A pledge fund is a
collective investment scheme that allows backers to make investment decisions on deal-to-deal basis. It emerged after the
dotcom bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet
The Internet (or internet) is the global system ...
when many investors abandoned the conventional
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
fund format in favour of
angel investor clubs that allowed members to decide on whether to take part in a certain investment opportunity. The model itself isn't limited to
venture financing and can be applied across a multitude of business sectors wherein investments are made on per-deal basis.
Unlike the traditional
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
fund, the pledge fund allows investors to opt-in or opt-out of each investment opportunity the manager presents. The capital is contributed to a
special purpose entity
A special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited ...
that purchases the shares. The fund may be organized within one SPV or establish separate SPVs for every portfolio investment. Execution of investors' right to opt-in and opt-out of deals makes pledge fund management, administration and documentation more complicated than of traditional private equity fund. Pledge fund model minimizes investing partners' capital risks but has certain drawbacks. For example, the extra time required to assess and screen investment opportunities and deal execution uncertainty may be disadvantageous in competitive acquisition process.
See also
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Private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
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Private equity fund
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Search fund
References
Private equity
Venture capital
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