What Are SPVs?
What are SPVs?
Special Purpose Vehicles (SPVs) are standalone legal entities created for the sole purpose of pooling and managing capital for a specific investment. Designed to isolate financial risk, SPVs allow investment teams to quickly mobilize funds for targeted opportunities without impacting their broader portfolio.
In this guide, we’ll break down what an SPV is, how it works, and why it’s so popular among fund managers and limited partners (LPs) looking to optimize their investments in private markets.
Understanding Special Purpose Vehicles
An SPV is a standalone legal entity created solely to pool and manage capital for a specific investment purpose. Unlike traditional investment vehicles, an SPV operates independently, with its own legal identity, assets, and liabilities that are entirely separate from the parent company or primary fund.
The structure of an SPV is designed to isolate financial risk. By containing the liabilities associated with a particular investment, SPVs protect the parent company or SPV investors from exposure to the potential financial outcomes of that specific venture. This separation makes SPVs ideal for private market investments where focused, purpose-driven capital deployment is essential.
Typically, an SPV pools resources from multiple investors, concentrating funds on a single investment or project. Commonly used for real estate acquisitions, venture capital deals, and other targeted investments, SPVs provide a flexible, efficient way for investors to seize specific opportunities without affecting broader portfolio strategies.
How Do SPVs Work?
SPVs are structured in specific ways that enable them to serve as flexible, targeted investment vehicles. The specifics Here’s a breakdown of how SPVs work, from their formation as independent entities to their streamlined exit strategy.
- Identify the Purpose of the Investment
An SPV is a dedicated investment vehicle formed for a specific purpose, such as investing in a startup, acquiring a real estate asset, or participating in a co-investment opportunity.
It operates as a standalone legal entity, with its own assets, liabilities, and legal status, which isolates all financial opportunity—and risk—from the parent company or portfolio. This separation allows investors to participate in a specific investment opportunity without exposing their broader assets to potential liabilities associated with the SPV.
- SPVs pool capital from multiple investors under a unified structure.
SPVs allow multiple investors to join forces and pool their capital toward a single investment. When investors contribute funds, they each receive a proportional “membership interest” in the SPV, which is typically defined in the operating agreement.
This means that each investor’s ownership stake—and eventual return—aligns with the amount they’ve contributed. Pooling capital through an SPV allows investors to participate in high-value opportunities collectively, while the SPV itself holds the investment and manages it as a single entity. This structure not only simplifies capital deployment but also provides a streamlined approach to ownership, allowing the SPV to act as a unified presence on the target company’s cap table or asset registry.
- SPVs isolate risk, protecting investor assets and the broader portfolio.
SPVs create a clear boundary between a specific investment and other assets owned by investors or the parent company.
By containing all financial activity, obligations, and risk within the SPV, investors gain a safeguard: if the SPV’s investment does not perform as expected, their other assets remain unaffected. This risk isolation feature allows investors to confidently participate in high-value or high-risk opportunities knowing that any financial downside is limited to the SPV itself.
- SPVs allow flexible terms tailored to the investment.
SPVs provide flexibility in structuring terms, allowing investors to create agreements specific to the needs of a particular investment.
Unlike traditional funds, SPVs can have customized management fees, carried interest, and distribution waterfalls. Additionally, many SPVs call capital upfront instead of using multiple capital calls, streamlining the investment process. This flexibility in structuring gives both LPs and GPs more control over how the investment is managed, allowing them to design terms that maximize value for the specific opportunity at hand.
- SPVs are pass-through entities, maximizing tax efficiency and income distribution.
Most SPVs are structured as pass-through entities, meaning they don’t pay corporate income tax. Instead, any income, gains, or losses “pass through” directly to the investors, who report them on their own tax returns.
This setup avoids the additional taxation often associated with traditional corporations, where income is taxed at both the company and shareholder levels. For investors, this structure simplifies tax reporting and ensures they benefit more directly from the SPV’s performance. It’s particularly advantageous for investments with predictable income streams or one-time returns, as any profits from the SPV are distributed directly to investors based on their ownership share.
- SPVs have a defined lifecycle, offering a clear exit strategy for investors.
Unlike traditional funds with longer holding periods and diverse portfolios, SPVs are created with a finite purpose and timeline. Once the target investment has reached its goal—such as a property sale, acquisition, or startup exit—the SPV distributes the returns directly to investors and is dissolved.
This lifecycle provides investors with a predictable and straightforward exit strategy, ensuring their capital is deployed only for the duration of the specific investment. For investors looking to participate in shorter-term or opportunistic investments, this clarity and structure make SPVs an appealing choice.
Typical SPV Legal Structures
SPVs can be established in several different legal structures, each offering unique benefits suited to specific types of investments and goals. Here’s an overview of the most common SPV structures:
- Limited Liability Company (LLC) - LLCs are one of the most popular structures for SPVs, particularly in the United States. LLCs offer flexible management structures and limit personal liability for investors to the amount of their investment. They also enable pass-through taxation, where income or losses flow directly to investors. LLCs are often used for SPVs in real estate and venture capital, where streamlined operations and liability protection are top priorities.
