Special purpose vehicle (SPV)

What is a special purpose vehicle?

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.

What are SPVs used for?

The use of structured investment vehicles 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:

Investment flexibility: 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. SPVs can also function as a “sidecar”, allowing investors to back companies that don’t fit their fund’s investment strategy or terms.

Risk management: SPVs allow businesses to isolate financial risk by housing certain assets or holdings in a separate company. This ring-fencing approach protects the parent company’s balance sheet from the SPV’s liabilities, while providing flexibility for specific investments.

Joint ventures: if two or more companies want to collaborate on a specific project – such as creating a subsidiary company to pursue different business activities – they can combine their resources and set up an SPV. This allows the parent companies to limit their exposure to potential liabilities and ensures the SPV is “bankruptcy remote”, protecting it from insolvency if one of the companies goes under.

Regulatory compliance: if needed, companies can use SPVs to meet regulatory requirements by separating their operations into distinct legal entities with their own balance sheets, assets and liabilities.

Tax efficiency: in order to reduce their overall tax burden, some companies choose to establish SPVs in jurisdictions with a favorable tax regime, such as the British Virgin Islands (BVI) or Cayman Islands.

Financial structuring: in complex financial transactions, SPVs can be used to align stakeholder interests and manage their exposure to risk. The real estate and infrastructure sectors often rely on SPVs for this purpose.

Types of SPV

There are several different SPV structures, each with different purposes and requirements. The most suitable type of SPV depends on whether you’re an angel investor, a venture capitalist or a fund manager – and where your investors are likely to be based.

LLC and LP SPVs

In the United States, SPVs are typically formed as a limited liability company (LLC) or a limited partnership (LP) with the sole purpose of making an investment in a private company. While both structures offer similar benefits and protections for investors, LP SPVs are a sensible choice if you plan to raise capital from non-U.S. investors because the entity type is globally recognised.

Bare trust

In a UK bare trust SPV, the shares are held by a trustee for and on behalf of the underlying investors in the SPV. The trustee of the SPV has no decision-making power beyond acting as a legal owner of the SPV’s assets, while the trust beneficiaries (i.e. investors) retain full control over the assets.

Bare trust SPVs offer beneficiaries direct ownership, tax transparency and the right to vote on investment decisions. This type of SPV also has relatively low setup and administrative costs, due to their limited management needs and simple ownership structure.

Private fund limited partnership (PFLP)

Private fund limited partnership SPVs are commonly used by VCs based in the UK. They are structured in the same way as a VC fund, with a regulated SPV manager appointed to handle investment decisions and reporting.

This type of SPV offers several benefits, including a structured approach to investment and limited liability for investors. However, PFLPs cost more to set up than bare trust SPVs because they require professional management and have a more complex governance system.

SPV vs. fund

Limited partnership SPVs share many characteristics with conventional venture capital funds. However, there are also some key differences between SPVs and VC or PE funds, such as investment allocation and timing.

SPV tax

Tax treatment and compliance requirements vary for different SPV structures and jurisdictions. For instance:

• If the SPV is formed as a limited partnership or a PFLP, it is treated 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.

• While limited partnership entities are not taxed, they are required to file annual self-assessment partnership tax returns

• There are no annual filing requirements for UK bare trust SPVs, which means lower administrative costs compared to PFLPs.

• If any of the SPV’s investors are based in the US, they will be subject to US tax laws and compliance and reporting obligations.

• If an SPV is used to invest in a US company, its investors may need to submit tax filings to the IRS, irrespective of where they are domiciled.

Fund payment structures

General partners (GPs) operating an SPV sometimes adopt the same “2 and 20” payment structure often used in traditional private 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.

Who uses SPVs?

Depending on the type and purpose of the vehicle, SPVs can be used by a variety of different people and entities – from retail investors and first-time fund managers to established GPs and large VC and PE firms.

Angel investors and syndicates

When multiple investors (such as angels or high-net-worth individuals) band together and pool their personal capital, this group is called a syndicate. Syndicate SPVs are attractive to angel investors for a number of reasons:

1. Access to more deals

Syndicate SPVs allow investors to combine their resources and write bigger cheques than they could afford individually. They might also have access to a wider variety of investment opportunities, across different stages and industries.

2. Deal term control

Investing a larger amount of capital via an SPV gives a syndicate more control over deal terms than the individual investors would have.

3. Follow-on investments

Pooling capital allows investors to remain competitive in larger deals if a portfolio company grows and raises another funding round.

4. Carried interest

Charging carried interest (or “carry”) allows syndicate organisers or lead investors to maximise upside from their investments, similar to how fund GPs would charge a management fee.

Emerging fund managers

Raising a debut venture fund or private equity fund can be a daunting process, whereas SPVs are relatively quick and easy to set up. For this reason, many aspiring fund managers start by using SPVs to invest in individual companies and build out a small portfolio. By establishing a track record, they’ll have something tangible to show LPs when the time comes to launch their first full fund.

Venture capital or private equity firms

VC or PE fund managers often use institutional SPVs for large-scale investments and specialised deals, such as late-stage private company funding rounds, infrastructure projects or private equity acquisitions. There are several reasons why a GP might choose to set up an SPV instead of a traditional fund:

1. The deal doesn’t fit with the fund’s investment thesis

If an investment opportunity doesn’t meet the criteria set out in the fund’s limited partnership agreement (LPA), the fund manager can set up an SPV, raise additional capital and invest in the company with money that doesn’t belong to the fund.

2. 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. To make an investment without violating these limits, GPs can use an SPV (sometimes called a “sidecar”) instead. Similarly, SPVs can be used to “top off” an investment the fund has already made (or plans to make) in a specific company. In this scenario, the GP raises an SPV to invest alongside the fund and increase company ownership beyond what the LPA permits.

3. The fund is outside its investment period

LPAs usually set a specific time interval during which a fund can deploy its assets. If the 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 existing limited partners.

4. The fund has run 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 could launch an SPV to finance this investment.

5. The investors want to extend existing investments

If a VC firm has a fund that’s nearing the end of its ten-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 “liquidity vehicle”) to hold those 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 GPs more time to prepare the business for sale.