A mixed fund that receives capital without specifying investment goals. Investors pay the money to the blind pool without knowing which properties will be acquired. In a blind pool money is obtained generally from investors and is mainly associated with the recognition of the name of a specific company or a person. Most often the money is managed by a general partner, who has wide freedom in making investments. A blind pool may have some broadly stated aims, such as income or growth, or a focus on specific assets or industry. There are usually very few safeguards or restrictions on investor safety. Blind pools are often called 'blank check guarantee' or 'blank check offer' (A. Kleymenowa, 2012).
Blind pools have an uncertain reputation as a result of fraud scandals in the past. Scandals took place in the 1980s and 1990s. They most often occur at the end of a protracted bull market, where investors have not involved in risk analysis and due diligence.
Advantages of Blind Pools
The flexibility granted to blind pools means that they win over traditional funds, which usually follow their investment policies. For example, a real estate investment fund still needs to invest in real estate, even when the market for office space or other commercial real estate is trudging (B. Case, 2010). This guarantees low performance in the short term. In contrast, a blind pool would have the capability to go somewhere else to find better possibilities. Often the only criterion imposed on an investment in a blind pool will be the parameters of financial results.
To optimize and reduce the risk of infestation, investors very often use portfolio diversification (R. Cotton, 2012).
The use of Blind Pools
Blind pools are ordinarily used in energy investing (gas and oil) and real estate (non-traded REITs) and some other assets. Some of the most respected and largest Wall Street firms have underwritten blind pools. Notwithstanding, investors should be very careful of any investment without a stated goal because of a high risk associated with them (R. Jay, 2013).
Studies show that managers investing in blind pools tend to make worse financial decisions, while those whose management is constantly monitored by investors from different pieces of the capital market tend to produce higher returns (B. Case, 2010).
Risk associated with Blind Pools
An investment tool collects capital from the public without informing investors how their funds will be used. These pools are repeatedly used to acquire and convert private companies into public companies without a long registration process. These are risky investments in which investors should pay special attention to the origin and knowledge of officers and promoters. It is worth noting that shares in Blind Pools are often sold at comparatively low prices to the public.
There are many references to the risk of investing in blind pools. Below are examples:
- "Traditional buyers generally prefer the highest possible visibility into a potential purchase. Funds with unfunded capital have blind pool risk and thus bidders typically assign a larger risk premium to the unfunded position which results in a bid lower than 100 percent of NAV" (A. Kleymenowa,2012)
- "The secondary market facilitates investments in more mature funds allowing buyers to avoid paying early management fees. In this market, buyers can obtain immediate exposure to a diverse range of managers, underlying companies, and vintage years while minimizing, or even eliminating, the risk of investing in a blind pool" (A. Kleymenowa, 2012).
- Case B., (2010), Senior Private Markets Research AnalystSenior Private Markets Research Analyst
- Cotton R., (2012), The Benefits of Secondary Funds in a Private Equity PortfolioSenior Private Markets Research Analyst
- Jay R., (2013), Reenergizing the IPO MarketRestructuring to Speed Economic Recovery
- Kleymenova A., (2012), Liquidity in the Secondaries Private Equity MarketLondon Business School
- Steven B., (2004), Shedding New Light on Business Development CompaniesThe Investment Lawyer
Author: Paulina Byrska