A guide to investment terms
Money owed to suppliers
Money owed to customers.
When one company takes over another and clearly establishes itself
as the new owner. Acquisition also describes any deal where the
bidder ends up with 50 per cent or more of the company taken
Companies often need to use external finance to fund an
acquisition. This can be in the form of bank debt and/or equity,
such as a share issue.
A procedure defined by the Insolvency Act 1986, providing a
possible alternative to the liquidation or receivership of a
company. Once an administration order is gained by a court, the
claims of all creditors are frozen, giving the company protection
against its creditors. The administrator then runs the company.
The term of receivership in the UK. If a company is no longer
financially viable, an administrative receiver may be
appointed to run the company, probably with a view to selling it as
a going concern. The company is then said to be in administrative
receivcership or more commonly, in
An advisory board is common among smaller companies. It is less
formal than the board of directors. It usually consists of people,
chosen by the company founders, whose experience, knowledge and
influence can benefit the growth and direction of the business. The
board will meet periodically but does not have any legal
responsibilities in regard to the company.
Alternative investment Market, a stock market regulated by the
London Stock Exchange and intended for smaller companies.
Annual percentage rate.
See business angels
charged by a bank for arranging a customer's overdraft
Anything owned by an individual, a business or financial
institution that has a present or future value i.e. can be turned
into cash. In accounting terms, an asset is something of future
economic benefit obtained as a result of previous transactions.
Tangible assets can be land and buildings, fixtures and fittings;
examples of intangible assets are goodwill, patents and
The percentage breakdown of an investment portfolio. This shows how
the investment is divided among different asset classes. These
classes include shares, bonds, property, cash and overseas
investments. Institutions structure their allocation to balance
risk and ensure they have a diversified portfolio.
Assets and liabilities
This provides a statement of a company's assets and
receivable that is likely to remain uncollectible and will be
A fund that spreads its investments between various types of assets
such as stocks and bonds. Investors can avoid excessive risk by
balancing their investments in this manner, but should expect only
A statement of the assets, liabilities, and capital of a business
or other organization at a particular point in time, detailing the
balance of income and expenditure over the preceding period.
A person or organization declared in law as unable to pay their
Bill of exchange
of exchange is a written document instructing the person it is
addressed to pay a specific amount to another person by a specified
This is a standard measure used to assess the performance of a
company. Investors need to know whether or not a company is hitting
certain benchmarks as this will determine the structure of the
investment package. For example, a company that is slow to reach
certain benchmarks may compensate investors by increasing their
A person who enjoys the benefits of ownership even though the title
is in another name.
A type of IOU issued by companies or institutions. They generally
have a fixed interest rate and maturity value.
figure on a profit and loss account that results from various
calculations included on this statement.
level of sales necessary for a company to cover all its fixed and
variable costs for a given period of time, i.e. so that the
business will not operate at a a loss. Above break-even sales, a
company will be profitable.
A kind of short-term financing that allows a company to continue
running until it can arrange longer-term financing. Companies
sometimes seek this because they run out of cash before they
receive long-term funding; sometimes they do so to strengthen their
balance sheet in the run up to flotation.
The rate at which a start-up uses its venture capital funding
before it begins earning any revenue.
Individuals who provide seed or start-up finance to entrepreneurs
in return for equity. Angels usually contribute a lot more than
pure cash – they often have industry knowledge and contacts that
they can pass on to entrepreneurs. Angels sometimes have
non-executive directorships in the companies they invest in.
An organisation that facilitates the bringing
together of businesses and business angels e.g. www.xenos.co.uk
Document prepared by
management that summarises the operational and financial objectives
of a business and the detailed plans and budgets showing how the
objectives are to be realised. It is different from an investment
proposal in that the business plan is considered an internal
document. See Can I get any help with my
This is the purchase of a company or a controlling interest of a
corporation’s shares. This often happens when a company’s existing
managers wish to take control of the company. See management
Buy-In Management Buy-Out
A combination of an management buy-out and management buy-in, the
team buying the business includes both existing and new
allowance which takes account of depreciation of certain types of
business assets such as machinery, equipment, vehicles etc. You
claim part of the cost of the item each year against your profits,
before your tax is worked out.
