What Investments are SPVs Used For?

What Investments are SPVs Used For?

shutterstock_530884738

A special purpose vehicle (SPV) is a legally structured entity used to pool capital and sometimes used as a subsidiary designed by a parent company to mitigate financial risk.

Since these entities are designated legally as a separate company (usually a LLC), SPV obligations will remain secure, even if the parent company or underlying private asset experiences bankruptcy.

An SPV is created to pool investment capital from investors or by a parent company to safeguard or silo assets in a different asset that, more often than not, is not represented on the parent company’s balance sheet. In this way, the asset(s) attributed to the investors or company are protected. Across the board, SPVs help to build joining ventures, ensure asset security, protect specific corporate assets, or enact other investment or financial transactions.

SPV_LLC

The underlying private assets that SPVs are used to to invest in can range from startup equity, private company debt, real estate, alternative assets, secondaries or other high-risk ventures or investments. Regardless of the purpose, SPVs protect the partners in the entity from risk, even if the underlying asset flounders.

In other instances, an SPV may be designed exclusively to securitize debt so investors are confident in ultimate reimbursement.

Overall, operations of the SPV pertain solely to the acquisition and financing of specific assets. Given the nature of the separate legal structure, this architecture isolates the risks of the associated activities engineered by the startup company or asset.

There are a variety of investor types in an SPV, including an individual, trust, limited partnership, LLC or other corporation, or retirement accounts, among many other options.

What Investments are SPVs Used For?

As discussed above, SPVs have a variety of uses for a variety of purposes. Some of the most common SPV uses include:

1. Pooling Investment Capital

The most common use for SPVs today is for deal-by-deal investment into early stage startup companies. Within private capital raising, SPVs are also called sidecars, syndicates, PE funds, nano funds, pledge funds, LLCs or co-investing.  Raising capital with an SPV allows for up to 250 accredited investors to pool their investment capital into a startup company. Startup companies that are fundraising like SPVs because it keeps the startup's cap table clean.

2. Risk Sharing

Certain projects entail more financial risks than others. If a company foresees involvement in a high-risk project, by creating an SPV, that company can legally isolate the project risks.

3. Securitization

Another common reason to create an SPV, securitization, enables assurance of return on investment. Consider, for example, when a bank issues mortgage-backed securities from a pool of existing mortgages. The bank can then isolate those loans from other existing financial obligations through creation of an SPV. The creation of this vehicle enables investors in the mortgage-backed securities to receive their payments before other bank creditors

4. Asset Transfer

Some assets can be more complicated than others. To make these assets easier to transfer, a parent company can build an SPV to own those hard-to-transfer assets. When the company wants to sell those assets, they can actually sell the SPV itself, completing a merger and acquisition process with the purchasing company.

5. Property Sale

Another common use of SPVs is for sales of property. If the taxes on a specific property sale outweigh the gain from the sale, an SPV is a solution. By creating an SPV that owns the sale property, the parent company can then sell the SPV rather than the properties. The parent company will then pay taxes on the gains from the sale of the SPV, rather than having to pay the sales tax of the properties

How to Start your SPV

If your goal is to invest in a startup company, mature private company, high-risk venture or invest in commercial property with investors, you should consider setting up an SPV to protect you and your investors from financial risk.

Starting your SPV comes with the same requirements as any venture capital fund or limited partnership.

Those requirements are as follows:

  • Legal creation of the entity, usually as an LLC or LP
  • Registered Agent as a liaison between the entity and state
  • Legal documents such as an operating agreement, private placement memorandum and subscription agreement
  • Obtaining a Employer Identification Number (EIN) from the IRS
  • Most capital-raising SPVs will want or need to open a bank account to aggregate the funds from their investors before they send these funds on to the target company or before they complete the asset purchase

By adhering to the above requirements (further detailed in the Anatomy of an SPV), you can ensure that your SPV falls within legal parameters. As you consider options for your SPV, Assure is here to help guide you along every step of the way.

To begin your SPV, click here.

Topics: SPV

TELL US ABOUT YOUR SPV