BZT Dictionary®

Raise a fund

To a large extent, Private Equity (PE) invests other people's money. PE offers large local and international investors the opportunity to invest in unlisted companies by creating and raising a fund. Typical fund investors are pension funds, insurance companies, public institutions, foundations and mutual funds. "Private Equity" is an "asset class" in the entire portfolio of fund investors.

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RAMBO

An abbreviation of "Rescue After an MBO". Sometimes a Management buy-out (MBO) fails and the owners must start a restructuring or a turn-around of the business. The causes of the failure can be many. Perhaps the investors paid too high a price just before a downturn in the economy and the company's management has not been able to move the company away from a negative development. Under such circumstances a RAMBO may be necessary.

Ratchet effect

When a variable quantity typically only moves in one direction. The expression can have different, specific meanings depending on context. One example is when the consumption levels does not fall as much as income in an business cycle down-turn.

A ratchet effect can also mean a provision which is sometimes included in an acquisition agreement for a transaction (a MBO-transaction) in which a business' management will become part owners. The agreement may give the management an increasing ownership share if the company achieves certain profitability targets.

R&D

Abbreviation of Research and Development, that is, the function in the company which is responsible for development of new products.

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Real interest rate

A real interest rate is the rate of interest which has been corrected for inflation. If the nominal annual interest rate is 5% and inflation is 3% during the year, the real interest rate will be 5% - 3% = 2%. This means that if you have saved €100 you will have €105 in the account after a year, but the purchasing power will only have increased by 2%, that is, €2.

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Redemption program

A "redemption program" is a modified repurchase program for shares in a corporation. In the first stage, the company gives out free shares (redemption shares) to its owners in proportion to their holdings -- for example, a shareholder may receive one (1) redemption share for each existing share. In the second stage, the company then buys back the redemption shares at a pre-determined price which in principle corresponds to what a dividend per share would have been. The direct return per share before taxes is thus the same.

A redemption program does not diminish the number of outstanding shares and, just as with a share repurchase, can be an advantage for those investors who have different tax rates on dividends and repurchases. As an example, the repurchase of redemption shares may, in certain jurisdictions, be taxed as a tax-free sales profit while an ordinary dividend is taxed as a financial receipt.

Red flag

A warning flag of a serious deficiency or drawback in the company in advance of an acquisition. In connection with due diligence (DD) of a business, a red flag report is a report which describes problems and risks in the target company. Among other things, this may relate to legal, financial or environmental risks.

A red flag will definitely lead to efforts to haggle about the acquisition price, even if the buyer can remedy the deficiencies after the acquisition. Too many difficult and unexpected "red flags" may lead the buyer to withdraw and not go through with the acquisition.

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Relative return

An investor will compare an investment's return with an "index". The relative return shows how capable the investor is at creating value in the portfolio (or the fund) as compared with the market's general developments. The goal is to do better than a comparable index.

If, for example, the value of the shares in the portfolio increased by 8% while the share index for comparable shares rose by 5%, the relative return is 3%. Well done! But if the index increased by 10% the relative return will be -2%. Not such a good job!

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Rescue

When a company in crisis, perhaps on the way towards bankruptcy, is moved from loss to profit by means of a comprehensive rescue. A rescue usually involves capital contributions, restructuring of the business, change of management, and always a "fight against the clock".

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Restructure

Means very large, comprehensive changes in a company's organization and business. The intention is to increase the pace of decision making, execution and necessary changes in working methods while adapting the company to a new situation. It can involve selling businesses, changing top management or introducing an entirely new organizational structure with new assignments and reporting channels.

Return

Return in a company is measured by the ratio between profit and invested capital and is expressed in a percentage. The measurement of return can be based on parts of or on the whole of the invested capital.

Examples are "return on equity" (ROE) or on "capital employed" (ROCE).

The "return" on your own private savings account is the interest rate you receive from the bank.

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Return on capital

The profit in a company can be seen as the "interest" on the capital which has been invested in the company. Often the concept "return on capital" is used as a synonym for profitability. Read more under "Profitability".

Revenues

It is necessary to distinguish among payment, income and revenues or receivables.

Payment means, as an example, that a customer pays for goods or services and the money arrives in a bank account or the company's cash account.

Income comes into existence when a company sells goods or services. When the company sends an invoice, the income is booked.

Receivables are income, which is periodized, that is divided over the periods during which performance by the company is made and delivered. Assume that the company sells a project and receives an advance for a project that will go on for three months. The income is then booked as a receivable in the profit and loss statement and reported one-third each month.

Reverse take-over

When a smaller company acquires a larger company. Usually it is the larger company which acquires and integrates a smaller company. It is naturally associated with greater risks when a smaller company acquires a larger one, for example:

• Does the smaller company have sufficient financial and management resources to integrate the larger company?
• If the cultures of the enterprises differ -- whose culture will win out?
• Can the smaller company's organization and reporting structure be developed so as to deal with a business which is twice as large?
• Etc...

Sometimes the end result after the integration is that the management of the purchased company "takes over" the purchasing company!

Right of first Refusal, ROFR

Generally, "right of first refusal" (ROFR) is a contractual right -- but not an obligation --for a person/business to enter into a transaction (purchase, lease etc.) with a person/business ahead of anyone else. See also "Option".

In the case of shares and ownership in a company, there may be a right of first refusal clause in the certificate or articles of incorporation (depending upon the jurisdiction) or in a shareholders' agreement. A seller of shares in the company must then first offer her/his shares to the existing owners who are covered by the right of first refusal. See also "Pre-emptive rights".

How a right of first refusal is exercised varies depending on the type of asset and on the jurisdiction. Regarding shares in a company, it is common that the communication between the new and the old shareholders will go through the company's Board of Directors. When the Board of Directors has received information that a sale to a new owner has taken place, the Board of Directors must inform every existing owner who is entitled to purchase.

Risk credits

"Risk-assuming credits" are defined as loans and grants from governmental institutions. They are also called soft loans. This is a form of financing which is appropriate for the start-up of a new company. Combined with financing from an active business angel, this type of credit can be the optimal financing (and ownership) for a newly started company so that in its next stage it can take in "Venture Capital". Repayment of risk-assuming credits and soft loans may be conditioned on the company/business generating a profit.

Road show

A "road show" is a trip to a variety of places made by the top management of a company, often accompanied by a financial advisor, to meet analysts and investors. Most often this occurs in connection with the closing of the books, and for a relatively long period. But it can also happen in connection with a listing on an exchange or with a new issuance of shares or other securities.

The purpose is to inform the market, create a positive interest in the company and sell the shares. The management and the advisors will have carefully prepared the presentation and the responses to the questions which may be asked during the Q&A session.

In conjunction with a relatively large exchange listing, this may be a time-consuming international trip to various financial centres, often with several meetings a day for a couple of weeks.

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R&W

Abbreviation of "Representations and Warranties", that is, commitments as to specific facts and guaranties. The concept relates to guaranties which existing owners (sellers) give to new, incoming owners (buyers) in connection with a transaction relating to an asset, for instance a share transaction.