancements are being made, and where the growth in usage of said asset or demand for service provided or produced is the focus. These are typically greenfield or brownfield assets, potentially involving new or unproven technologies that do not have pricing power at the time of the investment but can be developed over time to have this at some time in the future.


Natural resources

Agriculture/FarmlandEncompasses the investment of capital into land used for growing crops or harvesting livestock.
EnergyA strategy defined as the investment of capital into the processes behind the discovery, production, storage, distribution, and/or retail of energy resources.
Metals and MiningInvolves the investment of capital into metals/minerals as a raw product, the exploration for these commodities, or in the process of refining such materials to produce their pure form.
TimberlandInvolves the investment of capital into land covered with trees or other woody vegetation (either in the form of privately-owned tree farms, or naturally-occurring forests).
WaterInvolves investment of capital into water-related assets and/or processes.


Natural resources strategies process

AgTechEconomic sector focused on the use of technology to improve current agricultural practices, either to increase productivity or reduce environmental and social costs.
Annual/RowA crop that can be planted in rows wide enough to allow it to be tilled or otherwise cultivated by agricultural machinery. Row crops are most commonly annuals, crops that complete their lifecycle in one year and must be replanted, or short-lived perennials grown as annuals. Includes wheat, corn, maize, and barley.
AquacultureThe production of fish, shellfish, crustaceans, seaweeds, or algae in a managed environment, often enhancing production beyond that which would normally be achieved naturally.
Base MetalsMetals that oxidize, tarnish, or corrode when exposed to air or moisture. They are more abundant in nature and therefore cheaper than precious metals. Examples include aluminium, copper, lead, nickel, tin, and zinc.
BiomassBiological matter used as a renewable energy source, including purpose-grown energy crops and the biodegradable proportion of industrial, municipal, agricultural, and forestry residues.
Construction MineralsMinerals used by the construction sector. Typical construction minerals are aggregates (sand, gravel and crushed natural stone), various brick clays, gypsum, and natural stone.
DownstreamThe final stage in energy industry operations. Includes all activities relating to the refinement and distribution of energy and any by-products. For example, refining crude oil and distributing the by-products (e.g. gasoline, natural gas liquids, and diesel) down to the retail level. End customers for this distribution can include residential, industrial, and agricultural entities.
ExplorationThe process of searching for new mineral deposits that can be commercially mined.
Ferrous Metals Metals containing iron, such as iron ore and steel.
GeothermalAn energy production method that uses hot water and steam from underground reservoirs to power turbine generators.
HardwoodWood from angiosperms (flowering plants), mainly deciduous trees, and broad-leaf evergreen trees. Hardwoods all have enclosed nuts or seeds. Examples include cherry, mahogany, maple, and oak.
HydroelectricElectricity produced by the use of flowing water to power a turbine.
Industrial MineralsNon-metallic, non-fuel minerals used in a range of industrial applications including the manufacture of chemicals, glass, fertilisers, and fillers in pharmaceuticals, plastics, and paper. Examples of industrial minerals include salt, clays, limestone, silica sand, phosphate rock, talc, and mica.
Land OwnerInvestment strategy based on owning agricultural land and leasing/renting this out to others. See Operator and Owner-Operator.
LivestockDomestic or domesticated animals raised for food or in the production of food. For example, beef and dairy cattle, poultry, sheep, and swine.
MidstreamRefers to the collection, processing, storage, and transportation of energy. It is the middle stage of energy industry operations between the initial extraction/production of upstream energy and the final distribution of downstream energy.
Natural ForestsNaturally-occurring large area of land covered with trees or other woody vegetation which is harvested for timber production.
Non-Metallic MineralsAll commercially mined minerals that are not metals or fuel. Divided into construction minerals, industrial minerals, and precious stones.
Non-RenewablesEnergy from a source that cannot be readily replaced by natural means on a level equal to its consumption, such as oil and natural gas.
Oil Field Services Companies that assist oil & gas producers with their production activities. These companies manufacture, repair, and maintain equipment used in oil & gas extraction and transport, and provide additional services to the energy industry.
OperatorInvestment strategy based on carrying out agricultural activity without owning the underlying land, which is instead leased/rented from others. See Land Owner and Owner-Operator.
Owner-OperatorInvestment strategy that involves both owning farmland and carrying out agricultural activity on that land. See Land Owner and Operator.
Perennial/PermanentA crop produced from plants that lasts many seasons and can be harvested multiple times without needing to be replanted. Includes grapes, nuts, and citrus fruits, among other crops.
Platinum Group Metals (PMG)The platinum group metals are platinum, palladium, ruthenium, rhodium, osmium, and iridium. Their production is very limited and they are used for a number of different industrial applications.
Precious MetalsPrecious metals are metals that are rare and/or considered to have high economic value such as gold, silver, and the platinum group metals. Among other reasons, they are considered valuable because of their rarity, their use in industrial applications, or as jewellery, and their possible use as a store of value.
RefiningThe processing of mined products to reduce them to a pure state. For example, the processing of iron ore to extract iron.
RenewablesEnergy from a source that can be naturally replenished at a rate equal to that at which it is consumed, such as wind and solar power.
Royalty-Backed LendingA form of financing in which a fund provides capital in return for a share in the revenue generated by the extraction of a particular resource.
SoftwoodWood from gymnosperm (seed-producing) trees – conifers, cone-bearing seed plants. Examples include cedar, fir, and pine.
Tree Farms Trees planted and grown specifically for timber production – includes trees grown in plantations and nurseries.
UpstreamUpstream operations involve the exploration, recovery, development, and production of energy resources. Upstream firms will take the first steps to locate and search for new energy resources and, at a later stage, extract them.
Water IndustrialsCompanies that provide products or services used by water utility companies. For example, pump, pipe, and valve manufacturers, filtration and treatment companies, and desalination plants.
Water UtilitiesCompanies that provide water and/or wastewater services consumed by the public or other businesses.

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