- In this article, we analyze the advantages and disadvantages of SPVs or special purpose vehicles, independent legal entities created to manage the investment of a specific project with certain legal, tax, and operational benefits.
- SPVs are used to create specific financial structures that help separate risks, facilitate investment, manage assets, and meet particular business objectives. At FlexFunds, we offer the possibility of issuing exchange-traded products (ETPs) through an SPV established in Ireland that is fully tailored to the client’s needs. Contact us for more information!
In the current and complex financial universe, there are different types of investment vehicles that serve to protect and increase capital according to the goals and needs outlined. Among the most innovative are SPVs.
What are SPVs?
Specifically, special purpose vehicles (SPVs) are independent legal entities created to manage investment in a particular project.
In the startup and financing ecosystem, companies pool investment from various market participants into an SPV to facilitate the management of the social capital structure.
While SPVs are used in various market sectors, they are predominant in early-stage real estate, technology, or renewable energy projects.
SPVs “provide a wider range of investors, or limited partners, the opportunity to invest in companies without having to commit their entire investment upfront or pay significant management fees,” commented Susan Akbarpour, Managing Partner at Candou Ventures.
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Advantages of SPVs
Special purpose vehicles offer multiple benefits for the parties involved:
Limited liability
SPVs provide limited liability for those investing capital. This means that, in case of default, their personal assets are protected, and their liability is limited to the money invested in the financial vehicle.
Risk management
Furthermore, managers can better handle investment risk by separating the assets and liabilities of the parent company, limiting exposure, and reducing potential losses.
Tax efficiency
Another attraction of SPVs is that they could provide tax benefits, as they can be established in a tax-efficient jurisdiction to reduce taxes on income and capital gains.
Operational flexibility
Special purpose vehicles can be structured in various ways based on clients’ needs and goals because they can be formed as debt, equity, or hybrid vehicles.
Disadvantages of SPVs
While SPVs are comprehensive, they are not without drawbacks:
Lack of transparency
One of the main problems with SPVs, although not always the case, is their occasional lack of transparency. Those who contributed the money may not know exactly what assets are inside, how they are performing, or what associated risks exist.
Leverage
Moreover, many special purpose vehicles may be highly leveraged to achieve greater benefits, which could result in significant losses if debt is not managed properly by professionals.
High complexity
Creating and managing an SPV is not a simple or inexpensive task. Investors or entrepreneurs must carefully analyze the benefits of incorporating such a vehicle into their strategy, as it may entail administrative and legal costs for adding separate records, financial statements, tax returns, etc.
Conflicts of interest
Finally, SPVs may experience conflicts of interest. For example, the sponsor of the vehicle (the entity that creates it for the “special purpose”) may also be the manager, which can be problematic if there is an incentive to obtain a personal benefit rather than that of the investors.
FlexFunds and SPVs
At FlexFunds, a leading provider in designing and creating investment vehicles, we offer the possibility of issuing exchange-traded products (ETPs) through an SPV established in Ireland fully tailored to the client’s needs.
We work with renowned international providers to provide personalized and cost-effective solutions. To learn more, do not hesitate to contact our experts.
Sources:
- https://www.forbes.com/sites/forbesagencycouncil/2023/08/21/spv-driven-funds-democratizing-venture-capital-through-transparent-investor-communication/?sh=26bfcab04a59
- https://www.capboard.io/es/captable/gestion-spv
- https://legalvision.com.au/pros-cons-special-purpose-vehicle/#drawbacks-of-an-spv-structure
- https://fastercapital.com/content/Special-purpose-vehicles–SPVs—The-Backbone-of-Shadow-Banking.html
