Why should I set up a fund SPV?

Special Purpose Vehicles (SPVs) have been vital instruments for the global fund industry for a long time. Some are routine and familiar, some are complex. In this first part of our series on fund SPVs, Jason Gerlis, Head of Americas at Ocorian, explores what fund SPVs are, why you’d set one up, and what to bear in mind when you do. 

What is a fund SPV?

As the name implies, an SPV is a company incorporated for a specific reason. There is a broad range of reasons to set up a fund SPV, from facilitating co-investment to acting as carry vehicles; from raising and deploying capital to holding assets; from contracting with suppliers to acting as BidCos for transaction work; and everything in between.
 
SPVs are pivotal tools in the realm of investment management, serving as essential components for managing risk, optimising tax strategies, and segregating liabilities. Their role, often misunderstood, is not just about administrative convenience but about enhancing the strategic and operational efficiency of investment funds.
 
In 2024, SPVs are part and parcel of doing business internationally. But it’s essential to remember that each jurisdiction will have different rules governing the structures, including varied regulatory requirements around how they operate.

Why should I use a fund SPV?

There are a number of reasons why a fund manager might seek to use an SPV, some of the key ones are: liability segregation, ringfencing assets, tax optimisation and opacity of assets.

Liability segregation

One of the key reasons to use a fund SPV is to isolate risk. They are separate entities from their parent companies, with their own assets and liabilities and they therefore conduct independent financial transactions. 

Fund SPVs employ ringfencing that limits the liability to the assets of that corporate vehicle and protects the overall fund structure and the other assets of the fund manager.

By isolating liabilities to the SPV, we ensure that any financial recourse by creditors is limited to the assets within the SPV. This setup is essential in high-leverage situations to prevent creditors from laying claims on the broader fund's assets, thus safeguarding investor interests and maintaining fund stability.

Ringfencing assets

When it comes to capital raising, fund managers will use a fund SPV to ringfence investments for specific purposes, delivering on discrete manifestos and targets and providing a clear proposition for their investors. 

Firstly, there are legal and regulatory requirements in certain jurisdictions that prevent foreign companies from owning property directly. This necessitates the establishment of a local entity, such as an SPV, to hold assets. Other predominant reasons for using SPVs include tax optimisation and the segregation of liabilities and assets. Those investors are assured that their capital will be used exactly as defined in the SPV fund documentation and is segregated from other investments of a fund.

Case study: real estate fund

A fund has successfully raised money from investors and has committed to invest in real estate. The fund could of course purchase the property they are looking at, for example a block of student accommodation, and go to the home jurisdiction’s local registry to record the purchase under the fund’s name. However, when it comes to selling the accommodation, they would need to separate out the accounting and ownership particulars from the rest of the fund assets and then return to the registry to update the records.

Using a fund SPV would give the fund a company with the express purpose of owning the student accommodation, the compliant segregation of liability and assets, tax efficient structuring, and ownership of assets in the required jurisdictions. 

This SPV would be listed on the registry as the owner and, when the time comes to sell the property, the fund could do this simply by selling the shares in the SPV, therefore transferring ownership of the property in a structured, compliant way. 

Transparency is of paramount importance, so the ownership would be clearly documented in the registry, increasing attractiveness to a buyer.

Tax optimisation

Setting up an SPV in a specific country can serve as a strategic tax play, crucial for legal ownership of assets within respective jurisdictions. This is crucial because certain assets may need to be legally owned within their respective jurisdictions. Additionally, local tax reporting requirements, such as the UK's FRS 102, necessitate such structures.

Managing risks

Fund SPVs are typically structured as corporate vehicles and are prized for their ability to maintain confidentiality and help managing high-stake investments. This structure is particularly beneficial in high-risk scenarios, such as investments in biotech firms, where an SPV can contain liabilities, preventing them from affecting the broader fund and its investors.

While not always the case, carry vehicles and some co-investments might opt for partnership structures due to their resemblance to funds and the favourable tax implications associated with receiving an interest in the fund.

In the structure of investment funds, distinctions are made between arrangements “above and below the line". Above the line, where general partnerships manage the fund and engage in co-investments, the focus is on maximising returns and tax efficiencies. Below the line, they typically employ corporate structures for their ability to encapsulate risk and enhance financial safety through their opaque nature, acting as blockers to contain liabilities within the SPV itself.

A unified approach

The decision to use an SPV often originates from a range of advisors such as tax lawyers, corporate financiers and M&A consultants, as these structures are typically necessitated by tax structuring needs. They will often then be established by these parties on behalf of the General Partners (GP) or the fund to meet these immediate needs, with little thought as to the efficiency of their ongoing operations or synergies with a firm’s existing SPVs. This fragmented approach can create operational challenges post-setup for an asset manager.

Ocorian’s SPV services

By outsourcing your SPV management to a single global provider like Ocorian, we can streamline your operations, enhance efficiency, and simplify management and governance.

We offer:

• Teams based in 15 jurisdictions, including Americas (Bermuda, BVI, Cayman Islands, US), EMEA (Gurnsey, Ireland, Isle of Man, Jersey, Luxembourg, Mauritius, Netherlands, UAE, UK) and APAC (Hong Kong and Singapore)
• Provision of local directors
• A single unified technology platform across all our fund administration and SPVs to integrate all entities seamlessly
• A single board management solution, which consolidates all your board packs and minutes in one place

As a fund administrator of 30 years specialising in alternative assets, we possess deep expertise in real assets, including private equity, venture capital, real estate, and debt restructuring. We are recognised experts in alternative funds and are adept in managing fund SPVs for General Partners.

For more information about our fund SPV services, contact us for further information.

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