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The acronym SPV refers to Special Purpose Vehicle, which in Spanish is also known as Sociedades de Propósito Especial, and refers to independent entities that are formed to manage the investment in a project or to create a new one.
Although they can be created for different purposes, what characterises them all is the structure or shell they use, which is always similar.
And although it may sound complex, in the following lines you will see that they are actually simpler than they seem. In fact, these companies are very common in crowdfunding and crowdlending investments.
What is an SPV?
It is actually an independent entity or company that can have different purposes, which generally have to do with the development or investment in a project.
To make it easier to understand, imagine a company that wants to create a new, more innovative project and, to do so, instead of doing it within the structure of the main business, it does it in a new independent entity – SPV -. In case the investment does not go well, this economic damage will not have any impact on the core business.
In legal terms, SPVs are distinct companies, operating with their own assets and liabilities and created for a specific purpose.
Thus, they can be used either as an investment vehicle or to create a new company out of a parent company in order to continue its activity, as seen in the example above.
In other words, the SPV is the structure, what is inside can serve a variety of purposes.
The best known uses, as you have already seen, can be to pool investors’ money and use it to invest in a project; or to create a secondary company in case the main one goes bankrupt, or vice versa.
In short, they are independent entities or companies that help, above all, to develop new projects and, more importantly, to minimise risks.
Types of SPV
With what you have seen so far, you have already seen that there are several reasons to create an SPV. Generally, the reasons for setting up an SPV can be divided into three main blocks. Although the structure is the same, the only thing that changes is the purpose of the creation.
On the one hand, there are SPVs that function as an investment vehicle to pool assets from several investors with the intention of investing in a company or launching a project. They differ from other types of investment vehicles, such as funds or SICAVs, because these SPVs generally invest in a single project.
To see this with an example, imagine a group of investors who want to launch a new company that is developing a new application focused on nutrition and healthy habits.
To separate this company from others they may have and minimise potential risks, they can do so through an SPV. This example also applies if, instead of developing it, they want to invest in or buy the existing company.
Many investment platforms use SPVs as a way to invest in the different projects they propose to their clients.
Secondly, there are SPVs that are created as independent companies from a parent company. Thus, this new company has its own legal personality, which allows it to separate financial risks. This can be common, if a business decides to create an independent subsidiary that does not interfere with the accounts of the parent company.
Finally, they can also be common as a result of collaboration. For example, two companies that believe that they can bring a common project to fruition, may opt for the SPV formula to create an independent business in which they share control, but limit the risks and take it out of their core business.
This could be the case of a joint real estate investment by a crowdfunding platform with a developer.
Investor SPVs
In Spain, investing Special Purpose Vehicles (SPVs) have the same objective: to channel investors’ money to manage or invest in a project, as discussed in the previous section.
They are most frequently used to finance real estate, renewable energy or new technology projects. However, it is also common in crowdfunding or crowdlending.
Investment platforms that work as crowdfunding have their raison d’être in that, if the project goes badly, it remains isolated from the rest of the projects. This is because each of them works independently to minimise the risks of an investment.
SPVs and real estate crowdfunding
In the case of real estate crowdfunding, to which all types of investors now have access to benefit from this alternative market, SPVs are an essential instrument. Thus, the lead company creates an SPV for each real estate project in which it is going to buy, refurbish, rent or sell a property. If one goes wrong, it does not affect the other projects.
Therefore, in the event that an investor is invested in different real estate projects, if these are done through different SPVs, what is achieved is to minimise the risks so as not to create a domino effect that could drag down the rest.
