What is a PPM?
A private placement memorandum is a legal document that provides prospective investors with important information about a company and its security offerings. The business owners or management team will use this document to draw in new investors. PPMs are not used in traditional investments that are registered with the SEC, but rather in more complex alternative investments. Some common examples of alternative investments include venture capital, hedge funds, commodities or even real estate trusts. These alternative investment vehicles usually cater to institutional investors or individual investors with a high net worth due to their complexity.
Why do alternative investments need a PPM?
Most alternative investments are not as heavily regulated as traditional stocks, bonds or mutual funds, which means that they can come with additional risks for investors. Companies need a PPM document before launching an alternative investment to provide investors with important information about the company and the specific securities the company is offering. The PPM allows investors to assess the risks associated with investing and also gives them a look at the potential benefits of doing so.
Additionally, a PPM will protect a company from a legal perspective. By laying out the terms of the investment and potential risk factors ahead of time, the company has legal standing if there are any investor complaints.
Most alternative investments, including private equity investments, debt investments and hedge funds, will require a PPM. It’s also helpful to have a PPM for real estate investments or commodity investments. As an investor, a PPM gives you a detailed overview of the investment to help you assess whether it’s worthwhile.
What should investors look for in a PPM?
A private placement memorandum exists to make sure that potential investors understand the structure of the business they are investing in, as well as the potential benefits and the potential risks.
As a result, there are certain components that every PPM document should have. Most PPMs are written by investment bankers who are familiar with the regulations necessary for private investments. It is also helpful to consult with a business lawyer when constructing a PPM.
Even if you’re already very interested in an investment, it’s always essential to read the PPM before making a commitment. There has been a lot of hype around alternative investments in recent years, making them highly competitive. There have been instances where sponsors have added fees to the PPM or otherwise adjusted things to their advantage, knowing that investors wouldn’t read the document thoroughly.
Taking the time to read the entire PPM can help you find the best alternative investments for your portfolio and avoid potential problems. Here is the information you will find inside the PPM and the most important components to look for.
Low interest rates are depressing returns.
The low interest rate environment has taken the wind out of the sales of many traditional safe haven assets. U.S. government bonds, the safe haven investment of choice for individual investors, are returning a yield below inflation, and many high-quality sovereign bonds from OECD countries have negative yields. What this means is investors can no longer count on a traditional 60/40 portfolio to provide healthy returns and safeguard against capital loss.
Instead, many investors are using alternative investments, such as real estate, as safe haven investments. This asset class has many of the advantages of traditional safe haven investments — including a lack of correlation to equities, lower volatility and strong performance through market cycles — while offering the potential for much better returns than highly rated sovereign bonds.
Summary Of Offering
This section is an overview of the investment. This section provides the basic information that investors need and encourages them to read further. Some items that should be included in this section include a short business summary, the company’s capitalization, investor requirements and investor protections.
This is another very important component of any PPM document. Investors want to have a full understanding of the risks that come with any potential asset. Examples of common risk factors include high competition from other businesses, specific tax challenges for businesses in your industry, a lack of management experience and more. Each risk factor should be stated in a clear and concise manner.
This section is to inform potential investors of your business plan. This should include information about your products or services, supply chain, marketing plan and target audience, as well as some broader information about your industry for context. This should also include information about your company’s management team and how you plan to execute day-to-day operations. Management information should include biographies, relevant experience and any potential conflicts of interest.
Terms Of Securities
This section includes a number of important details about the securities themselves. These include all rights and restrictions associated with the securities, as well as the legal class of the securities. Additionally, this section should include information about who can invest, necessary documentation investors must sign, minimum and maximum investment amounts, and more. Other key things to include are investor rights, including conversion and redemption rights, voting rights, dividend rights and more.
Investors will want to be privy to your company’s current financial state. This section should include information about your current financials as well as planned sources of funding. It should also include information about planned uses of proceeds, your plan to achieve profitability in the future, and any financial challenges that you anticipate in the future.
In this section, you can attach any additional documents that would be relevant to your investors. These could include existing tax documents, contracts, financial statements and more.
A PPM is one of the most important documents for any alternative investment. It provides investors with all of the essential information they need before moving forward. When developing a PPM document, it’s best to work with an investment banker or lawyer who has experience with this type of work.
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Written by Rob Johnson, Forbes Councils Member
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