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.
- 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.