“Do we need to prepare a Private Placement Memorandum in connection with our fundraising?” It’s a question we get asked all the time by our fund manager clients and the ultimate answer is driven by how those managers weigh the relative benefits and detriments of preparing and using a PPM during their fundraising process.
The PPM is a disclosure document regarding the private offering of securities (namely, limited partnership or limited liability company interests) by fund managers and is meant to provide investors with a wide array of information about the fund, the fund manager and its organization to allow those investors to make an informed decision about investing in the fund. At the same time, through those same disclosures, the PPM provides the fund manager a degree of protection against later claims by the fund’s investors and others regarding misstatements and/or omissions of information by the fund managers during the fundraising period. In addition to these benefits, from a marketing perspective, producing a PPM provides a fund manager with a perfect opportunity to fully and thoughtfully tell the business story as to why this fund offering is unique, high quality and offers prospective investors the opportunity for positive investment returns. Moreover, some investors, particularly institutional investors, might in some cases require the production of a PPM before they will either take a meeting with a fund manager or move further down their investment process with that fund manager. In those investors’ view, a PPM “professionalizes” the marketing of the fund and the story behind it in a way that just an executive summary and/or slide deck can’t. Funds working with placement agents may be encouraged, sometimes strongly, by the agent to produce a PPM in order to improve the “best of breed” appearance of the fundraising effort. Finally, it is often the case that for those firms that have historically drafted and used a PPM in their prior fundraising efforts, investor expectations are such that the PPM will be expected to be produced as a matter of precedent and it would look too unusual and require too much explanation not to draft the PPM again (though of late, a number of very reputable firms raising sometimes very large funds have proceeded without a PPM, in the interest of time or otherwise, so the ice may be melting on this point).
On the flip side, some fund managers are looking to streamline the fundraising process as much as possible. Because preparing a PPM is not a legal requirement or condition, strictly, of having a legally compliant private offering of fund interests, a number of fund managers choose not to produce one, instead relying on other marketing materials and their meetings with investors to convey the information they wish to disclose to them. The PPM drafting process does take considerable time on the part of the fund manager, who is really the only party that has the ability to draft the business case. They are passionate about it, and understand it fully. It’s not a component that can be very successfully outsourced, though there are some marketing providers who provide ghost writing type services or sometimes even more robust services involving conceptualizing and framing the overall business presentation. The PPM also requires the review of fund counsel to fully and properly set forth the legal considerations and risk factors involved with the fund offering and vet through the business story for any potential legal missteps by clients in their wording. In addition, the PPM will require updating of information constantly over a long fundraising period (e.g., portfolio performance information, changes in fund terms, possible legal or tax changes during that time, etc.), and thus, more time required to be spent on the PPM by the fund manager beyond just the initial drafting. By making the decision to not draft a PPM, a fund manager can save a lot of time and money, but at what cost?
We have seen fund managers of all shapes and sizes make all types of decisions on this issue based on the factors noted above and sometimes others. Some feel that producing a high quality PPM and its attendant benefits of greater risk minimization, an additional opportunity to fully tell the business story behind the firm and the fund and the potential for greater receptivity by institutional investors outweigh the time and cost saved by not drafting one. A competing view that we see quite often, particularly of late given the busy enviornment and haste of many offerings, is that drafting the PPM is a time consuming, costly and unnecessary extra step for the fund manager in an already tough fundraising environment. In some cases, the envisioned LP base may be viewed as not really interested or in possession of sufficient time to process such a long document – i.e., perhaps they prefer a slide deck in some cases.
The right decision for a firm depends entirely on their respective approach to these issues, taking into careful account the size and nature of fund, the LP base, and so forth. No matter the approach, many issues are involved in making this decision and having an experienced fund counsel like Cooley can greatly help you scope out the various considerations to be thinking about regarding this decision.
