An SVP is a Special Purpose Vehicle, also called a Special Purpose Entity, which is a separate legal identity created by an organisation in order to isolate the financial risk of the parent company under which it exists.
What is a Special Vehicle Purpose Venture Capital?
SPV’s are created to protect assets and separate the liabilities of apparent companies. Each SPV is independent in terms of financials, ownership, operating structure and any other SVP with the same SVP organiser or the parent company. Usually, SPV’s are either Limited Liability Companies (LLC) or Limited Partnerships (LP). In case the parent company goes bankrupt, the SPV is not affected since it maintains a separate legal identity altogether and is, for this very reason, called a bankruptcy-remote entity. An SPV may also be used to undertake a risky venture while reducing any financial impact upon the parent company and its investors.
Can an SPV invest in an SPV?
It should be noted that SPV’s are similar to traditional Venture Capital funds and both SPV’s and VC funds invest in startups. There are a lot of differences in investing in a VC fund and purchasing a membership in an SPV. What is also noteworthy is that an SPV only invests in a single startup.
How does a (SPV) Special Purpose Vehicle work?
Before investing in a startup, it is important to understand how a startup works. Raising an SPV is much like building a house. One needs to take into account the rules, risks, structure and administration.
Rules:
Rules are set up by the government for the protection of consumers For example, an SPV must be in a position to acquire, hold and dispose of assets. An SPV must be bankruptcy remote which means that the bankruptcy of the originator should not affect the interests of the holders of instruments issued by the SPV.
Risks:
Neighbourhood, size and location of a house matter when it comes to the valuation of the house; the value may appreciate or depreciate accordingly. Similar is the case with SPV’s. Risk is part of the deal and must be accepted. Location, team, market fit etc., are some factors that determine the risk of the SPV.
Structure:
The structure determines the cost of building the house. A house has basic amenities that it must have such as wiring, windows, pipes, labour etc. The expense depends on the size, quality and features that the house offers. The legal four walls of your vehicle form the structure as in that of a house. The type of structure and its legal features determine the amount of money to be spent on the investment even before it is made.
Administration:
This is the cost of maintaining the house. Once a home is complete and you move in there will be a number of ongoing maintenance expenses which include annual tax, water, electricity, gas, maintenance of the lawns or grounds and other miscellaneous expenses. Similarly, an SPV has administrative fees such as entity maintenance tax returns, investment decisions, distributions, exits, shutdowns and more.
How to create a Special Purpose Vehicle in India?
In India, creating an SPV requires that the originator should have the opportunity and flexibility in choosing a legal structure for the SPV based on its specific requirements whether in the form of a company, a trust (with or without a trustee), a statutory corporation, a society, firm etc., or basically any other business entity that can be formed. The provisions of the patent law of incorporation of such entities i.e., The Companies Act, The Trust Act, The Partnership Act etc., will be applicable. While different forms of SPV’s have evolved around the world the Indian mortgage market has taken clues from its US counterpart. Basically, an SPV must have sponsors or promoters just like a company. Usually, the parent company is the one that promotes or sponsors the SPV. In India, Real Estate Investment Trusts and Infrastructure Investment Trusts are helpful in mobilising funds from India and overseas for various capital intensive projects.
In addition, SPV’s allow flexibility in structuring in the sense that different ways of raising capital may be used depending on the investor. Capital can be raised by issuing shares, and numerous share classes can be created to maintain control over it. Moreover, it means that the SPV can be sold without getting involved in tedious contracts, licenses, government permissions and other party negotiations which may be time consuming and counter-productive.
Some of the advantages of setting up an SPV are as follows:
· It separates the risk and frees up capital
· It allows for securitisation of assets without affecting the managerial relationship
· It leverages future earnings to create more funds
· It allows for the transfer of assets
· Maintains direct ownership of specific assets
· Provides legal protection
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FAQs
Q. What is the difference between SPV and joint venture?
A. When two or more companies form a partnership it is called a joint venture. SPV is generally created by two or more investors instead of two or more companies.
Q. What is SPV and how does it work?
A. A special purpose vehicle (SPV) is a legally structured business that is used to pool money and is frequently employed as a subsidiary created by a parent company to reduce financial risk.
Q. How is SPV formed in India?
A. Like any other company, forming an SPV must have promoters or sponsors. More often, the parent company promotes the SPV, therefore, it remains unaffected by the ups and downs of the parent company.
Q. How do I invest in SPV?
A. When you invest in an SPV, you are often pouring your funds into a holding company that is structured to make a single investment. The funds are then invested in a startup by the SPV, making it a shareholder in the company.
