Private markets — investments in assets that don't trade on a public stock exchange — have long been a cornerstone of institutional portfolios. Pension funds, endowments, and sovereign wealth funds have allocated to private equity, private credit, private infrastructure, and real assets for decades. Now, as access broadens to include individual investors, the terminology can feel like a foreign language.
This glossary organises the most important private markets terms into thematic groups that follow the lifecycle of a fund: how it's structured, how money flows in and out, how fees work, how performance is measured, and how investors eventually get their capital back. Whether you're reviewing a fund document for the first time or deepening your understanding, these definitions will help you read the fine print with confidence.
Fund structure terms
General partner (GP)
The General Partner (GP) is the firm that manages a private markets fund. The GP makes all investment decisions — sourcing deals, conducting due diligence, negotiating terms, and eventually selling or exiting investments. In exchange, the GP earns management fees and a share of the fund's profits.
The GP also invests its own capital alongside investors, typically 1% to 5% of the fund's total size. This "skin in the game" aligns the GP's interests with those of its investors.
Example: A private equity firm raises a $500-million fund. As the GP, the firm contributes $10 million of its own capital and manages the remaining $490 million contributed by investors.
Limited partner (LP)
A Limited Partner (LP) is an investor who commits capital to a private markets fund but has no role in managing it. LPs are "limited" in two senses: they have limited influence over investment decisions, and their financial liability is limited to the amount they've committed.
LPs include pension funds, university endowments, insurance companies, family offices, and, increasingly, individual investors who access private markets through their wealth management providers.
Example: A Canadian pension fund commits $50 million to a private credit fund as an LP. It receives periodic reports on the fund's performance but does not choose which loans the fund makes.
Fund of funds
A fund of funds is a vehicle that invests in multiple underlying private markets funds rather than making direct investments in companies or assets. It might offer diversification across managers, strategies, and vintage years in a single allocation.
The trade-off is an additional layer of fees — the fund of funds charges its own management fee on top of the fees charged by each underlying fund. However, for investors who lack the resources to evaluate and access dozens of individual funds, a fund of funds can simplify the process considerably.
Example: An investor commits $200,000 to a fund of funds that, in turn, allocates across 15 private equity and private credit funds spanning North America and Europe.
Co-investment
A co-investment is an opportunity for an LP to invest directly in a specific deal alongside the GP's main fund, usually on favourable terms — often with reduced or no management fees and carried interest.
GPs offer co-investments to strengthen relationships with their largest LPs and to access additional capital for deals that exceed the fund's allocation limits. For LPs, co-investments provide greater control over portfolio construction and lower overall costs.
Example: A GP identifies a $300-million acquisition target but can only allocate $200 million from the main fund. It offers its largest LPs the chance to co-invest the remaining $100 million directly in the deal at reduced fees.
How money flows in and out
Capital call (capital draw)
A capital call is a formal request from the GP to its LPs to transfer a portion of their committed capital into the fund. When an LP commits $10 million to a fund, that money isn't handed over on day one. Instead, the GP "calls" capital in installments as it identifies investments to make.
Capital calls are typically issued with 10 to 15 business days' notice. Failing to meet a capital call can result in serious penalties, including forfeiture of the LP's existing interest in the fund.
Example: An LP commits $5 million to a private equity fund. In year two, the GP issues a capital call for 20% of each LP's commitment. The LP must wire $1 million within the notice period.
Distribution
A distribution is the return of capital — and, ideally, profits — from the fund back to its LPs. Distributions occur when the fund sells an investment, receives interest or dividend payments, or otherwise generates cash.
Distributions can take the form of cash or, in some cases, shares in a company that has gone public. The timing and size of distributions are unpredictable, which is one reason private markets require a long-term investment horizon.
Example: A private equity fund sells a portfolio company for $80 million, having originally invested $40 million. After deducting fees and carried interest, the GP distributes the net proceeds to LPs in proportion to their commitments.
Commitment
A commitment is the total amount of capital an LP pledges to invest in a fund over its lifetime. It represents a binding obligation — not a suggestion. The GP draws down the commitment over the fund's investment period through a series of capital calls.
