- Special purpose vehicle (SPV)
- What is an SPV?
- Use of SPVs
- Types of SPVs
- Limited liability company SPV (LLC SPV)
- Limited partnership SPV (LP SPV)
- Joint ventures (JV)
- How an SPV works
- SPV vs. fund
- SPV vs. SPAC
- SPV taxes
- Fund payment structures
- SPV advantages and disadvantages
- Who uses SPVs?
- Venture capitalists
- Emerging fund managers
- Angel investors
- How to set up an SPV
What is an SPV?
A special purpose vehicle (SPV) is an alternative fundraising structure that allows multiple investors to pool their capital and make a single investment. A company can also set up an SPV as a separate legal entity for a specific purpose, such as to isolate financial risk.
Use of SPVs
The use of SPVs in the private markets has expanded significantly over the last decade. In Q4 2024, the annual count of new SPVs on Carta was up 116% compared to five years before.
SPVs have multiple use cases in the business world. Here are some of the most common applications:
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Public corporations sometimes use SPVs for risk management purposes, such as isolating certain holdings from the parent company’s balance sheet.
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In the venture capital (VC) and private equity (PE) sectors, emerging fund managers often launch an SPV to establish a track record before raising capital for a traditional fund.
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SPVs can also function as a “sidecar,” allowing investors to back companies that don’t fit their fund’s investment strategy or terms.
Types of SPVs
There are several different SPV structures, each with their own purposes and requirements. The most suitable type of SPV depends on whether you’re an emerging fund manager, venture capitalist, or angel investor—and where your investors are likely to be based.
In the United States, SPVs are typically formed as a limited liability company (LLC) or a limited partnership (LP). Joint venture (JV) SPVs are less common, especially among fund managers.
Limited liability company SPV (LLC SPV)
The traditional way for VC firms to set up a special purpose vehicle in the U.S. is by creating an LLC SPV—a legal entity formed with the sole purpose of making an investment in a private company. Investors all become members of the LLC and then appoint a manager. While this type of SPV can technically be used outside the U.S., the entity might have trouble accepting capital from international investors.
Limited partnership SPV (LP SPV)
Limited partnerships offer the same benefits and protections for investors as LLCs, along with additional advantages across international jurisdictions. LP SPVs are a sensible choice if you plan to raise capital from non-U.S. investors because the entity type is globally recognized.
Joint ventures (JV)
A joint venture is when two or more companies combine their resources and collaborate on specific projects, such as creating a new entity to pursue different business activities. In this scenario, the SPV—also known as a special purpose entity (SPE)—functions as a subsidiary company with its own balance sheet, assets, and liabilities.
There are two key benefits of this legal structure: It allows the SPV to be “bankruptcy remote,” protecting it from insolvency if the parent company goes under; at the same time, it offers liability protection for the parent companies.
How an SPV works
SPVs share many characteristics with conventional venture capital funds, such as being subject to the same federal securities laws and regulations. These regulations govern how fund managers can raise money, set up their funds, and advertise services to investors.
However, there are also some key differences between SPVs and VC funds, such as investment allocation and timing.
SPV vs. fund
SPVs | VC funds | |
Number of investments | All of the capital is used to fund a single company or project. | A fund will typically finance multiple companies or projects that fit the investment thesis. |
Investment timeline | Short-term strategy: SPV investors typically see a faster return on their money, as this only depends on one company exit. | Long-term strategy: It can take up to 10 years before every investment within a fund’s portfolio exits. |
Capital contributions | Single drawdown of capital: Fund managers using SPVs typically call all of the capital from investors upfront. | Multiple capital calls over time: Venture fund GPs call a specific amount of capital when they’re ready to invest in a portfolio company. |
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. |
SPV vs. SPAC
Special purpose vehicles should not be confused with special purpose acquisition companies (SPAC), which fulfill a different role in the lifecycle of a venture capital-backed company. The purpose of a SPAC is to merge with a private company that intends to go public, serving as a conduit for the company to transition into the public markets.
The main differences between SPVs and SPACs are how they’re formed, their typical size, how common they are, and what sort of investors use them.
SPV taxes
If the SPV is formed as a limited partnership or a limited liability company, it is treated by default as a pass-through entity. This means that investors are responsible for paying taxes on their pro-rata share of the SPV’s income, but the SPV entity itself is not taxed.
