Provided by Leslie Cummins and Peter Tropper of the International Finance Corporation
This section will guide you to:
Start by Focusing on Two Key Questions
Focus on the following two questions, which will help you and your legal counsel to structure your Fund to protect both your and your Investors’ interests:
- What is my source of funding (who are my Investors going to be)?
- Where (geography, sector, size, etc.) is my Fund investing?
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Get Good Advice
- Hire experienced counsel for advice, structuring, documentation, tax planning, filing, review of PPM, etc. Discuss with your legal counsel the insights you have gained from focusing on the two prior questions.
- Warning! Stay clear of third party service providers without prior Private Equity Fund experience.
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Understand the Purpose of the Private Placement Memorandum (PPM)
- The Private Placement Memorandum (PPM), also known as the Prospectus, is the document central to marketing Private Equity Funds. The PPM is an offering document that summarizes the terms, conditions, and risk factors of the Fund that the Investor should be aware of before making a decision to invest.
- There is no legal requirement in the United States, for example, to supply any information whatsoever to prospective investors. However, it is industry best practice to do so. In other markets, consult your counsel concerning regulatory requirements.
- The PPM is a legal and contractual document, and may be the most important document for many Funds. It should be reviewed by internal and external counsel.
- The Fund Manager must be aware of regulations to be followed as to whom a Fund may be marketed. In the United States, for instance, only qualified buyers may invest in Private Equity Funds, according to the 1940 Investment Company Act.
- There is no standard PPM layout, content, or design, although each PPM must contain standard disclosure information. Your counsel should advise your on this.
- Familiarize yourself with as many PPMs as possible, noting continuities and deviations. Focus on PPMs of Fund Managers which are raising 3rd or 4th Funds as opposed to 1st Funds, as these will have incorporated lessons learned from earlier fundraising efforts.
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Plan the Content and Layout of Your PPM
A suggested PPM layout is as follows:
- Cover page (Note: Confidentiality terms)
- Legal Disclosure Pages: (varies depending upon countries of origin of Investors which you are targeting.)
Section 1: Executive Summary
Section 2: Key Personnel and Institutions Backing the Fund Manager
- Describe the history of your Fund Management Group as an institution, as well as any affiliated institutions
- Describe your team’s philosophy, strategy, and competitive advantages
- Describe your management team, Investment Committee, and investment and back office team members. This section should describe:
- Describe your Private Equity Investment Track Record. This section should describe:
- All historical and current assets under management.
- Foci of previous and current Funds of similar nature
- IRR and cash multiple details on fully realized divestments
- Portfolio diversification details, e.g. by geography, sector, stage, etc.
- Average holding time, etc.
- Download this Suggested Track Record Chart for PPM
Section 3: Investment Strategy and Processes
- Describe the environment and opportunity in which you plan to invest
- Describe your Investment Strategies. This section should illustrate which of the following you intend to employ and why:
- Earnings Expansion
- Margin Improvement
- Multiple Expansion / Strategic Repositioning
- Professionalization of a Family Business
- Transparency, Corporate Governance, and Management
- Financial Restructuring
- Leverage
- Adding Value to Your Fund’s Investees
- Exit Strategies
- Describe Your Investment Processes
- Sourcing
- Screening
- Initial Investment Committee Review
- Due Diligence
- Investment Committee Approval
- Closing the Deal
- Investment Drawdown
- Investment Monitoring
- Distributions
- Reporting Your Progress to Your Fund’s Investors
- Valuing Your Fund’s Investee Portfolio
- Benchmarking Your Fund’s Performance
Section 4: Summary of Principal Terms
The term sheet contained in the PPM consists of a high level summary of the Fund’s key terms, for the Investor’s consideration. To learn more about key terms and Fund structuring:
Section 5: Risk Factors
This section should describe the Fund’s risk factors. Please consult your lawyer for more information about this section.
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