For those familiar with the stock market, you likely know of the annual reports and SEC filings such as 8-K and 10-K. These are the documents that allow an investor to become familiar with the company. The PPM, short for Private Placement Memorandum is a private offering document not offered to the public at large. By definition, private investment opportunities are not public offerings. The PPM is used by investors to become familiar with the terms of the private investment opportunity.
Reviewing the PPM is an important part of the due diligence process. Most investors rely on a referral from another investor or a friend, just the marketing materials alone, or after a phone call with the manager. Generally, this is an okay strategy. However, it’s when a manager doesn’t do what they says they’re going to do and an investment goes awry that every word in the PPM comes under scrutiny.
Let’s help you look at a PPM.
There is likely to be a summary in the beginning that spells out many of the high points investors want to hear about. You may see information regarding documents, a brief company bio, and any information relating to fees you might incur investing. This won’t tell you everything, but it will be a good place to get you started.
From there, the document may go into management and further detail about the company. If you are unfamiliar with the company, this is where you will want to spend some time. As an investor, you will want to look at management and who is on the executive level. Even further, you’ll want to see their bios and how much experience they have. Should there be any issues with the company, these are the individuals tasked with eliminating the issue.
Further into the private placement memo, you will tend to find something along the lines of an investment strategy and principal terms. This information will tell you, the investor, how the company or fund will operate to generate your desired returns. Here is where you will really want to get into the detail and understand the end game. The principal terms will outline what investors pay, they expenses the company will bear, how profits are split and more. In a ranking of your decision-making, this section is near the top, if not the highest. You will likely know if this is a solid investment opportunity from this section, depending on if the details are laid out well.
Lastly, you will find a section that details the risks of the investment. For those of you familiar with stocks, this is typically in the first section of the annual report. Though it can be lengthy, it is important to understand many of the internal and external risks that can influence your investment returns. No matter how well versed you are with risks in this industry or another, it is important to review possible risks. Similar to the investment strategy, this is a section that may determine your willingness to invest.
No matter the market or investment, it is critical to read up on every piece of information. In the private equity market, it typically means higher levels of investments, which means a greater need to research. While with a stock, you can invest down the price per share, with private equity, you are investing a 5 to 8 digit investment at once. The private placement memorandum is a great way to start, but if you have any questions, reach out to the company or fund and request more information. Odds are they are willing to explain or give you more information should you have any concern.
Sources: Origin Investments; origininvestments.com