For fund managers and investors, understanding the differences between Special Purpose Vehicles (SPVs) and traditional private funds is essential for making informed decisions about which investment vehicle to choose. SPVs offer a flexible and cost-effective way to execute single investments, while funds offer diversity and align with long-term investment mandates.
SPVs, venture capital (VC) funds and private equity (PE) funds all serve a specific purpose in the APAC region; however, their applications, benefits, and limitations differ significantly. In this article, we’ll explore why fund managers use SPVs, typical terms and rights, common jurisdictions, and how SPVs compare with conventional funds.
What are SPVs used for?
SPVs are legal entities created to fulfill specific financial or operational objectives. Here are some common use cases:
Risk management and investment flexibility: SPVs allow businesses to isolate financial risk by housing assets or projects in separate entities. This ‘ring-fencing’ approach protects the parent company from the SPV’s liabilities while providing flexibility for specific investments without impacting the overall balance sheet.
Financing: SPVs are commonly used to pool capital from investors for a specific project or asset. Fund managers can issue asset-backed securities tied to the SPV’s cash flows, offering a structured financing solution.
Tax efficiency: Companies may establish SPVs in jurisdictions with favorable tax regimes, reducing their overall tax burden.
Joint ventures: SPVs enable companies to collaborate on specific projects while limiting their exposure to potential liabilities.
Compliance and regulation: SPVs help businesses meet regulatory requirements by separating operations into distinct entities.
Financial structuring: In complex financial transactions, SPVs align stakeholder interests and manage exposure effectively. The real estate and infrastructure sectors often rely on SPVs for this purpose.
SPVs vs. funds
While SPVs and funds are both investment vehicles, their structure and purpose differ:
| SPVs | Funds | |
| Investment focus | Single company or project | Multiple companies or projects within a mandate |
| Capital contributions | Single drawdown of capital | Multiple capital calls over time |
| Complexity | Simpler legal and commercial structure | More complex legal governance requirements |
| Efficiency | Quicker to set up and raise capital | Often slowed down by due diligence and compliance |
| Cost | Lower setup and maintenance costs | Higher costs due to ongoing governance and reporting |
Why do fund managers use SPVs?
SPVs allow venture capitalists (VCs) to optimize for liquidity and even fund reputation. There are several reasons why fund managers might choose to set up an SPV instead of a traditional fund.
Syndication: To participate in deals requiring large check sizes, fund managers use SPVs to pool capital from individual investors without overcrowding a startup’s cap table.
Strategic value: SPVs are useful if a deal doesn’t align with a fund’s investment thesis but still offers strategic benefits, such as partnerships or exit opportunities.
Opportunity SPVs: Fund managers use SPVs for purchasing additional portfolio company securities in secondary transactions, which may provide liquidity to early investors or extend exposure to promising investments.
Establishing a track record: Emerging fund managers can set up SPVs relatively quickly and easily, allowing them to build a track record before launching a full-fledged fund.
Responding to market conditions: In uncertain markets, SPVs offer flexibility by focusing on a single investment rather than more diverse strategies.
Common jurisdictions for SPVs
SPVs are typically structured as private companies. Two popular jurisdictions for setting up an SPV in the APAC region are Singapore and the British Virgin Islands (BVI). While Singapore is known for having robust legal frameworks and favorable tax regimes, the BVI offers cost efficiency and familiarity for investors—in terms of laws, regulations, and compliance. Both of these jurisdictions are widely recognised and provide a stable regulatory environment for SPVs.
Typical commercial terms in SPVs
SPVs are often structured in a way that minimizes costs and simplifies operations. This typically results in the following commercial terms:
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Fees: Usually no management fees, and carried interest fees range from 10-15%.
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Reporting: Annual reporting with no audit requirements to keep costs low.
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Rights: Investors typically have financial, voting, information, exit, and liquidation rights tailored to the SPV’s structure.
SPV advantages and disadvantages
| SPV advantages | SPVs disadvantages |
| Easier and less expensive to set up than VC and PE funds. | Limited appeal for institutional investors due to the perceived simplicity of these investment vehicles. |
| Low compliance and regulatory burden compared to other private funds. | Increasing operational challenges as the number of SPVs grow. |
| Cost-efficient maintenance and reporting requirements. | Potential for rising maintenance costs if the SPV is poorly managed. |
| Lower liability risk for investors and companies, as the SPV is a separate legal entity. | Less diversification than a traditional fund, as SPVs are usually raised for a single deal. |
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