October 30, 2023

How to Write an Effective Search Fund PPM

Preparing a private placement memorandum (PPM) to share with potential investors is typically the first step for most searchers as they begin their search journeys. A PPM is, in essence, an introduction to the searcher and the search fund.

Needless to say, search fund investors, especially those who have been in the industry long term, probably review countless PPMs on a regular basis. In our experience, these investors tend to focus primarily on the searcher’s biography and background, along with any notes on industry specialization. They may also be especially attentive to any anomalies in designated geography, targeted industries (i.e., new or niche spaces), and the few post-acquisition investment terms that appear in a PPM (e.g., catch-up, vesting terms, board designees, etc.). 

Generally, investors are looking for individuals who can demonstrate a strong combination of skills, experience, and personal qualities to successfully search for, acquire, and manage a business that will generate attractive returns on their investment. The specific criteria may vary from one investor to another, but these factors are generally important considerations in the evaluation process. 

That said, a PPM is also a legal document that will ultimately be distributed with a suite of other investment documents upon closing. As such, preparing a PPM from a legal perspective requires careful attention to detail and adherence to applicable securities laws. Here are some key steps to consider when drafting a PPM:

  1. Introduction: Provide an overview of the search fund, its objectives, its investment strategy, and potential risks in the introductory section. 
  2. Biography and Background: This is the most important section of any PPM. Searchers should highlight any relevant background and experience, emphasizing their qualifications to successfully execute the search and acquisition. Investors prefer searchers with a proven track record of success in their prior professional or entrepreneurial endeavors. This includes factors such as educational background, work experience, and past business achievements. A robust professional network can be invaluable for sourcing potential deals and accessing industry experts. It is also a plus if the searcher has a broad network and the ability to leverage it effectively.
  3. Business Description and Investment Thesis: This is the second most important section of any PPM. Clearly articulate the investment thesis, detailing any specific industries the searcher will focus on, the types of businesses the search fund will target, and the rationale for these choices. Investors want to know how the searcher plans to identify and source potential target companies. A well-defined strategy for finding and evaluating acquisition opportunities is crucial. This includes assessing financials, operational performance, market potential, and any risks associated with the acquisition. 
  4. Industry Focus: It is not at all crucial to have a specific industry thesis, as many successful searchers have been industry agnostic. If the searcher has a specific industry thesis and relevant experience in that industry, consider discussing it in the PPM and drawing that connection in the personal background section. However, there are some caveats. If the specific industry thesis is to be discussed in the PPM, the industry description should be narrow enough to warrant a meaningful conversation but not so specific that it significantly diminishes the target pool. For instance, “healthcare” is too broad, while “healthcare that provides billing services to left-handed dentists on Wednesdays” is far too narrow. The latter is, of course, an exaggeration — but jokes aside, these descriptions are a balancing act, and searchers should exercise judgment in preparing them. The bottom line is investors will want to understand why that particularly industry should have appropriately sized targets that match classic search fund characteristics. It is about whether the searcher can articulate way the industry makes sense for a search fund acquisition more than it is about whether the searcher is merely interested in that industry. Lastly, in order to maintain adaptability, searchers should appear willing to consider other industries, if that is something they are truly open to. Those that are not completely focused on a single industry should discuss at least three but no more than five various industries.
  5. Risk Factors and Risk Acknowledgement: Include appropriate disclaimers regarding the speculative nature of the investment and the absence of guarantees for returns. Disclose potential risks associated with investing in the search fund, such as economic, regulatory, and industry-specific risks. Require potential investors to acknowledge that they have received and understood the risks associated with the investment. If applicable, disclose any potential conflicts of interest that may arise during the search and acquisition process. On the flip side, investors expect searchers to have a clear understanding of the risks involved in acquiring and running a business and a strategy for mitigating those risks.
  6. Financial Projections: Provide financial projections for the search fund, including potential returns, anticipated expenses, and any assumptions made in the projections. Searchers should have a strong understanding of financial concepts, as they will be responsible for evaluating potential target companies, conducting due diligence, and managing the acquired business's financials. The PPM should discuss use of proceeds and explain how the funds raised from investors will be used, including search costs, acquisition costs, and working capital. The financial sections of the PPM represent an opportunity for the searcher to demonstrate to investors that they can model. For these sections in particular, it may be beneficial for searchers to consult financial experts to ensure that the models are accurate, appropriate, and, most importantly, prepared in a way that best demonstrates their modeling capabilities. Finally, a common mistake we often see is the omission of the stepped-up search capital. If applicable, searchers should take care to ensure this is reflected, as it is obviously a meaningful point from the investor’s perspective.
  7. Subscription Process: Detail the terms of the offering, such as the minimum and maximum amount of capital to be raised, the offering price, and the percentage of ownership offered to investors. Outline the process for potential investors to subscribe and participate in the search fund. Since this process constitutes a securities offering, searchers should ensure compliance with federal and state securities laws, including Regulation D and any applicable “blue sky” laws. 
  8. Alignment of Interests and Exit Strategy: Investors often seek alignment of interests between themselves and the searcher. This may involve shared financial incentives and a clear plan for the searcher's compensation, such as any performance-based incentives for the searcher. Investors want to understand the searcher's plan for eventually exiting the acquired business, whether through a sale, merger, or other means. The potential for a profitable exit is a key consideration for potential investors.
  9. Boilerplate Language: While most searchers work off a template and, as such, tend to leave in language that appears “boilerplate,” it is best practice to review such language carefully to ensure that it resonates. That said, there is a high bar to edit such boilerplate language if the searcher is using a tried and true precedent. However, from time to time, there are regulatory or industry updates that render updates to such language necessary. Searchers who have questions or issues with those portions should consult legal advisers who specialize in search funds.

Ultimately, a searcher’s PPM represents a first impression and is an important opportunity for searchers to showcase effective communication, organizational skills, and attention to detail. Because a PPM is also a complex legal document tied to other such investment documents upon closing, any misstatements or omissions can have significant legal consequences. Therefore, it is essential to work closely with experienced search fund attorneys to ensure the PPM not only is attractive but is accurate, is compliant, and adequately protects the interests of both the search fund and potential investors.