Investor's wiki

Pledge Fund

Pledge Fund

What Is a Pledge Fund?

A pledge fund is a type of investment vehicle in which the participants concur, or "pledge," to contribute capital to a series of investments. Not at all like a blind pool, supporters of a pledge fund reserve the right to survey every investment prior to contributing. On the off chance that they don't support the specific investment being thought of, they can abstain from investing in that particular project.

Pledge funds are a common approach to venture capital investing among investors who wish to hold control over individual investment choices.

Understanding Pledge Funds

The concept of pledge funds acquired fame following the dotcom bubble of the late 1990s and mid 2000s. During that crisis, blind pool funds which had made aggressive investments in technology companies confronted huge losses. In response, investors went to alternative approaches that could permit greater oversight of the investment cycle.

For these investors, the primary temperance of the pledge fund design is that it doesn't force individual investors to back ventures they don't wish to invest in, however which the majority of investors support. As opposed to being forced into partaking in these investments, pledge-fund investors can opt in or out of investments dependent upon the situation. For some investors impacted by the dotcom bust, this was a welcome innovation.

Despite the fact that it has its foundations in the technology startup sector, pledge funds are utilized across various industries and are not restricted to beginning phase investments. For sure, due to the additional flexibility which it offers to investors, pledge fund managers might find it more straightforward to raise capital involving this model as compared to blind pool funds.

Beside permitting investors prudence about whether to back specific opportunities, pledge funds are generally structured in a way like conventional private equity funds. The cash contributed by investors is held in a special purpose vehicle, which is utilized as equity capital while financing acquisitions. The money raised is additionally used to fund administrative expenses and management fees.

While the pledge fund structure offers greater control to investors, it likewise has expected downsides. Specifically, pledge funds might be less able to make the most of time-delicate investment opportunities, on account of the lack of certainty around investor capital. Also, pledge-fund managers might experience issues enrolling third-party investors to aid large deals, since the individuals associated with the pledge fund could contrast starting with one deal then onto the next.

In conclusion, merchants with various admirers might favor dealing with a more traditional fund structure in which permanent capital is as of now set up — especially on the off chance that they wish to close as fast as could really be expected.

Real World Example of a Pledge Fund

Assume you are the manager of a pledge fund specializing in commercial real estate acquisitions. You foster a strategy document illustrating your investment approach, with several instances of potential acquisition up-and-comers. In view of your market research and financial modeling, you receive preliminary interest from 10 investors.

Since you are utilizing a pledge fund model, your 10 investors don't contribute capital into your fund initially. All things being equal, they consent to survey every investment individually and afterward choose whether to invest capital in each proposed deal. With that overall commitment close by, you set out to find and foster expected deals.

In light of the flexibility you offer to your investors, you had the option to find 10 patrons moderately rapidly. Some of them were specifically seeking the control that your pledge fund gives, and they would have been uncomfortable assuming that you had utilized a blind pool model.

Then again, your pledge fund structure isn't without complexities. Specifically, it keeps you from knowing with certainty the number of your investors will decide to invest in a particular project. Thus, you can't rest assured whether a given project may be too large for you to handle. Essentially, while haggling with merchants, you really want to project confidence that you can close the deal in spite of not knowing without a doubt whether your investors will give the required funds.

Features

  • A pledge fund is an investment vehicle where supporters contribute capital on a deal-by-deal basis.
  • The investors reserve the right to opt out of specific investments. Conversely, blind pool investment funds don't offer this level of flexibility.
  • Pledge funds are famous in the venture capital community, in spite of the fact that they are additionally utilized in different areas, like private equity or commercial real estate acquisitions.