Special Purpose Vehicles (SPVs) may seem complex due to their unique components and nuances. However, they are becoming an increasingly popular tool in the investment world. This article aims to simplify SPVs, explaining their purpose, benefits, and how they are formed.
What is a Special Purpose Vehicle (SPV)?
An SPV, or Special Purpose Vehicle, is a legal entity created solely for pooling capital from multiple investors to invest in a target asset. While SPVs have been around for a while, their use has become more prevalent in recent years, especially in venture investing.
Why are SPVs used?
SPVs offer a host of benefits to different types of investors and fund managers. In venture investing, SPVs enable a group of smaller investors to pool their capital together to make a single, larger investment. This is particularly useful when there’s a high minimum investment requirement.
For founders, SPVs help keep their cap table clean, as the SPV appears as a single line item instead of multiple entries. This simplifies investor relations, as the SPV manager becomes the single point of contact for investor updates.
For deal managers, SPVs can be set up to capture management fees and carried interest, similar to a Venture Capital (VC) or Private Equity (PE) fund. This can be a lucrative opportunity for those who put the deal together.
SPVs: A Boon for Fund Managers, Angel Investors, Syndicates, and DAOs
SPVs expedite the formation and execution process, allowing fund managers, angel investors, syndicates, and Decentralized Autonomous Organizations (DAOs) to be agile in today’s competitive funding environment. They also improve the funding experience for Limited Partners (LPs) or members and founders, making SPV management a breeze.
SPVs vs Special Purpose Entities (SPEs)
The terms SPV and Special Purpose Entity (SPE) are often used interchangeably. The primary difference is that SPEs are typically trusts or companies. Despite seeming complicated, both SPVs and SPEs can be quite straightforward when set up and managed correctly.
Components of an SPV
An SPV, often referred to as a ‘disregarded entity’, is typically structured as a Delaware Limited Liability Company (LLC) with pass-through taxation. This means that the LLC itself is not taxed, and any income or capital gains taxes generated from the SPV are passed on to the owners of the LLC.
The Operating Agreement and Private Placement Memorandum (PPM) are key documents that outline the purpose and use of the SPV. The Subscription Agreement allows SPV members to commit the capital they wish to invest in the SPV.
Parties Involved in an SPV
An SPV involves several parties, including the target company, the manager or sponsor, the members, and the closing agent. Each party plays a crucial role in the formation, operation, and eventual wind-down of the SPV.
Understanding Know Your Customer (KYC) in SPVs
KYC, or Know Your Customer, is a set of guidelines that anyone facilitating a transfer of money must follow. It is designed to protect against money laundering and other illegal financial activities. The KYC process ensures that all parties involved in an SPV have been verified.
Whether you’re an emerging manager looking to build your portfolio or an existing fund looking to capture an opportunity outside of your fund’s scope, SPVs are becoming the go-to vehicle for pooling capital and executing investment opportunities. Understanding the different components and factors that make up an SPV is crucial in today’s investment landscape.