An SPV (special purpose vehicle) or SPE (special purpose entity) is, in general, a legal entity created for a specific transaction, like pooling capital from a variety of investors into an LLC that invests in a startup, real estate project or other asset.
Forming an SPV
An SPV (special purpose vehicle) is, in general, a legal entity created for a specific transaction, like pooling capital from a variety of investors into an LLC that invests in a startup, real estate project or other asset. Once formed, the SPV can be owned and managed by members of the SPV or by a third party manager. The SPV is responsible for managing its own decisions, funds, reporting and risk capital. Still, an SPV can be formed to essentially run on “auto mode,” with a pre-punched program that requires little to no management decisions. Some SPVs even go without a central office and are based only in documents such as shareholder agreements.
Though independent in many ways, an SPV is still bound by the purpose for which it was created. In other words, the SPV cannot engage in any activities not part of the special purpose goal. Once the purpose for which the SPV was created is attained, the SPV should be terminated.
SPV’s are referred to by a variety of names, SPE, LLC Fund, and Syndicate. The name by which an SPV entity is referred typically depends on the purpose of the SPV.
Purposes of an SPV
There are several reasons you may form an SPV. One main, overarching purpose of an SPV is to reduce risk. It allows the organizer and manager of the SPV to aggregate the risk into one vehicle. If the SPV ever goes bankrupt, it will not affect other entities. Aside from reducing risk, you may form an SPV simply to gain independence from the parent company in terms of ownership, management, and funding.
Types of SPVs
There are two types of SPVs: off-balance and on-balance. An off-balance SPV documents its equity, assets, and liabilities on its own balance sheet, while an on-balance SPV documents these things on the parent company’s balance sheet as equity or debt. Most parent companies prefer off-balance SPVs, as they offer lower risk, lower funding costs, higher credit ratings, and better management of assets and liabilities.