Glossary
Key terms and definitions for private fund managers. Browse by topic or search for a specific term.
83 terms
Fund Formation & Structure
View topic →Carry Crystallization
Carry crystallization is the process of calculating and realizing a GP’s accrued carried interest on transferred assets, typically triggered by a continuation vehicle transaction.
Certificate of Formation
A Certificate of Formation is the document filed with the Delaware Secretary of State to create a limited liability company.
Certificate of Limited Partnership
A Certificate of Limited Partnership is the formation document filed with the Delaware Secretary of State to create a limited partnership.
Co-Investment Vehicle
A co-investment vehicle is a special purpose vehicle that allows select investors to invest additional capital alongside the main fund in a specific deal.
Continuation Vehicle
A continuation vehicle is a new fund entity formed by a GP to acquire one or more portfolio companies from an existing fund, giving LPs a choice between liquidity and continued exposure.
Delaware Limited Partnership
A Delaware limited partnership is a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act (DRULPA).
Employer Identification Number (EIN)
An Employer Identification Number (EIN) is a nine-digit number issued by the IRS to identify a business entity for tax purposes.
Fairness Opinion
A fairness opinion is an independent assessment from a financial advisor confirming that a transaction price is fair to the parties involved, commonly used in continuation vehicle transactions.
Feeder Fund
A feeder fund pools investor capital and invests it into a master fund, which holds all investments and makes all trading decisions.
General Partner
The general partner is the entity that manages a limited partnership fund, makes investment decisions, and bears unlimited liability for fund obligations.
GP-Led Secondary
A GP-led secondary is a transaction initiated by the general partner to restructure fund holdings, most commonly through a continuation vehicle.
Limited Partner Advisory Committee (LPAC)
A Limited Partner Advisory Committee is a governance body composed of select limited partners that reviews conflicts of interest, approves certain transactions, and provides oversight of GP activities.
Limited Partnership
A limited partnership is a legal entity with a general partner who manages the fund and limited partners who invest capital with liability capped at their commitment.
LP Election
An LP election is the process by which existing limited partners in a fund choose to sell their interest for cash or roll into a new vehicle during a continuation vehicle transaction.
Management Company
A management company is the separate entity that employs a fund's investment team, receives management fees, and provides advisory services under an investment management agreement.
Parallel Fund
A parallel fund is a separate vehicle that invests alongside the main fund on the same terms, in the same deals, and in the same proportions.
Registered Agent
A registered agent is a person or company designated to receive legal documents, tax notices, and official correspondence on behalf of a business entity.
Series LLC
A series LLC allows creation of separate "series" within a single legal entity, each with its own assets, liabilities, and members, with liability shields between them.
Special Purpose Vehicle (SPV)
A special purpose vehicle (SPV) is a legal entity formed for a single investment or transaction.
Warehouse Vehicle
A warehouse vehicle is a temporary entity used by a GP to hold investments made before the fund closes, with those investments later transferred into the fund.
Securities & Investor Compliance
View topic →Accredited Investor
An accredited investor meets specific SEC financial thresholds that qualify them to participate in private securities offerings.
Bad Actor Disqualification
Bad actor disqualification prevents a fund from using the Rule 506 exemption if certain covered persons have specified legal or disciplinary history.
Beneficial Owner
A beneficial owner is any person who holds investment discretion over or receives the economic benefit of a fund interest, determining who counts toward the 3(c)(1) investor limit.
Covered Securities
Covered securities are securities exempt from state registration requirements under the National Securities Markets Improvement Act.
ERISA
ERISA is a federal law governing employee benefit plans that can impose fiduciary requirements on private funds when plan asset thresholds are met.
Federal Preemption
Federal preemption is the principle that federal securities law supersedes state securities law for certain types of offerings.
General Solicitation
General solicitation is any public communication used to attract investors to a securities offering, prohibited under Rule 506(b) but permitted under Rule 506(c).
Knowledgeable Employee
A knowledgeable employee participates in a private fund's investment activities and is excluded from beneficial owner counts and qualified purchaser requirements.
Look-Through Provision
A look-through provision requires counting the individual investors behind an entity investor rather than counting the entity as a single investor.
Private Placement
A private placement is a sale of securities to a limited number of investors without a public offering or SEC registration.
Qualified Client
A qualified client meets financial thresholds under SEC Rule 205-3 that allow an investment adviser to charge performance-based fees.
Qualified Purchaser
A qualified purchaser meets elevated investment thresholds under the Investment Company Act, qualifying them for 3(c)(7) funds.
Regulation D
Regulation D provides SEC exemptions that allow private funds to raise capital without registering a public offering.
Rule 506(b)
Rule 506(b) allows private funds to raise unlimited capital without general solicitation from accredited and up to 35 sophisticated investors.
Rule 506(c)
Rule 506(c) allows private funds to publicly advertise their offering, but requires every investor to be a verified accredited investor.
Section 3(c)(1)
Section 3(c)(1) exempts a fund from Investment Company Act registration if it has no more than 100 beneficial owners and does not make a public offering.
Section 3(c)(7)
Section 3(c)(7) exempts a fund from Investment Company Act registration if all of its investors are qualified purchasers and it does not make a public offering.
Self-Certification
Self-certification is the process by which an investor confirms their own accredited or qualified status through representations in the subscription agreement.
Sophisticated Investor
A sophisticated investor is a non-accredited investor with sufficient knowledge and experience to evaluate a prospective investment.
Verification Under Rule 506(c)
Verification under Rule 506(c) refers to the reasonable steps an issuer must take to independently confirm each investor meets the accredited investor standard.
