Special purpose vehicles, or SPVs, are legal entities made specifically to serve a purpose. A parent company makes it and has its liabilities, assets, balance sheet, and everything else. These SPVs are used to securitise assets, isolate financial risk, and conduct financial transactions without affecting anything. Learn about all the different uses of special purpose vehicles and additional information.
Special Purpose Vehicles: Uses
The following are some of the most typical uses of an SPV:
Securitisation
One of the common reasons why a company chooses to create an SPV is to securitise the loans. It allows investors in mortgage securities to get payments from a bank or financial institution’s other creditors.
Risk Sharing
Having an SPV is useful for isolating the risks of any project and sharing them with other investors. This helps reduce the overall risk that an organisation may have accumulated over time.
Property Sale
An organisation can make an SPV when the taxes on property sales are more than the capital gains received from the sale. In such cases, the SPV would own the properties. Then, the company may sell the SPV instead of the properties and pay the taxes only on the capital received from the sale instead of paying the entire property sales tax.
Asset Transfer
Some kinds of assets are challenging to transfer, so an organisation can still own those assets through an SPV. But if they ever want to transfer those assets, then they may sell that SPV.
Risks and Advantages of Special Purpose Vehicles
The following are the risks and benefits an organisation receives by creating an SPV.
Risks
Some of the risks include the following:
- The balance sheet gets affected severely if an asset is sold
- There is lower access to capital at the vehicle level since it does not possess the same credit as the parent company
- Regulatory fluctuations cause challenges for organisations owning vehicles
Advantages
The following are the advantages received from a special-purpose vehicle:
- They are incredibly easy to make and set up
- Direct ownership of a specific asset
- It leads to isolated financial risk that may not affect the parent company
Wrapping Up!
Special Purpose Vehicles are versatile and can be used in several different industries for finance projects, securitisation, asset management, and raising capital. They optimise tax structure and improve financing options. These SPVs can facilitate complex transactions and enhance transparency when they are structured properly.
FAQs
1. How is a Special Purpose Vehicle made?
An SPV can be made in several ways, whether it is as a limited liability partnership, corporation, or trust. It can be designed to be owned, funded, and self-managed. However, it has to be made by a parent company for purposes like joint venture formation, asset securitisation, etc.
2. How is a Special Purpose Vehicle different from a company?
The difference between an SPV and an ordinary organisation is in its objective. The SPV’s scope is narrower than that of a company since it can only accomplish what it was made for.
3. What are the limitations of forming a Special Purpose Vehicle?
While an SPV has several uses, it also has its fair share of drawbacks. Maintaining and even making an SPV can be an expensive affair since there are accounting legal fees to be considered. There are also other ongoing costs for compliance and administrative purposes.
