- Structuring an SPV requires a highly specialized team with in-depth knowledge of how these vehicles work and the different types that exist.
- This information is intended for fund managers and investors looking to develop a special purpose vehicle for various purposes.
- FlexFunds offers an asset securitization program that uses an Ireland-domiciled SPV to create exchange-traded products (ETPs). For more information, feel free to contact our experts.
Structuring an SPV is no simple task. In fact, itâs a process carried out by highly specialized multidisciplinary teams. The reason is that SPVs are vehicles used for very advanced and sophisticated purposes, generally involving the management of large amounts of capital.
However, below we outline the key points for understanding the process of structuring an SPV and its connection to asset securitization.
What are SPVs?
SPVs, or special purpose vehicles, are financial entities created by a parent company to primarily isolate financial risks.
By registering as a legally independent entity from the parent company, the SPV ensures the fulfillment of its obligations – even in cases of bankruptcy or severe financial distress of the parent company.
In operational terms, the sponsor of the SPV transfers the initial required assets through an asset transfer.
This way, the sponsor retains certain economic interests in the operation and maintains an indirect stake in the project, without formally taking on the role of partner or manager of the SPV.
In all cases, the capital structure of the SPV and its legal relationship with the sponsoring entity are determined by the bylaws and other contractual agreements that regulate governance and the distribution of economic and operational rights.
Main SPV structures
Although all SPVs are developed for similar purposes, they can be structured in many different ways depending on the goals and needs of the parties involved:
Limited Liability Company (LLC) SPV
For example, an SPV can be a limited liability company (LLC).
These companies offer operational flexibility and tax advantages and limit the partners’ liability to their capital contributions, not their personal assets.
Unfortunately, one downside of this structure is that it may face challenges when accepting capital from international investors.
Limited Partnership (LP) SPV
On the other hand, SPVs can also be structured as limited partnerships (LP), similar to LLCs.
The difference is that these entities include two types of partners: the general partner (who manages the SPV and is liable with their own assets) and the limited partner (who only contributes capital and has limited liability).
For this reason, LPs are often used for projects that require a clear separation between management and financing, such as real estate developments.
Joint Venture (JV) SPV
Nowadays, SPVs can also be structured through a joint venture (JV).
This structure is typically chosen when two companies want to collaborate on a joint project but do not wish to merge permanently.
The main advantage is that it allows for a strategic alliance without giving up autonomy. Additionally, risks and benefits are shared between the partners as agreed.
Trust SPV
Lastly, there are trust SPVs, which represent the most common type of structure for the vast majority of financial projects.
In this structure, a trustor transfers assets to a trustee to be managed according to parameters established in the contracts.
For this reason, trusts are frequently used in asset securitization processes, where exchange-traded products (ETPs) are created.
FlexFundsâ securitization program creates SPVs in Ireland, as it is an on-shore jurisdiction and a member of both the European Union (EU) and the Organization for Economic Co-operation and Development (OECD). It is also the only EU country that follows common law.
How are SPVs structured?
There are four fundamental steps involved in structuring an SPV:
Define the SPVâs purpose
The first step is to define the purpose of the special purpose vehicle. An SPV for a short-term real estate development will differ greatly from one for a long-term corporate investment.
Understanding the objective, as well as the potential investors and participants, will help determine the appropriate legal structure, jurisdiction, and other elements of the SPV.
Choose the right legal structure
Next, you must define the legal structure – whether it will be a limited liability company, a trust, a joint venture, etc.
At this stage, itâs important to weigh the pros and cons of each type of entity, along with the laws of the country where the project will take place.
Select the jurisdiction
After that, the parties involved must decide which jurisdiction is the most suitable. As mentioned earlier, Ireland is one of the most flexible options.
By the end of 2024, there were 3,608 SPVs registered in Ireland, with nearly EUR 1.25 trillion in assets under management.
Register Terms and Conditions
Lastly, the terms and conditions of the project and the SPVâs structure must be formally documented.
This includes the company bylaws, articles of incorporation, contracts with third parties if applicable, and any other necessary records to ensure the SPV is legally valid.
To learn more about FlexFunds and our ETPs, remember you can contact our team of experts. Weâll be glad to assist you!
Sources:
- https://carta.com/learn/private-funds/structures/spv/
- https://www.wilmingtontrust.com/library/article/role-of-the-trustee-in-asset-securitization
- https://idsa.ie/industry-statistics/
