SPVs are, in a nutshell, distinct legal entities created by parent companies. It’s important to note that, as an autonomous entity, a special purpose vehicle wholly possesses assets of its own, and the scope of its operations are, in general, completely distinct. That means that a special purpose vehicle stands independent of the parent company, and can therefore be used for a wide variety of purposes, such as simplifying mergers and acquisitions, facilitating individual asset sales or securitising loans. 

Perhaps most commonly, however, these entities are used to isolate financial risk. As independent entities, they are safeguarded from financial or—in a worst-case scenario—bankruptcy proceedings of the parent company. For this reason, SPVs are often referred to as “bankruptcy-remote entities.”

Due to their flexibility, it may come as no surprise that they carry with them a rather unsavoury history. SPVs have been key to some of the biggest bankruptcies in history—Enron and Lehman Brothers are just two examples of companies who used special purpose vehicles to hide debt and mask liabilities, with catastrophic results. 

Despite this somewhat rocky history, there are still many valid reasons why a company may want to create one. In fact, some recent regulations put in place in the wake of the 2008 financial crisis have done much to alleviate the concerns of shareholders, individuals, and business leaders alike, so there has never been a better time than today to dig deep into the benefits that can be experienced through a special purpose vehicle. So, let’s get started.