It's important to understand that a commitment is not the same as an investment. Until capital is called, the committed amount remains with the LP, but it must be available on demand.
Example: An investor signs a subscription agreement committing $1 million to a venture capital fund. Over the next 4 years, the GP calls that capital in increments of $200,000 to $300,000 as new investments are made.
Drawdown period
The drawdown period is the window — typically the first 3 to 5 years of a fund's life — during which the GP calls committed capital from LPs to make investments. Once the drawdown period ends, the fund shifts from investing new capital to managing and eventually exiting its existing portfolio.
Some funds extend the drawdown period by 1 to 2 years if attractive opportunities continue to emerge, subject to LP approval.
Example: A 2024-vintage private equity fund has a 4-year drawdown period. By 2028, it has called 90% of committed capital and begins focusing on growing and exiting its portfolio companies.
Fees and compensation
Management fee
The management fee is an annual charge — typically 1.5% to 2% of committed capital — that compensates the GP for the day-to-day operations of running the fund. This covers salaries, office costs, due diligence expenses, and portfolio monitoring.
During the investment period, the fee is usually calculated on committed capital. After the investment period ends, many funds shift to charging the fee on invested capital (the amount actually deployed), which reduces the cost to LPs as exits occur.
Example: A $200-million fund charges a 2% management fee. During the investment period, LPs collectively pay $4 million per year in management fees regardless of how much capital has been called.
Carried interest (carry)
Carried interest — commonly called "carry" — is the GP's share of the fund's net profits, typically 20%. It is the primary financial incentive for fund managers to generate strong returns. The point at which carry begins to be paid depends on the fund's distribution waterfall. Under a "European" (whole-fund) waterfall, carry is generally paid only after LPs have received back their drawn capital plus any preferred return. Under an "American" (deal-by-deal) waterfall, the GP may receive carry on individual profitable exits earlier, before all capital has been returned, subject to clawback provisions. Many funds also apply a minimum return threshold (the hurdle rate) before carry is earned.
Carry aligns the GP's interests with those of its investors: the better the fund performs, the more the GP earns.
Example: A fund returns $800 million on $500 million of invested capital, generating $300 million in net profit. After the hurdle rate is met, the GP receives 20% of the profit — $60 million — as carried interest. The remaining $240 million is distributed to LPs.
Hurdle rate (preferred return)
The hurdle rate, also called the preferred return, is the minimum annual return that must be delivered to LPs before the GP can begin earning carried interest. It is typically set at 7% to 8% per year. Depending on the fund's structure, the hurdle can be measured at the fund level (across the whole portfolio) or at the deal level (on each individual investment), which affects when and how the GP starts to participate in profits.
The hurdle rate protects LPs by ensuring the GP only participates in profits after investors have earned a baseline return on their capital. If the relevant returns fall short of the hurdle, the GP receives no carry.
Example: A fund with an 8% fund-level hurdle returns $540 million on $500 million of committed capital. The first $40 million of profit goes entirely to LPs (satisfying the 8% preferred return). Only profits above that threshold are subject to the carry split.
High-water mark
A high-water mark is a mechanism that prevents a GP from earning performance-based compensation on the same gains twice. It records the highest net asset value (NAV) the fund has achieved. The GP can only earn carry on returns that exceed the previous high-water mark.
This is more common in hedge funds and open-ended private markets vehicles than in traditional closed-end funds, but it appears in some private credit and real assets structures.
Example: A fund's NAV reaches $120 million, then drops to $105 million. The GP cannot earn carried interest again until the NAV surpasses $120 million — the previous high-water mark.
Clawback
A clawback is a contractual provision that requires the GP to return previously received carried interest if the fund's final performance does not justify it. Its relevance depends on how carry is specified. Under a deal-by-deal (American) structure, early profitable exits may generate carry before the fund's full results are known; if later investments underperform, the GP may have been overpaid relative to the fund's total performance. Under a whole-fund (European) structure, carry is calculated on aggregate performance from the outset, so a clawback is less likely to be triggered.
