Building your PPM
Crafting a strong PPM as a prospective traditional searcher.
The private placement memorandum (PPM) is at the foundation for fundraising as a traditional searcher. Institutional Limited Partners Association defines the PPM as “a document that outlines the terms of securities to be offered in a private placement,” and it is one of the first formal steps a searcher takes to set up their fund. The PPM should contain all necessary information on the securities being offered to investors, which, in search funds, include an executive summary, investment highlights, principal background, investment opportunity, and industries of interest, just to name a few.
Luckily, for prospective searchers, there are many resources at their disposal to craft a PPM that is consistent with the expectations of traditional search fund investors. For those raising a fund coming out of business school, your school’s ETA club (assuming it has one) should also have examples of PPMs from alumni who raised in recent years. The structure for PPMs is relatively standardized, which should be a sign of relief for those who may be intimidated by long legal documents and raising capital for the first time.
Because investors appear to expect a common structure in a searcher’s PPM, I would like to share some of my lessons in crafting my own PPM and the feedback I received from investors during fundraising. I hope prospective searchers can use this guide to ensure their PPMs avoid silly mistakes (many of which I made), so conversations with investors can go more smoothly.
I’ll walk through setting up the foundation of your PPM, where to spend your time differentiating yourself, where not to, who to get feedback from, and how to identify deviations that will raise questions later on in fundraising.
Let’s dive in.
The PPM Foundation
You were right if you guessed that I would reference the Stanford Search Fund Primer at some point in this post. While I have only seen a few dozen searcher PPMs, most appear to use the same structure provided when you download the primer since it is consistent and familiar to the search fund investor community. Each searcher may tweak certain sections to accommodate their strategy, and each attorney may have their own flavor on legal disclaimers that add some variability to individual PPMs. But fundamentally, all look very similar. Since this template is free, I recommend prospective searchers start here and reference at least five completed PPMs from searchers who have recently raised. If you’ve been networking properly with searchers in the community and staying involved in your ETA club at school, you should not have a problem seeing these examples.
Where to spend your time
Below is an image of my table of contents to give you a sense of the different elements one needs to put together in the PPM, many of which are completed for you.
Because much of the document is standardized in raising a search fund, prospective searchers must focus on a few key sections: principal background, industries of interest, search strategy, and a few other small things.
Principal Background
I argue the “Principal Background” is the most important section of any prospective searcher’s PPM. In my PPM, I split my background into the following sub-sections: Professional Experience, Education, and Personal. Think of this section as the opportunity for one to demonstrate oneself as a hungry, capable entrepreneur that will be a good fiduciary throughout the various stages of the search fund lifecycle: fundraising, searching, transacting, operating, and exiting. The last point is critical. In crafting your own personal narrative, make sure to address aspects of your background that will prepare you for each of the stages in the journey ahead.
Using me as an example, I discussed my passion for operating through experiences at Apple and Gap Inc. and my ability to unlock value on different teams - ones that tackled business development (i.e. revenue growth), cost of goods, and G&A (i.e., people operations, managing a P&L). I laid out how I executed on those teams and used data to be as specific as possible. I also discussed my summer internship experience at NextGen Growth Partners and how the experience was valuable in validating my interest in pursuing this career path.
One area (out of many…) of weakness I had professionally was my lack of managing a team of direct reports. To address this weakness directly in my experiences, I emphasized the cross-functional leadership skills I built in various roles at Apple and Gap Inc. I further demonstrated my management potential and ability to work in teams by highlighting my basketball career and continued involvement with my alma mater’s program through the mentorship of current players.
You need to be thinking about what’s going to differentiate you from your classmate or peer who is also raising a search fund. What’s your competitive advantage? To not rely on my professional experiences to differentiate (because there are many peers with much more qualified backgrounds than me), I partnered with Booth’s Polsky Center for Entrepreneurship and Innovation to participate in a Private Equity Lab Course that would help accelerate the learning of the first few months of my search. For me, this program was a way for me to gain an edge in fundraising by structuring in aid at the onset of my search to improve my sourcing and deal evaluation capabilities. The preparedness and commitment to successfully doing a deal was something that I stressed in this section.
