What Are Special Purpose Vehicles (SPVs) in Investment?
What Are Special Purpose Vehicles (SPVs) in Investment?
SPV, Special Purpose Vehicle, is a legal entity designed for multiple investors to pool capital and collectively invest in a single company. SPV special purpose vehicle finds various applications in business, such as public corporations using them to segregate specific holdings from their parent company’s balance sheet.
In the venture capital sector, fund managers often utilize SPVs to establish a track record or invest in companies outside their fund’s strategy. Essentially, an SPV is a subsidiary created for a singular purpose, frequently employed to safeguard corporate assets or manage potential liabilities.
Special Purpose Vehicles (SPVs) play a versatile role in both business and finance.Â
The following are common applications of SPVs:
Project Financing: SPVs are often established to streamline project financing for large-scale infrastructure projects. They function to separate the financial risk and liabilities associated with a specific project from the parent company.
 Investment Structuring: Special Investment vehicles, a subtype of SPVs, are utilized to structure investments strategically, leveraging interest rate differentials between long- and short-term debt to enhance returns for investors.
 Asset Securitization: In asset securitization, SPVs are employed to convert illiquid assets into tradable securities. This is prevalent in industries like finance, where loans or receivables are bundled and sold to investors.
 Risk Management: Intermediate SPVs aid in risk management by isolating individual assets and liabilities from the parent company. This is particularly common in private equity transactions where specific assets require ring-fencing.
Real Estate Transactions: SPVs find frequent use in real estate transactions to isolate the assets and liabilities of specific properties or projects. This simplifies the management and financing of real estate portfolios.
 Tax Planning: Jurisdictional shell companies, a form of SPV, are frequently employed for tax planning purposes. Incorporating in offshore jurisdictions with favorable tax provisions allows companies to optimize their tax liabilities within legal boundaries.
 Securities Issuance: SPVs play a role in issuing securities such as bonds or asset-backed securities. This allows companies to raise capital by leveraging specific assets without directly impacting their overall financial structure.
 Bankruptcy Remote Structures: Structured to be bankruptcy remote, SPVs ensure that the financial distress or bankruptcy of the parent company does not automatically affect the SPV. This is crucial for maintaining the integrity of specific projects or investments.
 Intellectual Property Transactions: SPVs are utilized by companies to manage and safeguard their intellectual property. By isolating IP assets in a separate entity, businesses gain flexibility in licensing, partnerships, and sales.
 Mergers and Acquisitions: In mergers and acquisitions, SPVs can be employed to facilitate the acquisition of specific assets while keeping them separate from the acquiring company’s core operations.
 SPVs exhibit several similarities with conventional venture capital funds, particularly in terms of taxation, payment structures, capital calls, and regulatory oversight:
 Taxation: SPVs function as pass-through entities, meaning investors are individually responsible for paying personal income taxes on any profits generated through the SPV. The SPV entity itself does not incur any tax liabilities.
Fund Payment Structures: General Partners (GPs) operating an SPV may adopt the common “two-and-20” payment structure used in traditional VC funds. This entails charging a 2% annual management fee on the total Assets Under Management (AUM) and receiving a 20% share of profits after the SPV surpasses the specified hurdle rate outlined in its Limited Partnership Agreement (LPA). The hurdle rate signifies the minimum return the fund must achieve before GPs participate in the fund’s profits.
 Competitive Deal Terms: GPs may adjust payment structures based on the competitiveness of the deal. In situations where the deal is highly competitive, GPs might increase the management fee or carried interest beyond the standard two-and-twenty. Conversely, more favorable terms may be offered to entice reluctant Limited Partners (LPs) to participate in a deal.
 Capital Calls: Unlike traditional VC funds that gradually call capital as needed for individual deals, fund managers utilizing SPVs typically request all capital from investors upfront.
 Regulatory Compliance: SPVs are subject to the same laws and regulations governing other private funds. They operate within the regulatory framework applicable to private investment entities.
 Why Do Angels and VCs Use SPV and Special Investment Vehicles?
 Angels and venture capitalists (VCs) use Special Purpose Vehicles (SPVs) for various reasons:
 Deal-by-Deal Investment: SPVs allow angels and VCs to structure investments on a deal-by-deal basis. Instead of committing to a fund that spans multiple investments, they can create separate SPVs for individual deals, providing flexibility in portfolio construction.
 Risk Isolation: SPVs help isolate and manage risks associated with specific investments by creating a separate legal entity for each investment. They can ring-fence risks, protecting the overall portfolio from the impact of a single underperforming asset.
 Portfolio Diversification: Investors may use SPVs to engage in a variety of industries, sectors, or stages of development without being constrained by the limitations of a traditional fund structure.
 Alignment with LP Preferences: Limited Partners (LPs) in venture capital funds may have specific preferences or restrictions regarding certain investments. special investment vehicles provide a way for GPs (General Partners) to structure deals that align with the preferences of their LPs without affecting the overall fund strategy.
 Efficient Fundraising: Through this, investors can be quickly assembled for a specific opportunity without the need for a comprehensive fundraise.
 Customized Deal Terms: Depending on the nature of the investment and the preferences of the investors involved, angels and VCs can customize the terms of each SPV to meet specific requirements.
 Conclusion
SPVs quicken the investing process while allowing flexibility and strategic co-partnership. However, challenges may arise in aligning LPs and portfolio companies on exit terms. Additionally, SPVs lack the diversification inherent in typical VC funds since they usually invest in a single company.Â
To conclude, despite these drawbacks, SPVs are cost-effective, easy to establish, and serve as a gateway for investors entering the VC ecosystem, particularly during market downturns.
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