An organization may create an SPV to accomplish several goals, including risk reduction. The SPV is a distinct legal entity, and it doesn’t share a balance sheet with the parent company. Plus, it receives a special legal status that can help to isolate financial risks. Here are a few ways using an SPV could benefit your company, even if you’re just learning about them.
Simplify the Asset Securitization Process
Loan securitization is one of the most common reasons to form an SPV, and it’s not hard to see why. For example, let’s say your company is issuing mortgage-backed securities. However, you may want to avoid the risk of having them on the company’s balance sheet, even if they are profitable.
A bank in this situation could open a special purpose vehicle, put the loans into its name, and they’d avoid much of the risk entirely. Plus, any investors who’ve put money into the loans would receive regular payments. A special purpose vehicle can open new opportunities on top of debt securitization.
As such, this can be a great way to ensure payment continuity while still cutting risk exposure. The investors would receive their payments before other creditors who paid the bank.
Hide Assets and Liabilities From the Parent Entity
Sometimes, it can be difficult to transfer assets from one entity to another, even if you want to do it. Since governmental provisions regulate them, you must comply. However, using an SPV can be an easy way to circumvent these regulations and transfer the asset.
By initiating a merger and acquisition process, the asset could be put into the company’s name. Thus, you would be removing it from the parent company’s balance sheet.
Lower the Risk of an Audit and Shield Investors
There’s always the risk of getting an audit notice, especially when selling assets. For example, you may have sold some real estate, and the property taxes might be too high for comfort.
Transferring the property over to the SPV would limit the capital gains from the sale. As a result, this would limit your overall tax liability, and you can save much of what you would’ve paid in taxes.
Once the SPV holds the real estate, you can turn around and sell the SPV. That would make it so that you only had to pay capital gains taxes on the company you sold.
Offload Risky Assets From the Parent Company and Sell Them
When undertaking a risk in a venture, you can put part of it into the SPV’s name, and it lessens investor risk exposure. Separating the riskiest parts of a venture can significantly reduce exposure. Plus, it can shield investors if there’s an issue with insolvency further down the line.
Isolating the financial risk can make certain projects seem more palatable. This can help managers attract outside capital whenever they’re trying to attract them. Since there isn’t as much risk involved with the project, it won’t be as hard to convince them to invest.
Improve Your Access to Capital Funds and Meet Minimum Requirements
Raising capital can be what determines the success of a project, and using an SPV can make it easier. Since you can pool funds with more than one investor, capital requirements are easier to meet. Plus, you can guarantee investors that they won’t be exposed to excessive risk if they buy-in.
If you’ve had issues hitting the minimum capital requirements for a venture, then an SPV can help. You can pool funds with more than one investor, and you can shield them from much of the risk assumed.
Expand Operational Freedom by Avoiding Certain Regulations
Often, an SPV is formed as a way to avoid regulations imposed on the parent company. When trying to comply with governmental regulations, an SPV can help you get where you want to go. Since they’re not under the same laws, you can do more with the company, and that’s a huge asset.
Use Unique Waterfall Provisions to Direct Cash Flow to Investors
When creating the SPV, you can decide which investors receive payments first. This can go a long way toward guaranteeing their returns, making them attractive.
Why You Should Consider Using an SPV
Forming an SPV must be done according to specific laws, so you should work with someone who knows what to do. That way, you can count on them to form one properly, and then you’ll get all the benefits.