While professional and educational experiences send implicit messages about one’s personal background, they don’t tell the full story of who you are and why you want to do this. In fact, if investors were to invest solely based on my professional experiences, they’d have missed about 99% of what makes me who I am. Searching is not for the faint of heart, and I recommend prospective searchers use the PPM to discuss the root of their drive. Did you come from humble beginnings? Did you watch a close family member run a small business? Whatever the case, use the “Principal Background” to paint the picture of what truly makes you unique and wake up each morning energized to attack the day. Investors want to partner with entrepreneurs that have a diverse set of interests, not just ones that are immediately related to search funds. Be honest and open, and don’t be afraid to let your personality shine!
Industries of Interest
Besides the “Principal Background”, the “Industries of Interest” that you choose for your PPM will be one of the main topics when fundraising begins. I’ve heard feedback from some investors not to spend too much time on this section since the odds are you won’t acquire a company in one of the initial industries. However, many investors do care a lot about the industries you choose in your PPM. With that in mind, I encourage you to err on the side of caution and do a robust job of evaluating the industries you will pursue when you launch your search. It’s a good exercise regardless.
My observation is that investors don’t necessarily care too much about what industries you choose (to some extent) but more about how you evaluate them, why you chose them, and why you will have a competitive advantage as a searcher in that space. The underlying assumption is that you are broadly choosing industries consistent with where these firms and individuals invest.
Industry ideation is one of the most challenging aspects of operating a search fund, and I found a tremendous amount of value in reviewing the portfolio companies of the prominent search fund investors to see what types of businesses they typically invest in. Coupled with tops-down, megatrend forecasts on the economy, I developed a perspective on industries that were consistent with search fund investors and where I, as a searcher, could gain credibility with business owners quickly.
Once you’ve selected your industries (and this might take some time), consider the following elements to cover in your analysis:
Executive Summary
Investment Thesis (i.e., why do you like this space?)
Industry Overview (i.e., market size, growth rate, competition, level of fragmentation)
Business Model (i.e., revenue model, cost structure, scalability, growth potential via organic and inorganic growth)
M&A Activity (i.e., how will market activity drive prices in the space?)
Exit Opportunities (i.e., if your investors buy this asset, how do they realize their return?)
Principal Fit (i.e., why you?)
Key Risks
Search Strategy
When raising a traditional fund, another element that investors will focus on is one’s search strategy: that is, how one will go about acquiring the business. Searchers will use some combination of proprietary and brokered deal flow to build their pipeline. Proprietary deals are businesses the searcher found via cold outreach or warm introductions and are not represented by some intermediary such as an investment banker or business broker. Brokered deals are when a business owner has hired an intermediary to sell their business for some fee. Some businesses you reach out to directly via proprietary tactics may, in fact, be represented by an intermediary.
While brokers can add valuable experience to a searcher’s sourcing efforts, I do not recommend allocating much time to them in your search, if at all, especially at the beginning. A significant effort is needed to build your proprietary sourcing machine in your early days, and looking at brokered deals will only distract you from the work crucial to your search foundation. My strategy all along was to focus on proprietary deals through my own outreach programs, but I had heard feedback from many former searchers about the value in spending more time early on reaching out to brokers to view CIMs, get a feel for the market, and develop a relationship with ones that represent businesses in your industry focus areas. I didn’t validate that feedback as much as I should have, which hurt me during fundraising.
In the search strategy section of my PPM, I highlighted my focus on doing just that: spend time on brokered deals early on and then shift my focus to primarily proprietary deals afterwards. I couldn’t have been more wrong. Traditional search investors were concerned with this strategy for obvious reasons, and I spent a lot of time during fundraising managing the skepticism. For those looking to raise a traditional search fund, I recommend spending almost 100% of your time on proprietary deal flow and being explicit about that when outlining your strategy to find qualified leads. You can still add yourself to broker lists early in your search, but you should not be wasting time trying to sort through opportunities that are likely out of your wheelhouse regarding quality and price.
Instead, I recommend using this section of the PPM to highlight your efforts to build a strong proprietary sourcing engine, which includes email drip campaigns, LinkedIn messaging, attending industry events, and cold calling. Each searcher will have their own perspective on what combination of the above methods makes the best proprietary sourcing engine, but from the early months of my search, I can assure you that the more personalized approaches are much more effective.
Miscellaneous Tips
When creating your representative search budget in your PPM, leverage your searcher conversations to develop a perspective on how much you should allocate to each expense category. I wouldn't spend much time on this section, but be reasonable with your assumptions about how you will use the budget. Odds are that your actual spend will be much different than the forecasted categories but do your best to keep it realistic based on your strategy. The more important aspects to focus on are the total amount you are raising and smart spending throughout the search to ensure you can extend your roadway as much as possible.
