What is an SPV?

The acronym stands for Special Purpose Vehicle (in the US it’s often called a Special Purpose Entity) and the name is given to an entity which is formed for a single, well-defined and narrow purpose.

SPVs are primarily business associations of persons or entities eligible to participate in the association, and they can be formed for any lawful objective.

Is there a difference between an SPV and a company?

SPVs are mostly formed to raise funds from the market. Technically, an SPV is a company and therefore has to follow the Companies Act.

Like a company, the SPV is an artificial person and has all the attributes of a legal person. It is independent of the members subscribing to its shares and has an existence of its own in the eyes of law. It can thus sue and be sued in its own name.

Members of an SPV are mostly the companies and individuals sponsoring the entity; an SPV can also be a partnership firm, though this is unusual.

Conversely a company, as distinguished from an SPV, could almost be called a general purpose vehicle. It may do the many things mentioned in its memorandum of association or as permitted by the Companies Act. An SPV can do the same but its scope of operation is limited and focused. The memorandum of association is narrow and this provides comfort to lenders who may otherwise be concerned about their investment.

How is an SPV established?

An SPV must have promoter(s) or sponsor(s). Usually, a sponsoring corporation hives off assets or activities from the rest of the company into an SPV. This isolation of assets is important for providing comfort to investors. The assets or activities are thereby distanced from the parent company, and the performance of the new entity will not be affected by the ups and downs of the originating entity’s business. The SPV will be subject to fewer risks and thus provide greater comfort to the lenders.

What is important is the distance between the sponsoring company and the SPV. It must clearly be seen to be an SPV and not simply a subsidiary of the sponsoring company. A good SPV should be independent of the sponsor. Unfortunately, this doesn’t happen in practice. One of the reasons for the collapse of the Enron SPV in the early 2000s was that it became a vehicle for furthering the ends of the parent company in violation of the prudential norms of corporate financing and accounting.

What are the advantages of setting up an SPV?

The biggest advantage is that it helps in separating risk and frees up capital. As a result, an SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation.

SPVs also allows securitisation of assets without disturbing the managerial relationship. Under such an arrangement, any predictable income stream generated by secure assets can be securitised. This means a company can leverage future earnings to raise funds now.

Where are they used?

SPVs can be used for many purposes; for example, facilitating investment projects with China via Hong Kong and the Caribbean. The British Virgin Islands is a popular jurisdiction for such arrangements

SPVs are often set up in offshore locations. Does the prospect of working overseas interest you? If you are a lawyer or chartered accountant and interested in working in the Bermuda/Caribbean region, visit our jobs portal to see the latest vacancies. Our site also includes a downloadable All You Need to Know guide which will tell you everything you need to know about living and working offshore.