Traunch: The Little-Known Word You Need to Know in Business and Finance
What is a Traunch?
Traunch is a little-known word that originates from the French word tranche, meaning “slice.” In business and finance, traunch refers to a portion or slice of something, usually money.
A traunch is one of a series of payments to be paid out over a specified period, subject to specific performance metrics being achieved. It is commonly used in venture capital (VC) circles to refer to the fundraising rounds used to fund startup companies.
For example, if a startup company is looking to raise $40 million, it may do so in two traunches of $15 million and $25 million. The first traunch may be paid out immediately, while the second traunch may only be paid out if the company reaches certain milestones, such as hitting $100 million in revenue.
While traunch is not a commonly used word outside of VC circles, it is an important term to know if you are looking to raise capital for your business. Understanding traunches can help you structure your funding rounds in the most advantageous way for your company.
In another example, let’s say you’re a small business owner who wants to buy a new piece of equipment for your factory. You may need to traunch a loan to cover the cost of the purchase. Traunching a loan means taking out a loan in stages or increments instead of taking out the entire loan at once. This can be helpful if you can’t afford to take out the whole loan all at once.
Traunching can also refer to investing in something in stages. For example, let’s say you’re considering investing in a new company. You may want to traunch your investment, which means investing a little bit of money now and then more later, instead of investing all of your money at once.
Traunching is a helpful way to spread out the cost of something, whether you’re traunching a loan or an investment.
Definition of Traunch
According to Investopedia, a traunch is “one of a series of payments to be paid out over a specified period, subject to certain performance metrics being achieved.”
Traunch vs. Tranche
Which term should you use, traunch or tranche?
While traunch and tranche originate from the French word for “slice,” traunch is used almost exclusively in business and finance, while tranche can be used in other contexts, such as a slice of cake.
When in doubt, however, traunch is always a safe bet.
Why Would You Use A Traunch?
The benefits of using traunches include:
- Spreading out the cost of something over time
- Reducing risk by only investing a little bit of money at first and then investing more later on
- Allowing startups to prove themselves before receiving more funding
- Small businesses can buy new equipment without taking out an entire loan.
Traunches can be helpful in a variety of situations. For example, if you’re looking to raise money for your business, traunches may be a good option. And if you’re considering investing in a new company, traunching your investment can help reduce your risk. Finally, if you’re a small business owner who wants to buy new equipment, traunching a loan can help you spread out the cost of the purchase.
Traunch and Collateralized Debt Obligations
You may have heard of the term traunch from the Hollywood movie “The Big Short.” Starring Brad Pitt, Christian Bale, and Steve Carrell, the film centered around the housing market collapse in 2008 and the subsequent banking failures.
It explains how the use of traunches in a financial instrument called CDOs, which stands for collateralized debt obligations, led to the collapse.
CDOs are securities backed by a pool of loans, such as mortgages. The loans in the collection are divided into different traunches or slices.
The first traunch, which is the safest, is called the senior traunch. The next riskiest traunch is called the mezzanine traunch. And the riskiest traunch, which is the most likely to default, is called the equity traunch.
The traunches are then sold to investors. For example, the senior traunch is typically sold to institutional investors, such as pension funds. In contrast, the mezzanine and equity traunch are sold to hedge funds and other types of investors willing to take on more risk.
The traunches are structured so that the equity traunch takes on the first losses, the mezzanine traunch, and the senior traunch.
This structure is designed to protect the senior traunch from losses, but it didn’t work out that way in 2008. Instead, the equity and mezzanine traunch defaulted, and the senior traunch also lost money.
The traunch structure is still used today, but some changes have been made to prevent a repeat of the 2008 financial crisis.
For example, the traunches are now required to have a minimum credit rating, and there is a limit on how much of the pool can be in the equity traunch.
Despite these changes, traunches are still considered to be risky securities, and they should only be purchased by investors who are willing to lose all or part of their investment.
Summary
Traunches are a type of financial payment that is made in installments over a period of time. They are often used as an alternative to traditional loans and can help businesses reduce risk by only investing a small amount of money initially.
Traunches can also help raise money for a small business and help invest in new companies.
However, traunches are risky securities and should only be purchased by investors willing to lose all or part of their investment.
Here are some final points about a Traunch.
- A type of financial payment that is made in installments over a defined period.
- Often used as an alternative to traditional loans, it can help businesses reduce their risk by initially investing only a small amount of money.
- It helps raise money for a business and in investing in new companies.
- They are consideredIt is considered risky securities and should only be purchased by investors willing to lose all or part of their investment.
Do you think traunches are an ideal way to structure investments? Have you ever invested in a traunch? Let us know in the comments below.
