What is a special purpose vehicle?

What is a special purpose vehicle? Hint: it's not a car. 

If you’ve ever wondered what a special purpose vehicle, or SPV, is, you’re not alone. SPVs play a big role in structured finance, property, and investment, helping their parent companies reduce risk, segregate funds and streamline operations. 

In this guide, we break down what SPVs are, why they’re used and how they can benefit both individual investors and businesses. 

Important: The information in this guide is general in nature, not legally binding, and should not be considered financial or investment advice.    

Key takeaways: 

• A special purpose vehicle (SPV) is a separate legal entity created for a specific, often strategic, purpose. 

• SPVs are commonly used to manage risk, streamline investment, or isolate specific assets or projects. 

• They're widely used in property investment, project finance and structured finance, especially in the UK. 

• Setting up an SPV can offer benefits, but it also comes with responsibilities – professional advice is essential. 

  
  

What is a special purpose vehicle? 

In plain English, a special purpose vehicle (SPV) is a distinct legal entity that someone creates for a very specific and limited purpose. You might also hear them called special purpose entities (SPEs); the terms are often used interchangeably. 

Think of an SPV as a separate, ring-fenced entity. Legally and financially, it stands apart from the company or individuals who set it up (the “parent company”). Its activities are strictly confined to the particular task for which it was formed. 

Why are SPVs used? 

Business owners establish SPVs for various strategic reasons. Here are just a few:  

• To isolate or reduce risk: A primary driver for creating an SPV is to protect the parent company’s assets and limit its liability. By housing a potentially risky project or asset within an SPV, financial or legal issues that arise in the SPV don't usually directly impact the parent company's core business or other assets. 

• To drive investment and project finance: SPVs are frequently used to structure and channel investment into specific projects – particularly large-scale developments or infrastructure initiatives. They can bring together multiple investors under a clear and legally defined framework. 

• To hold specific assets: An SPV can be established to hold particular assets, like a piece of valuable property or intellectual property rights. This can streamline management and ownership. 

• To structure complex financial products: SPVs are an essential part of complex financial products like securitisation. For instance, banks use SPVs to isolate mortgage assets when issuing mortgage-backed securities to investors. 

• To make operations or taxes more efficient: In some cases, the structure of an SPV can offer operational advantages or potential tax efficiencies. This can depend on the jurisdiction and the SPV’s specific purpose. 

  
  

Common ways SPVs are used 

SPVs appear in various sectors, and they’re often finely tailored to meet specific needs. 

Property investment schemes (especially in the UK) 

Many landlords in the UK use SPVs (often limited companies) to purchase and manage buy-to-let properties. 

This structure can potentially offer tax benefits, as profits are subject to corporation tax rates rather than income tax rates for individuals. 

Securitisation and structured finance 

Banks use SPVs to isolate pools of assets, such as mortgages or credit card debt, when issuing mortgage-backed securities or other asset-backed securities to investors. This separation helps to create more secure and tradable financial instruments. 

Project finance and joint ventures 

Corporates frequently employ SPVs for large infrastructure or development projects. This allows multiple companies to collaborate on a specific venture while clearly delineating responsibilities and liabilities within the SPV. 

Investment vehicles 

Private equity and hedge funds sometimes use SPVs to manage specific deals or investments, allowing for focused management and reporting for particular ventures. 

How do you structure and register an SPV? 

In the UK, the most common structure for an SPV is that of a limited company (LTD) or Limited Liability Partnership (LLPs). 

Setting up an SPV as a limited company is a relatively straightforward process handled through Companies House. You begin by registering the company name, outlining its registered office, appointing directors and drafting the articles of association, which govern how the company operates and defines its specific purpose. 

Once established, SPVs have ongoing regulatory and reporting responsibilities, just like other registered companies, which need careful management. 

The benefits and drawbacks of establishing an SPV 

Like any financial tool, SPVs come with their own set of advantages and disadvantages. 

SPV pros 

• Risk management and asset protection: Effectively separates risks associated with a specific project or asset from the parent company. 

• Simplified accounting for specific projects: Allows for clearer financial tracking and management of individual ventures. 

• May offer tax benefits: Depending on the structure and jurisdiction, there can be tax advantages. 

• Facilitates investment and borrowing: Can make it easier to attract investment or secure financing for specific projects. 

  
  

SPV cons 

• Cost and complexity of setup and maintenance: Establishing and managing an SPV involves costs and administrative complexities. 

• Regulatory scrutiny: SPVs are subject to regulatory oversight, which requires careful compliance. 

• Potential for misuse: While legitimate, SPVs have been used in the past to obscure liabilities (a notable example being the Enron scandal, where SPVs were used to hide debt). This highlights the importance of transparency and ethical use. 

  
  

What investors should know 

For investors considering investing via, or in, an SPV, thorough due diligence is absolutely vital. It’s crucial to: 

• Understand the specific purpose and limitations of the vehicle. 

• Assess the transparency and reporting obligations of the SPV. 

• Seek professional financial and legal advice to fully comprehend the risks and potential rewards involved. 

  
  

How SPVs fit into the financial landscape 

SPVs have become increasingly popular, particularly in real estate and alternative investment structures. They play a significant role in cross-border transactions and wealth management, offering tailored solutions for complex international financial activities. Their relevance is also growing for overseas investors looking at UK property markets, providing a structured way to hold and manage assets. 

Is an SPV right for you? 

To recap, an SPV is a distinct legal entity created for a specific, limited purpose, offering benefits like risk isolation and facilitating investment in various sectors, including property and infrastructure. However, setting one up involves costs, complexity, and ongoing regulatory responsibilities. 

Deciding whether an SPV is the right structure for your needs requires careful consideration of your specific circumstances and goals. It is essential to seek expert legal and financial advice to determine the most appropriate structure for your situation. 

At Interpolitan Money, we understand the intricacies of SPV structures and can provide tailored financial solutions to support their operations. From multi-currency accounts for seamless international transactions to cross-border payments and secure escrow services, we can meet the demands of these specialised entities. 

Selecting the right financial partner for your SPV 

The benefits of using an SPV, such as risk management and facilitating investment, are compelling for many business owners and high-net-worth individuals looking for strategic financial structuring. When considering setting up this type of company, it’s crucial to speak with trusted advisors to explore your options thoroughly. 

Finally, remember that selecting the right financial partner for your SPV is a critical decision. Traditional banks aren’t always the most flexible when it comes to dealing with SPVs, and their appetite for cross-border transactions can sometimes be limited. At Interpolitan Money, we have a deep understanding of various international jurisdictions and can dedicate the necessary resources to ensure seamless compliance across different regions for your SPV. 

Contact us today to learn more about how we work with SPVs and how our tailored financial solutions can support your unique needs.