Special Purpose Vehicles (SPVs): everything you need to know

Investors love Special Purpose Vehicles (SPVs) for their ability to collaborate investments through structures like syndicates and pledge funds.

Business owners can choose SPVs such as roll-up vehicles (RUVs) and subsidiary SPVs to simplify cap table management and establish distinct legal entities for specific projects.

There are numerous ways to deploy SPVs - though some are easier to understand than others! Here, we cover what they are, how they work, and why Vestd is the best way to set up and manage them. 

Contents

1. What is a Special Purpose Vehicle?
2. SPV: The investment side
   • Syndicates
   • Pledge funds
   • Managed funds
3. Why would investors or fund managers use SPVs?
   • Why fund managers use SPVs
   • Why angel investors use SPVs
4. SPV: The business side
   • Streamlining your cap table
   • SPVs for company secretaries
5. The link between SPVs with SEIS and EIS
6. Setting up a SPV with Vestd

What is a Special Purpose Vehicle?

A SPV is a legal entity created for a specific business purpose or activity. It allows a company or group of investors to isolate assets, liabilities, and risks related to a particular project.

Think of it as a separate box where a company or investors can put all the bits and pieces – money, assets, and risks – of a particular project. This box stands apart from the main business or personal finances, keeping everything neat and tidy.

Depending on the venture, SPVs can be structured as limited companies, partnerships, or other legal forms. So, in essence:

A SPV is a clever way to manage the finances and risks of a project, making sure it's easy to handle without affecting the rest of your operations.

They also offer numerous strategic and practical uses for both business owners and investors, which we’ll explore below. 

The investment side of SPVs

SPVs serve dual purposes for both companies and investors. Let’s begin by exploring the investment side, where SPVs can be used to create syndicates, pledge funds, and managed funds. 

1. Syndicates: teaming up to invest

In the simplest possible terms, a syndicate does what it says on the tin, acting as a group of investors who come together to invest in a single target company.

Syndicate investing is a popular choice for angel investors looking to invest in fast-moving startups and typically involve a ‘lead investor’ with domain knowledge taking the helm and leading the syndicate’s investment.

SPVs form a dedicated legal entity for the syndicate – acting as a vehicle for those transactions. Syndicates involve several key parties that work together:

• The lead investor: This is the individual who sources the deal, negotiates terms, and rallies other investors to participate. The lead investor must contribute their own capital.*
• The follow-on investors: These are the other individuals the lead investor brings in on the deal. They usually pass on their voting rights to the lead investor as a proxy to simplify governance.
• The nominee: Nominees act as the legal owners of the syndicate's shares, while the individual investors remain the beneficial owners. This keeps the cap table clean.
• The target company: The company the syndicate is investing in.

*If the lead does not themselves invest "materially", they need to be regulated and this becomes a Managed Fund structure.

And here are some key criteria for a syndicate to satisfy if the lead investor is not a regulated fund manager:

• The lead investor must personally invest a material amount
• No up-front "deposits" may be collected from investors
• Each investor must retain a say in share voting and management

2. Pledge funds: capital for multiple investments

A pledge fund allows investors to commit capital upfront to participate in a series of syndicate investments arranged by a lead investor.

It provides the lead investor with indicative interest to go out and source multiple investment opportunities. The key difference between this and a standard syndicate is that investors make a non-binding "pledge" of capital to the lead investor ahead of time.

Legally, separate syndicates must still be set up for each target company invested in. For each deal, the investors still retain the right to opt in or out. This means that individual participating investors don’t take on liability for deals they don’t opt into, but also don’t have to retrieve their capital from the fund.

As with standard syndicates, the lead investor must materially invest their own capital into each deal. No upfront "deposits" can be collected from investors. These restrictions are necessary for the lead investor to avoid being considered a regulated fund manager.

3. Managed funds: for authorised fund managers

Managed funds are similar to pledge funds in that they involve a series of syndicate investments. The difference is that with a managed fund, the lead investor has obtained FCA authorisation to function as a regulated fund manager.

This means the fund manager can collect committed capital upfront from investors into a single vehicle. When the manager identifies an investment opportunity, they can deploy capital without returning to the individual investors for approval on that specific deal.

So, a quick recap:

• Syndicates allow group investing in individual opportunities
• Pledge funds let investors pre-commit to a series of investments
• Managed funds offer a fully managed solution through authorised managers

With the right structure and strong leadership from a lead investor, a SPV can be a powerful way to build a portfolio of innovative early-stage companies. Vestd provides the technology and support to make that process seamless.

Why would investors or fund managers use SPVs?

Venture capitalists, fund managers and investors - if you want to optimise your investments and add flexibility to your strategy, special purpose vehicles are a valuable tool.

