Recently, Alto partnered with Assure to provide fund managers and other deal sponsors the ability to seamlessly accept IRA capital into Assure special purpose vehicles (SPVs).
As the leader in providing outsourced administrative and transactional support services for the private investment marketplace, Assure is among the most respected names in structuring SPVs. So who better to help answer the question, “What is an SPV?” than Assure?
Below is a guest post written by Assure outlining what an SPV is, how they work, and why they are effective vehicles for pooling together investors into private market opportunities. As always, this post is for information and educational purposes only; neither Assure nor Alto provides legal or tax advice.
What Is a Special Purpose Vehicle?
An SPV is a business entity that serves a special limited purpose. Special purpose vehicles are often created to protect assets and separate the liabilities of a parent or subsidiary company. An SPV may share the same managing and sponsoring entity—referred to as an “SPV organizer”—and is financially independent of any other special purpose vehicle with the same organizer. SPVs also have their own:
- Operating structure
- Ownership structure
- Balance sheet
While an SPV can be any type of entity, they are usually structured as either a limited liability company (LLC) or a limited partnership (LP).
An Assure SPV allows investors to pool funds into an SPV, allowing it to acquire and manage a specific asset or assets. This makes an SPV a simple and flexible way to structure an investment fund.
In many ways, an Assure SPV mirrors the structure of SPVs used by venture funds. They fill an allocation by finding additional investors and pooling them in a separate entity—away from the venture fund’s core fund. All capital is usually called upfront, eliminating the need for capital calls through the life of the fund.
Other key features of SPVs include:
- Removing audit and financial statement obligations
- Allowing for unique waterfall provisions and economics specific to an investment
- Giving investors the opportunity to choose specific investments
- Allowing investors to pool capital to meet minimum investment requirements
- Providing the SPV sponsor with carried interest or other performance fees
Why Raising an SPV Is Like Building a House
When thinking about special purpose vehicles, it’s helpful to think of raising an SPV as being like building a house, as both have a specific structure and are subject to risks, government regulations, and administrative costs.
Whether you’re building a house or acquiring an asset, there will always be risks. Factors such as neighborhood, size, and location determine whether your house will appreciate or depreciate. The risk of the asset acquired by an SPV is determined similarly by location, team, product-market fit, etc.
The structure determines the cost to build the house. A house has basic must-haves… sheetrock, brick, windows, wiring, pipes, and labor. The expense of the structure will depend on the size, quality, and features of the house before you even move in.
Your SPV structure is the legal four walls of your vehicle. The type of structure and its legal features will determine how much money you will spend on your investment before you even make the investment.
Both owning a home and managing an SPV come with administrative costs, as well. Once your home is complete and you move in, there will be ongoing maintenance expenses. These include taxes, utility bills, general upkeep, lawn care, HOA membership, etc.
Similarly, an SPV has ongoing administrative fees like entity maintenance, tax returns and K1s, ongoing investment decisions, distributions, exits, shutdowns, and more.
Rules have been set up by the government in an effort to regulate and protect consumers. How far back from the street you must build; how tall the house can be; plumbing and electrical code requirements; the requirement to get a building permit; and so forth.
An SPV has similar government regulations and protections.
The Structure of an SPV Provides Simplicity and Flexibility
The SPV structure simplifies an organizer’s investment strategy by providing straightforward entity set-up, clear and concise management/operational procedures, and a comprehensive post-closing processing for each investment fund.
Simplicity Through the Series LLC Structure
Using a series LLC saves time and money. A series LLC is a type of limited liability company in which the certificate of formation for the “master” company provides for the establishment of one or more designated “series” entities. Each series’ assets, operations, debts, liabilities, and obligations are kept completely separate from the master company and accounted for independently.
Several states and territories have made it possible to create series LLCs, including:
- Washington D.C.
- Puerto Rico
Easy and Economical Entity Set-Up Process
As part of Assure’s fund administration, SPV organizers receive expert assistance in setting up and maintaining the administrative obligations of investment funds.
Through Glassboard, Assure streamlines the entity set-up process by:
- Filing a certificate of organization with the applicable state agencies
- Providing off-the-shelf operating agreements for regular or series LLCs
- Handling the administrative filings for the master, including maintenance of the registered agent, franchise tax fees, dissolution, and final tax reporting
- Providing off-the-shelf operating agreements for each series entity set-up under the master, specifying that each series is designed to invest in one or more portfolio company securities (each subsequent series becomes effective upon the creation of the series operating agreement through Glassboard)
Once the structure is set up, Assure can help create investment entities at volume with a management structure that is efficient and cost-effective. If an SPV has unique needs, Assure will work with the SPV organizer to modify the structure and documents, as necessary.
Flexibility Across Asset Types and Needs
SPVs can be used to facilitate investments in various types of assets and the SPV structure can be modified to meet specific needs. For example, an SPV can be used to invest in startups, real estate, private funds, or other assets.
SPVs are used to invest in various asset types, from startups raising seed capital to the purchase of secondary shares in pre-IPO companies. Assure can administer SPVs for various assets and asset classes, and the SPV structure is flexible to accommodate different investments.
Special purpose vehicle organizers can have unique needs, and an SPV allows organizers to tailor the structure and economics to meet those needs. These include:
- Simple or complex waterfall provisions accounting for preferred returns, hurdles, and other profit allocations
- Providing members with specific rights, such as redemption, voting, and pro-rata rights
- Timing of distributions
- Regulatory requirements
The Use of SPVs Is Only Growing
Assure has helped SPV organizers form more than 6,000 SPVs and has seen almost every variation and asset class, making them experts in the field. To learn more about running SPVs with Assure, email email@example.com.
And if you already have your investment vehicle created and are looking for a way to easily accept IRA capital into your deal, set up an Alto Deal Sponsor account today.