The clawback ensures that carry is ultimately measured against the fund's total performance, not on individual winners viewed in isolation.
Example: Under a deal-by-deal structure, a GP receives $5 million in carried interest after two early, profitable exits. By the end of the fund's life, however, several later investments produce losses, and the fund's overall return falls below the hurdle rate. The clawback provision requires the GP to return some or all of the $5 million.
Performance and valuation
Net asset value (NAV)
Net Asset Value (NAV) is the estimated current value of a fund's holdings, minus any liabilities. In public markets, NAV is straightforward — you can look up the market price of every holding. In private markets, NAV relies on periodic appraisals and valuation models, which means it is an estimate, not a real-time price.
Funds typically report NAV on a quarterly basis. It is the primary metric investors use to track the current value of their holdings between capital calls and distributions.
Example: A private equity fund holds stakes in 12 companies. Based on quarterly valuations, the GP estimates the portfolio is worth $650 million. After subtracting $15 million in fund-level liabilities, the NAV is $635 million.
Internal rate of return (IRR)
The Internal Rate of Return (IRR) is the annualised rate of return that accounts for the timing and size of all cash flows — capital calls, distributions, and the current NAV of remaining holdings. It is the standard performance metric in private markets because it captures both the magnitude and the speed of returns.
A high IRR can be misleading if it is based on a small, early exit. For this reason, IRR is typically evaluated alongside multiple on invested capital (MOIC) to get a complete picture.
Example: An LP commits $1 million to a fund. Over 7 years, the LP receives $1.8 million in distributions. The fund calculates a net IRR of 12%, meaning the investment grew at an annualised rate of 12% after fees.
Multiple on invested capital (MOIC)
Multiple on Invested Capital (MOIC) measures total value relative to the amount invested, expressed as a multiple. A MOIC of 2.0x means the investment returned twice the capital put in. Unlike IRR, MOIC does not account for the time it took to generate those returns.
MOIC is useful as a simple, intuitive measure of how much money a fund has made. It complements IRR, which captures the speed of returns.
Example: A fund invests $10 million in a company and eventually sells its stake for $25 million. The MOIC on that investment is 2.5x — the fund returned $2.50 for every dollar invested.
J-curve
The J-curve describes the typical pattern of returns in a private markets fund over its lifetime. In the early years, the fund reports negative or flat returns because management fees and fund expenses are deducted while investments have not yet had time to appreciate. As the portfolio matures and exits begin, returns rise — creating a shape that resembles the letter J.
Understanding the J-curve is important for setting realistic expectations. Poor early performance does not necessarily signal a bad fund — it may simply reflect the natural rhythm of private markets investing.
Example: A 2023-vintage fund shows a net IRR of -5% after its first year due to management fees and no realisations. By year 5, after several successful exits, the IRR climbs to 14%.
Vintage year
The vintage year is the calendar year in which a fund makes its first investment or holds its final close (the specific definition varies by data provider). It is used to compare funds that started investing at the same point in the economic cycle.
Comparing a 2008-vintage fund to a 2015-vintage fund without context would be misleading — the 2008 fund invested during a financial crisis, while the 2015 fund deployed capital during an expansion. Vintage year groupings allow for fairer comparisons.
Example: Two private equity funds both target mid-market Canadian companies, but one is vintage 2019 and the other vintage 2022. Comparing their returns requires acknowledging that each fund entered the market under different economic conditions.
Mark-to-model
Mark-to-model is a valuation approach used when there is no observable market price for an asset. Because private assets are not traded on an open market, recent transaction prices (mark-to-market) are generally unavailable, so value must be estimated using financial models — incorporating assumptions about revenue growth, comparable company valuations, and discount rates. In practice, many GPs engage independent third-party valuation firms to perform or review these estimates, which adds rigor and reduces the appearance of self-interest.
While necessary in private markets, mark-to-model introduces subjectivity. Two parties valuing similar companies could arrive at different figures depending on their assumptions.
Example: A fund holds a stake in a private software company that has not been sold or publicly listed. Its value is estimated at $45 million using a discounted cash flow model and comparable public company multiples, often with input from an independent valuation provider.