Voting Securities
Voting securities are equity interests that carry the right to vote on matters related to the issuer, relevant for ownership thresholds and reporting requirements.
Registration & Regulatory Filings
View topic →Fund Documents & LP Terms
View topic →Fund Term Extension
Fund term is the total lifespan of a private fund from formation through final liquidation, typically 10 years with provisions for extensions.
GP Clawback
A GP clawback requires the general partner to return excess carried interest at the end of the fund life.
Investment Management Agreement
An investment management agreement authorizes the management company to advise and manage the fund in exchange for fees.
Key Person Provision
A key person provision suspends the fund investment period if specified principals depart or reduce their involvement.
Limited Partnership Agreement (LPA)
The LPA is the governing document of a private fund structured as a limited partnership, defining GP and LP rights, fund economics, governance, and operational rules.
Most Favored Nation (MFN) Clause
An MFN clause entitles an investor to receive any more favorable terms granted to other investors in the same fund.
Operating Agreement
An operating agreement is the governing document of an LLC, defining member rights, management authority, and economic terms for GP entities, management companies, and LLC-structured funds.
Private Placement Memorandum (PPM)
A PPM is the disclosure document provided to prospective investors in a private fund offering, describing the strategy, risks, terms, and conflicts of interest.
Side Letter
A side letter modifies standard LPA terms for a specific investor, granting preferential rights or fee arrangements.
Subscription Agreement
A subscription agreement is the contract an investor signs to commit capital to a private fund, documenting commitment amount and investor qualification representations.
Fund Tax & Reporting
View topic →Blocker Corporation
A taxable entity interposed between a fund and certain investors to block pass-through income that would create tax problems.
Calendar-Year Fund
A fund with a fiscal year ending December 31, the default and standard for nearly all private funds.
ECI (Effectively Connected Income)
Income effectively connected with the conduct of a trade or business within the United States, relevant primarily for foreign investors in private funds.
Fiscal Year End
The last day of a fund's accounting year, which determines the timing of financial reporting, tax filings, and compliance deadlines.
Franchise Tax
An annual tax imposed by a state on entities organized or doing business in the state, unrelated to income.
Long-Term Capital Gains
Gains on assets held for more than one year (or more than three years for carried interest), taxed at preferential rates.
Pass-Through Taxation
The tax treatment applied to partnerships where income and losses pass through to partners rather than being taxed at the entity level.
QSBS (Qualified Small Business Stock)
Stock in a domestic C-corporation that meets specific criteria, entitling the holder to exclude up to 100% of gain on sale.
Schedule K-1
The tax form issued annually by a partnership to each partner, reporting the partner's allocable share of the fund's income, deductions, gains, losses, and credits.
Section 83(b) Election
A tax election allowing recipients of restricted property to recognize income at the time of grant rather than at vesting.
Short-Term Capital Gains
Gains on assets held for one year or less, taxed at ordinary income rates rather than preferential capital gains rates.
Tax Distributions
Distributions made to partners to help cover their tax liabilities arising from the fund's pass-through income allocations.
Three-Year Holding Period
The holding period required under Section 1061 for carried interest gains to receive long-term capital gains treatment.
UBTI (Unrelated Business Taxable Income)
Income earned by a tax-exempt entity from activities unrelated to its exempt purpose, subject to federal income tax even though the entity is otherwise tax-exempt.
Withholding Tax
Tax withheld at the source on payments or allocations to partners, primarily affecting foreign partners and nonresident domestic partners.
Ongoing Compliance
View topic →Annual Audit (Custody)
The annual audit conducted to satisfy the custody rule's audit exception, performed by a PCAOB-registered independent accounting firm.
Books and Records Rule
SEC Rule 204-2 requires registered investment advisers to create and maintain specific records related to their advisory business.
CCO (Chief Compliance Officer)
The individual designated as responsible for administering the adviser's compliance program, required under Rule 206(4)-7.
Code of Ethics
A written document establishing standards of ethical conduct for an adviser's supervised persons, required for RIAs under Rule 204A-1.
Compliance Manual
A written document establishing the adviser's policies and procedures for regulatory compliance, required for RIAs under Rule 206(4)-7.
Custody Rule
SEC Rule 206(4)-2 requires registered advisers who have custody of client assets to implement safeguards including surprise examinations or annual audits.
Deficiency Letter
A letter issued by the SEC following an examination, identifying areas where the adviser's practices do not comply with securities laws.
Insider Trading
The buying or selling of securities based on material nonpublic information, in violation of a duty of trust or confidence.
Marketing Rule
SEC Rule 206(4)-1, effective November 2022, governs how investment advisers advertise and market their services.
MNPI (Material Nonpublic Information)
Information about a company or security that is both material and not yet available to the public, central to insider trading law.
Net vs Gross Returns
Gross returns reflect performance before fees; net returns reflect the LP's actual experience after all fees and expenses.
Performance Advertising
The presentation of investment performance in marketing materials, subject to specific requirements under the SEC marketing rule.
Personal Securities Transaction
A trade in securities by a supervised person of an investment adviser or by accounts in which the person has a beneficial interest.
SEC Examination
A review conducted by the SEC's Division of Examinations to assess an adviser's compliance with securities laws.
Surprise Examination
An unannounced verification of client assets by an independent public accountant, required under the custody rule for advisers who do not use the audit exception.
Testimonials and Endorsements
Under the marketing rule, testimonials are statements by current clients and endorsements are statements by non-clients recommending the adviser.