What is an SPV?

What You’ll Read

• Legal structures of an SPV 
• What’s the difference between an SPV and a fund?
• How have SPVs impacted the venture ecosystem?
• How SPVs will impact private market transactions in the MENA region

Key Takeaways

• Special Purpose Vehicles (SPVs) describe legal entities commonly used by founders and investors in the private markets to transact efficiently and seamlessly.
• SPVs provide benefits to both investors and founders by way of simplifying the capital raising process, aggregating investors into a single entity, and providing flexible solutions to participate in an investment opportunity outside of a fund’s thesis. 
• Zest makes it easy for investors and founders to create SPVs with our platform. 

Background

Special Purpose Vehicles (SPVs) describe legal entities commonly used by founders and investors in the private markets to transact efficiently and seamlessly. Below, we’ll explain what they are, why they’re used, and how they benefit the private market ecosystem.

Introduction

Special Purpose Vehicles (SPVs) were originally created as a mechanism to separate financial risk from a parent company. The SPV would act as a separate legal entity with its own asset and liability structure to ensure that its activities would not affect the financial health of the parent company and vice versa. SPVs have been used for a variety of reasons across the financial landscape, including asset transfers, securitizations, property sales, and more. 

In venture capital investing, SPVs have been commonly used as a way to group investor capital under one entity to make a singular investment in a start-up.

Legal structures of an SPV 

SPVs can adopt different legal structures based on the intent of the entity, and the jurisdiction in which the entity is created.

Special purpose company (SPC) vs special purpose entity (SPE) vs special purpose vehicle (SPV)

These naming conventions, albeit slightly different, all describe the same type of entity - which as described above, was originally created as a mechanism to separate financial risk from a parent company. In venture capital, this type of entity has been commonly used as a way to group investor commitments under one entity to make a singular investment in a start-up.

Series structure vs single SPV

Occasionally, a manager will set up a single SPV entity to make an investment without any intention of creating future SPVs for subsequent investments. In this case, it may make sense to set up a single SPV. 

However, managers often have the intention of wanting to create SPVs for several different investment opportunities, particularly if they intend to use SPVs as a way to build their track record and grow their investing practice. In this case, setting up a Series structure can save time and complexity. 

A Series structure allows a manager to create subsequent entities with a single filing, known as a Master entity, and without additional registration. By doing this, a manager is able to quickly spin up future SPV entities under the same Master entity which saves time and costs.

Legal Distinctions

SPVs can be created around the world. Based on local and national regulations, the exact legal entity for an SPV can vary. 

For example, SPVs that are created in the United States are often set up as either limited partnerships (LP) or limited liability companies (LLC) and are commonly registered in the state of Delaware. Common jurisdictions also include the Cayman Islands, British Virgin Islands, and in the MENA region, Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) zones, and can be designated as LLCs or exempt companies. 

A Series structure in the state of Delaware is set up as Series LLCs or Series LPs, while a Series structure domiciled in the Cayman Islands is set up as Segregated Portfolio Company (SPC), under which Segregated Portfolios (SPs) are created. This is what we use at Zest to create SPVs. In the ADGM and DIFC, these Series structures are often designated as Cell Companies.

What’s the difference between an SPV and a fund?

Funds are entities that are created to pool investor capital, which is then managed by a General Partner who has the discretion to allocate the capital from their investors (Limited Partners) across investment opportunities within the mandates of their Limited Partner Agreement (LPA). As a General Partner, when you raise a fund, you are selling your investment strategy to prospective LPs that you will plan to implement once you’ve raised capital and conducted your first closing of the fund - this can often take up to 24 months or longer when raising a fund. 

On the other hand, an SPV is often formed to group investor capital for one specific investment opportunity. As a General Partner of a Fund, creating a dedicated SPV means that you are selling the investment opportunity at hand when raising capital from LPs. The fundraising timeline for an SPV is often much shorter than it is for a fund, as a manager is looking to raise and deploy the capital into the investment opportunity quickly. SPVs are also formed by business owners (founders) or syndicate leads to invest in a single company alongside their network of investors.

How have SPVs impacted the venture ecosystem?

SPVs are used in the venture ecosystem for different reasons. 

Founders of companies have benefited tremendously from the growth in popularity of SPVs. Specifically, founders use SPVs for the following reasons:

• Simplify the capital raising process.
• Accept smaller check sizes from investors, including at the earliest stages of a company’s life and during a “friends and family” round.
• Include value-add angel investors, startup operators, and advisors in the company’s success, thereby creating additional supporters of the company. 
• Streamline the company’s cap table by combining multiple investors into one entity with ownership in the company, reducing future costs and operational hurdles. 
• Maintain an organized cap table to prepare for follow-on financing rounds or M&A discussions.

Founders use Zest to simplify their cap tables during or even after their fundraise.  

Syndicate leads and fund managers utilize SPVs for a variety of purposes in the private markets. Key benefits of using SPVs for deal leads include:

• Syndicate leads are able to build their investing track record and develop relationships with their network of investors. 
• Syndicate leads are able to invest in opportunities on a deal-by-deal basis in a cost-effective manner. 
• Fund managers can take their pro-rata allocation even if the fund doesn’t have enough capital left to deploy. 
• Fund managers are able to participate in investment opportunities that may be outside of their fund’s investment thesis, investment time period, or concentration limits based on geography, sector, or company stage. 
• Fund managers may create an SPV for strategic co-investment opportunities with LPs who are not involved in the fund.

Syndicate leads and fund managers use Zest to digitize their processes and seamlessly set up SPVs. 

Participating investors take advantage of SPVs as part of their investment strategy for several reasons, including:

• Investors maintain autonomy over their investment decisions and are able to diversify their portfolios accordingly.
• Investors are able to access opportunities for much lower investment minimums than are typically required to be directly on the company’s cap table.
• Investors are able to access liquidity (subject to the company’s approval).

Investors benefit from Zest’s mission to increase transparency and digitization within the SPVs they are participating in.

How SPVs will impact private market transactions in the MENA region

SPVs will play a significant role in the development of the private market ecosystem across the MENA region. We believe the use of such vehicles will result in further capital deployment across early-stage and late-stage companies, consolidation of administratively-intensive cap tables for founders, and secondary liquidity opportunities for both investors and founders in the future. With investor interest across the MENA region growing for access to co-investment and deal-by-deal opportunities, we expect SPVs to play a pivotal role in investor activity throughout the coming years.

How Zest can help

If you are looking to set up an SPV to group your investors, Zest can help. 

Zest is digitizing private market transactions, building tools to streamline how entrepreneurs, funds, and investors transact. Our platform is designed to save you time and reduce administrative costs, simplifying the end-to-end investment process