In the last issue, we examined who controls the clock, and why timing decisions are fundamentally a governance question.
But governance does not exist in the abstract.
It is written down. Disclosed. Structured into documents that investors receive before they commit capital.
Which raises the practical question:
If governance determines outcomes, how do you find it in the document in front of you?
That is what this issue is about.
Who Reads an OM/PPM and How
In Canada, this document is called an Offering Memorandum (OM). In the US, and most other countries, it is called a Private Placement Memorandum (PPM). The analytical framework in this issue applies equally. For simplicity, we use OM/PPM interchangeably throughout.
Most investors read a PPM the same way they read a pitch deck, starting with the return projections and the team bios, then checking the minimum investment. And they miss most of what matters.
Sophisticated investors read a PPM differently.
They read it as a governance document first and a return document second. Because returns are projections. Structure is a commitment. And the structure of an offering: how decisions are made, how money flows, who controls what, and under what conditions determines whether projected returns have any realistic path to realization.
The numbers tell you what the Sponsor/GP hopes will happen. The structure tells you whether the Sponsor/GP has designed a vehicle capable of getting there and whether your interests are protected along the way.
The Framework: 7 Things Sophisticated Investors Look For
01 The Waterfall, Not the Headline Return
The return projection on the cover page is management’s best case under favorable assumptions. The waterfall, the distribution priority structure buried deeper in the document, tells you what actually happens to cash when it flows.
Read it carefully. It answers the questions the headline return does not:
- Does the LP receive return of capital before the Sponsor/GP participates?
- Is there a preferred return, and what is the rate?
- At what point does the Sponsor/GP’s participation begin and at what percentage?
- Are refinancing proceeds treated as return of capital or as distributions?
- Is the waterfall the same at every liquidity event, or does it change at exit?
A waterfall that prioritizes LP capital return and preferred return before any Sponsor/GP participation is structurally aligned. One that allows early Sponsor/GP participation before LP capital is returned is not regardless of what the headline return suggests.
Read the waterfall first. Then read the headline return.
02 Who Controls Timing and Under What Conditions
The party that controls timing often controls outcomes. In a PPM, timing control is embedded in the governance section, and it is rarely summarized on the cover page. You have to find it.
Look for:
- What decisions require LP or LPAC approval versus Sponsor/GP discretion
- Whether there is a defined hold period or whether exit timing is open-ended
- What triggers a mandatory distribution event
- Whether the Sponsor/GP can extend the hold period unilaterally
- What vote threshold is required to force or block a sale
A strong structure defines these boundaries clearly. It does not leave timing to Sponsor/GP discretion without investor consents.
If the governance section is vague on timing control, assume the Sponsor/GP controls it because ambiguity in legal drafting typically benefits the drafter.
03 How the Sponsor/GP Gets Compensated and When
Sponsor/GP compensation is one of the most revealing sections in any PPM. Not because compensation is inherently problematic. A Sponsor/GP should be compensated for sourcing, managing, and growing the platform. But because the structure of compensation determines where incentives point.
Ask three questions:
- Does the Sponsor/GP co-invest alongside LPs and at the same terms?
- Are acquisition, refinancing, and disposition fees reasonable and clearly disclosed?
- At what point does the Sponsor/GP’s economic upside beyond base compensation trigger?
In many private placements, fees are not paid directly to the Sponsor/GP. Instead, they flow through a Management Company, a separate entity often owned by the Sponsor/GP, that employs the team and invoices the fund or platform for services rendered. This is standard market practice, and worth understanding.
The management fee, typically 1-2% annually, compensates for running the platform: acquisitions, site oversight, lender relations, investor reporting. It is earned regardless of performance. Platform management is not passive work, and the OM typically includes cure provisions for non-performance.
Some Sponsor/GPs use a different model: a fixed salary booked directly as a platform operating expense, bypassing the management fee structure entirely. Three distinctions matter:
- Visibility: A salary sits in the platform P&L as an operating expense, visible and benchmarkable. A management fee is charged upstream, against LP capital or AUM, before it flows through the operating business.
