SPV Defined: How a Special Purpose Vehicle Company Works

A special purpose vehicle (SPV) is a subsidiary company that operates as a separate company and separate legal entity from its parent company. Another name for the same concept is a special purpose entity (SPE). This type of additional business structure is often useful because it can take on higher risks than a parent company could endure without its investors raising eyebrows.

Allocation of a special purpose vehicle’s own balance sheet and assets, as well as financial reporting and filings of financial statements, occur separately from those of the main business. This is due to the separate legal status of the two entities. Keeping the SPV off balance sheets is symbolic of how this type of arrangement can help shield parent companies from risk.

Big companies and small startups alike are capable of deploying subsidiary companies or SPVs for ethical, financially sound reasons. However, there are cases of entities using SPVs for nefarious or misguided purposes. For instance, selling pools of mortgage loans as SPVs was an instigating factor in creating the real estate bubble that led to 2008’s financial crisis.

Special purpose vehicles, or SPVs, can be attractive options to business owners and investors for a multitude of reasons related to risk mitigation and financial returns. Here are four specific reasons a company might use an SPV:

1. 1. To attract equity investment: Equity investors, lenders, and hedge fund managers are often drawn to the risk of SPVs as an investment strategy. While the issuer of loans might find SPVs are a little less stable in capital markets, for many the potential high rewards offset the risks.
2. 2. To avoid regulatory burdens: It might vary from one SPV to the next, but some allow for business owners to legally skirt regulations or taxes from entities like the US Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS) that their parent companies cannot.
3. 3. To ease asset transfer: SPVs make the securitization process simpler for specific assets. It can be easier and more cost-effective to sell off a tranche (or pool of asset-backed securities) than the individual assets themselves. This is useful if you’re trying to access more financial liquidity or get a quicker estimate on the SPV’s valuation as a whole.
4. 4. To isolate financial risk: The special purpose vehicle is a bankruptcy-remote entity, meaning its potential insolvency and that of the main company cannot threaten each other’s financial individual well-being. For instance, if something disrupts an SPV’s receivables and it cannot meet its debt obligations, this will have no effect on the parent company, as it’s a separate situation. This is why many are more willing to use SPVs that operate at a higher credit risk than their main businesses.

You might see special purpose vehicles structured in various different ways. Here are five forms an SPV business venture might take:

1. 1. Joint venture: SPVs can be joint ventures between multiple companies. If two companies think they could collaborate on a specific project without desiring to merge in total, an SPV provides a solution for this.
2. 2. Limited liability company: A limited liability company (LLC) or limited liability corporation allows business owners to shield their personal assets in the event of a lawsuit. Forming an SPV as an LLC allows the owners to double up on security as a result, since both the main business and the individuals’ personal finances will remain immune from the risks the SPV takes.
3. 3. Limited partnership: A limited partnership operates similarly to a joint venture, except the former is generally a long-term commitment to work together between two or more companies and the latter is project-specific. Forming an SPV simplifies the partnership process for companies seeking to work together.
4. 4. Public-private partnership: Governments will occasionally allow companies to form SPVs to assist them in achieving a shared goal, as in an infrastructure or public defense project. This operates as an incentive to companies, as they will have to take on less risk to assist the state as a result of the SPV formation.
5. 5. Structured investment vehicle: You create a structured investment vehicle (SIV) when you design an SPV as a means to make profits on the difference between securities and debts.

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