Preliminary Investment Memorandum
Also written PIM · Preliminary Investment Memorandum (PIM)
A memorandum a fund's investment team may present to its Investment Committee, detailing a proposed investment and deal structure, to get authorisation to sign the term sheet.
In plain language
A term sheet is not a binding contract. But it is still a commitment. It carries an exclusivity period. It sets out a valuation range, board rights and investor rights. And it tells the company that the fund is serious. So an investment team should not sign one on its own authority.
The Preliminary Investment Memorandum (PIM) is how the team gets that authority. Before signing the term sheet, the team may send a PIM to the Investment Committee. The PIM sets out the proposed investment and deal structure. Its purpose is to get authorisation to sign the term sheet.
Two phrases in the workbook's sentence carry weight. The first is "may". The PIM is an internal governance step, not a rule set by a regulator. The second is "depending upon the protocols". Whether a PIM is needed depends on how the manager's own organisation is set up.
How it works
Two Investment Committee touchpoints before the term sheet.
| Step | Document | What it seeks |
|---|---|---|
| After the management presentation | A brief 2–3 page investment proposal | To alert the Committee to the deal, or a go-ahead to negotiate; a cost-cover if needed |
| After negotiations, before the term sheet | Preliminary Investment Memorandum | Authorisation to sign the term sheet |
What goes into an investment proposal to the Committee. Section 7.6.2.1 lists what proposals put up for in-principle and final screening usually contain:
- Executive summary — proposed transaction, background, deal team recommendation and investment thesis;
- Company overview — history, products, customers, suppliers, competitors, organisation, management biographies;
- Market and industry overview;
- Financial overview — historical and projected income statement, balance sheet and cash flow;
- Risks and key areas of due diligence;
- Valuation overview — comparable company analysis, precedent and peer transactions, DCF, multiple-based valuation;
- Exit — strategy, options and anticipated timing;
- Deal structure and term sheet conditions;
- Recommendations and proposed investment size and structure.
How the Committee reads it. The Manager or Investment Committee examines every proposal for (a) whether it conforms to the primary investment theme of the scheme, (b) performance, risk profile and management of the portfolio, and (c) fund-level risk concentration and compatibility with the return potential.
What happens next. With authorisation, the team presents the company with the non-binding term sheet. Due diligence review begins only once the term sheet is executed by both parties, and its findings may lead to a revised final term sheet — which becomes the basis for the definitive agreements.
A worked example
Illustrative figures. After six weeks of negotiation with Nagpur Agro Foods, Deccan Consumer Fund II's team has broad agreement on the deal. Before signing a term sheet it takes a PIM to the Investment Committee:
| PIM heading | Content |
|---|---|
| Proposed investment | Rs 120 crore for a minority stake |
| Valuation | Pre-money range of Rs 560–620 crore (a range, not a single number) |
| Structure | Rs 90 crore in equity shares, Rs 30 crore in CCPS |
| Investor rights | One board seat, affirmative rights on capital structure and business plan changes, tag-along on promoter shares |
| Exclusivity | 90 days |
| Key risks and diligence areas | Second-line management depth; related-party sales through a promoter-owned distributor |
| Exit | IPO in 5–6 years; strategic sale as fallback |
At a Rs 120 crore cheque, the stake would be between 120 / 740 = 16.2% and 120 / 680 = 17.6% post-money, depending on where the valuation lands in the range.
The Committee checks fit with the fund's consumer theme, the effect on concentration (Rs 120 crore is 13.3% of the Rs 900 crore fund) and the return case, and authorises signing subject to a condition that the related-party distribution arrangement be a specific focus of the legal and financial DDR.
Why NISM asks about it
Chapter 7 (Investment Process and Governance of Funds) introduces the PIM at 7.1.4 alongside the term sheet, and sets out the contents of investment proposals and how the Investment Committee assesses them at 7.6.2.1. Expect a sequencing question — the PIM comes before the term sheet is signed and before due diligence review — and a question on its purpose: authorisation to sign the term sheet.
Common exam traps
- The PIM seeks authorisation to sign the term sheet, not final approval of the investment.
- It "may" be presented, "depending upon the protocols" of the manager — it is internal governance, not a SEBI requirement.
- It comes before the term sheet; due diligence review comes after. The DDR does not commence until the term sheet is executed by both parties.
- Do not confuse it with the 2–3 page investment proposal after the management presentation, which alerts the Committee or seeks a go-ahead to negotiate.
- Valuation in the term sheet is often a range, so a PIM can sensibly carry a range too.
- It is not a Private Placement Memorandum. The PPM is the AIF's offer document to its investors; the PIM is an internal deal document.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Definitive AgreementsThe binding agreements signed between an investee company and the investment manager representing the AIF to complete an investment — chiefly the share subscription agreement and the shareholders' agreement.
- Investment CommitteeA committee the manager of a Category I or II AIF may constitute to approve the fund's investment decisions; its members are responsible for those decisions and bound by the Code of Conduct.
- Management PresentationA meeting arranged by the company's bankers at which its key management team presents the business to a fund's investment team, ahead of the team's investment proposal to its Investment Committee.
- Final Investment MemorandumThe memorandum a PE fund's deal team prepares once the investment committee gives final approval, proposing a specific valuation — which the start-up can still negotiate before final agreements are signed.
- Non-binding Letter of IntentThe document a private equity fund gives a target after initial due diligence, proposing an investment amount, a valuation and a stake — none of which it is yet obliged to honour.
- Term SheetThe non-binding document in which an AIF and an investee company set out the main terms of a proposed investment. Once signed, it leads to due diligence and then to the binding definitive agreements.
- Deal SourcingThe investment manager's work of finding, screening and completing investments in suitable unlisted companies — through networks, intermediaries and its own research — to build a deal pipeline.
- Due Diligence ReviewThe three-part investigation — business/commercial/technical, financial and legal — an AIF's investment manager runs on a potential investee company after the term sheet is signed and before the definitive agreements.
- Exclusivity PeriodA term-sheet clause under which the investee company agrees not to negotiate with other potential investors while the AIF completes its due diligence and definitive agreements.