Navigating the Private Placement Memorandum (PPM)

[Jorge Abreu]

If you plan to be a passive investor in a multifamily syndication, you need to understand what a Private Placement Memorandum (most commonly referred to a the PPM for short) is, why it is needed and what should be contained in it. The PPM is technical, lengthy (often more than 100 pages) and carries legal jargon and disclaimers that would pretty much scare anyone out of investing. As I like to say, it explains all the “side-effects” including all the ways you can die if you proceed.

All joking aside, the PPM is a document there to protect you as the investor and a necessary part of the due-diligence process for every investor.

The goal of this module is to help take away the mystery, overwhelm and to help you navigate the private placement memorandum efficiently as possible so that you can make a well-informed decision about a potential private investment.

PPMs will vary by the type of issuer, the size of the offering, and the number and type of investors being solicited, but each private placement memorandum should at least contain the five sections outlined below.

1. Executive Summary

This Executive Summary section presents a condensed description of the investment. It usually includes the investment thesis, pricing, minimum subscription amount, investor qualifications, disclosure of management fees, and a brief discussion of the issuer’s governing documents. Note: Be wary of disclaimers that allow management to have too much latitude or discretion and pay close attention to the conflicts of interest. This section should mirror what has been stated in the marketing materials and represented by company representatives.

2. Investment Strategy

The Investment Strategy section presents a thorough explanation of the issuer’s investment strategy, process, and criteria, as well as its deal flow sourcing and exit strategy. Included in this section is a description of the issuer’s key competitive advantages and resources in its specified markets. It will also discuss the industry, state and geographical focus of the investment. Note: Investors should review this section to learn how the issuer intends to achieve its targeted results and assess whether the investment strategy supports the issuer’s objective. Investment strategies that are well reasoned and clearly written will provide investors with information they’ll need to make a fully informed investment decision. An offering with an investment strategy that is vague, unclear or that does not make sense is probably an offering that should be avoided.

3. Management and Experience

The Management and Experience section contains biographical and background information about the principals and key employees. It provides a detailed overview of the issuer’s history and how it has succeeded. This section often provides the issuer’s investment manager’s track record.

Note: The success of an investment will be dependent upon the management team, so it is imperative that team has the background and experience to implement the investment strategy. Prior experience successfully managing similar investments supports the proposition that the management team is capable of implementing the investment strategy with positive results.

4. Summary of Principal Terms

Perhaps the most important section of the private placement memorandum, is The Summary of Principal Terms which outlines the organization of the company, what fees investors will pay, what expenses the company will bear, how profits will be split, and a thorough summary of the business plan. A careful analysis of the Summary of Terms should provide most of the information necessary to fully comprehend the investment offer

5. Risk Factors

Risk Factors seem to be the section that will truly make everyone’s eyes glaze over. Few investors need to be advised that, “in the event of war, no assurance can be given that the investment will meet its stated goals.” Nevertheless, this section is perhaps the most important component of the PPM because it outlines the factors that make the offering risky or speculative. While there are certain risks that are present in nearly all investments (civil unrest, bankruptcy, natural disasters, etc.), investors should pay particular attention to those risks that are unique to the investment opportunity given the nature of the issuer, its investment plans and the trends within the issuer’s industry.

In addition to risks inherent in the investment, there are risks associated with the offering entity and the management team. Perhaps the most significant of these are conflicts of interest.

Take note of the following:

Fees and expenses – Shifting expenses from management to the investor, charging management salaries and overhead to the fund, allocating transaction fees to the fund and not co-investors, etc.

Transactions with affiliates – Affiliate of management acts as creditor or lender to the fund, or the fund acquires an investment from a management affiliate Competing funds – Management launches a new fund with the same strategy as an earlier fund, creating conflicts between allocation of investments between the funds The above-listed sections are those commonly found in most PPMs, but it is not the exclusive list. As you are reading the private placement memorandum, if you find any information that seems odd, inconsistent, or otherwise incomprehensible, you should contact the issuer and the issuer’s management team should be available to respond promptly

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