Special Purpose Vehicle (SPV)

A Special Purpose Vehicle (SPV) is a legal entity created to isolate financial risk and facilitate specific investment objectives. Commonly employed in private equity, SPVs serve as a flexible and targeted tool to hold assets, execute transactions or finance projects while maintaining a degree of separation from the parent fund.

Key takeaways

• SPVs confine the risks and liabilities associated with an investment within the vehicle itself, protecting any associated funds.
• These entities can be customised for various investment objectives, from co-investments to securitisations.
• Structuring SPVs in tax-friendly jurisdictions can reduce overall tax burdens.

What is a special purpose vehicle (SPV)?

SPVs fulfil a narrowly defined purpose, such as acquiring assets, managing investments or structuring debt. Their limited scope makes them a key tool for achieving financial and strategic goals while minimising risk to a fund. As a separate legal entity they are also used to isolate specific assets or investments from the broader portfolio of an investment fund, ensuring that risks and liabilities are contained within the SPV.

In private equity, SPVs often enable co-investments, optimise tax arrangements and address regulatory considerations. They are also frequently used by new general partners (GPs) operating on a deal-by-deal basis to establish a track record before they raise a traditional limited partnership fund structure.

What types of assets can an SPV hold?

SPVs are versatile and can hold a range of assets, including:

• Equity and debt instruments
• Real estate properties
• Intellectual property
• Financial derivatives
• Securitised assets

This flexibility makes SPVs adaptable to various industry-specific requirements and investment goals.

Why are SPVs essential in private equity?

Private equity firms or their individual funds leverage SPVs to isolate risk, pool investor capital for specific projects and enhance operational efficiency. By using SPVs, firms can shield the parent company and other investments from potential liabilities associated with a particular deal, thereby improving investor confidence.

Purpose of SPVs in private equity

SPVs play a pivotal role in private equity, enabling firms to structure deals efficiently and mitigate risks. Here are some of their primary purposes:

Structuring deals

Private equity transactions often involve significant financial and operational complexity. SPVs allow firms to isolate specific assets and their liabilities within a separate legal entity. This focused approach ensures targeted asset oversight while protecting the broader portfolio from potential negative impacts.

Risk mitigation

One of the primary reasons for creating an SPV is to isolate financial risks associated with a particular asset. By containing risk within the SPV, private equity firms safeguard their broader portfolio of investments from adverse impacts. This offers liability protection, safeguarding a fund from potential financial losses due to litigation or other legal matters.

Facilitating co-investments

SPVs are instrumental in offering co-investment opportunities. Limited partners (LPs) can participate in specific deals through SPVs, allowing private equity firms to attract additional capital outside of their main fund.

Increase equity exposure

SPVs enable GPs to allocate additional capital to a specific asset, increasing their influence and strategic leverage over the company. By channeling more funds into an investment, GPs can enhance their voting power and secure greater rights, which in turn strengthens their overall control over the business. And doing this via an SPV benefits from the aforementioned isolation of liability risk.

Common applications of SPVs in private equity

SPVs are highly adaptable and find applications across various private equity strategies, including:

• Leveraged buyouts (LBOs): SPVs are frequently used in LBOs to house the debt associated with the acquisition. This isolates the financial obligations from the parent firm while securing the assets of the acquired company as collateral.
• Co-investments: Many private equity firms use SPVs to enable LPs to co-invest in specific deals alongside the primary fund. This structure ensures that co-investors can directly access targeted investment opportunities without affecting the composition of the main fund.
• Real estate investments: SPVs simplify ownership and financial arrangements in private real estate investments. By consolidating all aspects of a property or portfolio into an SPV, real estate fund managers can manage these assets more efficiently and attract specialised investors.
• Securitisation: In private equity, SPVs can be used to bundle together illiquid investments—often stakes in private companies, private debt or other non-liquid assets—and issue tradable securities backed by these assets. This process allows the original holder of the assets to convert them into cash without directly selling the investments, which could be challenging due to their illiquidity.

Advantages of SPVs for private equity firms

SPVs provide numerous benefits that make them indispensable tools for private equity firms. These include:

• Risk management: By isolating financial outcomes, SPVs protect the parent firm—whether the private equity firm or a specific fund—from potential losses. This separation is particularly valuable in high-risk projects or when dealing with volatile assets.
• Tax optimisation: SPVs can be strategically established in jurisdictions with favourable tax regimes. This enables private equity firms to reduce tax liabilities and improve overall returns.
• Regulatory compliance: SPVs help navigate complex regulatory environments by creating a clear legal and operational structure for specific projects. This is especially useful in cross-border investments where compliance requirements can vary widely.
• Flexible structuring: SPVs can be tailored to accommodate diverse investment strategies, whether it’s a single-asset fund, a project finance vehicle or a platform for co-investment. Their versatility supports innovation in deal structuring.

SPVs are widely used in private equity for their flexibility and risk management benefits. By enabling firms to isolate liabilities, attract co-investors and optimise tax strategies, these dedicated vehicles are an indispensable feature of PE’s asset structuring toolkit. Their application in everything from debt housing in LBOs to securitisation demonstrates their versatility.

Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.