Money used to purchase fixed assets
for a business, such as land, buildings or machinery. It also
refers to money invested in a business on the understanding that it
will be used to purchase permanent assets rather than to cover
day-to-day operating expenses.
When an asset is sold for more than the initial purchase cost, the
profit is known as the capital gain. This is the opposite to
capital loss, which occurs when an asset is sold for less than the
initial purchase price.
This is the amount of capital that the fund has at its disposal,
and is managing, for investment purposes.
The total amount of money being transferred into and out of a
business, especially as affecting liquidity.
Estimate of the timing and amounts of cash inflows and outflows
over a specific period (usually one year).
Any two parties that invest alongside each other in the same
representing ownership and voting rights in a business.
The process by which a company buys back the stake held by a
financial investor, such as a private equity firm. This is one exit
route for private equity funds.
whereby an organisation provides goods or services to a customer
and then allows certain amount of time for them to pay for them to
pay for it.
allowed to customers to pay for goods or services received.
A person or company to whom money is owing.
Cross company guarantee
A guarantee given to a bank by several companies that are part of
the same group of companies, when the bank lends money to one of
the companies in the group.
Items that are either cash
now or are expected to be turned into cash within one year's time.
These include that are either turned into cash within one year's
time. These include cash, debtors, stock and marketable
to another organisation that will have to be paid within one year.
These include accounts payable, bank loans and short-term
Ratio of total current
assets to current liabilities.
Income that is received
during the period of the investment (e.g. dividends) as opposed to
the capital gain portion received on an investment at the end of
the investment period.
A debenture is a
medium- to long-term debt instrument used by large companies to
borrow money, at a fixed rate of interest.
In terms of
financing a business there is a distinction between debt and
equity. Debt is money borrowed from a bank or other institution
which is subject to interest paid at a specified rate. The total
borrowed must be repaid either on a specified date or on
Debt to equity
A comparison of debt to equity in a business’ capital
Organisations or people who owe money.
Also known as the 'average collection period' this is the financial
ratio which (on average) shows how efficient the organisation is at
collecting what it is owed.
If the terms of an investment agreement/loan are broken, then the
business is in default.
A notional figure charged to the organisation's overheads to allow
for the reduction in the value of fixed assets due to wear and tear
over the lifetime of the asset. These fixed assets are shown on the
balance sheet after the relevant change for depreciation has been
established companies that are breaking even or trading profitably.
The company uses the capital to finance strategic moves, such as
expansion and growth.
A dividend is the amount of a company’s profits paid to
shareholders each year.
This is the actual act of transferring the agreed money from the
investor to the investment target.
successfully in private equity at a fund or company level, involves
thorough investigation. As a long-term investment, it is essential
to review and analyse all aspects of the deal before signing.
Capabilities of the management team, performance record, deal flow,
investment strategy and legals, are examples of areas that are
fully examined during the due diligence process.
This is when a company is in an early stage of development. This
means that the company has only recently been established, or is
still in the process of being established – it needs capital to
develop and to become profitable. Finance Wales is able to offer
finance to early-stage business.
The purchase of a business by its employees
either directly or via a trust.
In a functioning
venture, equity is the total of the invested capital and the
retained profits during the operating life of the business. In the
case of a business’ demise or dissolution, equity refers to the
residual value of a business or investment after all debts and
other claims are settled, i.e. the amount to which the owners are
Capital invested in a business for the medium to long term in
return for a share of the ownership and sometimes an element of
control of the business.
A fund in which the returns generated by its investments are
automatically channelled back into the fund rather than being
distributed back to investors. The aim is to keep a continuous
supply of capital available for further investments.
