What Is an SPV?

A special purpose vehicle (SPV) is a unique type of entity created to accomplish one or more of several goals.

The easiest way to think about it is as a small, separate company designed to serve as a proxy or an intermediary in order to serve the parent company’s objectives.

You might also hear this called a special purpose entity (SPE), or a bankruptcy-remote entity.

So what exactly is this entity?

How can you use it?

And why would you want to use it in the first place?

The Basics of an SPV

As we've already outlined, an SPV is basically a small, separate company created by a parent company to achieve one or more specific aims. The SPV can be created as a limited partnership, corporation, a trust, a limited liability company (LLC) or a different type of entity – much like a traditional business.

It can be used to create opportunities for independent ownership, isolated management, and startup funding, and it can be useful for securitizing assets, creating new ventures, separating certain business assets, or executing transactions.

One of the most common applications of an SPV is as a tool for pooling investments. Venture capitalists can combine their assets in an SPV to more easily launch a new business or invest in a startup or property. SPVs are distinguished from investment funds, as SPVs usually make only one investment into the new business.

Depending on how the SPV is structured and related to the parent company, its financials probably won't appear on the parent company's balance sheet as equity or debt. In most cases, the SPV tracks all of its own financials independently. This is another advantage, though it can carry some risks.

Unfortunately, many people are familiar with the basics of an SPV because these vehicles were infamously used by Enron in the early 2000s to hide financial data. It wasn't the only unscrupulous trick used by the organization to fool investors, but it was part of the overall scheme.

The good news is, SPVs have earned and maintained a much better reputation in the worlds of business, finance, and investing. It still has the potential to be misused, but in the overwhelming majority of cases, it's simply a convenient tool to assist with legitimate, promising business opportunities.

Why Use an SPV?

SPVs are typically used for some kind of specific purpose, such as:

·       Investing in startups. One of the most common uses of an SPV is to invest in a startup. Thanks to this vehicle, it's easier than ever for multiple individual or corporate investors to pool their assets and function as one unit. It also makes it much easier to track finances and coordinate assets.

·       Isolating risk. You may also want to use an SPV to isolate risk in some way. Remember, an SPV functions as a totally separate business and tracks all of its financial data independently. If your business wants to take on a particularly risky venture, it may be prudent to isolate that venture in the framework of an SPV so you don't have to report on financials related to it on your parent company’s accounting.

·       Facilitating a temporary need or venture. It's also possible to harness the potential of an SPV to make things easier in a temporary venture or to execute some temporary actions on behalf of your parent company. For example, if you're about to execute an acquisition, you may create an SPV to make it easier.

·       Developing, buying, or selling land. Similarly, you may choose to use an SPV for developing, buying, or selling land. Land transactions are a bit easier to facilitate with an SPV in play.

·       Tax optimization. Some businesses utilize SPVs as a tool for tax optimization. Because these vehicles are relatively easy to create and manage, you can use them to coordinate the flow of different assets and ultimately put your business in a much more favorable tax position.

The Advantages of SPVs

These are some of the greatest advantages of using SPVs:

·       Isolation of risk. Arguably the biggest advantage of an SPV is to isolate risk for the parent company. Instead of putting all your eggs in one basket, so to speak, you can distribute your eggs into multiple smaller baskets. This is especially important if your parent company has a powerful reputation to uphold, if you're planning on pursuing a somewhat risky venture, or if you just want to diversify your business portfolio a bit more. There's no guarantee your calculated risks will pay off, so an SPV makes it possible for your business to substantially gain in the best-case scenario and remain neutral in the worst-case scenario.

·       Discrete accounting. Companies also benefit from segmenting their accounting practices. Instead of tracking your company’s financial data all in one location, you can separate some of your priorities and tracking to make things more intuitive and better organized. This is also a way of making sure that certain items don't end up on your company financial sheet.

·       Expanded access. Utilizing an SPV can also democratize access to certain investment opportunities. Because of the relative ease of setting up an SPV, these are commonly used tools for venture capitalists and other investors.

·       Low expenses. Compared to other alternatives, setting up an SPV is relatively inexpensive. There are some costs, as we'll explore below, but they're so minimal that they probably won't jeopardize your profitability and wielding one.

·       Broad utility and potential. Finally, SPVs have broad utility and potential. They can be created quite easily and for a wide range of purposes, and they can be used in a variety of ways to benefit your parent company. The use cases we explored above are just the beginning, as there are many creative ways to make use of an SPV for your business.

The Disadvantages of SPVs

There are some disadvantages to consider, however:

·       Complexities. In the realms of corporations, tax law, and management, SPVs are relatively simple. However, that doesn't mean they're completely intuitive or easy to master. There are some complexities associated with creating and managing spreads that you'll need to be aware of. Typically, that means hiring an SPV expert to help you plan, create, and ultimately manage your special vehicles.

·       Costs. Creating an SPV is typically cost efficient, especially if you're using one for a move that's going to make your business more profitable. However, it's not free. You'll need to account for the costs of creating and managing an SPV before you incorporate one into your plans.

·       Regulatory hurdles. You may also face some regulatory hurdles. Depending on how, when, and why you create your SPV, it may exist in a regulatory environment that's distinct from that of your parent company. In other words, you may have a totally different set of regulatory requirements to adhere to.

·       Imperfect risk isolation. Finally, remember that an SPV isn't a perfect way to isolate risk. With an SPV in place, you'll be able to track financials somewhat separately, and you may be able to protect your parent company from direct flak associated with a questionable or frowned-upon business decision. However, these protections have limited capacity, and they can actually work against you if the public finds out that you specifically used SPVs to hide nefarious or misleading activity. You should never use an SPV for illegal or unscrupulous dealings.

SPVs are a somewhat complex topic.

It’s not hard to understand the basics, but if you want to optimize your SPV successfully, or if you have complicated regulatory and business environments to contend with, things can escalate rapidly.

That’s why it’s important to work with SPV experts who know the ropes and can guide you through the process.

If you’re ready to get started with a free consultation, contact us today!

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