Supercharge your VC fund's returns with SPVs!

Supercharge your VC fund's returns with SPVs!

Author: Ulric Musset
Read time:  3 minutes
Published date:  September 21, 2022
‍Your VC fund is a success when your LPs are happy. With that in mind, what if there’s a way to not just offer great returns, but really supercharge them?

❝ ‘Episode 1 is currently deploying its third seed fund - investing over £150m across the three funds. We use the Vauban platform to rapidly create SPVs and re-invest into our runaway companies where our funds no longer have the spare capital to follow on. Our LPs get the opportunity to double down on the winners with a minimal one off setup cost! We’re also using Vauban to set up a feeder vehicle into our latest fund so entrepreneurs can invest below the minimum ticket size with little administrative burden and advantageous terms.’ ‘ - Simon Murdoch, Managing Partner,  Episode 1 Ventures

Aim for top decile

‍Your VC fund is a success when your LPs are happy. This is putting it very bluntly of course, and disregards many factors, but ultimately it can be brought down to that very simple sentence. With that in mind, what if there’s a way to not just offer great returns, but really supercharge them?

Let me explain.‍‍

603e5262891a1951fd448e1f top decile vc fund

Missing out

One of your portfolio companies is performing exceptionally well, and you secured a follow-on allocation in their Series C. However:

1. You can't follow from your early-stage focused fund;

2. Concentration limits prevent you from putting any more money; or

3. It does not really fit within your investment thesis

You know it would create great returns for your LPs but from the fund’s perspective it’s just not economically feasible. Whichever the case, you pass on the follow-on allocation.Sounds familiar? That’s because these are common issues VC funds run into, among a variety of other reasons that ultimately leave you struggling to take advantage of valuable rounds and deals. Your LPs are missing out on higher returns.‍‍

SPVs as a solution

There is a solution however, in the form of a co-investment special purpose vehicle (SPV).

An SPV is a single-deal syndicate created ad-hoc that can be used to invest on a deal-by-deal basis. Specifically, those deals a VC would have otherwise had to pass on, the ones not fitting its core strategy, or just further rounds that give your LPs additional exposure to that one highly attractive portfolio company.

An SPV can take various legal forms, but is always a tax-transparent entity with only a few maintenance requirements.

You can invite your LPs to invest in the SPV, which in time will supercharge their returns, and the VC can take carry and a management fee.‍

603e5238ed7c985ad5011096 spv solution

SPVs are cost-efficient, making them a viable vehicle even for those smaller allocations, and easy to set up; incorporation is a matter of days, and the SPV can be fully up and running, bank account included, in a week. Perfect for the time sensitive, ultra competitive deals.‍


Let’s look at an example of how an SPV can supercharge your LPs returns, by creating additional exposure below.‍

603e4371b98158d55537aae4 Scenario 1 Fund return

The VC Fund column shows you what you would earn by only investing through your VC Fund, whereas (as below) adding the column: "ABC" SPV means also investing by way of a deal-specific SPV. The returns could jump from $47.5M (238%) to £63.5M (303%).‍‍

603e926a049ea95a1c382aff scenario 2 fund spv

Your LPs already know!

The above table clearly shows the benefit of co-investing. LPs are increasingly catching on to this, realising the great potential, which creates a “SPV”-trend.

Don’t be surprised if your more savvy LPs will proactively start asking you to do co-investment. Having such rights explicitly embedded in your VC fund means a competitive edge.

Your LPs will be happy with the increased returns you created for them, but there are some things to look out for. For example, cherry-picking your favourite LPs to invest in an SPV may create friction with the other LPs (although offering pro-rata rights can solve that).  

Also, watch out not to get “carry”-ed away. A strategy in which the core fund is just used to identify the winning portfolio companies, with follow-on SPVs investing only in the “winners” (to inflate the carry), would surely not be appreciated by your LPs in the long run. Therefore, SPV responsibly and keep your LPs happy!‍Vauban SPVs can be domiciled in the UK, the US, and Luxembourg.‍

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Ulric Musset
Author: Ulric Musset