A private placement memorandum is the offer and sale of any security by a firm not involving a public offering, hence it is a 'private offering'. Private placements rely upon Sections 3(b) or 4(2) of the 1933 Act as construed and/or under Regulation D as published by the SEC. Regulation D sets forth certain compliance guidelines for the Private Offering Exemption. Any registered representative involved in the private placement process should have a working familiarity with these regulations.
PPMs are often distributed by private equity firms to attract investors; limited partners rely on this information to make their decisions. PPMs include both general and specific information about the fund offerings. Below is a list of general sections often included in a PPM. However, private equity firms may select to exclude or add additional sections. It is also recommended you seek Legal Counsel prior to sending you PPM to any accredited investors.
A typical private placement offering includes the following sections:
1. Notices to Investors
2. Executive Summary
3. Firm & Fund Investment Strategies
4. Investment Professionals & Advisory Committee
5. Investment Track Record
6. Summary of Pricipal Terms & Agreements
7. Legal & tax matters
8. Risk Factors
9. Accounting & Reporting
• Notices to Investors
These are important disclosure legends informing prospective investors that the securities described are not registered with the SEC. Depending on your offering, you may need some additional state-specific disclosures.
• Executive Summary
The executive summary provides information relating to the size of the fund, anticipated closing dates, and general information about the management team's previous fund raising experience. Additionally, the summary includes a concise description of the General Partner, key investment strategies, opportunities and challenges in the current market, and other noteworthy, differentiating information.
• Firm & Fund Investment Strategies
Included in this section is a detailed overview of the firm's background and history; how it has succeeded and what strategies were used. General information about the firm's prior funds is also provided, if applicable. The information includes the firm's key competitive advantages and resources in its specified markets. The investment strategy will discuss the industry, stage, and geographical focus of the fund. The General Partner should use this section to present a thorough explanation of the firm's investment strategy, process and criteria, as well as its deal flow sourcing and exit strategy.
• Investment Professionals & Advisory Committee
Also included in the PPM is a list key investment professionals, their roles in the respective new fund and their experience both within in the industry and specifically with the firm. Principal investors' records are often included with current board positions held in portfolio companies of the firm's prior funds. This detail provides some insight on the firm's level of involvement in portfolio companies and the individual partners' ability to manage a new fund portfolio.
Second in this section, firms typically provide information on the Investment Committee and/or Advisory Board. These vary in composition and activity level with different firms. However, larger Limited Partners often have positions on the Advisory Boards, which is particularly important to prospective LPs. Details of the members, their affiliations, and their meeting schedule are included, as well as an explanation of the investment committee's guidelines and valuation methodology for evaluating new and existing investments.
• Investment Track Record
The investment performance section varies significantly by firm due to size differences and more importantly, firm longevity. There is no standard or mandatory format, but most firms present the fund's investment performance record in table format. The table outlines past fund sizes, vintage years, and IRR performances; typically reported in terms of gross returns for an entire fund rather than individual limited partners' net returns over fees. More robust investment track records will contain additional performance statistics, such as unrealized/realized IRRs and detailed information on a representative number of portfolio investments.
• Summary of Principal Terms & Agreements
The term sheet proposes initial terms and agreements between the General Partner and the Limited Partners for the Investor's consideration. This high level summary includes any of the following applicable information: the purpose of the issuance, identification of the issuer, the distribution and capital call schedules, the type of security that is being issued (debt, preferred stock, common stock), specific terms of the security being issued (dividends or interest, current pay or accrued, warrants, collateral), affirmative and negative covenants, conditions precedent, the management fee, the General Partner commitment to the fund, and the fund's cooperative investment policy. Additional terms may include a key-man clause, divorce clause, clawback provisions, and additional terms relating to the corporate governance of the fund.
• Legal & Tax Matters
Tax concerns vary for US and non-US investors and the PPM will briefly discuss relevant tax treatments and how it affects the Limited Partners. Unrelated business tax income, or UBTI, concerns tax-exempt institutional limited partners. If a fund generates UBTI, the limited partners may be subject to a tax liability. For example, UBTI could occur when a fund generates ongoing business income such as using fund capital for an investment in rental real estate. Additional tax treatments of fund investments and legal issues such as ERISA regulations are included in this section. The Employee Retirement Income Security Act of 1974 (ERISA) and subsequent regulations established federal laws for private pension plan administration and investment practices.
• Risk Factors
This section offers a comprehensive description of the three main areas of investment risk for prospective investors: business, management, and fund level risk. Business related risks would address industry concerns, inherent risks to the specific industry, and/or the uncertainty within the business environment. Management concerns elaborate on the relationships with other entities such as parent companies. Risks at the fund level may detail cross-fund investments, co-investment activity by principals or investments in public equities. Please consult legal counsel for more detailed information.
• Accounting & Reporting
Allocation of profits and losses, accounting for stock options, and other such explanations are included in the accounting and reporting section. This section also contains the schedule for audited and non-audited financial statements and additional reports to be issued. Generally, General Partners issue non-audited statements on a quarterly basis, and annual audited statements. Limited Partners utilize these statements to determine the approximate valuation of their investment and keep track of their outstanding capital commitments and distributions to date.