In private fund formation, fund managers face a critical decision: whether to structure their fund as a traditional blind pool fund or a deal-by-deal fund. Each structure offers distinct benefits and challenges, catering to different issuers, investors, and strategies. Understanding the key characteristics, advantages, and disadvantages is crucial for fund managers to select the vehicle that best aligns best with its management style and investor’s preferences.

Traditional Blind Pool Funds

Traditional blind pool funds represent a tried-and-true structure that is the more typical of the two structures. In this structure, investors commit capital which is called by the investment manager or GP as investment opportunities arise. The investment manager or GP retains discretion over all investment decisions on behalf of the investors, deploying the committed capital across a portfolio of investments over a specified period of time.

Key Characteristics:

Investment Selection: Investment managers present one overarching business plan with investment criteria, risks, and strategies for the fund as a whole. Plans for individual portfolio investments are not presented to investors before they subscribe to the fund. Investment managers only select investment opportunities in accordance with the overarching business plan and investment criteria.
Capital Deployment: Investors commit a certain amount of capital upfront, and the investment manager or GP calls upon this capital as investment opportunities arise. Once capital is received, the investment manager or GP deploys capital in its sole discretion. This structure allows for operational efficiency where the investment manager does not need to pitch each deal.
Fund Management: The investment manager or GP exercises significant discretion over the selection and management of investments. Investors rely on the expertise and judgment of the investment manager or GP and have little to no authority on investments made.
Fees and Distributions: Traditional funds have distribution waterfalls and fees disclosed upfront with such distribution waterfalls and fees applying across the entire fund portfolio.

Advantages:

Management Control: Investment managers or GPs leverage their experience to identify and manage investments. Investors have limited to no control and are completely passive in the fund.
Efficient Capital Deployment: Investment Managers and GPs are efficiently able to deploy capital as needed.
Predictable Distributions and Fees: Investors know upfront all fees and distributions involved.

Disadvantages:

Blind Pool Risk: Investors may be hesitant to invest without knowing the specific investments pursued or the specific business plan, returns, or risks of individual investments. Managers can overcome this challenge by building and maintaining trust with investors.
Market Timing: Fund managers must deploy capital within a set time period, which can potentially result in pressured investments during less favorable market conditions.
Raising Capital: Unless managers have a significant track record, it may be difficult to raise capital without identifying individual investments.

Deal-by-Deal Funds

Deal-by-deal funds represent a more flexible approach. In this structure, managers present individual investment opportunities to investors. Investors elect on a deal-by-deal basis which investments they want to invest in, rather than committing to a blind pool.

Key Characteristics:

Investment Selection: Investment managers present individual investment opportunities, business plans, risks, and distribution structures to investors each time an investment opportunity is identified.
Capital Deployment: Capital is committed and deployed on a deal-by-deal basis. Investors provide funds only when they decide to participate in a specific deal and capital may not be as diversified.
Tailored Investment Plans: Investment managers can tailor each investment opportunity to specific investor preferences, market conditions, and business goals. Investors have greater transparency into each investment.
Fees and Distributions: The fund charges fees on a per-deal basis and fees may vary from one deal to another. This can include management fees and carried interest on profits.

Advantages:

Investor Flexibility: Investors appreciate having the freedom to choose which deals to participate in.
Tailored Investment Strategy: Managers and investors can tailor their respective business plans investment decisions to their preferences, risk tolerance, and return expectations.
Selectivity: Managers do not have as much pressure to deploy a large pool of capital, allowing greater selectivity on investment opportunities pursued.

Disadvantages:

Fundraising: Managers must continuously raise capital for individual investments resulting in increased time spent on capital raising.
Administration: Each deal requires additional documentation, due diligence, and investor communication, increasing administrative time and decreasing operational efficiency.
Risk of Non-Commitment: Investors may not commit to every deal, increasing difficulty in funding investments.

Choosing the Right Structure

The choice between traditional blind pool funds and deal-by-deal funds depends on various factors. Fund managers should evaluate its management preferences, investor base, and business goals to select the best structure. If you have any questions, would like to start a fund, or have questions on securities offerings and PPMs, feel free to reach out. We’re here to help!