Lecture 7 Fundraising and IR Flashcards
Three steps in the Asset Management Cycle (LP perspective)
Asset Allocation, Fund Selection, Monitoring
PPM
A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document.
What happens in the Asset Allocation phase?
- Asset Manager (LP) determines the weight he wants to invest in PE
- determines the diversification within PE class
- selects investments he wants to conduct
What happens in Fund Selection?
- Commercial DD
- Legal DD
How do PEs attract investors?
- informal announcements
- talks between PEs and potential investors
How do PEs attract investors?
- informal announcements
- talks between PEs and potential investors
What does the PPM include?
- targeted venture market
- investment strategy
- composition and reputation of the fund management team
- legal fund structure with proposed detailed terms and conditions
4 substeps in the fundraising process
- Fund pre-marketing
- Fund DD
- Fund structuring
- Fund closing
Fund DD
- investors require detailed documents from the PEs to carry out a detailed DD
- personal meetings between PEs and individual investors
- PE investor seeks a commitment from a sponsor so a reputable investor willing to commit himself to invest prior to other investors
Steps in the Fundraising process
- Deal Flow (look at e.g. 350 funds p.a.)
- Screening (deselection of funds with a bad risk/return profile)
- Preliminary DD
- Main DD (only with around 10% of funds looked at in deal flow) –> thorough analysis of performance, team, tax, and legal issues
What do AM look at in fund DD when looking at the management team of the PE firm?
- if the team size is adequate in relation to the fund and the stage
- previous PE experience
- industry related and financial management expertise
- value adding capabilities
- low turnover of senior staff
What is discussed in Fund Structuring?
PEs and investors negotiate final limited partnership agreement (LPA); a legal document specifying
- compensation structure for the fund
- distribution scheme of costs and profits, and
- covenants relating to:
- overall fund management
- activities of GPs
- restrictions of the type of investment
What is the role of gatekeepers?
They are investment advisors and make investment decisions for the institutional investors.
What do placement agents do?
They help PE firms find limited partners committing to a fund
Do PE require LPs to invest everything at the beginning?
No. Usually, there are so-called capital calls. This means that the LPs generally do not invest 100% of capital contributions at initial fund closing. GPs then do capital calls for needed capital. There are penalties against LPs in case of failing to meet capital calls.