However, both structures can elect different taxation: LLCs SPVs can elect to be taxed as an S-corporation or a C-corporation, while LP SPVs can elect to be treated as a C-corp for tax purposes.
SPVs may offer further tax benefits, depending on where the vehicle is established. For instance, jurisdictions with favorable tax regimes, such as the Cayman Islands and British Virgin Islands (BVI), allow some investors to reduce their overall tax burden. However, fund managers should consider potential withholding tax implications and U.S. reporting requirements—such as the Foreign Account Tax Compliance Act (FATCA) and controlled foreign corporation (CFC) rules—when structuring offshore SPVs.
Fund payment structures
General partners (GPs) operating an SPV sometimes adopt the same “2 and 20” payment structure often used in traditional VC funds. This means that GPs charge a 2% annual management fee on the total assets under management (AUM) and take a 20% cut of the profits after the SPV hits the threshold specified in its limited partnership agreement (LPA). This threshold is typically a return on investment (ROI) the fund must provide to investors before GPs can collect their share of the fund’s profits.
For competitive deals, the GP might decide to raise the management fee or carried interest above the standard “2 and 20.” On the other hand, offering more favorable terms for limited partners (LPs) can help GPs attract reluctant investors to a deal.
SPV advantages and disadvantages
SPVs offer many benefits compared to other private funds, such as being more straightforward to set up, invest in, and manage. This lowers the barriers for breaking into the venture capital and private equity ecosystems—especially during difficult fundraising periods. Nonetheless, there are some potential drawbacks, as outlined in the table below.
SPV advantages | SPV disadvantages |
Traditional VC and PE funds vary in terms of administrative costs, but they are generally expensive to take to market. SPVs, on the other hand, can usually be set up for a fraction of the cost. | Historically, some LPs have stigmatized SPVs, seeing them as funds for investors not yet ready to break into VC or PE. However, this stigma is shifting as more investors start using SPVs to supplement other, less flexible investments. |
It’s less expensive for LPs to invest in an SPV than a traditional private fund. Some LPs invest as little as $1,000 in an SPV, but typically need to allocate at least $500,000 to a larger VC or PE fund. | SPVs are usually raised for a single deal (i.e. to invest in one company), which means they’re less diversified than a typical fund. This can result in an increased financial risk for investors. |
SPVs allow investors to isolate financial risk. If an SPV investment performs poorly, it won’t weigh down the IRR or TVPI of the firm’s core funds. This is beneficial for GPs raising a follow-on fund. | If a GP wants to set up an SPV as a continuation fund, they might struggle to get their LPs and the portfolio company to align on exit terms. |
Who uses SPVs?
In recent years, rising interest rates have prompted many LPs and independent sponsors to allocate their capital elsewhere than the private markets. Creating bespoke pools of capital that are structured as SPVs gives investors more visibility and autonomy than a traditional private fund structure. Compared to full funds, SPVs tend to be smaller and therefore easier for GPs to manage.
Aside from LPs and GPs, there are several other groups who can leverage SPVs for a specific purpose.
Venture capitalists
An SPV is a structured investment vehicle that VCs can use to optimize for liquidity and even fund reputation. In some situations, setting up an SPV makes more sense than a traditional fund. Here are some examples:
The deal doesn’t fit with the fund’s investment thesis: If a VC firm wants to invest in a startup that doesn’t meet the criteria set out in their fund’s limited partnership agreement (LPA), the GP can set up an SPV, raise additional capital for it, and invest in the company with money that doesn’t belong to the fund.
The deal would exceed the fund’s concentration limits: Sometimes, a fund’s LPA will limit how much capital the fund can invest in a single company, sector, stage, or location. If making an investment in a certain portfolio company would fit the fund’s investment thesis but violate these concentration limits, a GP can invest via an SPV (sometimes called a sidecar) instead. Similarly, an SPV could be used to “top off” an investment the fund has already made (or plans to make) in a company. In this scenario, the GP raises an SPV to invest alongside the fund and increase ownership in a company beyond what the LPA permits.
The fund is outside its investment period: A fund’s LPA sets a specific time interval during which the fund can deploy its assets. If a GP wants to make an investment outside this period, they can form an SPV and may even raise capital for it from the fund’s limited partners (LPs).
