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PPM, OM, Prospectus Offering Documents, Private Placement Memorandum In the United States, offering documents include a private placement memorandum (PPM, OM or prospectus), a limited partner (or limited liability company) agreement, and a subscription agreement. Offering documents for an offshore hedge fund include the private placement memorandum and the subscription agreement. If the hedge fund accepts non-accredited investors, it should include a set of financial statements. If the hedge fund’s manager is registered as an investment adviser with a U.S. federal or state regulator, the offering document will included a Form ADV Part 2, which describes the investment manager in detail. Learn More About SEC or State Investment Adviser Registration
Although there are no specific disclosure requirements for offering documents, basic information about the hedge fund’s manager and the hedge fund itself typically, in fact is disclosed. The information provided is general in nature and it normally discusses in broad terms the hedge fund’s investment strategies and practices. For example, disclosures generally include the fact that the hedge fund’s manager may invest fund assets in illiquid, difficult to-value securities and that the hedge fund manager reserves the discretion to value such securities as it believes appropriate under the circumstances.
PPMs disclose any lock-up period that new investors must observe, as well as laying out the specifics for when investors will be able to redeem some or all of their investments out of the hedge fund. PPMs name service providers to the fund. PPMs may generally disclose potential conflicts of interest to investors, frequently under the heading of “Risk Factors.”
The fund's offering materials and legal documents must clearly spell out the manager's approach to charging performance and management fees and include a description of the fee schedule; the exact formula used to calculate fees owed, and where appropriate, example calculations. Hedge fund fees should be calculated based on audited portfolio valuations. Where the period of audited financial valuations does not coincide with the fee calculation period, investors should familiarize themselves with the hedge fund manager's portfolio valuation methodologies and the processes used to prepare the fee calculation. Once audited financials become available, the fee calculations should be reviewed and adjusted for any valuation differences.
Performance fees should be based on dollars of value added, not percentage returns or average capital invested for the calculation period. Performance fees computed as carried interest should be calculated on net value added as opposed to gross value added. Offering documents should adequately define "net value added" upon which performance fees are calculated (gross value added less any other expenses charged to the hedge fund). Learn More About Hedge Fund Performance Fees
The PPM also may disclose that the adviser may exercise its discretion to invest fund assets outside the stated strategy or strategies. PPMs also discuss qualifications and procedures for a prospective investor to become a limited partner, as well as provide information about the hedge fund’s operations. PPMs discuss fund expenses, allocations of gains and losses, tax aspects of investing in the fund and may incorporate the hedge fund’s financial statements (see below for an outline of the contents of an offering document).
Hedge Fund Offering Documents Offering Documents are the key to hedge fund sales. While there is no requirement that prospective accredited investors in a U.S. hedge fund be provided with offering documents, it is good (and common industry practice) to do so. Most hedge funds provide written information to their investors in the form of a private offering memorandum. This document—referring to both the prospectus and subscription agreement-- goes by many names and acronyms including: private placement memorandum, PPM, Offering Memorandum, OM or prospectus (“PPM”). Whatever it is called, the PPM is an extensive document individually created for each hedge fund.
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The disclosures in a PPM furnished to investors serve as protection to the principals against liability under the anti fraud provisions. Some of the information may be disclosed less formally in one-on-one conversations between investors and the hedge fund adviser. Hedge fund advisers may also provide information to hedge fund investors in the form of side letters, conference calls and financial statements.
In addition, some hedge fund advisers may provide prospective investors with access to their prime brokers and other service providers, such as administrators, both during the investor’s initial due diligence of the hedge fund and subsequently. Hedge fund investors must often spend significant resources, frequently hiring a consultant or a private investigation firm, to discover or verify information about the background and reputation of a hedge fund adviser. In practice, even very large and sophisticated investors often have little leverage in setting terms of their investment and accessing information about hedge funds and their advisers.
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What is a Private Placement? The private placement memorandum (PPM) is a disclosure document that provides potential investors with the terms and conditions of the hedge fund. This document is similar to a business plan, except that the emphasis is on the disclosure of facts rather than projected results. A PPM includes a discussion of the terms of the offering, the allocation of proceeds, and the risk factors inherent in the business and industry. In general, the memorandum must contain all information about the fund, the investment manager, and the securities offered, as well as any other information that would be considered "material" by a potential investor. The PPM is accompanied by a subscription agreement and investor questionnaire. The subscription agreement is a contract to purchase a specified amount of securities at an agreed price, and contains a statement that the investor has received and reviewed the PPM, is aware of the risk factors, and is a suitable investor. The investor questionnaire elicits information about the investor's background, employment and investment or business experience. It is used, in part, to confirm the investor's accreditation and sophistication. This document should be professionally prepared. Need help? Contact Us for Assistance
Fiduciary Audits PPMs should be written with accountability in mind. Consider the PPM that states that “the goal of the fund is capital preservation.” Unless capital preservation is clearly defined in terms of asset allocation, one might expect that all of the fund’s assets consist of principal protected investments with specific maturity dates as such investment would most likely preserve capital. Given this PPMs should not state capital preservation as a goal unless the fund invests in items that return the principal investment. When used in a PPM, the terms “capital preservation,” “liquidity and marketability,” “risk aversion” need to be defined (and adhered to by the hedge fund manager) with a future audit in mind. In the future, there may be a trend toward investment policy audits (at the top levels of the hedge fund industry).
An investment policy audit evaluates whether the hedge fund manager is in compliance with the statements made in the investment policy and investment strategy section of the PPM. An asset allocation audit examines whether the fund’s portfolio is within the range of a PPMs stated asset allocations percentages. Contact Us for Assistance
Private Placement Memorandum (PPM) Checklist Description of Interests Investment Objective and Strategy Fees and Expenses
IMPORTANT GENERAL CONSIDERATIONS
SUMMARY OF OFFERING AND PARTNERSHIP TERMS MANAGEMENT
Role of the General Partner and the Investment Manager Background of Management Other Activities of General Partner, Investment Manager and Affiliates Investments by General Partner and Affiliates
INVESTMENT PROGRAM
Purpose Features of the Partnership’s Trading Strategy
BROKERAGE PRACTICES
Brokerage Arrangements Soft Dollar Arrangements Referral of Investors Broker and Custodian
RISK FACTORS AND CONFLICTS OF INTEREST
Partnership Risks Market Risks Regulatory Risks Conflicts of Interest
ERISA CONSIDERATIONS
General Fiduciary Matters Plan Assets Plan Asset Consequences
TAXATION
Introduction Classification of the Partnership Taxation of Partnership Operations Tax-Exempt Investors Other Taxes Tax Elections; Returns; Tax Audits Other Matters Special Considerations for Limited Partners who are not U.S. Citizens or Residents State Taxation Future Tax Legislation Collection of Investor Information Disclosure of Nonpublic Personal Information Protection of Investor Information Changes to Privacy Policy
EXHIBITS
A - Limited Partnership Agreement B - Subscription Documents C - Form ADV Part II of the General Partner
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