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Businesses face an inordinate amount of risk in their day-to-day operations, the biggest of which undoubtedly comes to their finances. The actions of competitors, failed investments, and shifting market conditions can all severely disrupt the viability of business operations—shocks that are extraordinarily difficult to come back from. It’s for these compounding reasons that most organisations implement a multitude of strategies that safeguard their finances. Of them, special purpose vehicles are one of the most popular.

WHAT ARE SPECIAL PURPOSE VEHICLES?

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. 

WHO SHOULD TAKE ADVANTAGE OF SPV'S?

Regardless of the inherent versatility of the entity, SPVs are most commonly used by businesses for financial planning purposes. For example, they are often turned to by:

STARTUPS LOOKING TO SIMPLIFY FINANCING

Businesses are beholden to their investors, often compromising the efficacy of their operations. That’s why many startups create SPVs to act as the fundraising branch of the overarching organisation. Investors place their hard-earned money in the SPV, and then the parent company only has to deal with one investor, the special purpose vehicle itself, rather than all of the individual shareholders in question. This not only limits their accountability to a multitude of people with differing opinions, interests, and attitudes but also ensures minimal investor oversight of the day-to-day operations of the company in question.

BUSINESSES LOOKING TO HEDGE THEIR INVESTMENTS

Since SPVs secure assets in the event of insolvency, it gives companies more freedom to make higher risk investments without facing the higher levels of risk associated with them. Similarly, special purpose vehicles can be used as a way for businesses to offload assets that could be considered a credit risk, thereby improving the credit score of the parent company and allowing them to secure better repayment terms on loans.

COMPANIES INTERESTED IN ISOLATING THE RISKS ASSOCIATED WITH NEW BUSINESS VENTURES

On the flip side to our above point, SPVs can actually be leveraged by companies to conduct high-risk projects without endangering the stability of the parent company. By isolating these projects within the confines of the SPV in question—and its investors—businesses protect themselves from the financial failings of these endeavours, and are not adversely affected in the stock market or in the eyes of the individual holders.

THE OTHER SIDE

Unfortunately, it’s not all rose-coloured when it comes to special purpose vehicles. In the wake of the 2008 financial crisis, many governments across the world started to step in and strip away some of the power of SPVs with the goal of minimising the ability to hold offshore haven accounts or cloud finances from investors. In particular, it’s now extremely popular to restrict ownership of a special purpose vehicle from the parent company in question, and instead mandate that it be owned by a third party. Moreover, the independent nature of special purpose vehicles means that they don’t share the credit rating—or history—of its parent company, which could limit the viability of its operations. 

 

Regardless of the difficulties that you come across, however, there is a silver lining—third-party service providers can greatly facilitate the process. Whether it’s the incorporation of a SPV or its day-to-day management, compliant business services enable you to leverage all of the flexibility of the vehicle with none of the drawbacks or complexities. If you’re looking to isolate your risk or hedge your investments, there is no better way to do so than with a special purpose vehicle. 

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