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Sep 27, 2022 9:51:36 AM | Assure Analytics
This is a follow-up to Assure Analytics’ latest contribution to the March edition of Assure Structured Live. This quarterly virtual conference covers all things SPV and will deepen your knowledge of fund structuring and administrative needs. All of the Masterclass sessions are also available on-demand for additional insights on this topic or other expert discussions on SPVs.
SPVs raise capital across the spectrum of deal sizes – from thousands to millions to hundreds of millions of dollars. They invest in a diverse array of assets from startup companies, to real estate projects to crypto currencies. In our recent Assure Structured Live presentation, the Analytics team dove into the long-tail of the SPV market: a growing segment of deals that raise $250,000 or less. Historically, formation and administration fees would have made this category of SPVs essentially unviable. But with Assure driving down formation and administration costs in recent years, these SPVs have become feasible and increasingly common. Today, sub-$250,000 SPVs comprise more than a third of Assure deals and represent a unique component of the private markets.
In this article, we look at specific insights around the growth in this market segment and some of their underlying characteristics. For investors considering formation of an Assure SPV targeting less than $250,000 in capital, we hope this article provides insights that support your strategies, tactics and perspectives on the market.
We’ve seen a steady increase over the last three years in the prevalence of SPVs raising $250,000 or less. In 2021 alone, there were nearly 850 of these SPVs with combined capital totaling over $80 million. By volume, this segment is up 4X in the last three years, and today represents over a third of Assure SPVs. Considering the growth of SPV activity in general, we interpret this trend to mean that as more investors embrace SPVs (and Assure democratizes access to the private markets), investors are increasingly comfortable using SPVs for smaller and smaller capital raises. Innovations such as Assure Labs make SPVs viable for deals of all sizes.
While $80 million across all sub-$250K SPVs is a relatively small sum compared to the broader SPV market (2021 Assure SPVs totaled $3B), the real influence of these SPVs comes from their significant place within vehicle (or deal) count.
In the last few years there has been a steady reduction in the average and median SPV size in this segment of the market as more investors are doing smaller deals. Whereas in 2015 the average and median both hovered around $150,000, that has since dropped to an average of $96,000 and a median of $80,000.
This change is a direct result of the introduction of the Assure Labs product, which enables more deals at lower ticket sizes. Reduced structuring and administration costs fuel and facilitate this market trend towards a new minimum viable threshold of SPV deal size.
Turning to the source of capital, this section takes a look at the role of investors in this segment of the SPV market. For brand new organizers, the plunge into raising that first SPV can sometimes be daunting. In this section, we offer context on typical investor capital commitments for this portion of the SPV market. (Some first-time organizers, such as family offices and VCs, start with much larger SPVs. We’ll discuss these segments of the market in future articles.)
In 2021, the average sub-$250K SPV raised its capital from just seven investors, each contributing an average of $22,000 to the deal. The median was even lower, raising an average of $13,000 each from just five investors.
This demonstrates that SPVs are extremely accessible when compared to historical private market standards. The 850+ SPVs in this segment are proof that private market investments are being made with close networks and investor commitments at modest ticket sizes.
It also points to SPVs as an extremely effective tool for emerging fund managers building track records. Rather than needing to convince numerous LPs to commit several hundred thousand dollars each to a blind-pool fund, new SPV organizers can more easily gather checks from 5 to 7 investors who are comfortable risking $10K on an unproven dealmaker.
There have been other notable trends among investors backing sub-$250K SPVs. In recent years the average number of investors per SPV dropped significantly, and by 2021 that figure was less than a third of its 2015 level.
This demonstrates that organizers don’t need hundreds of investors (or even dozens) to get started with SPVs. It is particularly relevant for new organizers who believe they don’t have a sufficient investor base to successfully put together private markets deals. SPV organizers are proving that it only requires a handful of commitments to raise enough capital to begin making investments.
Different organizers have different fundraising strategies: whether it be a distributed capital raise, a raise that uses one or two big anchor investors, or a sole investor raise. Like other segments, sub-$250K SPVs vary in their ownership profiles.
It is most common for these SPVs to fall into the “Large Anchor” classification (this category is defined by one investor owning at least 25% of the SPV). Interestingly, 21% of the sub-$250K SPVs formed in 2021 have an ownership profile where a single investor owns 95%+ of the SPV (“Nearly Sole Investor”).
Of course, bear in mind that SPV ownership profiles can be driven by strategy, circumstances, and luck. You may think your network will align with a certain ownership profile, only to be surprised by an unexpected new investor, or vice versa. But the significant concentration of SPVs (>50%) among a close network of investors shows that only a small number of investors is needed to fund a deal.
Lastly, the following chart breaks down the type of investment structures used by SPVs to invest in deal assets. Although roughly two-thirds of 2021 sub-$250K SPVs used traditional investment types (stock, convertible notes, and SAFEs) to purchase assets in private companies and startups, a sizable portion (38%) used (or also used) what we’ve defined as “Other Investment Types.” This encompasses everything from crypto tokens to LP membership units to leasing agreements to options. There is a substantial variety of investment agreements within this other category, but perhaps one of the most interesting details is that it’s grown 10X in just the last few years.
Also of note, in recent years there’s been a decline in the prevalence of SPVs investing via preferred stock, from 60% as in 2018 to just 20% in 2021. One potential driver of this is the recent surge in startup investing competition. Investors may be adopting more founder-friendly terms and eschewing preferred stock deals in order to win access and get deals done faster. Another key factor is the use of SPVs to structure deals across asset classes from Art, to Antique Cars to Crypto to Real Estate, going well beyond the startup market.
SPVs raising $250K or less have become an integral part of the broader SPV market, growing over recent years to account for more than a third of deals today.
The organizers operating in this segment of the market range from brand new angels and syndicators to highly experienced dealmakers whose networks or preferred deal stages and asset types tend towards these types of SPVs.
These SPVs are trending down in size, with more modest investor commitments. They’re raising $15,000 to $20,000 from each of their investors, and they’re increasingly raising from smaller investor groups.
In short, SPVs have evolved into a robust, highly flexible mechanism for private market investing. The introduction of Assure Labs was the catalyst for this shift in market dynamics. As the data shows, Assure SPVs can be used by anyone, anywhere to invest across the spectrum of private market assets.
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