Public market equivalent (PME)
A Public Market Equivalent (PME) is a benchmarking tool that compares a private markets fund's performance against what the same cash flows would have earned in a public market index, such as the S&P/TSX Composite. It answers the question: did this fund outperform what I could have achieved by simply investing in the stock market?
PME analysis is valuable because it accounts for the timing of cash flows, making it a fairer comparison than simply placing an IRR next to a stock index return.
Example: A private equity fund reports a net IRR of 15%. A PME analysis shows that investing the same capital calls and receiving the same distributions in the S&P/TSX Composite would have produced a 10% return. The fund outperformed its public market equivalent by 5 percentage points.
Liquidity and exit
Secondaries (secondary market)
The secondary market is where existing fund interests and positions are bought and sold before a fund reaches its natural end, giving investors a measure of liquidity in what is otherwise an illiquid asset class. Transactions are typically priced at a discount or premium to the fund's reported NAV. The market has grown significantly in recent years and breaks down into two primary categories.
LP-led secondaries are the traditional form: an existing limited partner sells its fund interest — along with any remaining unfunded commitment — to a buyer. Variants include single-fund interest sales, portfolio sales (multiple fund stakes bundled together), and structured or deferred-payment deals where consideration is paid over time.
GP-led secondaries are initiated by the GP to provide liquidity to existing LPs or to extend the hold period on assets. The main sub-types are: continuation funds (single-asset or multi-asset), in which the GP moves one or more portfolio companies into a new vehicle and existing LPs choose to cash out or roll over — now the dominant GP-led structure; tender offers, in which a third-party buyer offers to purchase LP interests, often paired with a GP commitment to deploy fresh capital; and strip sales, in which the GP sells a slice across a portfolio of assets while retaining the rest.
Example: A pension fund holds a $20-million position in a private equity fund with 4 years remaining. Needing to rebalance its portfolio, it sells the position on the secondary market (an LP-led transaction) to another institutional investor at 92% of NAV — receiving $18.4 million.
Redemption cap (gate provision)
A redemption cap is a mechanism that limits the amount of capital investors can withdraw from a fund during any given redemption period. Redemption caps are more common in open-ended funds (such as private credit or real assets vehicles) than in closed-end private equity funds.
Redemption caps protect remaining investors by preventing a rush of withdrawals that could force the GP to sell assets at distressed prices. However, they can be frustrating for investors who need access to their capital.
Example: An open-ended private credit fund allows quarterly redemptions but imposes a 10% gate — meaning no more than 10% of the fund's NAV can be redeemed in any single quarter. If redemption requests total 25% of NAV, investors receive a pro-rata portion and wait for subsequent quarters.
Initial lock-up period
The initial lock-up period is the stretch of time during which an LP cannot withdraw or redeem its investment from a fund. In closed-end funds, the lock-up effectively spans the entire fund life — often 7 to 12 years. In open-ended vehicles, the lock-up may be shorter, typically 1 to 3 years, after which periodic redemptions are allowed (subject to gate provisions).
Lock-up periods give the GP time to invest capital and grow portfolio companies without the pressure of short-term liquidity demands.
Example: An investor commits to a private equity fund with a 10-year term. The investment is effectively locked up for the full 10 years, with distributions arriving as the GP exits individual portfolio companies along the way.
Exit
An exit is the process by which a GP sells or otherwise disposes of a portfolio investment, converting it from an illiquid holding into cash that can be distributed to LPs. Common exit routes include:
Initial Public Offering (IPO): the company lists its shares on a public stock exchange.
Trade sale: the company is sold to another company — often a strategic buyer in the same industry — or to another private asset manager.
Secondary buyout: the company is sold to another private equity fund. (This differs from a continuation vehicle, where the same GP moves the asset into a new fund rather than selling it to a third party — see Secondaries.)
Recapitalisation: the company takes on debt to pay a special dividend to its investors, returning capital without a full sale.
The timing and method of exit have a significant impact on fund returns.