- Quantum: A salary is typically lower in absolute terms than the equivalent management fee on a growing capital base. Unlike a percentage fee, it does not automatically scale with the size of the raise.
- Incentive: A salary does not create an incentive to raise more capital for its own sake. A percentage fee does.
Both are paid regardless of performance. Neither model is inherently superior. But where the cost lands, how large it is, and what behaviour it incentivises are meaningfully different.
Different strategies justify different governance and compensation structures, but sophisticated investors evaluate whether those structures are internally consistent with the stated investment mandate.
04 What the GP Co-Invests and at What Terms
Co-investment is alignment made concrete. A Sponsor/GP who invests their own capital alongside LPs at the same price, under the same terms, subject to the same waterfall, has economic skin in the game. That changes decision-making in ways that fee structures and governance provisions alone cannot replicate.
Look for three things:
- The size of the co-investment as a percentage of total committed capital
- Whether the co-investment is at the same unit price as LP investors
- Whether it is subject to the same distribution waterfall and hold period
A meaningful Sponsor/GP co-investment can be a strong alignment signal, particularly when it is invested at the same price and under the same economic terms as LP capital. A nominal co-investment of less than 1% or one made at a preferential price is not alignment. It is optics.
If the PPM is vague on co-investment terms, ask directly. A Sponsor/GP confident in their alignment will answer clearly.
05 What Requires Investor Approval and What Doesn’t
The governance section defines the boundaries of Sponsor/GP authority. Read it as a map of what the Sponsor/GP can do without asking you.
Sophisticated investors look for:
- Whether major acquisitions above a defined threshold require IC or LPAC or Board approval
- Whether new debt or significant leverage changes require investor consent
- Whether related-party transactions are subject to LPAC or Board review
- Whether the Sponsor/GP can be removed for cause and without cause and what vote threshold is required
- Whether fee increases require investor approval
The presence of defined approval thresholds and meaningful consent rights for LPs signals that the Sponsor/GP has thought carefully about governance. Their absence signals the opposite.
Pay particular attention to related-party provisions. Undisclosed related-party relationships are among the most common sources of LP value erosion in private placements.
06 How Conflicts of Interest Are Disclosed and Managed
Every private placement involves conflicts of interest. The question is not whether they exist, it is whether they are disclosed, managed, and governed.
A well-constructed PPM names its conflicts explicitly:
- Where the Sponsor/GP has economic interests in service providers to the platform
- Where the Sponsor/GP manages other vehicles that might compete for the same assets
- Where compensation structures create incentives that may not align perfectly with LP returns
- How those conflicts are managed through disclosure, LPAC/Board oversight, or independent approval
Vague conflict disclosure, language that acknowledges conflicts exist without specifying what they are, is a yellow flag.
The willingness to name conflicts specifically, and to describe the mechanism for managing them, is itself a signal of operational maturity.
07 What the Downside Scenario Actually Looks Like
Every OM presents a base case and often an upside case. The document that earns sophisticated investor confidence also presents a credible downside and explains what happens to LP capital in that scenario.
Look for:
- Whether sensitivity analysis is included and how it is constructed
- What the worst-case MOIC and IRR look like and whether they remain above the return of capital threshold
- Whether real asset ownership or other structural features provide a downside floor
- What the DSCR looks like under stress and whether the platform can service debt without a liquidity event
- Whether the downside is stress-tested across multiple variables simultaneously, not just one at a time
A Sponsor/GP who presents only favorable scenarios is either not stress-testing their model or not sharing the results.
The IKS Takeaway
The document is not the investment.
But it tells you whether the people behind the investment think like owners or like promoters.
Owners design structures that work for everyone because they intend to be inside the structure for the duration.
Some structures are optimized primarily for capital formation rather than long-term alignment.
Read the PPM to find out which one you are dealing with.
Structure first. Returns second. Always.
