A Special Purpose Vehicle (SPV) is a separate legal entity created by an organisation.
Because it’s a separate entity, it has its own assets and liabilities, its own debt, and its own legal status as a company.
SPVs play an essential role in the operations of all types of private investment funds and when expanding and operating internationally setting up an SPV or temporary entity can be useful for the purpose of acquiring and/or financing specific assets.
Over the years there’s been a distinct rise in the use of SPVs and it’s easy to understand why. They not only provide legal and financial protection for the parent company, but they’re (relatively) easy to set up, they have direct ownership of specific assets, and can provide tax savings.
How do SPVs work?
The name, Special Purpose Vehicle, denotes an entity incorporated to achieve a specific purpose – so SPVs have a specific single objective. Since SPVs are legal entities, this objective can be distinct from the main activities of its incorporators.
SPVs are often used to delineate and isolate financial risk and ensure continuity involved with the objective. Because they are separate, should the organisation enter bankruptcy or dissolve, the SPV can continue.
SPVs are also used to allow investors to pool money together under a single entity, allowing these many contributors to invest, together, in a single company.
Typically launched as Limited Liability Companies or Limited Partnerships, SPVs are owned by their members, and dividend pay-outs are made in proportion with member ownership. And each SPV has its own legal status and its own assets and liabilities, so can continue operating even if the parent company has issues.
SPVs are also extensively used by the funds sector. Managing the SPV portfolio and underlying investments in different jurisdictions can be challenging, as each country has its own rigid rules and processes to follow. Further, country-specific regulations and compliance can vary greatly, and be dependent on investment type. And managing ongoing operations and accounting for international SPVs within your fund structure leads to even more complexities.
Reasons for using an SPV company
There are many reasons to incorporate an SPV, including:
- an asset purchase or acquisition – thereby ensuring the asset is treated, and remains, separate and can be sold, mortgaged or refunded separately.
- property sale or purchase – again ensuring the property is considered independently owned. There are also tax benefits for using an SPV for property sales.
- project finance – to gather investors or financiers to fund a specific purchase.
- risk management – lowering the risk that the special objective would bring to the parent company.
- securitisation – the pooling of debt to lower risk exposure, and possibly selling such debt to investors.
For example, a company may launch an SPV to purchase office space for the company to use. Because the SPV is a separate and distinct entity, it retains ownership of the property even if the company dissolves. As a distinct entity, the proper lease agreements and legal paperwork also need to be in place to allow the company to rent space from the SPV.
For funds, a fund manager launches an SPV for each specific investment and once investment goals have been reached, the SPV conducts the purchase or acquisition of a single company. SPVs like this usually have a delineated lifespan.
Benefits and risks associated with SPVs
As SPVs are distinct and separate legal entities, SPVs carry their own legal status, they’re often seen as ‘bankruptcy-remote’: the SPV can continue to operate even if the parent company goes bankrupt.
Using an SPV to pool investors means that every investor knows (and supports) the intended purpose of the SPV – what it will be purchasing and why, as well as what the expected return on investment will be.
An SPV provides direct ownership of a specific asset – the SPV is the official owner, not the directors or investors behind the SPV. (Though this can also be a risk; see below.)
SPVs are relatively easy to launch and incorporate, though regulations vary country to country.
However, there are some risks involved with using SPVs.
The SPV launch process varies by jurisdiction, making some locations much more difficult to launch in than others. Implementing an SPV, in your home country or abroad, can be more complex than you think – each country has its own rigid rules and processes to follow. SPVs can be used for unlawful activity so need to be managed expertly and diligently to ensure strict compliance.
When used by funds or to make an acquisition, the SPV is the official owner or shareholder of the purchase – meaning individual investors don’t have voting rights.
In addition, because the SPV is a brand-new company, and doesn’t share the reputation of the parent company, it has no financial track record. It may be difficult to get loans from recognised financial institutions. They also generally have lower access to capital as they don’t have the same capital flow as the parent company.
But Auxadi can help.
Why Auxadi is your ideal SPV administrator
Multiple international SPVs mean an exponential increase in the required accounting, administration, and management of your ongoing operations. You also need to address regulatory and compliance needs and ensure strong due diligence. This can very quickly become complex, particularly when there’s more than one jurisdiction involved.
Working with a provider who is familiar with your chosen jurisdiction/s, have strong expertise in SPV administration across various different sectors, and know how to get them set up as efficiently and effectively as possible can be hugely advantageous for your business.
Auxadi has over 40 years’ experience with SPVs and can support your SPV through every stage of its life. We offer an end-to-end approach across a wide variety of sectors and jurisdictions, and you can access the data on all your SPVs through our unique, purpose-built MySPV technology platform.
MySPV, gives you access to the accounting and financial information of all your local and international SPVs in real-time. Built in partnership with Microsoft, MySPV offers data security, ease of access, and full visibility of your data.
Get in touch today to find out how Auxadi can help with the launch and ongoing managements and administration of your SPVs.