A Special Purpose Vehicle (“SPV”), also sometimes referred to as a Special Purpose Entity (“SPE”), is an off-balance sheet vehicle (“OBSV”) consisting of a legal entity created by the sponsor or originator to achieve an interim target of the sponsoring company.
Entities can be created to achieve narrow and well-defined objectives (e.g., to carry out leasing, research and development activities, or securitization of financial assets).
SPVs can be used to finance new ventures without increasing the debt burden of the sponsoring company or diluting existing shareholdings. The sponsor (or the entity that created the SPV) may provide a portion of the equity, with outside investors providing the remainder. This allows investors to invest in a particular project or business without investing directly in the parent company. These structures are often used to finance large infrastructure projects.
Sponsors often transfer assets to the SPV, obtain the right to use assets held by the SPV or provide services to the SPV, while other parties (“capital providers”) may provide funds to the SPV. Entities that deal with SPVs (usually creators or sponsors) can significantly control SPVs.
For example, an beneficial interest in an SPV can take the form of a debt instrument, an equity instrument, a participation right, a residual interest or a lease. Some beneficial interests may only entitle the holder to a fixed or stated rate of return, while others entitle the holder to or receive other future economic benefits from SPV activities. In most cases, the creator or sponsor retains a significant beneficial interest in the activities of the SPV, even though it may own little or no equity in the SPV.
What is an Orphan SPV
An orphan SPV, or single-purpose vehicle, is a type of special purpose vehicle that is created to finance a specific project or transaction. Orphan SPVs are typically used when the project or transaction is not large enough to warrant the creation of a full-fledged corporation.
Orphan SPVs are often used in the real estate industry to finance the development of a single property. They can also be used to finance mergers and acquisitions, or to raise capital for other types of projects.
Orphan SPVs are typically structured as limited liability companies (LLCs). This means that the investors in the SPV are not personally liable for any debts or liabilities of the SPV.
When an orphan SPV is created, it is typically funded by a group of investors. The investors may be individuals, businesses, or other financial institutions. The investors will typically receive shares in the SPV in exchange for their investment.
Once the orphan SPV is funded, it will use the funds to finance the project or transaction that it was created for. Once the project or transaction is complete, the SPV will be dissolved and the investors will receive their share of the proceeds.
Orphan SPVs can be a useful tool for financing projects or transactions. However, they are not without risks. Investors in orphan SPVs should carefully consider the risks involved before investing.
Here are some of the risks associated with orphan SPVs:
The project or transaction may not be successful.
The SPV may be unable to raise enough capital to finance the project or transaction.
The SPV may be dissolved before the project or transaction is complete.
The investors may not receive their full investment back.
Despite the risks, orphan SPVs can be a valuable tool for financing projects or transactions. Investors who are considering investing in an orphan SPV should carefully consider the risks involved before making a decision.
An SPV can be structured in different ways, depending on what the originator is trying to achieve with the vehicle and its geographical location.
Such SPVs can take the form of corporations, trusts, partnerships, unincorporated entities, Stitching (i.e. foundations under Dutch law) or multi-user structures (e.g. protected cell companies).
In Canada, SPVs take the form of charitable trusts. In Europe, a typical SPV is a limited purpose company with a charitable trust owner under domestic (i.e. UK) or offshore (i.e. Jersey) law. In the United States, SPVs are usually in the form of LLCs.
SPVs are often created under legal arrangements that impose strict and sometimes permanent restrictions on the decision-making power of their management committees, trustees or management over the operation of the SPV. In general, this condition states that the policy governing the ongoing activity of the SPV cannot be modified except by its creator or sponsor (i.e., it is carried out on so-called “autopilot”).
Key Benefits to Sponsoring Company
Freedom of jurisdiction
From a regulatory perspective, companies that start SPVs are free to incorporate the vehicles in the most attractive jurisdictions while continuing to operate outside those jurisdictions.
Minimal red tape
Depending on the choice of jurisdiction, setting up an SPV is relatively inexpensive and easy. This process can take as little as 24 hours and usually does not require government permission.
By structuring the SPV properly, the sponsor can limit legal liability in the event that the underlying project fails.
SPVs typically allow multiple parties to have ownership of a single asset and allow easy transfers between parties.
Clarity of documentation
It is easy to restrict certain activities or prohibit unauthorized transactions in the SPV document.
Financial risk isolation
By structuring an SPV as an “orphan company”, the SPV’s assets may not be consolidated with the company’s balance sheet assets and be “bankruptcy remote” in the event of bankruptcy or default.
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