What should a private placement memo actually contain? We outline the documentation we expect before bringing an opportunity to members—financials, legal structure, governance, and risk factors.
Off-market private placements—direct investments in operating companies, specialty credit opportunities, or structured products not available through traditional channels—often come with limited documentation. Sometimes intentionally so, as sponsors view extensive documentation as time-consuming and unnecessary for sophisticated investors.
We take the opposite view. Limited documentation isn't a feature, it's a risk. Before we bring any opportunity to members, we require a minimum documentation standard—not because we need regulatory compliance disclosures (though those matter), but because proper documentation forces sponsors to think clearly about their offering, their business, and their risk factors.
Here's what we expect to see, and why each component matters.
A proper placement memo begins with a concise executive summary: what is being offered, in what amount, at what terms, and why an investor should care. This should be 2-3 pages maximum, written for someone encountering the opportunity for the first time.
We're immediately suspicious of opportunities that launch into 40 pages of background detail without clearly articulating the investment thesis up front. If the sponsor can't explain what they're offering and why it's attractive in three pages, that's usually a sign they haven't clarified their thinking—or they're deliberately avoiding clarity.
The executive summary should include: amount being raised, use of proceeds, expected return profile, key risk factors, and timeline to liquidity. If any of these are missing, we ask for them before proceeding.
Most private placements include historical financials—typically three years of income statements, balance sheets, and cash flows. But raw financials without context are almost useless.
We need to understand significant line items, changes in revenue mix, unusual expenses, non-recurring items, and how accounting policies affect reported results. This requires either detailed footnotes (as you'd see in audited financials) or a management discussion section that walks through financial performance year by year.
For example, if revenue grew 40% year-over-year, we need to understand whether that's organic growth, acquisition-driven growth, price increases, or one-time project revenue. If gross margins declined from 35% to 28%, we need to know whether that's competitive pressure, changing revenue mix, or temporary factors.
We also look for financial projections—typically 3-5 years of projected income statements and cash flows, with clearly stated assumptions. We don't expect projections to be accurate (they never are), but we use them to understand how management thinks about the business and what needs to happen for the investment to work.
We need complete visibility into the capital structure before and after the offering. This means: all existing debt (amount, interest rate, maturity, covenants), all existing equity (classes, preferences, liquidation rights), and any other claims on the business (earn-outs, seller notes, warrants).
The use of proceeds section should be specific. "General corporate purposes" is not acceptable. We need to know exactly where the money goes: equipment purchases, working capital (broken down further), debt refinancing, acquisitions (with target identified or at least characterized), or distributions to existing owners.
If proceeds are refinancing existing debt, we need to see the terms of what's being refinanced and why. If the company is replacing 7% bank debt with 12% private credit, there's a reason the bank didn't renew—and we need to understand what it is.
Every private placement involves investing in a specific legal entity—an LLC, corporation, limited partnership, offshore fund, or SPV. We need to understand the entity structure, what jurisdiction it's organized in, how it's taxed, and what governance rights come with investment.
For equity investments, this means understanding: voting rights, board representation, information rights, approval rights over major decisions, and exit rights (drag-along, tag-along, redemption provisions). For debt investments, it means understanding: security interests, collateral, covenants, events of default, and remedies.
We've encountered situations where investors thought they were getting equity but were actually receiving profit interests with no liquidation value, or structures where "preferred equity" had no actual preference over common. The legal structure defines what you actually own—it needs to be clearly documented and reviewed by your counsel.
In private investments, management quality matters enormously. Unlike public markets where you can exit in seconds, you're locked in with this team for years. We need detailed biographies: education, prior experience, track record in current role, and references.
For sponsor-backed deals, we want to understand the sponsor's track record across multiple investments—not just the successes highlighted in marketing materials, but the overall portfolio including losses. We've learned to specifically ask: "What investments from your prior three funds failed to return capital, and why?"
Red flags include: management teams with no prior experience in the industry, sponsor teams that have only worked in up-markets, or situations where key personnel left shortly before the fundraise. None of these are automatically disqualifying, but they require explanation.
The risk factors section is where many private placements fail our documentation standard. Too often, this is boilerplate language copied from prior deals: "Investment involves risk of loss. Past performance doesn't guarantee future results. This is a speculative investment."
We require specific, material risk factors relevant to the particular opportunity: customer concentration (if three customers represent 60% of revenue, say so), regulatory risk (if the business model depends on maintaining specific licenses or operating in a gray area, disclose it), key person risk (if the business depends on one technical expert or relationship, acknowledge it).
Good sponsors use the risk factors section to demonstrate they've thought through what could go wrong. Weak sponsors use it for legal boilerplate. We can immediately tell the difference.
We need to understand the market opportunity and how the company is positioned. This includes: total addressable market, market growth rate, competitive landscape, and the company's differentiation.
But we're skeptical of top-down market analysis that shows massive TAM with no path to actually capturing it. A slide showing "$100B market opportunity" is meaningless if the company operates in a specific niche serving regional customers with $50M annual revenue potential.
Better documentation focuses on bottoms-up analysis: how many potential customers exist, what's the win rate, what's the sales cycle, what's average customer lifetime value, what's required to scale customer acquisition. These details matter more than industry research reports showing massive markets.
Every private investment needs a plausible exit strategy. This doesn't mean a guarantee, but it does mean a realistic path to liquidity based on comparable transactions, strategic buyer interest, or public market comps.
For debt investments, the exit is usually straightforward—maturity date or call provisions. For equity, we need to understand: typical holding period for similar investments, potential acquirers, IPO potential (if relevant), or sponsor's track record of successfully exiting similar positions.
Red flags include: no discussed exit strategy, unrealistic timelines ("we expect to IPO in 18-24 months" for an early-stage company), or exit assumptions that require perfect execution ("we'll be acquired for 12x revenue if we hit our plan").
Finally, proper documentation includes all legal agreements: subscription documents, operating agreements or shareholder agreements, debt instruments (if applicable), and any intercreditor or subordination agreements.
These shouldn't arrive 48 hours before closing with pressure to sign immediately. We require time to review with counsel—typically 1-2 weeks for complex structures. Sponsors who push for faster closings without allowing proper legal review are either disorganized or deliberately pressuring investors to skip due diligence.
We also verify that legal documents match the term sheet and private placement memo. We've encountered situations where the PPM described certain governance rights that didn't actually appear in the LLC agreement, or where distribution priorities differed between marketing materials and legal docs.
Process note
If a sponsor tells you they "don't create formal PPMs for sophisticated investors" or that "documentation will slow down the process," that's not a feature—it's a red flag. We maintain our documentation standard regardless of time pressure, deal heat, or sponsor reputation. Proper documentation protects everyone, and good sponsors understand this.
The quality of documentation correlates strongly with investment outcomes. Sponsors who think clearly, document thoroughly, and welcome scrutiny tend to run better businesses. Those who resist documentation, gloss over risk factors, or pressure for quick closes tend to have problems that emerge later.
We won't bring opportunities to members without proper documentation—not because we're inflexible, but because we've learned that corners cut during fundraising usually indicate corners cut elsewhere.