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Glossary

AECM

European Mutual Guarantee Association

Asset allocation

A fund manager's allocation of his investment portfolio into various asset classes (e.g. stocks , bonds, private equity).

Asset class

A category of investment, which is defined by the main characteristics of risk, liquidity and return.

Basel II

International rules on capital requirements for banks and investment firms. These rules are implemented in Europe through the Capital Adequacy Directive. They aim to make the international financial system safer by having the riskiness of banks' loan portfolios reflected in the capital charges they need to set aside against unexpected losses.

Business angel

A knowledgeable private individual, usually with business experience, who directly invests part of his or her personal assets in new and growing unquoted businesses. Besides capital, business angels provide business management experience for the entrepreneur.

Buyout

A transaction in which a firm (or part of it) is acquired from the current shareholders (the vendors).

Capital Adequacy Directive (CAD)

European implementation of the international rules on capital requirements for banks and investment firms. Globally the rules are often referred to as "Basel II". They aim to make the international financial system safer by having the riskiness of banks' loan portfolios reflected in the capital charges they need to set aside against unexpected losses.

Capital market

A market where debt and equity securities are traded. Both the primary market for new issues and the secondary market for existing securities are part of the capital market.

CIP

Competitiveness and Innovation Framework Programme

Competitiveness and Innovation framework Programme (CIP)

The CIP brings together several existing EU activities that support competitiveness and innovation for the period 2007-13. The combination of programmes provides synergies like a common toolbox and the synchronisation of calls for proposals. The sub-programmes comprise the "Entrepreneurship and Innovation Programme", the "ICT Policy Support Programme" and the "Intelligent Energy Programme".

Debt instrument

Loans and other funding instruments that provide the investor with mostly fixed minimum returns and are at least partly secured.

Early-stage capital

Financing for companies before they initiate commercial manufacturing and sales or generate any profit. Includes seed and start-up financing.

EASY

Early-stage investors for high growth businesses

EBAN

European Business Angels Network

ECB

European Central Bank

EIB

European Investment Bank

EMN

European Microfinance Network

Equity

The (ordinary) share capital of a company. Typical features of equity capital include an entitlement to profits, a proportionate share of the proceeds upon liquidation and subordination to creditors.

Equity gap

Exists when there is a persistent capital market imbalance preventing supply from meeting demand at any price (or at a price acceptable to both sides). An often cited example is the lack of venture capital for a young, innovative firm. See also risk capital.

European private equity and venture capital association professional standards

A set of behavioural principles that define the relationship between limited partners, general partners and investee companies. European private equity and venture capital association (EVCA) professional standards encompass a Code of Conduct, Governing Principles, plus Corporate Governance, Valuation and Reporting Guidelines.

EVCA

European Venture Capital and Private Equity Association

Exit

Liquidation of investments by a private equity or venture capital investor. The most common exits are (1) trade sale to another company; (2) public offering (including an initial public offering - IPO) on a stock market; (3) sale to another investor; (4) repayment of the investment (when part of the investment agreement); or (5) the write-off of the investment.

Expansion capital

Financing provided for the growth of a firm, which may or may not break even or be profitable. Capital may be used to finance increased production capacity, market or product development, or to provide working capital.

Factoring

Selling a company's accounts receivable, at a discount, to a financing company that assumes the credit risk of the account debtors and receives cash as the debtors settle their accounts.

Fund-of-funds

A fund that invests in other (venture capital or private equity) funds.

Fundraising

The process in which venture capital firms raise money to create an investment fund. These funds are raised from private, corporate or institutional investors, who make commitments to the fund which will be invested by the general partner.

Fund size

The total amount of capital committed by the limited and general partners of a fund.

General partner

A partner in a venture capital management company who has unlimited personal liability for the debts and obligations of the limited partnership and the right to participate in its management.

GIF

High Growth and Innovative SME Facility

Growth stock market

Alternative market for new, fast growing companies. Usually more lightly regulated than the main stock markets.

Guarantee

A commitment by a third party to pay the debt of borrowers when the latter cannot pay it themselves. The guarantor is liable to cover any shortfall or default on the borrower's debt.

Initial public offering (IPO)

The sale or distribution of a company's shares to the public for the first time. An IPO is one of the ways in which a private equity fund can exit an investment.

Institutional investor

An organisation which professionally invests substantial assets in international capital markets. Examples include banks, investment companies, insurance companies, pension funds, foundations, and endowment funds.

Internal rate of return (IRR)

In a venture capital fund, the net return earned by investors from the fund's activity from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return, using monthly cash flows and annual valuations.

Investment fund

A firm that invests the pooled funds of retail investors for a fee. It aggregates the funds of many investors into specific investments, giving investors access to a wider range of investment options at lower cost. Investors may be able to sell their shares when they want (open-ended fund) or their assets may be locked up for a fixed period (closed-end fund). In Europe, investment funds can be divided into funds targeting retail customers under common European rules (UCITS funds) and non-harmonised funds without common rules.

Investment readiness

The entrepreneur's understanding of the concerns of banks, business angels and venture capital funds. In particular, this includes knowledge about communication with investors and also how to structure business plans to secure external finance.

IPO

Initial Public Offering

JEREMIE

Joint European Resources for Micro to Medium Enterprises initiative

Limited partner (LP)

An investor in a limited partnership is someone who (in contrast to the general partner) is liable for partnership obligations only to the extent of his or her investment. Limited partners are usually restricted from taking an active part in the management of the partnership's business.

