Are you planning to acquire a company to diversify your business? Or are you aiming to raise capital for a new venture or project? One way to do these is to establish a special purpose vehicle (SPV) for your specific business plan. However, you need to understand the special purpose vehicle concepts and applications (if you’re not familiar yet) before using it.
Large corporations like yours use SPVs to mitigate the financial risk they face when advancing a new venture or business transactions. Thru SPVs, they quarantine their company from any unwanted results of their deals.
What are SPVs?
Also called special purpose entities (SPE), SPVs are subsidiary companies created for a specific business deal or financing purposes. They can effectively protect the parent company from risks during the funding or purchase of new assets. SPVs are used mainly by players in the finance and real estate industries, but can also be a tool for any company.
Various applications of SPVs in business
Companies can use SPEs to achieve crucial business targets and goals. Here are some ways organizations can use SPVs:
- Securitization of receivables like loans – Some companies mainly use SPVs to securitize their mortgages and other receivables. For example, a bank can exclude its mortgage-backed securities from its other obligations by establishing an SPV.
- Risk isolation and reduction – When a company has a significant project or acquisition, it can create an SPV to isolate itself legally from the risks related to the new venture.
- Quick transfer of non-transferrable assets – A company can quickly sell or transfer non-transferrable assets through SPEs. For example, if a parent firm wants to exit a merger, it can sell its SPV as a self-contained package quickly.
- Intellectual property protection –SPEs are practical tools to protect a parent firm’s intellectual property (IP). For example, if the parent has pre-existing licensing agreements, it can create an SPV to own the IP and isolate it from the pre-existing deals.
- Liquidity and funding – SPVs can be used to transform non-rated illiquid assets into rated and liquid securities. By doing this, companies can gain more financing.
- Financial engineering – Through SPVs, companies can raise funds for new deals or acquisitions without increasing their debt. They can raise equity from investors and sponsors of the SPV.
- Investment protection – Parent firms can use their SPEs to test the market before making a full investment. Investment companies use this strategy when venturing into the financial market.
Benefits of SPVs
There are many advantages of SPEs for your business. For better management, however, you may opt to hire the services of organizations that are experts in special purpose vehicle concepts and applications. Here are some benefits of SPVs for your operations:
- Protects the assets of the parent company during financial difficulties and lessens the credit risk for the stakeholders and investors.
- It facilitates the access of private firms and establishments to the capital markets.
- Generally, securitized loans have lower interest rates than the rates on the parent’s corporate bonds, thus, resulting in financial savings.
- The ownership of the investors and stockholders in the parent firm will be undiluted.
- An SPV can save your company from taxes, especially if you create it in tax haven territories.
Adopting smart business strategies can improve your bottom line. By using tools like SPVs, you can mitigate your risk exposure from your new ventures or projects. Make sure to follow the laws regarding their use to avoid any legal and regulatory issues.