- Limited Partnership (LP) - The LP structure is also widely used, especially in private equity and venture capital. In an LP, there are two types of partners: general partners (GPs), who manage the SPV, and limited partners (LPs), who provide capital but don’t participate in day-to-day management. This setup delineates roles clearly, with GPs overseeing operations and LPs acting as passive investors. Like LLCs, LPs generally benefit from pass-through taxation.
- Trusts - Trust structures are less common but can be effective for certain types of SPVs, especially in real estate or securitized assets. In this setup, a trustee manages the SPV’s assets on behalf of beneficiaries (investors). Trusts offer strong asset protection flexibility in managing distributions, making them suitable for handling specific legal or tax requirements. This structure is often chosen when managing income streams to beneficiaries is essential.
- C Corporations - While rare for SPVs, C Corporations may be used in certain cases where corporate governance and issuing different classes of shares are priorities. However, C Corporations are subject to double taxation—first at the corporate level and again on shareholder dividends—which often makes them less tax-efficient for most SPVs. This structure is typically chosen only when corporate-level tax benefits or specific governance requirements outweigh the tax drawbacks.
SPVs vs. Traditional Fund Structures
While both SPVs and traditional funds are investment vehicles, they differ in structure, purpose, and flexibility. Here are some key distinctions that highlight the unique advantages of SPVs:
- SPVs focus on a single investment, while traditional funds typically invest in a diversified portfolio over a longer period. This concentrated approach lets investors target specific opportunities they’re interested in without committing to a larger range of assets. It also provides transparency into the precise project they’re backing.
- SPVs have a finite lifecycle and dissolve once their objective is met, whereas traditional funds operate on multi-year timelines across multiple investments. For investors seeking a shorter-term commitment, SPVs offer a clear exit strategy that’s tied to the success or completion of a single project.
- SPVs offer flexible, customizable terms specific to one deal; traditional funds maintain standardized terms across all investments. This flexibility enables SPVs to be structured to maximize value for the particular opportunity, with unique capital calls, fees, or distribution terms.
- SPVs provide simplified, pass-through tax benefits, while traditional funds may involve more complex tax structures and reporting. As pass-through entities, SPVs allow income and losses to flow directly to investors, avoiding the double taxation seen in traditional corporate structures.
- SPVs give investors direct exposure to a single opportunity, unlike traditional funds, which spread capital across a broad portfolio. This allows investors to choose projects they have conviction in and lets fund managers leverage SPVs to offer highly targeted investment options.
SPV Use Cases in the Private Markets
SPVs are versatile tools that can serve a variety of strategic purposes in private markets. Here are some of the most common use cases where SPVs provide targeted benefits for investors:
Build a track record as an emerging manager.
Emerging managers can use SPVs to build a track record before raising a formal fund. By making individual investments through SPVs, they can demonstrate deal flow, investment strategy, and performance, helping attract LPs for future fundraises. This approach provides proof of concept and credibility without needing a fully committed fund.
Leverage pro-rata rights to maintain ownership.
SPVs allow fund managers to exercise pro-rata rights to maintain or increase ownership in a promising portfolio company. Rather than depleting capital reserves from a primary fund, they can use an SPV to secure additional shares, enabling them to protect or expand their stake as the company grows.
Manage co-investment opportunities for LPs.
SPVs offer a way for LPs to co-invest alongside a main fund, allowing them to commit additional capital to specific assets they find appealing. This setup provides LPs with tailored exposure to high-potential assets, while giving GPs the chance to meet demand for larger or more concentrated investments.
Invest as a real estate syndicate.
Real estate investors often use SPVs to pool funds for specific property acquisitions or developments, giving each project its own dedicated entity. This structure isolates liabilities and returns for each property, providing investors with a clear and targeted investment in a single asset while minimizing risk exposure across the syndicate.
Securitize assets like loans or receivables.
SPVs are frequently used in finance to hold pools of assets, such as loans, mortgages, or receivables, which are then packaged as securities for investors. This arrangement enables the parent company to transfer risk, while investors gain direct exposure to the performance of the underlying assets in the SPV.
Purchase secondary shares in mature companies.
SPVs are a common tool for buying secondary shares from existing shareholders of private companies. This allows investors to gain access to more established companies approaching liquidity events, such as an acquisition or IPO, without needing direct ownership in the parent entity or a primary stake.
Warehouse investments ahead of a fund launch
Managers planning to raise a fund often use SPVs to warehouse key investments in advance. This allows them to secure high-value deals before formal fund capital is available and later transfer these investments into the fund, maintaining continuity and strategic positioning.
Complete One-Time, High-Value Transactions
SPVs facilitate large, one-time transactions by containing the deal within a dedicated entity. This is useful for acquisitions, major projects, or unique financing needs where isolating the financial impact and risk of the transaction is essential.
Managing SPVs on Flow
If you're considering an SPV for your next investment - or if you need guidance on how to start - Flow can help. Flow provides an end-to-end SPV solution that combines intuitive software with integrated administration services. From entity creation to digital onboarding and ongoing administration, Flow’s platform simplifies every stage of the SPV lifecycle to be more efficient and cost-effective.
Schedule a call with a Flow product expert to learn how we can support your SPV investments with a comprehensive, scalable solution.