What Is a Blind Pool?
A blind pool, also known as "blank check underwriting" or a "blank check offering," is a direct participation program or limited partnership that lacks a stated investment goal for the funds that are raised from investors.
Key Takeaways
- Blind pools are investment vehicles that put very few restrictions on what and how they can invest and can be challenging to evaluate even for sophisticated investors.
- Blind pools, also known as "blank check underwriting" or a "blank check offering," gained a poor reputation over time as some people abused the freedom to fleece investors.
- A potential use for a blind pool vehicle is to provide funding for the acquisition of private companies to take them public outside of the traditional regulations and registration process.
Understanding a Blind Pool
In a blind pool, money is raised from investors, usually based on the name recognition of a particular individual or firm. They are usually managed by a general partner, who has broad discretion to make investments. A blind pool may have some broad stated goals, such as growth or income, or a focus on a specific industry or asset. There are usually few restrictions or safeguards in place for investor security.
One potential use for a blind pool vehicle is to provide funding for the acquisition of private companies to take them public outside of the traditional regulations and registration process. Blind pools are commonly used in energy investing (oil and gas wells) and real estate (non-traded REITs), as well as some other assets.
Some of the largest and most-respected Wall Street firms have underwritten blind pools. However, this backing aside, investors should be very cautious of any investment without a stated objective because of the added risk.
Critcism of a Blind Pool
Blind pools are often a product of late-stage market rallies when investors and financiers tend to become more greedy than prudent and forego proper due diligence. They became popular in the 1980s and 1990s alongside venture capital and angel investing, but many fraudulent deals involving blind pools gave them a bad name.
Sometimes these pools are created and later dissolved without making a single investment—though the managers or general partners still make off with hefty fees. Some people also use the term "blind pool" to describe companies that lack transparency or provide little information to shareholders.
Because of the stigma around blind pools, new variations with slightly more defined parameters have cropped up. Special purpose acquisition companies, for example, are essentially blind pools with tighter controls.
Benefits of a Blind Pool
The flexibility afforded to blind pools gives them an advantage over traditional funds, which tend to employ self-imposed rules governing investments. For example, a real estate investment trust (REIT) still has to invest in property even if the market for office space or other commercial properties is floundering. This would all but guarantee poor near-term performance.
In contrast, a blind pool would have the ability to go elsewhere to find better opportunities. Often, the only criteria placed on a blind pool investment will be financial performance parameters.
Evaluating a Blind Pool
Blind pools are generally not aimed at the everyday investor, but even institutional investors can have trouble properly valuing them.
The first step in evaluating any blind pool is to examine its prospectus, offering memorandum, or private placement memorandum, which tend to be long legal documents that outline what the fund may invest in and how much authority is given to the manager. As such, pay close attention to the fine print and disclosures.
Given that blind pools are so free-form when it comes to what they can invest in, it can be difficult to evaluate them in the sense of comparables. There are a few techniques, however:
- Review the general partner's past performance. Look past returns to try to get a picture of their investment process and see if it is repeatable.
- View specific transactions to see if they are similar to the current opportunity. Was performance good across the board or dependent on a few big winners?
- Does the general partner have good business relationships to call upon for ideas and advice?
- How is the fund manager compensated? For example, they may have an incentive to take too much risk.
FAQs
The main risk associated with blind pools is the lack of transparency and control. Since investors do not have detailed information about the specific investments, they are unable to assess the risk and potential returns associated with those investments.
What does it mean when a private market fund is a blind pool offering? ›
A blind pool, also known as "blank check underwriting" or a "blank check offering," is a direct participation program or limited partnership that lacks a stated investment goal for the funds that are raised from investors.
What reduced blind pool risk? ›
Limited blind pool risk
This means they don't know the eventual contents of their investment when they invest — they are blind to what will be in their pool of investments. In secondary investment, by contrast, this blind pool risk is limited, as secondary investors buy pre-existing assets and portfolios.
What is the difference between GP and LP? ›
General Partners (GP) vs Limited Partners (LP)
General Partners (GP) are the active managers and decision-makers responsible for running the venture capital fund, while Limited Partners (LP) are passive investors who provide the capital but have limited control or involvement in the fund's day-to-day activities.
What are the advantages and disadvantages of pooled funds? ›
They provide an affordable and efficient way for investors to access a wide range of securities. Investing in pooled funds can offer several advantages, including diversification, professional management, and high liquidity. However, like all investments, they come with risks and costs.
What is the downside risk in investing? ›
Downside risk is the potential for your investments to lose value in the short term. History shows that stock and bond markets generate positive results over time, but certain events can cause markets or specific investments you hold to drop in value.
What is the opposite of blind pool? ›
A pledge fund is an investment vehicle in which backers contribute capital on a deal-by-deal basis. The investors reserve the right to opt out of specific investments. By contrast, blind pool investment funds do not offer this level of flexibility.
Why would a company do a private offering? ›
Shares sold in an initial public offering (IPO) are offered to the general public and tend to attract more attention. However, private placement allows a company to raise money without going public and having to disclose financial information to the world.
What is a blind pool of capital? ›
A blind pool describes when a limited partnership raises funds from investors without telling them where the money will be invested. Funds for blind pools are often solicited from the public. They can usually purchase the shares in question at relatively low prices, given the risks associated with such investments.
What is a blind investment? ›
A blind trust is a financial arrangement in which someone's investments are managed without the person knowing where the money is invested. Blind trusts are used especially by people in public office, so that they cannot be accused of using their position to make money unfairly. [business]
A J-curve depicts a trend that starts with a sharp drop and is followed by a dramatic rise. The trendline ends in an improvement from the starting point. In economics, the J-curve shows how a currency depreciation causes a severe worsening of a trade imbalance followed by a substantial improvement.
What are the benefits of GP LP structure? ›
Key Takeaways
LP/GP structures can create a symbiotic relationship between equity investors. Co-GP funds may offer passive investors an opportunity to share in the profit potential of the sponsor promote while avoiding day-to-day management of the asset.
Why are private equity funds limited partnerships? ›
Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”).
Can you be both a GP and an LP? ›
The same person can be both a general partner and a limited partner, as long as there are at least two legal persons who are partners in the partnership. The general partner is responsible for the management of the affairs of the partnership, and he has unlimited personal liability for all debts and obligations.
Is building a pool a bad investment? ›
Under optimal conditions, a pool can increase the resale value of your home, but, unfortunately, according to real estate agents, not by much. On average, a pool adds only about 7% to your home's total resale value, with a high-end in-ground pool adding up to 8%.
What is the riskiest investment on the investment pyramid? ›
The top of our pyramid represents the most risky of all investments-options and futures. These investments are for the savviest investor. Many fortunes can be made and lost in this category.
What are the disadvantages of pooling equity? ›
Disadvantages. When money is pooled into a group fund, the individual investor has less control over the group's investment decisions than if he were making the decisions alone. Not all group decisions are best for each individual in the group. Also, the group must reach a consensus before deciding what to purchase.
What are the risks of investing in managed funds? ›
You have no control over investment decisions and may not know the exact makeup of the fund's portfolio. The markets may go against the managed fund, which could lead to losses. Some managed funds may also carry additional risks based on the type of assets they invest in.