An exit is the means by which a fund is able to realise its
investment in a company – by an initial public offering, a trade
sale, selling to another private equity firm or a company buy-back.
See Finance Wales' exits.
Method by which an investor intends to or has realised an
investment. This could range from a trade sale, through to a
management buyout by the directors, to flotation on the stock
The total amount of money (return) an investor anticipates
receiving from an investment.
Costs incurred by a project or business and therefore money that is
A company ceasing operations following its inability to make a
profit or to bring in enough revenue to cover its expenses.
The purchase by a factor of invoices at a discount to provide
Land, buildings, plant, equipment and other assets (with a life
exceeding one year) that cannot be easily moved or sold quickly and
that are acquired for carrying on the business of a company (cf.
Cost of doing business, which does not change with the volume
of business. Examples might be rent for business premises,
insurance payments, heat and light.
The launching or financing of a business through the trading of its
shares on a stock
Companies often require several rounds of funding. If an investor
has invested in a particular company in the past, and then provides
additional funding at a later stage, this is known as ‘follow-on
funding’. Finance Wales is able to offer follow-on funding to the
businesses it works with.
The act of purchasing an exporter’s receivables (the amount an
importer owes an
exporter) at a discount by paying cash. The importer is then
obliged to pay its debt to the forfaiter,
i.e. the purchaser.
The act of providing financial resources to finance a need, sources
of funding include credit, venture capital, donations, grants,
savings, subsidies, and taxes.
by which a private equity firm solicits financial commitments from
limited partners for a fund. Firms typically set a target when they
begin raising the fund and ultimately announce that the fund has
closed at such-and-such amount.
The ratio of debt to equity of a
company. In general, the higher the gearing, the higher the
percentage of annual profits which must be used to pay interest and
the greater the vulnerability of the company to events outside its
control such as a rise in interest rates
or a fall in sales.
A sum of money given to a business by a government, local authority
or public fund to finance a specific business activity.
The profit earned by a business from trading, prior to the
deduction of overhead expenses.
Growth capital or development
Long-term equity capital raised to allow a
company to grow ambitiously without relying wholly on short-term
A promise by a guarantor to repay a loan or part of a loan on
behalf of the borrower if the borrower cannot.
A person who accepts responsibility for the repayment of a
financial obligation should the original borrower default on the
terms of repayment or fail to repay the obligation altogether.
Method of financing the
purchase of assets. Under a hire purchase agreement, the business
pays an initial deposit with the remainder of the balance and
interest being paid over a period of time. At the end of the
period, the asset is owned by the business.
This is the length of time
that an investment is held. For example, if Company A invests in
Company B in June 1996 and then sells its stake in June 1999, the
holding period is three years.
The takeover of a company
against the wishes of the incumbent management or board.
is said to be illiquid if it cannot easily be turned back into cash
quickly and at a low cost. Shares in smaller companies are more
likely to be illiquid than those in larger companies; they will be
less easy to sell and you are likely to find that the spread or
between the buying and selling price is much wider.
The money that is being generated
and received by the organisation as a consequence of carrying out
its operations or receiving funding and subsidy for those
operations. Initial public offering (IPO): The initial offer and
sale of a company’s shares on a public market
such as a stock exchange.
An entity designed to nurture business ideas or new technologies to
the point that they become attractive to venture capitalists. An
incubator typically provides physical space and some or all of the
services – legal, managerial, technical – needed for a business
idea to be developed. Private equity firms often back incubators as
a way of generating early-stage investment opportunities.
When a company is unable to pay debts owed.
A charge for the use of money supplied by a lender.
Anyone, such as
an accountant or banker, in a position to bring together the
principals in a deal or prospective deal.
Putting money into an asset with the expectation of capital
appreciation, dividends, and/or interest earnings.
money into an asset with the expectation of capital appreciation,
dividends, and/or interest earnings.