Determining how many units you should allocate to investors highly depends on your goals but commonly is broken up into multiples of five percentage points. I raised 20 units (i.e., 5% of my search fund per unit), intending to partner with 10-12 investors, with the idea that some investors would have only wanted a half unit if I raised 10 units. However, it seems that many investors were so used to seeing 10 units that I spent some time clarifying unit amounts when it came to closing the fund. Although it wasn’t a concern, save yourself some time and structure your fund with only 10 units if you have a similar cap table structure as me. Remember that you’ll likely need to overcommunicate the structure for those who want a unique number of investors. While this might sound silly to include here, these little pieces reduce uncertainty throughout the stressful fundraising process.
The PPM includes a section on investment highlights that is relatively standard for search funds, but there is an opportunity to differentiate yourself in this section. I recommend completing the investment highlights section once you’ve written out your “Principal Background” section to ensure consistency throughout the memorandum. Find what it is about you that makes this opportunity attractive for prospective investors. For example, mine included the following:
Underserved Acquisition Niche
Tested Investment Vehicle
Operating Expertise of Principal Allows Translatable Skills in Various Industries
Committed and Resilient Principal
Extensive Team Building Abilities
Talent for Thriving in New Situations
Experience of Principal with Searching Best Practices
Where not to spend your time
What’s just as important is not wasting your time on certain areas of the PPM that are viewed as the standard. In fact, if you stray from the norm with certain sections, it will only raise more questions if you have not already shared these with investors before issuing your PPM. Much of the content in the “Investment Opportunity” section is relatively standardized, as it describes the search fund model, the stages of a search fund, and financial risks and returns. Don’t mess with any of that content unless you feel obliged, but have an attorney review the section to send out the document with confidence when you send it over to them for comments.
Further, I’ve learned that many searchers build pitch decks for investors, some of which are pretty extravagant. Do not waste your time creating the most extensive pitch deck because you won’t use it. I built a deck and did not use it once during the fundraising process since investors had everything they needed in the PPM. However, should you still make one? Honestly, I’d say yes and for two reasons. It’s always good to be overprepared (in the rare case that you need it), especially when heading into fundraising for the first time. Second, it may be a helpful tool for you to share with your undergrad interns later on when you onboard them to the fund. The situation will largely depend on context, but play it safe and let yourself worry about one less thing.
Getting feedback
Besides actually completing the PPM, receiving feedback on it is the next important step to kicking off the formal fundraising process. No matter how strongly you feel about it, take a few days away from it and share the PPM with a few people you can trust to provide transparent and detailed feedback. Since there are different types of content on the PPM (some more personal and others more technical), it helps to bring in diverse perspectives to review your work. For the “Principal Background” section and other notes related to your personal and professional experiences, find someone close to you that knows you well and can ensure you’re telling a compelling and complete story that will make you an attractive searcher to investors. This might be a spouse, parent, sibling, or a close friend that knows you well. For more technical areas of guidance, I recommend consulting with your attorney and a few others who have reviewed PPMs in the past. This might be a business school professor, investors that you’re more comfortable with, former searchers, or advisors at your school that are knowledgeable on search funds. Getting feedback from these diverse perspectives will only help strengthen your competitive position as a searcher and enable you to address major question marks in your “application” before launching the fundraising process formally.
Addressing deviations
While you can develop the strongest PPM any investor has ever seen, questions will naturally come up based on your situation and strategy. It’s natural due to the career path – just think about how different each stage of the search fund lifecycle is and the skill sets needed to succeed at each. No searcher will check all of the boxes no matter how strong their experiences are. Much of the fundraising process revolves around addressing the deviations from the core traditional searcher that the investors back. Wherever there is uncertainty, investors will dig in to better understand your logic or point of view, and it is crucial to understand that going into fundraising. The more you recognize those areas of weakness or deviations, the better equipped you will be to disarm investors in those conversations. It will also allow you to work towards addressing those weaknesses, which you will continue to do throughout the search process.
We’ve discussed what’s at the core of the PPM, where to focus your efforts and where not to, and how all of it relates to addressing deviations in your profile from the typical searcher raising capital. Keeping these factors in mind, you will be better able to manage the tough conversations in fundraising and focus on progressing towards the day in which you launch your search formally.
For those of you who are in the process of working on your PPM, feel free to reach out to me directly at david@whitecedarcompany.com if you’d like to discuss your progress or are looking for a current searcher’s perspective on how it looks. I’d be more than happy to help.