Limited partnership

A legal structure that is used by most venture capital funds. A partnership is usually formed for a fixed period of time between the investors in a venture capital fund (limited partners) and the management company (general partner) making the investments in the underlying portfolio companies. Details concerning management policy and profit-sharing are laid out in a partnership agreement.

Listed company

A company whose shares are listed on a stock exchange.

Mezzanine finance

Also called hybrid finance. Financing with assets that contain characteristics of both debt and equity, covering a variety of instruments tailored to a specific legislative and operating environment. Frequently unsecured, they usually offer higher returns than secured loans and often give the lender a stake in the equity of the company.

Microcredit

Small loans, usually smaller than €25 000, granted either by institutions specialising in microcredit or by banks.

NEFI

Network of European Financial Institutions for SMEs

Non-harmonised funds

Any investment funds that do not come under the European UCITS rules, whether subject to national regulation or not. Most of these funds target institutional investors. Examples include open-ended real estate funds, commodity funds, private equity funds, and venture capital funds.

OECD

Organisation of Ecomonic Cooperation and Development

Permanent establishment

A fixed place of business through which the business of an enterprise is wholly or partly carried out. For private equity/venture capital, permanent establishment refers to the possibility that a limited partner, either owing or having a stake in a venture capital fund, is considered as a resident of that country and hence liable for national taxation.

Private equity

Investment of equity capital in firms not quoted on a stock market. Venture capital is strictly speaking a subset of private equity, which also includes replacement capital and buyouts.

Private placement

Raising of capital through the sale of securities to a small number of professional investors. Investors typically include banks, investment funds, insurance companies, and pension funds. This allows the transaction to be exempt from many or all of the requirements that would apply in the event of a public offering.

Prudent person rule

A behaviourally-orientated standard of investment, rather than one based on quantitative criteria. The prudent person rule allows institutional investors to include asset classes like private equity and venture capital in their asset allocation according to their own needs, while respecting the risk profile of their clients. In other words, the obligation on pension managers to invest as a prudent investor would do on his or her own behalf, in particular by carrying out sensible portfolio diversification.

Replacement capital

The purchase of existing shares in a company from another private equity investor or shareholder.

Risk capital (markets)

Markets providing equity financing to a company during its early growth stages (start-up and development). It covers three types of financing: (1) informal investment by business angels; (2) venture capital; (3) stock markets specialising in SMEs and high growth companies.

RSFF

Risk Sharing Finance Facility

Secondary sale

The sale of private equity holdings by venture capital funds to other investors.

Securitisation

The packaging of designated pools of non-tradable assets with similar characteristics (such as loans) into marketable securities (such as bonds) and the selling thereof to investors. For example, a collection of similar commercial or mortgage loans could be packaged together and sold on to investors. Securitisation converts illiquid assets into liquid assets.

Seed capital

Financing provided to study, assess and develop an initial concept. The seed phase precedes the start-up phase. The two phases together are called the early stage.

SME

According to Article 2 of the Annex to Recommendation 2003/361/EC, the category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million (see: SME definition). SMEs are the backbone of the EU economy - they represent 99% of all enterprises in the EU. Some 23 million SMEs provide around 75 million jobs.

SMEG

SME Guarantee Facility

Start-up capital

Provided to companies for product development and initial marketing. Firms may be in the process of being set up or may exist but have yet to sell their product or service commercially.

Stock exchange (stock market)

A market in which securities are bought and sold. Its basic function is to recycle capital from savings into investments. It enables companies, governments and local authorities to raise finance by selling securities to investors.

Tax neutrality

The notion that a decision to invest or use a particular source of funding should not be made on the basis of differential tax treatment.

Tax transparency

A fund is tax transparent when the fund itself is not subject to taxation and the investment in the investee company is treated as if it were a direct investment for the initial investor in the fund (the limited partner), who is then taxed when the investment fund distributes its profit.

Technology transfer

Also known as knowledge transfer or knowledge sharing. The process whereby an enterprise converts scientific findings from research laboratories and universities into products and services in the marketplace.

UCITS

Undertakings for Collective Investment in Transferable Securities

Undertakings for Collective Investment in Transferable Securities (UCITS)

Investment funds for retail purposes that are harmonised at EU level to provide protection for investors.

VC

Venture capital

Venture capital (VC)

Investment in unquoted companies by venture capital firms who, acting as principals, manage individual, institutional or in-house money. In Europe, the main financing stages included in venture capital are early-stage (covering seed and start-up) and expansion. Strictly defined, venture capital is a subset of private equity. Venture capital is thus professional equity co-invested with the entrepreneur to fund an early-stage (seed and start-up) or expansion venture. Offsetting the high risk the investor takes is the expectation of a higher-than-average return on the investment.

Venture capital fund

An investment fund that manages money from professional investors seeking private equity and equity-related securities (such as quasi-equity) in small and medium-sized firms (investee companies) with strong growth potential. The venture capital fund is usually an unincorporated arrangement such as a limited partnership. A management company that usually has several funds under its control may be a limited company, a limited partnership or a company quoted on a stock market.

Working capital

The liquid assets a company has available to build its business, but also a measure of its efficiency and financial health. Working capital can be positive or negative, depending on how much short-term debt the company is carrying. A negative working capital means that a company currently is unable to meet its short-term liabilities with cash, accounts receivable, and inventory.

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