Tag Archives: Private Placement Memorandums

For certain businesses that want to increase capital by attracting investment from the general public, the issuance of shares is likely to be a very lengthy and complicated exercise. However, there is yet another way in which companies intending to raise funds can do so by means of the issuance of a Private Placement Memorandum, which is PPM.

When it comes to private fundraising, the need for a well-written Private Placement Memorandum (PPM) is indispensable for the issuers and their potential investors. A PPM is not only a disclosure document, but it also helps to protect against legal issues, promotes marketing, and gives detailed information about the investment being offered.

Structuring the Private Placement Memorandum

When drafting the PPM, a great deal of attention goes into ensuring that everything is clear, and to comply with regulations, and make a solid case for investment. Every section and component offer significant information in a constructive manner which offers potential investors a clear picture of the proposition on offer.

Structuring the Private Placement Memorandum

Structuring the Private Placement Memorandum

Executive Summary

Despite being a concise section, the Executive Summary demands attention to detail and clarity. It should briefly explain the intent of the investment, the aims, and the strategic benefits without violating regulations. It should portray the value proposition, in the private placement memorandum, in such a manner that the investors’ attention is drawn towards the investment opportunity as early as possible.

Investment Terms and Structure

A clearly phrased terms section describes the technical structure of the investment, including minimum investment thresholds, offered securities and their voting powers, dividends and preferences, lockup periods, and how to exit the investment. It should include clarifications on certain contentious terms such as conversion rights, liquidation preferences, etc. so as to address the features of the investment and provide clarity to the investors.

Detailed Business and Market Analysis

An effective business analysis, in PPM, shows the issuer’s business model, how it operates, and a description of its improvement approaches. It should provide an industry outlook based on facts, trends, and drivers of the market study as well as its competitors and disruptions in the market, market data, and forecasts along with other credible sources indicating the growth prospects.

Management and Leadership Profiles

The level of experience of the management team of the issuer has a great potential to change the beliefs of the investors. This part should include the qualifications, experience, and achievements of the key individuals. It is also interesting to know about the governance – how the board and advisors were formed, which enriches the presentation of the issuer’s ability to implement the plan.

Financial Projections and Assumptions

Financial forecasts are one of the most important elements encountered in any private placement memorandum. Investors are accustomed to seeing how realistic and facts-based management forecasts of a 3-5-year horizon covering revenue, EBITDA, capex, and cash flows look like.

Risk Factors

Due to the need to comply with and manage investor expectations from the outset, it is important to provide a full disclosure of all risks. The types of risk generally covered include risks posed by market fluctuations, levels of regulatory effectiveness, operational control, and competitive factors. Moreover, identifying industry or regional threats can assist in illustrating possible outcomes that are likely to affect profitability.

Use of Proceeds

It is important that Investors understand how their money will be put to use. A good ‘Use of Proceeds’ section explains how the funds will be spent in areas such as Research and development, market development, increasing operations, and repayment of any debts. This section should also exhibit the relationship between capital requirements and timelines with clear purposes that help the investors understand how the growth of the foreign entity will be in relation to their funding.

Legal Disclosures and Compliance

Regulatory compliance is of utmost importance while preparing the private placement memorandum. The legal disclosure’s part shall explain what type of securities laws (including, among others, those exemptions which are entitled under Reg D, in respect of the U.S.–based offerings of any securities) the private placement memorandum is adherent to. Other important disclosures include such issues as conflicts of interest, patents and other intellectual properties, material agreements, and risk of lawsuits.

Best Practices for Private Placement Memorandums Creation

An effective PPM should be simple, precise, and able to speak to the intended audience ensuring investors’ confidence and compliance.

Best Practices for Private Placement Memorandum Creation

Best Practices for Private Placement Memorandum Creation

Clarity and Precision

A private placement memorandum should be free from any vagueness and aspire to straightforwardness that will instill the trust of investors. Although it is impossible to avoid using technical jargon, clarity is all the more important, and ambiguous terms should be comprehensively defined. In other instances, it is advisable to employ graphs and tables that help to convey complex information better.

Data-Driven Insights

Substantiate any assertions on growth, market size, or competition with solid data, including third-party research, market assessments, or industry reports. This gives an impartial basis for forecasts and puts into perspective the issuer’s circumstances.

Customization for Target Audience

Modifying the content structure of the PPM depending on the type of investors will yield better results. Detailed analysis, comprehensive financial information, and emphasis on competitive advantages are imperative for professional and institutional investors. On the other hand, more general public audiences might be better served with straightforward and organized explanations.

