Blind Pool

What is a 'Blind Pool'

A blind pool is a direct participation program or limited partnership that lacks a stated investment goal for the funds that are raised from investors. In a blind pool, money is raised from investors, usually trading on the name of a particular individual or firm. They are usually managed by a general partner who has broad discretion to make investments. Such a venture may have stated goals, such as growth or income, of focus on a specific industry or asset. There may be few restrictions or safeguards in place for investor security. Blind pools may are also known as "blank check underwriting" or a "blank check offering."

Breaking Down '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.

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), real estate (non-traded REITs), and 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.

Blind Pool History

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 born and later dissolved without making a single investment — though the managers or general partners still make off with hefty fees. Some use the term "blind pool" to describe companies that lack transparency or provide little information to shareholders.

Blind Pool Evaluation

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. 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? (They may have an incentive to take too much risk).