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The full form of SPV is a Special Purpose Vehicle. It is also commonly known as a special purpose entity or SPE. An SPV or SPE refers to a legal entity or object engineered for a specific purpose and comes with its own assets and liabilities. It allows investors to pool their money by making an investment in a single company. Moreover, it is designed as a bankruptcy-remote, meaning that the SPV is legally separate from its parent company. Therefore, if the parent company somehow goes bankrupt, the SPV’s assets and liabilities will continue to function normally.
Use of SPVs
SPVs have a bunch of uses such as:
- SPVs can be used to raise funds for a wide range of projects such as the construction of a road or power plant.
- One of the most important uses of SPVs is to isolate financial risk from the parent company. This is particularly beneficial for companies that often embark on new adventures.
- You can also use SPVs to purchase real estate.
- Another common use of special-purpose vehicles is to form joint ventures between multiple companies.
- Securitization of loans is another important use of special-purpose vehicles.
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Advantages of SPVs
Special purpose vehicles or SPVs offer a ton of advantages for business owners and investors, making them among the top choices in the finance world.
- Risk isolation
- Direct ownership of assets
- Tax savings
- Easy set up
- Securitization of assets
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Disadvantages of SPV
- Companies using special purpose vehicles (SPVs) might face challenges in getting enough money because these vehicles do not have the same credit as the company that owns them.
- If an SPV sells an asset, it might have to follow the “mark to market” rules, which could greatly affect the company’s financial statements.
- Changes in rules from regulators could lead to big issues for these companies.
- The way SPVs are seen by others can sometimes be seen as negative.
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