Special Purpose Vehicles (SPVs)

It is also known as Special Purpose Entity (SPE) or Financial Vehicle Cooperation (FVC).

Definition– SPE is a fenced organization having limited predefined purpose and a legal personality.

Or

A special legal entity created by an organization for a specific objective which could be for joint ventures, isolation of corporate assets or securitization.

SPVs could be partnerships or joint ventures. In some cases it is required that SPV should not be owned by the main company as it will then be regarded as a subsidiary and not a separate entity.

A SPV has its own balance sheet and is nowhere connected to the main firm, not even in their balance sheet. It has its own assets to gain investments and sponsors. Sometimes these are set up as Orphan companies with separate directors and administration to ensure no connection with the sponsors.

*Benefits—

1. Isolates financial risks- In case a company goes bankrupt, others will be immune.
2. Ownership and easy selling of businesses- some businesses like related to power plants are hard to sell. Or sometimes the financial gains from selling is less than the property tax paid, so a pool of companies can be sold as one entity which seems feasible and easy.
3. Tax savings- if the SPV is in a tax haven. Means in a country where tax rates are low for businesses. So they can gain much more compared to the country they are operating in.
4. Easy to create and control- It is easy to operate, like in big infra project creating a SPV will minimize the risk of losses. If the SPV fails it will not affect the main firm.

*Risks—

1. Lower access to capital- being a separate entity it has less capital and investment as compared to the parent entity.
2. Optics is negative- sometimes the image of the SPV is negative and market does not see it as a viable option for investment.
3. If the regulations (laws in the country) change it could cause problems to the companies as well as the SPVs.
4. If the isolation is not proper it can impact sponsor’s balance sheet.
5. Accounting rules could be triggered if the assets of the company are sold.

Example- Enron Corporation

Also known as Enron Scandal

The corporation created hundreds of shell companies to hide its debt and continued fudging the data of losses until it all came out.

Being a legal entity SPVs are still widely in use but are now governed by some laws which came in the aftermath of Enron scandal.

Sources-

• Wikipedia,
• Investopedia,
• CFI (corporate finance institute)

26-06-21,

Saturday