Alternative Investments and Fund Accounting Fundamentals

Comprehensive vocabulary flashcards covering alternative investment structures, fund accounting principles, private equity, debt terms, and performance metrics.

Alternative Investment

An investment that falls outside conventional long-only public stocks, bonds, and cash; typically private, less liquid, and harder to value.

Illiquidity Risk

The risk of being unable to sell or redeem an investment quickly without taking a significant loss.

Private Fund

A pooled investment vehicle sold privately to eligible investors rather than to the general public.

Accredited Investor

An investor meeting SEC thresholds, typically requiring an individual income of $\$200\text{K}$ ($\$300\text{K}$ joint) or a net worth exceeding $\$1\text{M}$ excluding the primary residence.

Qualified Purchaser

An investor meeting a higher statutory standard than an accredited investor, generally requiring $\$5\text{M}$ or more in investments for an individual.

Sections 3(c)(1) and 3(c)(7)

Exemptions under the Investment Company Act of 1940 allowing funds to avoid registering as investment companies; 3(c)(1) limits beneficial owners to 100, while 3(c)(7) requires all investors to be qualified purchasers with no 100-owner limit.

Private Placement Memorandum (PPM)

The offering document that outlines a fund's investment strategy, terms, fees, and operational risks.

Subscription Agreement

The legal contract through which an investor commits capital to a fund and verifies their investment eligibility.

Limited Partnership Agreement (LPA)

The core governing agreement establishing the rights and obligations of the GP and LPs, covering management fees, waterfall structure, fund term, capital calls, and distributions.

Side Letter

An agreement granting a specific investor customized terms outside the LPA, such as fee discounts or specialized reporting rights.

Most-Favoured-Nation (MFN) Clause

A right permitting an investor to elect more favorable terms negotiated by other investors in the fund, usually subject to size comparability.

General Partner (GP)

The legal entity that controls the fund, makes investment decisions, and assumes management responsibility and unlimited liability.

Limited Partner (LP)

A passive investor who commits capital to a fund with legal liability strictly limited to the amount of their capital commitment.

Investment Manager

The operating firm that conducts day-to-day investment activities for the fund and earns the management fee.

Fund Administrator

A third-party service provider responsible for maintaining books and records, calculating NAV, processing capital activity, and preparing financial statements and investor reporting.

Placement Agent

A third-party intermediary engaged and compensated by a fund to assist in raising capital from potential investors.

Closed-End Fund

A fund structure with a fixed term where capital is called as needed, redemptions are prohibited, and proceeds are returned strictly via distributions.

Open-End (Evergreen) Fund

A fund structure without a fixed dissolution date, allowing investors to subscribe and redeem capital on a periodic schedule.

Investment Period

The initial phase of a closed-end fund, typically lasting around 5 years, during which the GP is authorized to call capital and execute new investments.

Master-Feeder Structure

A structure where multiple separate feeder vehicles aggregate investor commitments into a single master fund that executes all investments, accommodating different tax jurisdictions.

Parallel Fund

A separate entity that invests alongside the main fund under equivalent terms, established to resolve specific legal, regulatory, or tax needs.

Co-Investment

A direct investment made by an LP alongside a main fund into a specific asset, typically carrying reduced fees or zero management fees and carry.

Special Purpose Vehicle (SPV)

A distinct legal entity established to hold a single portfolio company, asset, or transaction.

Fund of Funds

An investment vehicle that allocates capital across underlying third-party investment funds rather than directly into operating companies or assets.

GP Commitment

Capital committed and contributed directly by the General Partner to align its economic incentives with those of the LPs.

2 and 20

Headline fund fee terms representing a $2\%$ annual management fee and a $20\%$ carried interest allocation.

Management Fee

An ongoing fee paid to the investment manager to cover operating overhead, charged on committed capital during the investment period and invested capital (or NAV) thereafter.

Carried Interest

A performance-based allocation representing the GP's share of fund profits, commonly $20\%$, realized only after LPs meet specified return thresholds.

