Serve dessert first

The first step to raising a fund in the good old days was to draft a slim, straightforward private placement memorandum to send to potential investors. That was before registration, before the Securities and Exchange Commission took an interest in pitches and before due diligence questionnaires poked into every corner of a portfolio company. Now the PPM has fattened up to address any doubts about track record or conflicts of interest.

GPs must instead use the first few slides of a pitch book to tell a succinct, compelling story, stressing the firm’s performance and the repeatability of their strategy. If the message hits home, LPs will sift through the rest of the pitch book and the PPM.

“The PPM isn’t as important as it once was,” says Janet Brooks, a placement agent with The Monument Group. “LPs have made a lot of decisions before they reach for it now.”
Market participants cite two reasons for the shift. Firstly, the PPM has become a dense document, loaded with legal and compliance language. “I’d say the length of these documents has increased 30 to 40 percent in the last ten years or so,” says Aaron Rudberg of Baird Capital. It’s become an unwieldy, formal introduction to a fund, when LPs are pressed for time to screen investments.

Secondly, fundraising now involves plenty of preliminary discussions. “The hot fundraising market has prompted some GPs to use the PPM as more of a formal legal document rather than a marketing tool, since they’ve already had a number of conversations with LPs and effectively sold the opportunity – well before the release of the PPM,” says Brooks.

That means it’s essential to craft a pitch that woos LPs from the start. “Given the amount of dry powder and the number of private equity firms out there today, you’ve got to be able to explain what differentiates you and how you plan to compete in the market,” says Rudberg. “If you don’t have a clear elevator pitch that they can repeat to their investment committee and their colleagues, it’s unlikely they’ll dig into your fund.”
The elevator pitch’s first formal appearance will be in the slide deck or pitch book that’s presented prior to, or at, the first meeting.

“The PPM lives in our data room, but our slide deck is our primary marketing tool now,” says Kimberly Kile of ABS Capital Partners. The message can’t be buried inside pitch books, which due to the SEC’s disclosure requirements have also become longer.

In-house IR staff and placement agents agree that the elevator pitch needs to appear at the start of the pitch book to appeal to LPs’ limited time and short attention spans. “We’re at a point where we’re training our partners to deliver our message in ten slides or fewer,” explains Kile.

Every market participant we spoke with stressed the need to highlight the firm’s track record. “Five years ago, the deck might have been geared towards selling the firm, the team and the terms,” says Sunaina Sinha, a placement agent with Cebile Capital. “Now, after the first few pages it’s all about bringing the track record to life.”

Track record isn’t just a few wins, but overall performance. “Our biggest emphasis is on communicating our realizations because you can’t spend unrealized gains,” says Michael Romano of Lightspeed Ventures.

As exciting as it may be to discuss a few landmark deals, the story must link them through a consistent strategy. “GPs want to sell their abilities as an investor, but LPs are equally interested in their abilities as a fund manager,” says Michael Elio of StepStone Partners. “And today, you need to prove your mettle as both.”

The second theme was how the strategy could be repeated over time, and in various market conditions. “Our story really has a strong emphasis on repeatability,” says Romano. “Can you have discipline and high selectivity to identify best in class opportunities if the S&P is up or down? Can the strategy work regardless of the overall state of the market?” And often that ends up touching on the fund’s experiences in markets less favorable that this one. 

Short pitch, full disclosure

A succinct message is vital, but the pitch books or marketing decks still need to include a more expansive view of the firm, for investors and for regulators. “These decks do get longer because you can’t just talk about your three wins anymore,” says Elio. “The era of being creative with pro forma performance is over.”

So while the initial message is up front, the rest of the content in the pitch book and the PPM still has to detail the firm’s actual performance. Sometimes this means touching on losses in the opening pitch, which can lend credibility.

“Fundamentally, the messages that resonate the strongest have a level of authenticity,” says Romano. “And you can’t have authenticity without transparency into the underlying performance, where you express pride in both the successes and the education that arrived in the wake of the failures.”

The basic structure of these marketing decks remains the same, addressing six key topics: firm, team, thesis, strategy implementation, performance and finally case studies, but the art comes in being able to distill that down to a core message.

One way to manage this tension between being compelling and being transparent is to organize the deck into two sections. The first tells the engaging topline story in the first 10 to 15 slides to discuss while meeting with LPs. It’s then followed by a longer second part, with more detail, to satisfy investor diligence and regulatory standards.
In crafting that story, it’s vital to tap the expertise of LPs that are close to the firm, along with placement agents to ensure that the story resonates with investors. “We interact with our largest LPs before a cycle as part of the process,” says Kile.

But that doesn’t mean the PPM has become irrelevant. If LPs are intrigued by that opening pitch, they will want to turn to it for the necessary level of detail. “We find that when LPs want to take a fund forward to their investment committee, they’ll use a lot of the material straight out of the PPM,” says Sinha.

And that means the PPM’s content needs to be as reader-friendly as it is legally compliant. Lawyers acknowledge that the PPM serves two purposes which can be at odds with one another; it’s a marketing document and a legal disclosure document.

Like the marketing deck, the executive summary can lay out the argument on behalf of the fund in greater detail than a series of slides, while the extensive disclosure elements appear later in the document. But that doesn’t mean the story should be sapped of any life in these pages.

Consequently there’s now a tendency to tell the story in the PPM with more graphics, photos and literal color.

“This has been well received by the LP community,” says Nick Chronias, of the placement agent First Avenue Partners. “As it makes the PPM more reader-friendly for investors and can be helpful in convening the key messages, particularly so in newer markets where English may be widely spoken, but is not the first language.” But there are two areas where GPs should stress transparency over a pithy phrase or graph.

One is the presentation of the track record. “There’s an SEC rule for registered investment advisors, which is basically an anti-cherry-picking rule,” says Scott Moehrke of the law firm Kirkland & Ellis. “This says if you present the IRR of one deal in a fund, you have to present the IRR of all other deals in that fund somewhere in the PPM, even if it’s just in the appendix.”

Lawyers have found the rigor in reporting performance can grate on GPs who aren’t used to that level of disclosure, but it’s here to stay. There have been enough headlines concerning fees and expenses that lawyers find clients are now more willing to err on the side on transparency.
Secondly, fund managers are required to delve into every potential conflict of interest.
“As firms mature and have multiple business lines and go public, there’s more potential for conflicts [of interest],” says Andrew Ahern of the law firm Debevoise & Plimpton. “These potential conflicts should be spelled out in the PPM, since that’s where the SEC expects these disclosures to be made.”

It’s vital to remember the PPM remains a legal document and it should strike a balance between that compelling pitch and compliance standards. Even so, without a clear, concise value proposition, LPs won’t waste their time wading into ever-growing PPMs and marketing decks.