A Private Placement Memorandum (PPM) is a critical document for any search fund looking to raise capital from investors. It serves as both a legal and informational document, detailing the investment opportunity and ensuring that potential investors have all the necessary information for informed decision-making. Crafting a compelling PPM is essential, as it reflects the professionalism of the fund and the seriousness of its managers. In this blog post, we will explore what makes a good search fund PPM and the essential information it should contain.
Understanding the Purpose of a PPM
Before diving into the specifics, it’s important to understand the purpose of a PPM. The PPM serves several key functions:
- Disclosure: It provides detailed information about the investment opportunity, risks, and the team behind the search fund. This transparency helps build trust with potential investors.
- Legal Protection: The PPM is a legal document that helps protect fund managers from liabilities. It ensures that all material facts are disclosed, and it outlines the terms of the investment.
- Attraction: A well-structured PPM can attract investors by highlighting the strengths of the search fund, its strategy, and the potential for returns.
Components of a Good Search Fund PPM
1. Executive Summary
The executive summary should be a concise overview of the entire PPM. It should include the key goals of the fund, the target investment thesis, and an outline of the financial benefits for potential investors. This section acts as a hook, capturing the attention of investors and encouraging them to read further.
2. About Search Funds
This section isn’t always needed, but keep in mind not all investors are familiar with search funds. Some searchers prepare two PPMs – one for investors that are very familiar with search funds, and another for those that may be less familiar and need more background on the history of search funds and how the search fund model works.
3. The Search Fund Team
Investors need to trust the individuals managing their funds. Ultimately, at the search capital stage, investors are not backing a company – they’re backing an entrepreneur (or multiple entrepreneurs). Include detailed biographies of the fund’s key team members, focusing on their relevant experience, skills, and past successes. Highlight any unique qualifications that set your team apart from others, such as industry connections or prior management or operational experience in certain sectors.
4. Investment Thesis
In this section, articulate the core thesis of the search fund. Detail the specific industries or companies you are targeting, and explain why now is the right time to invest in these areas. This is your opportunity to demonstrate expertise in the chosen market and justify the rationale behind your investment strategy. Having an industry focus is not always key, but some investors like to back search fund entrepreneurs that are focused on particular sectors. It can offer some risk reassurance for investors that the searcher can hit the ground running with their deep knowledge of the space.
5. Market Analysis
Whilst market research/analysis is not always needed, if you are launching your search fund with a focus on one industry (or perhaps a small handful), showing some market analysis can be helpful in establishing the credibility of the search fund. This section could include:
- Market size and growth trends
- Competitive landscape
- Key drivers of industry performance
- Potential acquisitions you have already identified
- Potential risks and barriers to entry
By showcasing a comprehensive understanding of the market, you can reassure investors about the feasibility of your strategy and the potential for success, as well as the depth of understanding you have of the market.
6. Risks
As PPMs act as a legal document, it’s important to be clear on risk factor disclaimers and acknowledging risks that come with this type of investment, such as there being no guarantee on returns. If there are legal, regulatory, economic or political risks that are specific to your fund or the industry you’re focused on, it’s also important to highlight these. Acknowledging risks is not just a legal box ticking exercise – it shows investors that you have understood the risks associate with the process you are taking on, and it gives you a chance to see of any concerns investors may have by demonstrating that you’ve got a plan to deal with the risks you have identified.
7. Financial Projections
Investors will want to see projected returns on their investment. Present clear illustrative financial projections, showing how search capital is stepped up into an potential acquisition, and how successful growth of a business in terms of revenue, EBITDA and exit multiples will deliver a return for investors. A quick way to lose the trust of investors is by getting the numbers wrong, so making sure your maths checks out, particularly when it comes to using debt and stepping up search capital, is important. At this stage you can use example numbers that illustrate the potential returns, given that you are yet to acquire a company.
8. Investment Structure and Terms
Clearly outline the terms of the investment, including the process for investors to subscribe to the search fund. It’s also important to check that this section meets legal obligations local to where your search is taking place. You will want to include information on the total amount of capital being raised, number of units available, minimum investment amounts and how an example cap table could look. Clear communication of these terms in a search fund PPM can help prevent misunderstandings and ensure that investors know what to expect.
9. Exit Strategy
An effective PPM should clearly articulate the fund’s exit strategy. Discuss the anticipated exit methods, such as selling to strategic buyers or to private equity. A solid plan for exit not only assures investors of their potential returns but also demonstrates that the fund has carefully considered its long-term strategy. One of the most common challenges for search fund entrepreneurs and investors is being misaligned on exit strategy and potential timelines. Ultimately investors are looking for a return on their invested capital, and it’s reassuring for them to know that you have thought through exit strategies at the early stages so that they can ensure they feel aligned and able to support your journey.
10. Appendices
Finally, include any supplemental information that may be relevant to investors. This can comprise:
- Legal disclaimers
- Market research reports
- More detailed financial information
- More background information on the search fund model
Appendices can provide additional context and reinforce the claims made throughout the PPM.
Sources, references and other reading:
- Goodwin Law have written a great article also summarising how to approach a search fund PPM: https://www.goodwinlaw.com/en/insights/publications/2023/10/insights-privateequity-how-to-write-an-effective-search-fund-ppm
- Searchfund.org have produced this helpful blog post with more guidance on search fund PPMs: https://www.searchfund.org/blog/how-to-write-an-effective-search-fund-ppm-from-the-lawyers-who-wrote-the-model
- The University of Chicago Booth School of Business has some resources available to help guide searchers creating a PPM here, including a PPM template download available: https://groups.chicagobooth.edu/ETA/ajax_display_files?mode=club&id=&embed=1&display=without_tags&ax=1&tag_id=1056090
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