Post by Benjamin Lapidus, Director of Acquisitions, Spartan Investment Group, LLC
As a passive investor, you may find yourself asking “which type of investment vehicle is a better fit for me: single deal or blind pool?” First, let’s define the choices:
A single deal or single asset investment is investing into a single managed asset with your cash. Your capital cannot be used for anything else other than that, and your return will be based strictly on the performance of that single asset.
A blind pool, on the other hand, is an investment into a managed fund, which allocates your capital into several manager-owned investments as the manager sees fit.
Both types of vehicles for syndicating capital have many similarities, and depending on how the Operating Agreement is drafted not every investment will be the same. Nor will every managed investment categorically exhibit the same pros and cons listed below. Nevertheless, most do, so let’s dive in.
Ultimately, the choice between the two investments comes down to the following distinguishing features:
A single deal investment allows you transparency into your investment. You have the opportunity to review not only the manager’s history and track record but also the specific features of the real estate that make it an attractive investment. Investing in single deals gives you control into how and where your funds are distributed.
Additionally, there is a marginal degree more liquidity in a single deal investment in that your funds are returned as soon as the asset is disposed of, which is not necessarily the case in a blind pool. Finally, fees are fixed in a single deal investment. Fees can only be charged one time on your capital for the life of the investment.
The cons are that you may spend more time picking and choosing your investments as a result of allocation control. Some investors do not like to spend time considering their choices, while others prefer control.
Secondly, an argument can be made that a single deal investment is less diversified, which is true if you are comparing to an equal size investment into a fund. However, diversification can be achieved by investing in multiple single deal investments on your own.
A blind pool’s pros and cons are essentially the opposite. You have limited choice into where your funds are allocated. Your transparency is limited to reviewing the manager’s history, track record, and the asset class in general, not the specific real estate investment choices. Your capital can be kept beyond the life of a single asset as the fund lives beyond the life of the fund’s ownership of that single asset.
And most notably, there can be increased fees. Specifically, a manager can choose to sell one asset and purchase another so that both disposition and acquisition fees are earned a second time, even if the trading of assets does not benefit the fund. This is called “burn and churn,” and some funds have legalese against this, but not always.
The pros of a blind pool are that if you trust the manager and their track record, then you can save time by giving up control and allocation choice into multiple assets, which will, in turn, give you a marginal degree more diversification without any extra effort needed by the passive investor.