Reasons to Consider Using Special Purpose Vehicles

2 min read

Sep 27, 2022 9:52:15 AM | Assure

A special purpose vehicle, also referred to as an SPV or SPV investment, is a subsidiary created by a parent company that is managed as a separate organization. From a high-level view, special purpose vehicles are typically created with the intention to isolate financial risk from the parent company.

SPV investments also establish an environment in which an investor or a financial team have more flexibility to transfer or securitize assets, raise capital, spread the risk of assets or new ventures, and even provide protection against bankruptcy and insolvency.

However, as mentioned, these are some broad strokes when discussing the advantages of an SPV. Because a special purpose vehicle can be structured or tailored to an investor’s design, there can be many different types of special purpose vehicles. This flexibility is what is attractive to many investors looking to start a new venture.

As an investor, you might be familiar with special purpose vehicles, or at least have some grounded knowledge about how they can operate and the advantages associated with them. However, there are many advantages of an SPV, and even more reasons to consider using one, and so it is worth discussing some of the finer points when it comes to special purpose vehicles.

Why to Consider Using

If you have a venture on the horizon, there are many investment strategies you are likely considering. However, special purpose vehicles have an edge over certain other opportunities that you might find beneficial for your situation. Here are a few of the more popular reasons to consider using special purpose vehicles.

Isolating Financial Risk

New ventures tend to introduce an element of risk. This is only natural, and as an investor, you understand the importance of mitigating risk when it comes to investing or reallocating funds. And since special purpose vehicles operate as their own legal entities, they have more freedom to tackle opportunities that might involve additional levels of risk that the parent company might not want to participate in, but this risk is isolated from the parent company.

For this reason, financial managers and company investors like to create special purpose vehicles to take steps toward higher credit risks than their main business. The ability to independently act without impacting the company’s financial well-being is a popular notion, and should the risks lead to bankruptcy, for example, the solvency of the entire company will not be on the line. Even if the special purpose vehicle reaches a place where it is unable to meet its obligations of debt, or it loses its investment, the parent company will not be impacted.

Attracting Additional Investors

Team of investors hearing a presentation.

Special purpose vehicles offer an investment approach that is appealing to many equity investors, lenders, as well as hedge fund managers. The freedom and flexibility of an SPV investment enables venturing into businesses or products that the parent company doesn’t normally offer.

In a sense, special purpose vehicles enable investors to take a new product, business model, or investment strategy on a test run, without worrying of the financial repercussions on the parent company. And since the risks are spread among the investors involved, and there are tax benefits working in favor of the SPV, it creates an atmosphere for an attractive investment approach that remains contained and in control of those involved.

Enabling Creative Approaches to Business

SPV tax benefits and operational freedom help establish an investing environment where new ventures can be tried without the larger company incurring any of the potential risk. This allows investors to be creative, and perhaps not in a way that they might normally feel comfortable doing so.

For instance, if a company wants to keep something secret from its competitors, a special purpose vehicle could be a way to do this. Since the information pertaining to the SPV investment can be kept off of the larger company’s books, the parent company doesn’t have to disclose this information as it pertains to the financials or the investment strategy. This allows companies to test strategies without the inherent risk that is typically affiliated with a new development.

Start Your SPV Today!

There are many reasons to set up a special purpose vehicle, and your investment strategy has the potential to greatly benefit from the opportunities an SPV offers. To learn more about how Assure can help you ensure the success of your next venture, click here and start your SVP today!