Special Purpose Vehicles are commonly known as SPVs. They are also referred to as Special Purpose Entities or SPEs. Your SPV could be a trust, partnership for a limited time, or another organization.

What is an SPV?

This is a legal object that has a specific singular purpose. It is used to aid its creators by isolating the company’s assets and projects. In simple terms, investors can feel more secure and confident about their investments.

Interestingly, the operations of the SPV include various financial transactions that are not limited to:

• Acquiring specific assets
• Creating joint ventures
• Financing these corporate assets
• Funding and managing businesses
• Isolating risks associated with these assets
• Act as a derivative instrument in terms of credit

Banks could create SPVs to protect their loans and mitigate risks. If a company creates an SPV for the ownership granted to a property, it is sufficient if it sells the SPV instead of the property. They need to pay only the tax they have gained on capital, not the property tax.

It is a must-have in modern investing as it reduces any negative repercussions for parent companies and their investors. The parent company is protected from any risks during the investment and the investors have a more stabilized income. How is that? It is simply because assets are harder to transfer but SPVs can be sold as mergers and acquisitions.

How can this help investors?

An SPV acts as a separate company and the investor can be reassured of receiving their payment. It is similar to a limited liability corporation that has independent ownership.

In some cases, they are also established to divide and manage operations. They are similar to Venture Capital funds in the sense that both funds invest in startups. While joint ventures are formed by a partnership of various companies, SPVs are formed by many investors joining hands.

These vehicles have sufficient status to make their obligations secure with minimal dependence on other parties. The SPV has its balance sheet and can be used to protect investors while embarking on risky ventures.

SPVs can also be created to divide and manage a company’s operations. If the company wishes to gain funding or isolate a specific operation from the business, it can create an SPV. It is a common practice as external investors don’t wish to be affected by the business’s risks and they don’t want their interest rates to get affected.

Financials of the special purpose vehicle

Let’s discuss the financials of an SPV that don’t appear as equities or debts on the parent company’s balance sheets. As mentioned, they have their balance sheets and the equities, assets, obligations, and liabilities are recorded there.

The SPV acts as an indirect source of financing for the parent corporation. Debt obligations are purchased by independent equity investors that the SPV brings in.

Suppose you wish to take a large subprime mortgage loan. You could have a big credit risk depending upon how to proceedings go. In such cases, it is beneficial for you as an investor to seek protection against the bankruptcy and insolvency of the company.

The SPV can help you in such a case provided you understand their roles and study their balance sheets. There are times when the SPV doesn’t know the company’s financial situation and tends to mask a lot of details from investors.

It is best to know their entity maintenance tax returns - are they paying the administrative dues on time? Are their distributions, exits, terminations, investment decisions, and so on established and concise?

These are vital aspects as only by knowing these details will you know if the SPV can be trusted and if they are in the right position to help you.

Summing up

What we can understand here is that special purpose vehicles are built to protect both the parent company from bankruptcy and investors from their loans.

They are easy to create and help isolate any potential financial risks. They also give investors direct ownership of corporate assets. They have some freedom of their own and maintain their balance sheets.

It is always a good idea to study their balance sheets and gain significant knowledge of both the parent and SPV companies.

To know more about special purpose vehicles and how they can protect you as an investor, click here.