Covenant: promise made by the borrower to the lender in a loan agreement. The most important of these are financial covenants, for example, a promise that the ratio of debt to EBITDA will not exceed a certain level. If a covenant is breached, the bank can call in the loan or enforce its security. Banks and bondholders have different kinds of covenants. Banks have “maintenance covenants”. These have teeth: they actively require a company to maintain certain ratio levels. Bondholders generally have “incurrence covenants”. These are relatively toothless, because they kick in only if the borrower wants to make a change (for example, “incur” new debt).  

Cov-lite ("Covenant Light"): Loan agreements that do not contain the usual protections for the lender. Cov lite loans contain covenants, but the company only has to comply with them if it is undertaking a pre-specified transaction, and not every day. The Alternative Oxford Private Equity Dictionary

A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond. The rating assigned indicates the stock or bond's level of investment opportunity. The three major rating agencies are Standard & Poor's, Moody's Investors Service, and Fitch Ratings.

Alternative Assets: Assets that historically were not included in investment portfolios alongside public market investments. Examples include leveraged buyout, venture capital, hedge funds and real estate. Because alternative assets are generally more risky than traditional assets, they should deliver higher returns, but will they? The Alternative Oxford Private Equity Dictionary

Scalability: (1) Potential for revenue growth of revenues without huge organizational complexity and expenses (e.g. the ability to add millions of new customers to an existing platform without millions of dollars of incremental cost). Businesses which are highly scalable are the holy grail for VC. (2) How easy it is to go from a small fund to a bigger fund. GPs tend to raise more money from one fund to the next and the issue of scalability is therefore raised: i.e. can the GP find enough investment opportunities to justify the increase in fund size.

Scale in is a trading strategy that involves buying shares as the price decreases. To scale in (or scaling in) means to set a target price and then invest in volumes as the stock falls below that price. This buying continues until the price stops falling or the intended trade size is reached.

Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

B Tranche: a.k.a. Term loan B. Second most senior tranche of debt in an LBO. Typically, non-amortizing and matures a year or so later than the A tranche. The interest rate is slightly higher than the A tranche. The Alternative Oxford Private Equity Dictionary

A club deal is a private equity buyout or the assumption of a controlling interest in a company that involves several different private equity firms. This group of firms pools its assets together and makes the acquisition collectively. The practice has historically allowed private equity to purchase much more expensive companies together than they could alone. Also, with each company taking a smaller position, risk can be reduced.

A B/C loan is a loan to low credit quality borrowers and borrowers with minimal credit history. This type of financing, which includes personal consumer loans and mortgages, is typically issued by alternative lenders charging high-interest rates and fees. They offer a second tier of loan eligibility to subprime or thin file borrowers, the sort of applicant who would not qualify for an A-labeled loan, which follows more conventional standards and is issued by traditional financial institutions.

The bond market—often called the debt market, fixed-income market, or credit market—is the collective name given to all trades and issues of debt securities. Governments typically issue bonds in order to raise capital to pay down debts or fund infrastructural improvements. Publicly-traded companies issue bonds when they need to finance business expansion projects or maintain ongoing operations.

CLO, Collateralized Loan Obligation: CLOs are CDOs made up of bank loans. Payments from various loans are pooled together and passed on to different classes of owners in various tranches. The Alternative Oxford Private Equity Dictionary.

EBITDA: Earnings Before I Trick the Dumb Accountant, but formally defined as Earnings Before Interest, Taxes, Depreciation and Amortization. It is a measure of the underlying earnings of the business; calculated as Revenue - Expenses (excluding tax, interest, depreciation and amortization). EBITDA is an important measure because it looks at underlying earnings, before financing costs and accounting adjustments such as depreciation and amortization. Prices of loans and companies are often expressed as a function of that figure. Hence, your EBITDA is big deal. Note an important finance gravity rule: An EBITDA always steadily goes up over time in a management presentation. The Alternative Oxford Private Equity Dictionary.

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace.

A liquid market a one with many available buyers and sellers and comparatively low transaction costs. The details of what makes a market liquid may vary depending on the asset being exchanged. In a liquid market, it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers and the product being exchanged is standardized and in high demand.

Public refers to anything that can be accessed by any person or group in the general population. In the context of investment and finance, the term is most commonly used to describe securities that are available on an exchange or an over-the-counter market, and the population who trades those securities.

A shadow banking system is the group of financial intermediaries facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

Yield: The income return an investment gives you (e.g. dividend or coupon), based on the price you paid for it. Usually expressed as an annual percentage rate based on the cost of the investment. People often search for yield. It is unclear whether they ever find it, but this refers to people seeking something that pays a high yield. This search is as frequent as it is odd. A yield is the maximum payment an investor will receive. If the underlying investment goes well, the investor receives the promised yield. But if the investment does not go well, the investor will receive less than the promised yield and may even lose capital. You are better off with a 3% yield you receive for sure than with a 5% yield that you have 50% chances to receive (and 50% chance to receive only you capital back, hence a yield of zero). Yield seeking is often given as the main reason for the growing popularity of private debt. As private debt goes down quite low in the capital structure, it is quite junior, hence offer high yield, but the expected returns highly depend on probability of default and recovery rate in case of default.

The Global Financial Crisis. As the most recent and most damaging financial crisis event, the Global Financial Crisis, deserves special attention, as its causes, effects, response, and lessons are most applicable to the current financial system.

What Are the Basel Accords? The Basel Accords are a series of three sequential banking regulation agreements (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS).

Private Equity: Equity securities of companies that have not gone public (i.e., are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer without the help of the stock market. In addition, there are many transfer restrictions on private securities. The Alternative Oxford Private Equity Dictionary

Private debt, or private credit, is the investment of capital to acquire the debt of private companies (as opposed to acquiring equity). The term private debt is when debt from private companies is acquired by another source.

Pemberton is a leading European private credit manager, backed by one of Europe’s largest insurers – Legal & General. We provide a range of financing solutions for borrowers and investment solutions for institutional investors.

Eric has over 30 years’ experience in investment banking, primary syndication, high-yield bond and loan markets. He worked at JP Morgan from 1997 to 2007 where his most senior role was Managing Director and Head of High Yield Capital Markets in Europe. He started his career in 1989 at Donaldson Lufkin and Jenrette in New York.

Cassandra has over 10 years’ experience in investment banking, leveraged loan syndication and high yield bond markets, including time as an Analyst at Bloomberg LP. She graduated from Warwick Business School with a BSc International Business.

Over the last twenty years, Ludo has been actively researching the private equity industry.