Integrate Scenario Analysis

Incorporating sensitivity analyses or more financial scenarios adds a positive twist in approaching risk management as it raises the level of sophistication in decision-making. Scenario analysis aims to enhance the investors’ understanding of the range and variability of potential outcomes and the stability of such outcomes under changing conditions.

Legal Compliance and Audit Trail

A private placement memorandum is subject to both political and legal consequences and therefore, the issuers should abide by the SEC requirements, if any, within the United States and seek a lawyer well-versed in securities law. Noncompliance causes and issues are managed with compliance reviews and documented audit trails and are useful in case there are claims from the investors.

Graphic and Visual Aid Integration

Employing illustrations, graphs, and figures is useful especially, in parts with extensive data analysis like financial forecasts and comparisons of industries. However, such components must be the formal ones to enhance the image and illustrate the message properly.

Emerging Trends in Private Placement Memorandums

With the development of PPMs, new trends that benefit investor interests and ease operations have started to be incorporated more into PPMs.

Emerging Trends in Private Placement Memorandum

Emerging Trends in Private Placement Memorandum

Enhanced ESG Disclosures

As Environmental, Social, and Governance (ESG) factors become more prominent, there is a growing preference among investors for issuers to inform them regarding the various ESG initiatives and how they create sustainable value over time. ESG-related aims, adherence to policy, and quantifying results can be beneficial in attracting more investors especially those who have responsible investment approaches.

Integration of Technology and Digital Platforms

Distribution and access of private placement memorandum is through a major transformation designed by technology. Secured private placement memorandum Digital Access is very instrumental in the investor review process and provides means to monitor compliance with ease. As such, the potential of blockchain technology is being sought for improving document security and transparency.

Focus on Global Compliance and Cross-Border Investments

With the growth of cross-border fundraising, there’s a need for PPM to include the issues of compliance with different territories. Existing regulatory models, such as the EU MiFID II and GDPR affect how information is shared, and data processed, and therefore liable to raise the stakes for foreign issuers.

Use of Data Analytics for Investor Insights

Organizations on the other hand do not stop at designing the private placement memorandum but rather utilize the analytics to understand the investors’ behaviors. This helps to fine-tune the PPM, enhances the subsequent investor roundups, and most importantly, the contents of the PPM. Analytics indicates the sections that are read most to help recompose the private placement memorandum to achieve the best results.

 

Magistral Consulting Services for Private Placement Memorandums

Private placements can be very difficult to navigate but having a trusted advisor can make all the difference. Magistral Consulting offers extensive support for Private Placement Memorandums (PPMs). Our services include:

Crafting PPM

Our team develops PPM that is detailed and compliant with the laws. Magistral Consulting works closely with you to understand your business, goals, and regulatory requirements and craft a PPM with all the required elements.

Compliance with the law

We make sure that your private placement memorandum adheres to all the relevant laws and regulations, and offer guidance on compliance issues, helping you avoid any legal pitfalls.

Financial Reports

We also help draft detailed financial statements that portray your company’s financial health and make sure that your financial data is presented clearly, facilitating better investment decisions.

Assessing Risks

It is very important to understand and disclose any possible associated risks to build investor trust. Our experts recognize and evaluate the associated risks with your investment offering, offering comprehensive risk disclosures in the PPM.

 

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

There are several essential sections: overview or summary, company description, team overview, market analysis, risk concerns, allocation of funds, financial reports, terms and conditions, agreement, and details about the legal and tax implications.

It offers a legal framework for companies to raise funds through private placements without going through a comprehensive registration process. This regulation sets the requirements and exemptions that companies should follow, ensuring that investors receive enough information to assess the risks of the investment.

Private Placements are a quicker and more flexible way to raise capital for companies, and they offer the potential for increased returns for investors with reduced ownership dilution than public offerings. But the disadvantages include limited liquidity of securities, higher risk due to lack of regulatory oversight, and the potential challenges associated with investing in early-stage companies.

Introduction

Private Equity (PE) consulting has been around for a while. Many consulting firms have practices offering private equity consulting services. It is interesting to note that even global consulting firms rely on offshoring to a great extent to deliver value to private equity clients on their most pressing issues. Offshoring reduces costs of consulting firms and some of it must be passed onto the clients (we hope!!). But what if all the advantages of offshoring could be passed onto the clients directly?

Read further to know more!!

Private Equity Consulting and Offshoring: Why it’s a match made in heaven?

Management Consulting as an industry has been around for more than 100 years on the back of its solid value proposition for clients. It brings in expertise, experience, political leverage, data sources, network, and usually signs business outcome-based projects with the clients. Usually, benefits outweigh the costs by 3X to 10X.