Preferred Return (Hurdle Rate)

The contractual baseline annual return, commonly around $8\%$, that limited partners must fully receive before the GP can participate in carried interest.

GP Catch-Up

A waterfall phase following the preferred return where the GP receives a disproportionate share of distributions until reaching its targeted percentage of cumulative profits.

Clawback

A legal provision requiring the GP to return previously received carried interest distributions if the fund's overall lifecycle performance underperforms contractual hurdles.

European (Whole-Fund) Waterfall

A distribution mechanism where limited partners receive a full return of contributed capital and the preferred return across the entire fund before the GP receives any carried interest.

American (Deal-by-Deal) Waterfall

A distribution structure where carried interest is calculated and distributed on an individual asset basis as deals are realized, typically following the recovery of capital and prior realized losses.

Management Fee Offset

A mechanism reducing the management fee owed by LPs by a defined proportion of transaction, director, or monitoring fees collected by the manager from portfolio companies.

High-Water Mark

A hedge fund provision ensuring performance fees are assessed exclusively on cumulative net profits exceeding the portfolio's prior peak Net Asset Value.

Capital Commitment

The total contractual amount of money a limited partner legally agrees to contribute to a fund over its operational lifetime.

Capital Call (Drawdown)

An official request issued by the GP directing LPs to fund a designated portion of their committed capital, usually with about 10 business days notice.

Unfunded Commitment

The remaining dollar portion of an LP's contractual capital commitment that has not yet been drawn down by the GP.

Recallable Distribution

Distributed proceeds that the GP retains the contractual authority to call back from LPs at a future date under conditions defined in the LPA.

Recycling

The practice of using realized proceeds from investment sales to fund new investments instead of immediately distributing them to partners.

Distribution in Kind

A distribution of actual securities or assets to investors rather than cash.

Equalization

The accounting adjustment made when subsequent close investors join a fund, contributing their pro rata share as if invested at the first close plus interest to reimburse earlier LPs.

Subscription Line of Credit

A short-term revolving credit facility secured by the unfunded capital commitments of LPs, used by funds to finance deals and delay capital calls.

Dry Powder

The aggregate total of committed capital raised by a fund that has not yet been deployed into investments.

Paid-In Capital

The cumulative gross amount of capital that limited partners have actually funded into the partnership to date.

ASC 946

The US GAAP accounting standard that provides specific authoritative reporting guidance for investment companies.

Fair Value (ASC 820)

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

Fair Value Hierarchy

A valuation framework categorizing inputs into three tiers: Level 1 (quoted active market prices), Level 2 (other observable inputs), and Level 3 (unobservable inputs).

NAV Practical Expedient

An accounting method permitting investments in other funds to be valued using the reported Net Asset Value per share, excluding them from the fair value hierarchy.

Calibration

The process of anchoring a valuation model to the initial acquisition transaction price and adjusting it over time for subsequent market and company developments.

Leveraged Buyout (LBO)

The acquisition of a company funded through a significant proportion of debt secured against the target company's assets and operating cash flows.

Growth Equity

Non-controlling, minority investments in established, revenue-generating companies experiencing rapid growth, typically executed with minimal to no leverage.

Venture Capital

Financing provided to early-stage, high-risk emerging startups with significant expansion and return potential.

Add-On Acquisition

A strategic bolt-on acquisition executed by an existing fund portfolio company to build operational scale or capture synergies.

Dividend Recapitalization

A corporate transaction in which a portfolio company takes on new debt to pay a special dividend to equity owners, returning capital without an equity sale.

Continuation Fund

A GP-led secondary vehicle created to acquire one or more assets from an older, maturing fund to extend the holding period for future upside.

J-Curve

The visual trend of initial negative returns in private equity caused by upfront management fees and startup costs, followed by steep positive returns as investments mature.

Vintage Year

The calendar year in which a private fund first closes, calls capital, or makes its initial investment, used for peer benchmarking.

