Special Purpose Vehicles in the Alternative Investments Industry – Overview and Considerations

Special Purpose Vehicles (“SPVs”) have become a popular investment structure in today’s alternative investment universe. Fund managers frequently form SPVs for the predefined purpose of holding a single investment for a finite period of time. There are many reasons why a manager may choose to establish a Special Purpose Vehicle, and there are specific considerations to be made before making the decision.

WHAT ARE SPECIAL PURPOSE VEHICLES

Special Purpose Vehicles are legal entities, usually limited liability companies or limited partnerships, created to fulfill specific, temporary objectives. As separate legal entities, SPVs have their own operating and ownership structures and are financially independent entities with their own balance sheets.

WHY USE A SPECIAL PURPOSE VEHICLE

Special Purpose Vehicles can be attractive investment structures for private equity, venture capital, hedge fund, and real estate investment managers. Some of the benefits of utilizing an SPV may include:

  • Protecting assets and separating liabilities of a parent or subsidiary company
  • Holding investments by private sponsors
  • Avoiding dilution in later venture capital funding rounds
  • Investing in holdings that fall outside of a hedge fund’s investment philosophy
  • Raising additional capital without increasing debt
  • Transferring assets
  • Holding each real estate investment in a separate SPV

EIGHT CONSIDERATIONS

Deciding whether to invest through an SPV warrants careful thought and consultation with your attorney and fund administrator. Some of the many points of discussion include the following eight considerations:

  1. Tax treatment at the SPV, manager, and investor levels should be determined and evaluated.
  2. Fund documents and partnership and investor agreements should be reviewed for any applicable stipulations and restrictions.
  3. Formation, joining, maintenance, administrative, and other ongoing costs and fees should be determined and defined.
  4. Regulation, compliance, and filing requirements must be established.
  5. Expense ratios should be ascertained (sometimes commitments in SPVs can be lower than other investment structures, triggering higher expense ratios).
  6. Any potential exemptions should be identified. (For example, depending on the particular SPV and SPV organizer, the investment vehicle may be entitled to exemptions in usual audit requirements, allowing the investment holdings to be held at cost.)
  7. Reporting requirements should be considered. Sometimes SPVs are valued and reported less frequently than other investment structures.
  8. Tax filing obligations should be confirmed for the SPV, SPV organizer, and investors.

 

Looking for additional information on STRAIT / A Sanne Company’s services for Special Purpose Vehicles? Reach out to a member of the STRAIT / A Sanne Company team.