Private Equity Consulting and Offshoring

Private Equity Consulting and Offshoring brought together

Offshoring also picked up with the advent of the internet. As the work was possible with the help of the internet and advanced communication options, offshoring started to make sense for low-end jobs like call centers and data entry. It was followed by IT and now it is the turn of high-end research, analytics, and consulting jobs. The value proposition of offshoring is cost efficiency and scale. In most cases, offshoring also results in improvements in terms of quality and delivery apart from cost-cutting.

When we combine the forces, we have the impact of consulting with the cost advantages of offshoring, making it an unbeatable value proposition for clients in their marketplace. Management consulting overheads like weekly flights for consultants, high-end hotels for stay, and highly-priced consultants, all of which are paid by the clients are reduced by remote working and service delivery. At the same time, task offshoring to a group with all the expertise in a given industry brings a scale that can be taken advantage of, by smaller clients.

Business Outcomes for Private Equity Industry and the Services Offered

Major work streams at all private equity companies, big or small, comprise of following workstreams:

Fundraising and marketing or investor relations

Deal origination

Deal execution along with due diligence; and 

Portfolio management to get into the operational details of portfolio companies to make it more valuable

Private Equity Consulting Business Outcomes

Private Equity Consulting Business Outcomes

Magistral's Service Offerings for Private Equity

Magistral’s service offerings for Private Equity

Here is how Private Equity consulting helps in these workstreams

Fund Raising and Marketing/ Investor Relations

A fund is established when it has a healthy pipeline of potential investors apart from the existing ones. This is the area where most emerging managers struggle. The game does not even start if the firm is not able to raise the angel fund. However, like everything else in life, robust results need time and consistent efforts. PE consulting helps reach out to the investors and maintain a continuous touch-point to drive home the value proposition of the fund and thus enable successful fundraising rounds.

 

The services that help in fundraising are

Fundraising documentation

Fundraising requires a lot of documentation. Sometimes it could be enormous for an emerging manager. At the same time, it needs to be streamlined for established managers. Magistral helps prepare documents like Private Placement Memorandums (PPMs)/ Confidential Information Memorandums (CIMs), pitch decks, financial models and projections, teasers, and strategy and marketing documentation.

Investor profiling and reach-out

Funds specializing in different areas have different ideal profiles for investors or limited partners. Magistral helps in profiling and reach out to these investors. Magistral also has an in-house database that carries leads of more than 15000+ Limited Partners (LPs) and General Partners (GPs). It can also access databases of other players if the task needs it.

Design and Data Support

Magistral has an in-house design team that streamlines the PowerPoint designs and makes them consistent with the global marketing standards. It’s like we receive the content in raw form, sometimes scribbles from a notepad or whiteboard, and the output is a well-designed PowerPoint that could directly be sent to investors. Similarly, pitch decks and PPMs could also be designed to look more powerful visually. Likewise, data could be streamlined related to investors or CRM systems that the clients use.

Newsletters

Multiple touch-points with investors mark content like Newsletters, PoV documents, Industry reports, and market research. Magistral has experience working with hundreds of clients working on these assignments. It has access to resources like secondary sources, interviews with the panel of experts, and triangulations to come up with market sizes, etc. Worthy content establishes the authority of the Private Equity fund in the eyes of accredited investors.

Sustainable Investment and Impact Assessment

We have a specific service offering around ESG analysis, sustainable investments, and impact assessments of the current or potential assets acquired by the Private Equity firms.

Deal Origination

Deal origination services make sure that the focus of the GP is on the suitable targets and populate the deal pipeline with more appropriate deals, to be taken up as and when required. Picking up the right deals is the lifeblood of PE operations. It’s by picking up the right deals that a GP can offer superlative returns to its LP investors. Magistral helps with Deal Flow support and Inbound deal flow analysis.

The deal origination related services offered are:

Industry tracking and landscaping

A Private Equity firm needs to scan the environment for investing continually. It needs to track its key markets, geographies, and industry regularly to take advantage of emerging trends. Magistral has helped multiple clients in tracking industries like healthcare, SaaS, blockchain, cybersecurity, heavy engineering, and many others.

Potential target identification

A list of suitable potential targets is generated using secondary and primary sources. As per the investment thesis, the targets satisfy a host of customizable criteria like revenue, profits, employees, industry, geography, and being open for investments. Secondary sources include databases, whereas primary sources are industry associations, accelerators, angel investor groups, etc.

Target company profiling

Once the list is generated for potential targets, the next step is to shortlist the companies of interest and go for a deeper dive.  A target company is profiled for its business details, strategy, latest developments, management, SWOT, Porter’s 5 forces, and other customized information. Understanding the openness of the company for an investor on the board is also studied at this stage.

