Glossary of terms

Drawdown

There are two very different definitions of this term, which is used widely in investment and fund management: In the hedge fund and broader investment industry, the term refers to the decline, in percentage terms, between an investment’s previous peak and trough valuations; the greater the drawdown, the greater the fall in value In the world of private, closed ended funds, such as private equity, however, the term is broadly synonymous to a “(capital) call” – the process of drawing monies (capital

Defaulting Investor

A DEFAULTING INVESTOR is an investor that fails to transfer cash to a fund within the timeframe stipulated in the DRAWDOWN NOTICE What happens in the case of a default Although most DRAWDOWNS  proceed without incident, sometimes cash is not received on time. Perhaps a High Net Worth Investor happens to be on holiday or is otherwise uncontactable, and fails to see the notice so does not fund on time. If a Limited Partner doesn’t fund within the period agreed in

Distributions

A distribution is any return of funds to an investor. Typically, this comes about when a fund sells one or more of its assets (when it “exits an investment”). Which partners receive a share of a distribution will be set out in the Limited Partnership Agreement (“LPA”) and will be determined by a number of factors. The priority in which various parties receive whichever share they are entitled to of the distributable funds is called the DISTRIBUTION WATERFALL. How it

Waterfall

The WATERFALL reflects the commercial agreement between the partners in a private equity fund for the share of the proceeds of the partnership according to certain pre-set rules set out in the Limited Partnership Agreement (LPA). The rules determine how much each partner in the fund gets paid, and according to what priority. The waterfall will need to be recalculated on every DISTRIBUTION. It is also the crux of the commercial agreement between the investors (the Limited Partners) and the

Drawdown Notice

A DRAWDOWN NOTICE is the means used by fund managers to communicate the need to DRAW DOWN funds from its Limited Partners. Because capital committed to a private equity fund (or fund with a similar structure and strategy) is not transferred to the fund manager at the point of subscription (or ‘commitment’), there needs to be a mechanism for drawing the required portion of the committed capital into the fund, in order for the fund to be able to make