Example: A private equity fund invested $30 million in a Canadian manufacturing company. After 5 years of operational improvements, the GP sells the company to a strategic acquirer for $75 million — a 2.5x MOIC.
Distribution waterfall
A distribution waterfall is the contractual framework that governs the order in which a fund's proceeds are distributed among LPs and the GP. A typical waterfall has four tiers:
Return of capital: LPs receive their invested capital back first.
Preferred return: LPs receive the hurdle rate (e.g., 8% per year) on their invested capital.
GP catch-up: the GP receives a larger share of subsequent profits until it has earned its target carry percentage on all profits to date.
Carried interest split: remaining profits are split between LPs and the GP, typically 80/20.
The waterfall protects LPs by ensuring they are made whole before the GP shares in the upside.
Example: A fund distributes $150 million in proceeds on $100 million of invested capital. The first $100 million returns LP capital. The next $8 million covers the 8% preferred return. The GP then receives a catch-up tranche, and remaining profits are split 80/20 between LPs and the GP.
Types of private markets investing
Private equity
Private equity involves acquiring ownership stakes in private companies — or taking public companies private — with the goal of improving operations, growing revenue, and eventually selling the business at a profit. Strategies range from buyouts of mature companies to growth equity investments in rapidly expanding businesses.
Private equity funds typically have a 10- to 12-year lifespan, with a 4- to 5-year investment period followed by a harvesting period during which the GP focuses on exits.
Example: A private equity fund acquires a controlling stake in a Canadian logistics company for $120 million. Over 5 years, the GP streamlines operations, expands into new markets, and sells the business for $300 million.
Private credit (private debt)
Private credit refers to loans and other debt instruments issued directly by investment funds to businesses, bypassing traditional bank lending. Private credit funds earn returns primarily through interest payments rather than equity appreciation, making them a source of steady, predictable income.
The asset class has grown substantially as banks have pulled back from certain types of lending, creating opportunities for private credit funds to fill the gap.
Example: A private credit fund lends $25 million to a mid-sized Canadian company at an interest rate of 10% per year, secured by the company's assets. The fund collects quarterly interest payments and receives its principal back at maturity.
Venture capital
Venture capital is a subset of private equity focused on early-stage and high-growth companies, particularly in technology, life sciences, and other innovation-driven sectors. Venture capital funds invest in companies that are often pre-revenue or pre-profit, accepting a higher rate of failure in exchange for the potential of outsized returns from a small number of breakout successes.
Returns in venture capital tend to follow a power-law distribution: a handful of investments generate the majority of a fund's profits.
Example: A venture capital fund invests $2 million in a Canadian software startup at the seed stage. The company grows rapidly, and the fund's stake is worth $40 million when the startup is acquired 6 years later — a 20x MOIC.
Real assets (real estate and infrastructure)
Real assets encompass investments in physical assets — primarily real estate and infrastructure. Real estate funds may invest in commercial properties, residential developments, or specialised sectors like logistics warehouses. Infrastructure funds target assets such as toll roads, airports, power generation facilities, telecommunications networks, and data centres.
Real assets sit along a spectrum: some are more income-generating (through rents, tolls, or tariffs), while others are oriented more toward capital appreciation, and many fall somewhere in between. They also often provide a degree of inflation protection.
Example: An infrastructure fund invests $75 million in a portfolio of renewable energy projects across Canada, earning returns through long-term power purchase agreements and the eventual sale of the assets.
Putting it all together
Private markets terminology can feel overwhelming at first, but it follows a logical sequence. A fund is structured around a GP and its LPs. Capital is committed, called, and eventually distributed. Along the way, the GP earns management fees and carried interest — subject to hurdle rates, high-water marks, and clawback provisions. Performance is measured using IRR, MOIC, and PME benchmarks, while NAV provides a periodic snapshot of value.
Understanding these terms is not just an academic exercise. When you review a fund's offering documents or assess a private markets allocation in your portfolio, knowing what a distribution waterfall means — or why a J-curve shouldn't cause alarm — puts you in a stronger position to evaluate the opportunity on its merits.