The fund is out of capital: If the fund has already invested most or all of its capital, but the fund managers want to pursue another deal, they may launch an SPV to finance this investment.
The investors want to extend existing investments: If a VC firm has a fund that’s nearing the end of its 10-year lifecycle but the fund managers aren’t ready to sell the remaining assets, they can set up an SPV (known as a continuation fund or a liquidity vehicle) to hold those specific assets. The fund’s LPs will usually have the option to sell their stakes in the portfolio company or transfer their assets into a new SPV, giving the fund managers more time to prepare the business for a sale.
Emerging fund managers
SPVs are popular among first-time investors who want to establish an initial track record. Raising a debut venture fund or private equity fund can be a daunting process, whereas raising an SPV for a single deal is typically much easier.
For this reason, some aspiring fund managers start by forming one or several SPVs to invest in individual companies. By building out a small portfolio, they’ll have something tangible to show LPs when the time comes to set up their first full fund.
Angel investors
When multiple angel investors band together and pool their personal capital, this group is called an angel syndicate. Syndicate SPVs are attractive to angel investors for a number of reasons:
Access to more deals: Syndicate SPVs allow angels to write bigger checks than they might be able to afford individually. This expands their range of possible investment sizes, including late-stage companies.
Portfolio diversification: Angels working together to invest through an SPV may have access to a wider variety of investment opportunities—across different stages and industries—than if they were investing on an individual basis.
Deal term control: Investing a larger amount of capital via an SPV gives an angel syndicate more control over deal terms than the individual investors would have.
Follow-on investment opportunities: Pooling capital allows angel investors to remain competitive in larger deals if a portfolio company grows and raises another funding round.
Carried interest: Charging carried interest (or “carry”) allows syndicate organizers to get upside from their investments, similar to a GP at a venture fund.
How to set up an SPV
1. Define the purpose and objectives of your SPV
The most common purpose of an SPV is to invest in one portfolio company. You’ll need to start by finding the target company and obtaining a set allocation of capital (e.g. $500,000). You can then pitch this opportunity to the investors you want to join the SPV.
2. Pick a location
Are you investing in a foreign company? Are your potential investors based in the U.S.? Keep in mind that financial regulations and tax treatment vary in different jurisdictions.
3. Choose an SPV structure
This may depend on your chosen location and the purpose of your SPV. For instance, a Delaware LLC is the easiest and least expensive option if you’re planning to invest in a U.S. company.
4. Draft and edit the governing documents
This includes subscription documents and an LLC operating agreement or limited partnership agreement, depending on the structure of your SPV. You may also want to provide a private placement memorandum (PPM), which informs investors of the potential risks of the SPV.
5. Acquire an EIN for banking and tax purposes
An Employer Identification Number (EIN) can be obtained through your registered agent, or by completing Form SS-4 and filing it with the Internal Revenue Service (IRS).
6. Open bank account(s)
Having a business bank account allows you to manage the finances of the SPV and receive capital from investors.
7. Establish service providers
Typically, you’ll want an SPV administrator and a tax provider. You may also need to appoint an auditor.
8. Onboard investors and make a capital call
SPV investors are usually expected to provide all of the money they’ve committed upfront. This ensures there is enough capital to make the investment.
9. Make an investment via the SPV
You’ll need to review and sign the relevant legal contracts to close the investment, such as SAFE documents or a stock purchase agreement.
10. Comply with regulatory exemptions
Raising capital for an SPV typically happens through an exempt offering framework. For instance, the exemptions provided under Regulation D allow GPs to issue private securities without registering the offering with the Securities and Exchange Commission (SEC). Additional regulatory frameworks that may be implicated include:
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Exempt Reporting Advisers or Registered Investment Advisers under the Investment Advisers Act of 1940;
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Section 3(c)(1) or 3(c)(7) exemptions under the Investment Company Act of 1940;
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The Employee Retirement Income Security Act (ERISA);
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Anti-money laundering or know-your-customer (AML/KYC) regulations.
11. Monitor ongoing regulatory and compliance obligations
Including state-specific franchise taxes, registered agent fees, blue sky securities notice filings, and possibly an annual Form ADV.
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