Blind Pool - Explained
What is a Blind Pool?
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Table of ContentsWhat is a Blind Pool?How Does a Blind Pool Work? Blind Pool HistoryBlind Pool EvaluationAcademic Research on Blind Pools
What is a Blind Pool?
A blind pool is a type of limited partnership scheme that pools funds from a large number of investors without giving a statement on what the funds will be used for. It can also be called a direct partnership approach in which a firm or an individual investor gathers funds or capital from investors without specifically stating the goal of the funds. A blind pool is also known as blank check underwriting or a blank check offering. Contributions of investors in a blind pool are managed by someone with intense knowledge of investment usually called the general partner. Investors trust the general partners discretion to good investments with their funds.
How Does a Blind Pool Work?
Generally, blind pools are flexible, they have the advantage of looking for profitable opportunities unlike a REIT that must invest in property even if it flounders or is insolvent. Unlike traditional funds, blind pools engage in investments that are governed by self-imposed rules. There is however a few restrictions on a blind pool investments, such as financial performance parameters paced on them. Although, blind pools do not have an explicitly stated investment goal for the funds that are raised from investors, they may have goals such as the industry the funds will be invested in and growth or income expected from the investment.
Blind Pool History
Blind pools started enjoying a significant popularity in the 1980s and 1990s. This is a form of limited partnership method that investors use when they desire to make more profits in the market. Blind pools do not follow due diligence, and their fraudulent use by general partners adversely impaired their reputation. Blind pools became renowned alongside other financing methods in the 1980s such as venture capital and angel investing. Despite the possibility that funds might be pooled from many investors without the managers of general partners making a single investment out of the funds, these managers still cart off exorbitant fees from the funds. Companies without transparency often use blind pools.
Blind Pool Evaluation
A blind pool can be evaluated in line of its descriptions; an offering memorandum or private placement memorandum. A private memorandum is a legal document that states the objectives, risks and terms of an investment providing a prospective for investors. If is also known as an offering memorandum. The level of authority that the manager or general partner can exercise as well as the types of investments the funds (blind pools) can be invested in are contained the legal documents. However, blind pools are not transparent when it comes to the type of investments they invest in, this has in turn impeded their effective evaluation. The major evaluation methods that can be used are:
- A review of the past transactions and investments.
- A review of the past performance of the general manager.
- The level of professionalism of investment knowledge that the general partner has.
- The amount of incentive allocated to the general manager or partner.
Academic Research on Blind Pools
- Patent-based investment funds as innovation intermediaries for SMEs: In-depth analysis of reciprocal interactions, motives and fallacies, Gredel, D., Kramer, M., & Bend, B. (2012). Technovation, 32(9-10), 536-549.
- Illiquid alternative asset fund modeling, Takahashi, D., & Alexander, S. (2002). Journal of Portfolio Management, 28(2), 90-100.
- Blind Pool Community Bancorp Closes $1 B Capital Raise, Dai, S. (2010). The Private Equity Analyst.
- Blind Pools' Stalk Bad Banks, Sidel, R. (2009). The Private Equity Analyst.
- Blackstone Weighs Raising $1 B Blind Pool To Buy Failed Banks, Dai, S. (2010). The Private Equity Analyst.
- Real estate portfolio strategy and product innovation in Europe, Hoesli, M., & Lekander, J. (2008). Journal of Property Investment & Finance, 26(2), 162-176.
- Analyzing a Private Placement Memorandum, Peer, N. J. (1988). NJ Law., 33.
- Demystifying the Challenges Facing Fundraising for Private Equity in the GCC Region, Alqahtani, D. S. (2014). The Journal of Private Equity, 30-33.
- Small-and Middle-Market Buyouts, Downer, J., Haggerty, J., & Benham, F. (2011).
- Letter of Credit: Gold Bullion, Austin, L. K. (1984). La. L. Rev., 45, 927.
- Fund managers under pressure: Rationale and determinants of secondary buyouts, Arcot, S., Fluck, Z., Gaspar, J. M., & Hege, U. (2015). Journal of Financial Economics, 115(1), 102-135.