Understanding Investing

Understanding Alternatives’ Speak

A glossary of terms to help guide investors through the key terms used in the private alternatives space.

As more investors look to alternatives to help them reach their investment goals, education is key to success, as is partnering with an experienced investment manager. PIMCO has been managing a broad range of private alternative strategies for more than 15 years. Our formidable market presence and dedication to superior results gives us a competitive advantage – one that we believe benefits our clients.

Use the glossary below to get familiar with the key terms used in private alternatives space.

Alternatives Glossary:

CAPITAL CALL

Capital is periodically called down by the fund as investments are made; they take place during the investment period specified in the fund terms enabling the money manager to invest capital when appropriate. Private equity funds typically have a capital call structure.

CAPITAL COMMITMENT

Amount of capital committed to the fund over a multi-year time period. (In PIMCO funds, we charge fees on called capital not committed.)

CARRIED INTEREST

The general partner’s share of the profits, which are based on the investments in the fund and can range from 10% to 30%.

CLAWBACK

Provides limited partners the right to recoup a portion of the general partner’s carried interest where subsequent losses mean the general partner received excess fees.

DRAWDOWN

Wherein the manager draws down capital or calls capital to invest in specific deals.

FUND LEVEL GATE

Provision whereby the fund limits the aggregate amount all investors are permitted to redeem (e.g., interval fund that provides 5%-25% quarterly redemptions of outstanding shares).

GENERAL PARTNER (GP)

Fund sponsor/asset manager (i.e., PIMCO); responsible for managing the investments in the fund.

GP CATCH UP

After the investor receives their return of called capital and the preferred return, the manager (GP) then “catches up” to receive a portion of the profits before splitting the subsequent dollars, typically 80/20.

GP Catch Up

HARD LOCK

Guidelines typically found in private funds where the asset manager does not allow contributions or redemptions for a set period of time, typically 1 -2 years.

HEDGE FUND

Generally a partnership structure with a General Partner (asset manager) and Limited Partners (end investors). Fee structures will vary. Historically, fee structures have tended to be from 2% management fee/ 20% performance fees to 1% management fee/ 10%-20% performance fees.

HIGH-WATER MARK

The highest peak value that a fund has reached. Depending on terms specified in the Private Placement Memorandum (PPM), the manager cannot collect fees if the value of the fund is below the high water mark.

HURDLE RATE

Minimum amount of returns a hedge fund must meet before the asset manager can charge an incentive fee.

INVESTMENT PERIOD

Time period where the General Partner (asset manager) calls and invests capital in investments. The investment period varies depending on the terms but is usually 2-4 years and is typically found in private equity structures, not hedge funds.

INVESTOR LEVEL GATE

A guideline found in hedge fund documents that limits the amount an investor can withdraw from the fund during the redemption period. Typical gates can be 20% to 33 1/3% at the investor level to 5% to 20% per quarter at the fund level.

IRR (INTERNAL RATE OF RETURN)

The calculation of IRR takes into consideration the timing of cash contributions and distributions to and from the partnership, and the length of time an investment has been held.

J-CURVE

Effect of timing on the fund’s interim returns, so named because the shape of the curve resembles the letter J. In the early years of a private equity fund, returns could be low or negative as investment gains usually come in the later years as the investments mature. Early investment returns can be negative due to management fees which are drawn from committed capital and underperforming investments that are identified early and written down. Deal related expenses such as legal diligence, legal documentation, audit work, and commercial work may also negatively impact early returns. In the final years of a fund, the higher valuations of the investment are confirmed by sales, resulting in cash flows to the Limited Partners.

J Curve

LIMITED PARTNER

End fund investor who does not take part in the fund’s management

MEZZANINE DEBT

Subordinated debt that is junior to senior debt. It is capital that is between debt and equity on the right hand side of the balance sheet.

MULTIPLE ON INVESTED CAPITAL

Measures the proceeds received from a fund plus the valuation of the remaining investments divided by the capital contributed to the fund.

PPM

Private Placement Memorandum is the offering document that outlines the investment opportunity, details risks of investing, and specifies terms and various legal liabilities when investing in a private fund. This document is crucial in making an investment decision.

PREFERRED RETURN/HURDLE RATE

The minimum annual return that Limited Partners are entitled to before General Partners receive their carried interest split. In today’s marketplace, preferred returns range from 5% to 8% depending on the strategy and objectives.

PRIVATE CREDIT

Debt that is not offered publicly, not filed or registered with any regulatory agency and typically available only to a small subset of large institutional buyers.

PRIVATE EQUITY

Capital, not listed on a public exchange, that is raised to directly invest in private companies, real estate, and usually consists of debt and equity investments.

PRIVATE PLACEMENT

Securities that are not sold through a public offering, typically offered to a limited pool of investors, and are regulated by the U.S. Securities and Exchange Commission (SEC) rules in the United States under Regulation D or Reg D.

PUBLIC CREDIT

Typically debt that is registered with a regulatory agency and offered publicly. In most cases, public credit (corporate bonds, high yield bonds, etc.) will have a CUSIP and is typically liquid.

REPURCHASE PERIOD

Redemption structure found in interval funds where the fund will repurchase between 5% and 25% of outstanding shares on a quarterly basis.

SOFT LOCK

Guidelines typically found in private funds where the asset manager imposes a lock on contributions and redemptions but still allows an investor to redeem albeit subject to an early redemption fee. This early redemption fee is typically paid back to the fund.

SUBSCRIPTION AGREEMENT (SUB DOCS)

An agreement between an asset manager and an investor for the investor to buy and the Fund or partnership to sell a specific number of shares in a private fund at a specific price.

WATERFALL

Distribution method that shows the allocation of gains between limited partners and general partners.

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Disclosures

Private or alternatives fund strategies involve a high degree of risk and prospective investors are advised that these strategies are suitable only for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment. All investments contain risk and may lose value. Past performance is not a guarantee or a reliable indicator of future results.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This information is summary in nature and is not intended to be all inclusive. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.