Net Operating Income (NOI)

A real estate metric calculated as property rental income and other receipts minus operational expenses, excluding debt service and income taxes.

Capitalization Rate (Cap Rate)

A real estate valuation metric calculated as Net Operating Income divided by the asset's property value, used to evaluate relative yields.

Debt Service Coverage Ratio (DSCR)

A credit and real estate metric measuring debt sustainability, calculated as Net Operating Income divided by total debt service obligations.

Loan-to-Value (LTV)

A lending risk ratio determined by dividing the principal outstanding loan balance by the assessed market value of the collateral property.

Real Estate Investment Trust (REIT)

A company owning, operating, or financing income-generating real estate that passes through the vast majority of its taxable income directly to shareholders.

Direct Lending

A private credit strategy where non-bank funds extend loans directly to middle-market operating companies without bank syndication or public markets.

Mezzanine Debt

A junior debt instrument that ranks subordinate to senior debt, offering higher interest rates and often equity participation rights like warrants.

Unitranche

A blended credit structure combining senior debt and subordinated debt into a single term loan facility with a single blended interest rate.

Payment-in-Kind (PIK) Interest

Interest that is not settled in periodic cash payments but is instead capitalized into the principal balance of the loan.

Original Issue Discount (OID)

The discount amount by which a debt instrument is issued below its par face value, accreted into interest income over the life of the loan.

Delayed Draw Term Loan (DDTL)

A credit facility allowing a corporate borrower to draw down pre-committed loan principal in tranches over an agreed time window.

Non-Accrual Loan

A distressed loan on which the lender ceases to accrue interest income on the financial statements because collection is deemed doubtful.

Business Development Company (BDC)

A specialized closed-end investment company, often publicly traded, created to invest in and extend debt and equity capital to private middle-market firms.

Lock-Up Period

A contractual timeframe following an initial investment during which limited partners are prohibited from withdrawing or redeeming capital.

Redemption Gate

A restriction imposed by a fund capping the aggregate percentage of fund assets that can be redeemed on a single redemption date.

Side Pocket

A segregated account established within a hedge fund to isolate illiquid or hard-to-value securities from the main portfolio and standard redemption cycles.

Schedule K-1

The standard US federal tax document reporting each partner's allocable share of a partnership's income, deductions, capital gains, and tax credits.

Unrelated Business Taxable Income (UBTI)

Income generated from debt-financed investments or active trades that exposes tax-exempt US institutional investors to taxation.

Effectively Connected Income (ECI)

Income derived from active commercial business activities within the United States that triggers US domestic tax filing obligations for non-US investors.

Blocker Entity

A corporate entity positioned between foreign or tax-exempt investors and underlying investments to prevent pass-through of UBTI and ECI.

Form PF

A regulatory reporting document required by the SEC through which private fund managers report fund size, leverage, systemic exposures, and risk metrics.

Multiple on Invested Capital (MOIC)

A return metric calculated as total value (realized proceeds plus unrealized fair value) divided by total invested capital.

Distributions to Paid-In Capital (DPI)

A liquidity realization metric measuring cumulative cash returned to investors divided by cumulative paid-in capital called.

Residual Value to Paid-In Capital (RVPI)

An unrealized performance metric measuring the remaining fund Net Asset Value relative to cumulative capital called.

Total Value to Paid-In Capital (TVPI)

A fund's total gross performance multiple, calculated as DPI plus RVPI, or total cumulative value divided by total paid-in capital.

Internal Rate of Return (IRR)

The annualized discount rate equating the net present value of all cash inflows and outflows to zero; highly sensitive to the exact timing of cash flows.

Service Level Agreement (SLA)

A formal contract defining specific operational accounting deliverables, standards, and performance deadlines agreed between a fund administrator and its client.

Transfer Agency

The administrative function that maintains the official investor register and executes the processing of subscriptions, redemptions, and ownership transfers.