Target pipeline management

For deals to be continuously happening, the pipeline needs to be populated continuously. There should be deals in all stages of deal-making. That is ensured by filling the targets in the funnel on an ongoing basis.

ESG Analysis

ESG or impact analysis is more critical than it was ever before. It’s imperative then that Private Equity firms evaluate the deals for ESG fitments. A company that performs better on ESG frameworks is a more sustainable investment and makes a far-reaching impact on the society and communities it serves.

Inbound deal flow management

If a firm receives lots of inbound inquiries, there needs to be an agency to sort out the worthy opportunities from the non-serious ones. Magistral matches the opportunities with the GPs investment thesis and brings forward the best deals.

Summarizing and preparing IMs:

If start-ups send IMs, the same need to be summarized for discussion with the investment committee. Magistral summarizes the Investment memos into investcomms decks for quick and effective decision making.

Deal Viability Analysis: This involves getting into the nitty-gritty of a deal, identifying red flags both inside out and outside in, to make sure the deal produces the impact, which is the aim of the investment to start with. This is achieved from the exhaustive and comprehensive market and company research.

Deal Execution and Due Diligence

Deal execution and due diligence ensure the right investment decisions to produce significant returns, identifying risks for better planning post-investment or M&A.

Here the services are about providing all the foresight and intelligence to make the right decisions. The primary service offerings here are:

Target company due diligence

Here, Magistral takes access to the data rooms and analyses the information to produce highly relevant deliverables and insights. Due diligence includes financial, operational, and ESG related aspects of a firm. Magistral works with both Private Equity firms and Investee companies. It prepares Due Diligence Questionnaires (DDQs) and collects information from the investee companies, either directly or indirectly.

Industry Research

Here, industry research is more specific and has to do with the target company’s operations. The industry in which the target operates and details like trends, SWOT, Porter’s five forces, key competition, pricing trends, news. etc. are captured to provide a holistic view about the industry in which the target company operates

Detailed company profiling and competitive intelligence

In this stage of the company profile, details are captured from multiple sources like ex-employees, management, existing employees, vendors, competition, investors, and industry stakeholders. Also, information related to competition and their strategy is captured using primary and secondary sources.

Investment Memorandums

If the investment needs to be made with other co-investors, standard documentation is applicable like Investment Memorandum, Confidential Information memorandum, Pitch Deck, and Financial Models.

Modeling and Valuations

This exercise ensures that deal is made at the right prices so that there is a significant upside for the investment returns. Magistral has prepared 100+ financial models for valuations in industries like SaaS, tech, healthcare, IT, manufacturing, B2C retail, fashion, chemicals, and e-commerce. Here the information and assumptions required to prepare a financial model are captured from detailed discussions with the client. The models in which Magistral has expertise include and are not limited to 3 parts financial models, LBO analysis, DCF modeling, Real Estate modeling, precedent transaction analysis, comparable analysis, and impact analysis.

Portfolio Management and Fund Management

Portfolio Management aims at maximizing the value of the investment in a company by a Private Equity firm. This is achieved by supporting various tasks of the acquired company to reach more customers, hence improving revenue or reducing operations’ costs. Fund Management is about streamlining the functions of the fund itself to focus on the core tasks of investing and fundraising.

Here the services are:

ESG Compliance Monitoring

Magistral, after assessing the ESG maturity of an investee company, suggests a set of metrics monitored periodically after the investment is made. The data is collected on these metrics and reported to the board and management along with investors every quarter.

Outsourced CFO

Outsourced CFO services are relevant for both funds and the portfolio companies, specifically in the cases where the PE firm invests in start-ups or smaller firms. These companies may not be in a position to invest in a full-time CFO and thus may go for an outsourced CFO that is fractional and provides the operational and cost flexibility. Sometimes Financial Process and Accounting could be outsourced, while CFO could be kept in-house. These tasks include accounting, bookkeeping, administration, procurement, and preparation of financial statements

Outsourced Fund Administration

This service is specifically for funds and takes care of all the administrative aspects of the fund like fund accounting, expense monitoring, trade reconciliation, distribution waterfalls, taxes, fees, incentives, expenses, etc.

Strategy and Business Development support

After the investments, most PE firms focus on growing the revenues of the portfolio companies. This is done through a slew of interventions on strategy and marketing. Magistral supports these activities by providing services like consumer and market studies, new product or market development, lead generation, which is critical in the B2B space, and finding follow-on acquisition or buyer for the investee companies.

And this is how Private Equity consulting joins forces with offshoring to provide an unbeatable competitive advantage for our clients.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.