This is a summary of the main terms of the investment into the
company. Typically it will describe the amounts and types of shares
to be issued. It will set out the manner in which the investors’
capital is to be returned and the way in which the investors are to
be protected at such time as their money is at risk. It will also
include warranties that certain states of affairs prevail in
relation to the company.
capital provided by institutions to facilitate growth in private
companies. To some extent the term is interchangeable with venture
capital. However, it emphasises that such capital is available for
growth projects being carried out by a range of young and
established businesses, whereas venture capital is mainly provided
for MBOs or MBIs that change the ownership of the business.
Providers of capital for the long term, as distinct from lenders of
short-term capital. Investors have rights which lenders do not
enjoy – and accept risks which lenders are not exposed to.
Intercompany loans are loans made from one business unit of a
company to another,
The cooperation of two or more individuals or businesses in a
specific business enterprise rather than a continuing relationship.
It can be simply an agreement between two parties as to who does
what and gets what or it can be an entirely new company set up for
the specific purpose of pursuing the joint business.
or individual that organises a round of financing, and usually
contributes the largest amount of capital to the deal.
Payment for an
asset by regular payments over a fixed period. An ‘off-balance
sheet’ method of financing capital expenditure.
Someone who makes funds available to another with the expectation
that the funds will be repaid, plus any interest and/or fees.
Letter of credit
A guarantee given by a bank on behalf of an importer to pay an
exporter, on presentation of specified documents that represent the
supply of goods within a specific time. Used in international
trade, it permits two parties to exchange ownership and possession
and the money to pay for them.
The amount of debt used to finance business assets.
Leveraged buy-out (LBO)
This is an MBO in which the equity capital is supported by a very
large amount of debt.
A company's legal debts or obligations that arise during the course
of business operations.
In a limited company, the debts of the company are separate from
those of the shareholders.
Institutions or individuals that contribute capital to a private
equity fund. LPs typically include pension funds, insurance
companies, asset management firms and fund of fund investors.
The standard vehicle for investment in private equity funds. A
limited partnership has a fixed life, usually of ten years.
Line of credit
An agreement negotiated between a borrower and a lender that
establishes a maximum amount against which a borrower may draw. The
liability of the borrower at any point is only the amount drawn
against that maximum. The agreement also sets out other conditions,
such as how and when money borrowed against the line of credit is
to be repaid.
The sale of all of a company’s assets, for distribution to
creditors and shareholders in order of priority. This may be as a
result of the failure of the company or by agreement amongst
When a company trades its shares on a stock market, it is said to
Form of debt which has to be repaid at a specified time in the
future (as distinct from a bank overdraft which may be called in at
A provision in the underwriting agreement between an investment
bank and existing shareholders that prohibits corporate insiders
and private equity investors from selling at IPO.
Form of debt which has to be repaid at a specified time in the
future (as distinct from a bank overdraft which may be called in at
Loans - see debt
The term used when income for a project or business is less than
Management buy-in (MBI)
An external management team buys into a target company.
The management team buys the company it is running.
This is the annual fee paid to the general partner. It is typically
a percentage of limited partner commitments to the fund and is
meant to cover the basic costs of running and administering a
The mutual combining of two or more companies in the interest of
all businesses involved.
A type of loan finance that sits between equity and secured debt. A
loan with equity provision– through warrants or options – is
sometimes incorporated into the deal. Finance Wales can structure
mezzanine finance for businesses.
The profit of a business after taking account of all overheads.
A part-time director who shares all the legal responsibilities of
executive directors on the board of a company, but who does not get
involved in the day-to-day running of the company.
A document acknowledging that a debt exists and promising to repay
intended for short-term financing to support cash flow or cover
day-to-day operating expenses. Loans of this type are part of the
line of credit.
The right to buy stock in a company after a certain period of
An amount of money that
a business with a bank account is temporarily allowed to borrow
from a bank at an interest rate and over an agreed period of
Overdrawn directors current account
This is a record of any transactions between a director and the
company which have resulted in being overdrawn.
