What are SPVs?
What is a Special Purpose Vehicle ("SPV") or Special Purpose Entity? Put simply, an SPV is an entity formed to serve a specific and limited purpose. SPVs are used in the alternative investment landscape as a funding structure, for instance, to pool capital for early-stage and late-stage investments.
One of the great strengths of SPVs is that they allow multiple investors to pool their money and invest as a single entity. If you’re a limited partner, this feature makes investing much more accessible and adaptable to portfolio diversification and unique investment opportunities. As a general partner, SPVs become an efficient way to source and invest in opportunities on an ad hoc basis.
What is the difference between an SPV and a Venture Capital fund?
A venture fund entity can be an SPV – there is a larger distinction to be made between a single purpose or single-asset SPV and an SPV whose purpose may be to make multiple investments. For our purposes here, we will discuss SPVs as single-asset structures as these are the main types of SPVs we see formed and managed at Flow.
The main differences between a single-asset SPV and a venture capital fund ("VC fund") include how you sell yourself as a GP, what you are pitching to Limited Partners ("LPs"), the underlying holding of the fund, and the timeline of raising and deploying capital.
Both VC funds and SPVs are governed by a Limited Partner Agreement, also known as an LPA, and a Subscription Agreement. The LPA sets forth the terms of the fund's investment, its management structure, and the capitalization and economic distribution standards while the Subscription Agreement sets forth the LP's investment details, risk disclosures, and tax treatment standards. Both types of fund structures also pool capital to invest as one entity into private opportunities.
With a VC fund, what you are selling to prospective LPs is your track record and strength as a GP alongside an overarching investment thesis for the fund. Points of emphasis on your strength as a GP might be access to high-quality deal flow or proprietary access to entrepreneurs, and access to capital to get the fund off the ground. In VC funds, a strong track record usually means showcasing earlier investments, made as an angel or through a previous fund, that have delivered outsized returns to LPs.
When raising a VC fund, there is typically an investment thesis, a target investment size, a target fund size, and an investment committee that oversees and approves all investment activity. The investment thesis might state the industry, stage, or geography that the fund intends to invest in. The target investment size and target fund size usually work cohesively to give potential LPs an understanding of how many companies the fund intends to invest in and the anticipated pace of its’ investment activity over the investment period.
Raising a VC fund can take up to 24 months, with the investment period for the fund primarily taking place in the first 4 to 5 years of the 10-year fund lifespan. Other components of a VC fund include, varying sophistication levels of portfolio construction, follow-on financing infrastructure, ownership target identification, and target investment size estimation.
An SPV is formed in order to take advantage of a specific offering, that is, you are selling the opportunity at hand, as a result the pitch is dramatically simplified. When raising an SPV, what you are selling is the opportunity at hand. As SPVs are formed in order to take advantage of a specific offering, the pitch is dramatically simplified. The company or asset involved usually supplies a large part of the language and materials for the investment, and the terms, size, and ownership can vary widely.
SPVs do not have to reflect an overarching strategy; and can span from emerging company seed deals all the way to secondary transactions in growth stage companies. The process of raising and closing an SPV is usually done in a few weeks. Some of the other features include: one-time capital call upfront, flexibility in setting your management fee and carried interest percentage, and more.
There are no constraints on size for SPVs*. Depending on your circumstances, it might make sense to set up an SPV structure for a small offering or to deploy hundreds of millions of dollars. SPVs can be used for either case.
If you would like to learn more about who utilizes SPVs and why you would use an SPV structure, read on in Why use an SPV?
* There are no constraints on size for SPVs that are conducting a private placement under Rule 506 of Regulation D, which is the regulatory exemption that most funds operate under. For more information you can head to the SEC website here.