After deciding on assets that an Investment Fund may want to offer – whether a set of legal cases or a series of aircraft leases – the firm must utilize a legal investment structure for those assets.
What is an SPV?
An SPV—also called a special purpose entity (SPE)—is an investment structure that is technically a subsidiary of the company which created it. That means it is reported on a
separate balance sheet, has a scope that is just a subset of the Parent company’s activities, and is financially independent of the parent company and from other SPVs under the Parent’s umbrella. Essentially, each investment structured as an SPV is its own limited liability company (LLC).
As an example:
Creating a fictitious case of XYZ Private Investments, XYZ Private is the parent company.
They set up a new subsidiary—a new SPV—each time they add a new portfolio product to their marketplace. Investors who choose that portfolio product are pooled into the SPV.
XYZ Private acts as the managing member of each SPV, which in the simplest terms means they service and distribute the funds and inform investors of any important administrative matters.
If any complications arise in the portfolio, XYZ Private, as managing member, will handle them. Usually, though, an SPV operates in “auto mode” and, once formed, simply runs as initially outlined.
SPVs are able to operate in “auto mode” in line with investors’ expectations, because each SPV is formed with a clear and limited scope. Additionally, investments in XYZ Private’s SPVs are never recycled—which means that in addition to having a limited scope, they have a strictly limited timeline. As soon as enough litigation within a portfolio settles to pay out all principal and interest owed to investors, the associated SPV closes. We refer to this as self-amortization: each time there is a principal pay-down, the SPV “amortizes” and gradually fades away until it naturally closes, and investors’ initial capital and returns are fully released back to them.
