Private Placement Memorandum
Overview of a Private Placement Memorandum
A private equity firm offers a private placement memorandum to potential investors. The document explains an investment opportunity to potential limited partners, and the firm hopes they will be interested enough to invest capital in the investment.Private equity firms usually include in the private placement memorandum a wide range of information that a limited partner would like to know when considering the investment. This includes summary terms and conditions proposed by the firm that a limited partner may negotiate if the LP decides to invest. In public capital investment offerings, the Securities and Exchange Commission regulates the document, but a private placement memorandum is not regulated and therefore the material and specifics provided to the limited partners may vary by firm. This article will cover what is most often included in a private placement memorandum, but private equity firms may choose to exclude any of these sections or add one that is not present.
The private placement memorandum is a document for private equity firms hoping to attract investors, and limited partners rely on the PPM to make their decision based on the information presented in it.
Here are some general sections of the private placement memorandum:
- Executive Summary: Some information usually included here would be the size of the fund, expected close date, and the management team's experience in past funds. Additionally this section includes a brief description of the General Partner, the investment strategies used, and the opportunities and challenges in the current market.
- Firm and Fund Investment Strategies: This is more or less self-explanatory but what you want to present is the firm's past performance and history; how it has succeeded and what strategies were used. How the firm's advantages and resources will succeed in the specified market. This section is a detailed overview of the fund's investment strategy discussing the geographical focus of the fund, stage and relevant factors in its market. This is also an opportunity for the General Partner to present a thorough explanation investment strategy, process, deal sourcing and exit strategy.
- Investment Professionals and Committee: This section presents the investment professionals involved in the new fund and explains their role. An especially important detail here is the history and experience of the investment professionals. Principal investors' records are often included here with current board positions held in portfolio companies of the firm's past funds. This is important information for the potential Limited Partners to know as it gives them an idea of the firm's degree of involvement in portfolio companies and the individual partner's ability to manage a new fund. Second in this section, firms often provide information on the Advisory Board or Investment Committee. This section varies by different firms but often larger Limited Partners will hold seats on the Advisory Board which is of particular importance in for prospective LP's. This shows the details of the Advisory Board's members, scheduled meetings, as well as valuation methodology and important factors when considering new investments.
- Investment Performance Record: This section varies by firm because of different sizes and especially the difference between how long a firm has been established. Generally, firms use a table format to present the fund's investment track record. This table usually includes past fund sizes and IRR performances of the funds (typically stated in terms of gross returns rather than individual LP's net returns over fees).
- General Partners and Limited Partners Terms and Agreements: This is where the firm gives its initial proposal of terms and agreements between the General Partner and the Limited Partners. Most importantly, the management fee, General Partner's commitment the fund, distribution of the capital call schedules and the fund's cooperative investment policy. Of interest to the investors is the percentage of profits that the General Partner takes, known as "carry".
- Legal and Tax Concerns: Tax treatment varies by whether the investor is U.S. based or non-U.S. based, and this section will briefly address different tax treatments and how it effects the Limited Partners.
- Fund-related Investment Risks: This section typically covers three areas of investment risk: business, management and fund risk. Business concerns would address concerns over the investment's industry and risks inherent to the industry and possible uncertainty in the business environment. The management concerns are usually relationships to other entities, possibly a parent company. The fund-related risks may include cross-fund investments, principal's co-investment activities or investments in public equities.
- Accounting and Reporting: Included in this section is an explanation of the allocation of returns and losses and accounting for stock options. This section gives a schedule for audited and non-audited financial statements that are delivered by the General Partner. This gives Limited Partners an idea of the valuation of their investment and a way for keeping track of their capital commitment.
Source: Tuck Center for Private Equity and Venture Capital
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