Special Purpose Vehicles (SPVs) play a crucial role in the efficient functioning of the global financial market. The parent company creates them as a separate legal entity to transfer risks, acquire financing, or for any specific investment endeavor, as explained by FlexFunds in an analysis reproduced below:
What is a special purpose vehicle (SPV)?
Special purpose vehicles are entities that have specific purposes. An SPV is a legal entity with its assets and liabilities and has a distinct identity from its parent company. Parent companies legally separate the special purpose entity primarily to isolate the financial risk and ensure that it can meet its obligations even if the parent company declares bankruptcy.
A special purpose vehicle (SPV) is also a key channel for securitizing asset-based financial products. In addition to attracting equity and debt investors through securitization, being a separate legal entity, an SPV is also used to free up capital, transfer specific assets that are generally difficult to transfer, and mitigate concerted risk.
What are special purpose vehicles (SPVs) created for?
Risk transfer and risk isolation are among the most critical objectives for creating SPVs.
There are different reasons why companies decide to create an SPV:
- Risk sharing
SPVs allow the transfer and sharing of risk among investors.
- Securitization
SPVs are used for the securitization of multiples types of assets.
- Asset transfer
Assets that are difficult to transfer can be repackaged in an SPV, which saves costs and avoids problems during sales, mergers, or acquisitions.
- Tax optimization
SPVs are also used to reduce tax burdens, especially on property sales. SPVs are also created to raise capital at more favorable rates for future investments, projects, and joint ventures, among other purposes.
What can be a potential SPV structure?
SPVs can adopt various business structures, among which the following stand out:
1.-Joint project:
Companies seeking to collaborate on a project can form a special purpose vehicle such as a joint venture.
2.- Limited liability company:
The idea behind forming an SPV as a limited liability company is to create a separate legal entity with its identity, rights, obligations, and liabilities. In the event of insolvency or a lawsuit, the parent company may find it easier to protect its assets and liabilities from certain issues.
Similar to joint ventures, limited partnerships exist for short periods. Having an SPV as a limited partner streamlines the entire partnership process and operations.
3.- Public-Private Partnership:
SPVs are often used as an arm of a company seeking to participate in a government project.
4.- Structured investment vehicle:
Structured investment vehicles are specific SPVs created to earn returns between debt and equity in a company.
SPV vs. private equity funds
Timing and investment allocation are the main differences between SPVs and traditional venture capital funds.
Traditional venture capital funds are long-term investments. It can take up to 10 years before a venture capital firm exits all investments in a fund’s portfolio. In contrast, SPVs generally seek to return money to investors in a much shorter period because earning a return depends on only one company achieving an exit, such as an acquisition or IPO.
The number of investments, the most significant difference between an SPV and a traditional venture fund is that an SPV invests all of its capital in one company. Traditional venture capital funds, on the other hand, invest in many companies operating within stages and industries that fit the fund’s investment thesis.
As for the regulation of SPVs, the laws and regulations governing private funds in each jurisdiction where this entity is created apply.
FlexFunds’ asset securitization program can enable you to convert any asset into a bankable asset by creating an Irish SPV in half the time and cost of any other alternative in the market.
Advantages of using an SPV
- Unique tax benefits: Some SPV assets are exempt from direct taxation if established in specific geographic locations.
- Spread the risk among many investors: Assets held in an SPV are financed with debt and equity investments, spreading the risk of the assets among many investors, and limiting the risk for each investor.
- Cost-efficient: It often requires a meager cost depending on where you created the SPV. In addition, little or no government authorization is needed to establish the entity.
- Corporations can isolate risks from the parent company: Corporations benefit from isolating certain risks from the parent company. For example, if assets were to experience a substantial loss in value, it would not directly affect the parent company.
Disadvantages of SPVs
- They can become complex: Some SPVs may have many layers of securitized assets. This complexity can make it challenging to monitor the level of risk involved.
- Regulatory differences: Regulatory rules that apply to the parent do not necessarily apply to the assets held in the SPV, which may represent an indirect risk for the company and investors.
- Does not entirely avoid reputational risk for the parent company: In cases where the performance of assets within the SPV is worse than expected.
- Market-making ability: If the assets in the SPV do not perform well, it will be difficult for investors and the parent company to sell the assets back into the open market.
FlexFunds designs investment vehicles issued by Irish SPVs and backed by world-class service providers such as BNYM, Interactive Brokers, Apex, or Bloomberg. FlexFunds‘ solutions make it easy for clients to raise capital from international investors and access global private banking.
For more information, don’t hesitate to contact the experts of FlexFunds at info@flexfunds.com.
For Pablo Gegalian
For Emilio Veiga Gil