Non-labour expenses incurred in the operation of a business
that are not directly related to the purchase of goods or services
being sold by the business.
that is owned and run by two or more individuals who are each
responsible for the debts of the business. The company is not a
separate legal entity.
written promise from a business owner and or business executive
guaranteeing payment on an equipment lease or loan in the event the
business does not pay.
The spread of investments into the various companies is referred to
as the portfolio.
This is one of the companies backed by Finance Wales.
Like common shares, they represent ownership in a business.
However, these shares are usually non-voting and have a fixed
dividend rate. In the event of liquidation, preferred shareholders
rank ahead of common shareholders but behind creditors for claims
against the assets of the business.
This refers to the holding of stock in unlisted companies –
companies that are not quoted on a stock exchange. It includes
forms of venture capital and Management But Out financing.
Profit and loss account
A financial statement presenting the revenue, expenses and profits
(or losses) of an organisation during a specified period of
This is a structure that determines the eventual equity allocation
between groups of shareholders. A ratchet enables a management team
to increase its share of equity in a company if the company is
This refers to a change in the way a company is financed. It is the
result of an injection of capital, either through raising debt or
The common term for administrative receivership.
Shares which can be repurchased by the company at a predetermined
The probability that actual future returns will be less than
See venture capital.
A security is a negotiable financial instrument that represents
some type of financial value.
A common exit strategy. The institutional investor from the
original buy-out exits selling their share typically to another
The market for secondary buy-outs.
The provision of very early stage finance to a company with a
business venture or idea that has not yet been established. Finance
Wales is able to provide seed capital to tech start-ups from the
Wales Technology Seed Fund.
Any person, company or other institution that owns at least one
share of a company’s stock. Shareholders are a company's
Small to medium-sized enterprise
These are captive or semi-captive firms that gain independence from
their parent organisations.
A social enterprise is an organization that applies commercial
strategies to maximize improvements in human and environmental
well-being, rather than maximizing profits for external
A type of
business entity that is owned and run by one natural person and in
which there is no legal distinction between the owner and the
A company that is in the first stage of its operations.
This is the strategic and
systemic process for creating successors at many levels of the
organisation. Finance Wales is able to provide funding to
facilitate this process i.e. a management buy-out or management
A promise given by an individual to ensure that a third party
fulfils its obligations and/or a promise to fulfil those
obligations in place of a third party if that third party fails to
The sharing of deals between two or more investors, normally with
one firm serving as the lead investor. Investing together allows
venture capitalists to pool resources and share the risk of an
investment. Finance Wales has co-invested with syndications on many
The duration of a
loan. Also any of the clauses which form part of a contract.
A summary sheet detailing the terms and conditions of an investment
When a private equity firm has raised a fund, or it wishes to
announce a significant closing, it may choose to advertise the
event in the financial press – the ad is known as a tombstone. It
normally provides details of how much has been raised, the date of
closing and the lead investors.
Sale of a company to another company. As a form of exit, it is an
alternative to flotation and more common.
Turnaround finance is provided to a company that is experiencing
severe financial difficulties. The aim is to provide enough capital
to bring a company back from the brink of collapse. Turnaround
investments can offer spectacular returns to investors but there
are drawbacks: the uncertainty involved means that they are high
risk and they take time to implement.
Revenue income that a company receives from its normal business
or gap between what was planned as part of a budget (the budgeted
figure) and what actually happened. Used as a tool for budgetary
monitoring and control.
The term given to early-stage investments. Finance Wales is able to
provide venture capital to early-satge businesses in Wales.
Vendor Initiated Management Buy-Out
The vendor/owner of a business leads/drives the MBO process, part
funding it through deferred consideration.
The amount of money a business needs to cover its day-to-day
activities such as paying wages, buying raw materials and paying
bills. The main sources are current assets but a business’ current
liabilities also have to be taken into account when working out how
much money a business has at its disposal.