A special purpose vehicle (SPV) is a company subsidiary formed for a single purpose. They’re often used isolate assets or risks for the parent company, or even be responsible for separate transactions that benefit the company. Read on to find out more about these structured finance entities.
What is an SPV?
What is an SPV?
A special purpose vehicle is a legal entity, generally created as a subsidiary. It has one purpose – although there are different types of SPVs used for a seemingly endless number of corporate financial maneuvers. Most commonly, SPVs are used to shield corporate assets or potential liabilities.
SPV Uses
SPV Uses
There are four major types of SPVs: Project companies, investment vehicles, intermediate SPVs, and jurisdictional shell companies.
- Project companies are used primarily to finance capital-intensive public-private projects, such as infrastructure construction.
- Investment vehicles are entities created to buy investments that benefit from the difference in interest rates between long- and short-term debt.
- Intermediate SPVs are used to isolate individual assets and liabilities from the parent companies, and are common in private equity transactions.
- Jurisdictional shell companies are frequently created to take advantage of privacy and tax provisions. They are frequently incorporated offshore.
SPV Pros and Cons
SPV Pros and Cons
As with any legal entity, there are pros and cons to special purpose vehicles. One of the biggest advantages from a corporate standpoint is the ability to isolate underperforming or toxic assets from public view (more on that shortly). Special purpose vehicles also allow companies to have direct ownership of a specific asset, whether it’s a building or a portfolio of securities.
Special purpose vehicles also are relatively easy to create and establish, especially in places that have structured tax and privacy laws to benefit them. Traditionally, the Cayman Islands, British Virgin Islands, Ireland, and Luxembourg have been among the most common jurisdictions for SPVs, although Singapore recently has emerged as a favorite.
There are downsides to an SPV. Special purpose vehicles typically don’t have as much access to capital as their creators, since they don’t have the same credit. If an asset held by an SPV is sold, it can also trigger accounting rules that affect the creator’s balance sheet.
Legislative and regulatory changes can also affect an SPV, especially when changes to tax and privacy laws. And as a final downside, the optics of a special purpose vehicle just aren’t good. Companies that use them are often seen as either attempting to dodge taxes or worse, hide nefarious activity.
SPV Example
SPV Example
Speaking of nefarious activity: Enron, an energy and commodities company, was described as “America’s Most Innovative Company” by Fortune for six consecutive years. The magazine wasn’t far off the mark – Enron created hundreds of special purpose vehicles to hide debt and bad deals from its balance sheet. Eventually, Enron would create 3,000 separate entities; more than 800 were located offshore.
Enron’s stock price topped $90 per share in August 2000. Barely a year later, amid questions about the company’s accounting practices, it fell below $1 per share. By December 2001, Enron declared bankruptcy, with $63.4 billion in assets – holding the record for the size of corporate bankruptcy until the next year. The failure of oversight spurred the passage of legislation known as Sarbanes-Oxley, which tightened corporate disclosure requirements and auditing accountability.
Not all special purpose vehicles are part of a multibillion-dollar fraudulent accounting scheme, of course. But smart investors will take a good look at balance sheets to ensure that if SPVs have been created by a company, there are good and legal reasons for their creation.
