A Special Purpose Vehicle or SPV is a legal entity that is often arranged as a subsidiary of a company and confers on it a particular status or purpose. It is used for financial and asset management in a variety of sectors. In the past, SPVs have come in for criticism because they have been misused, notably in the case of American corporation Enron and Lehman Brothers. Managed properly and with sufficient regulation, they can provide numerous benefits.
Prior to the financial crisis, SPVs were considered far too flexible and a tightening up on the regulations and governance in the ensuing years has gone a long way to making them more viable.
- They provide the chance for investors to access opportunities that wouldn’t normally be available.
- They can protect the core parts of a business by reducing the risk from the asset that has an SPV applied to it.
- It can help reduce red tape and make the transfer of assets much easier and quicker.
There are of course risks associated with employing an SPV – there could be an impact on reputation and risks to funds and liquidity that need to be taken into account. Having said that, many more corporations and businesses see the benefits of setting up this kind of arrangement.
Why would you need an SPV?
With current regulations there are numerous ways in which an SPV can be used. Essentially, it’s a temporary legal entity that is used to perform a specific task. For example, an SPV may be created by an investment bank or insurance company and is designed to reduce a particular risk or protect a singular entity.
In the past, SPVs have been used a lot for securitisation for loans and assets such as property. It was a big aspect in the subprime property market in the US where risky debt was pushed into securities that investors were likely to find more attractive.
You can use a SPV to handle the transfer of an asset that would be difficult to get rid of within the structure of an entire company. This makes it a self-contained package which can be more easily disposed of.
If you want to start a new venture but don’t want your existing business to be at risk, it can be financed by using an SPV. It can mean certain investors can put money into a specific venture while others can stay out of the loop. This is being increasingly used for large infrastructure costs such as building stadiums or office blocks.
The SPV can protect the main company from any adverse conditions, particularly isolating the financial risk of an acquisition or venture. This is perhaps the most controversial aspect of the SPV and there have been high court challenges over its suitability in cases such as these.
Finally, SPVs can, in some circumstances be used to gain more favourable financing. Because the entity is separate from the parent company, any lender will look at the assets of this rather than of the company as a whole.
The Benefits of SPVs
- A single entity can be owned by multiple partners and transferred to a SPV making it easier to transfer between interested parties.
- It cuts down on red tape that would have to be handled if the asset was held within the main company.
- The whole process can take place very quickly and give business owners more room to manoeuvre in as little as 24 hours.
- The documentation for a SPV can be tailored to prevent certain transactions or unauthorised behaviour that protects the entity.
- There are potential tax benefits to using SPVs
- Liability can also be limited if the SPV involves something that may risk the integrity of the holding company.
There are also some pretty big risks associated with using SPVs. First and foremost, the lack of transparency can make it difficult to track multiple SPVs which can lead to mistakes. There is also the prospect of reputational risk if things go wrong for the sponsoring company. There can be liquidity risks associated with SPVs as well as risk to equity if a large asset is held in a SPV.
With the high profile cases of Enron and Lehman Brothers in recent times, the regulations and governance surround SPVs has come under increasing scrutiny. That includes improving reporting capability and having appropriate oversight, particularly for large corporations who could well employ several different SPVs at any one time. Better regulation and simpler models would also help.
Having said that, off-balance models such as SPVs will continue to play an important role in financing projects and providing investment opportunities. Changes to the current regulatory framework will have an impact and how banks use them in the future and how well the parameters for safe implementation are put in place are going to be key factors.