Structuring investments through a SPV can help both fund managers and individual investors navigate the restrictions of traditional funds, allowing them to seize opportunities that might otherwise be out of reach.

SPVs also solve much of the admin headache involved in launching and managing multiple investments alongside other investors. 

Why fund managers use SPVs

Fund managers can deploy a SPV for strategic fundraising objectives. Here are some scenarios where SPVs are especially useful for existing or budding fund managers:

1. Deals out of scope with an investment thesis

If you come across a promising startup that doesn't quite align with your fund's limited partnership agreement (LPA), setting up a SPV allows you to raise additional capital and invest in the company without using your main fund's resources.

2. When the deal exceeds certain limits

Some legal structures or investing regulations sometimes limit the amount of capital you can invest in a single company, sector, stage, or geography. A SPV can offer a means to continue investing.

3. When you're a first-time investor

Launching your first venture capital (VC) fund can seem overwhelming. Some fund managers start by creating SPVs to invest in individual companies.

This allows them to build a portfolio of investments with concrete examples of their investment skills. When the time comes to raise their first VC fund, this track record can make it easier to gain the trust and financial backing of investors.

4. When your fund is running low on capital

If your fund has deployed most of its capital but an attractive investment opportunity arises, launching a SPV allows you to raise fresh capital and make the investment without being constrained by your fund's limitations.

Why angel investors use SPVs

Angel investors often choose to invest via a SPV as it enables them to expose their cash to asset classes or investment types they’re unfamiliar with, forming a community of like-minded investors with close relationships with the lead investor or fund manager.

By joining forces with other angels and forming what’s been known as an angel syndicate, you can pool your resources and actively pursue co-investments. Key benefits include:

1. Access to more deals

By banding together with other angels in a SPV, you can invest at larger amounts than you might be able to individually. This opens up a broader range of investment sizes, including later-stage deals that may have previously been out of reach.

2. Diversification made easier

With a wider variety of investment opportunities, SPVs make diversifying your portfolio easier. By allocating smaller amounts across different industries and stages, you can spread your risk and potentially optimise your returns.

3. Increased negotiating power

Investing as part of a syndicate SPV gives you more negotiating power. With a larger investment amount at stake, you can often secure better deal terms and more favourable conditions than you could as an individual investor.

4. Staying competitive in follow-on rounds

As your portfolio companies grow and raise subsequent rounds, it can be difficult to keep up as an individual investor. However, you can remain competitive in those larger follow-on deals by pooling your capital with other angels through a SPV.

SPV: The business side

Special purpose vehicles aren’t just for investors. There are numerous ways to wield them to your advantage as a founder or business owner, too. Fundamentally, a SPV acts as a discreet legal business entity for specific projects or objectives.

Below, we explore how companies use SPVs to streamline operations, handle risks and drive growth.

1. Streamlining your cap table with SPVs

As a founder of an early-stage company, attracting investors is an exciting milestone. However, managing all those individual investors can quickly become an administrative nightmare as your shareholder list grows.

This is where roll-up vehicles (RUVs) - a type of SPV - step in to help. 

Roll-up vehicles simplify shareholder management

An RUV is an SPV designed to consolidate multiple small investors into a single entry on your cap table. By streamlining your shareholder list, RUVs offer several impactful benefits and uses:

2. SPVs for company secretarial and legal matters

SPVs aren’t limited to investment management - they can also be highly useful for isolating assets and risk for individual projects. One key application is the creation of subsidiaries.

Creating subsidiaries with SPVs

A subsidiary is a separate legal entity owned and controlled by a parent company. By establishing subsidiaries through SPVs, you can unlock several practical uses and benefits:

Benefits of SPVs for company owners/founders

We know that it’s a lot to take in! Such is the flexibility of SPVs. But if we had to sum up the benefits for business owners:

• Simplified cap table management
• Better investor communication
• Efficient decision-making
• Asset protection

SPVs and SEIS/EIS tax reliefs

The UK government offers several incentives to stimulate investment into early-stage and growing businesses, notably through the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

These schemes are designed to encourage investments by offering attractive tax reliefs to investors.

For instance, SEIS provides up to 50% income tax relief on investments up to £100,000 per tax year, alongside other benefits such as Capital Gains Tax (CGT) exemption and loss relief.

Similarly, EIS offers up to 30% income tax relief on investments up to £1 million annually, with CGT deferral and loss relief provisions.

SPVs with SEIS/EIS

SPVs themselves aren’t the recipients of SEIS or EIS tax reliefs, as these reliefs are directly linked to individual investors.

So, in the case of Limited Liability Partnerships (LLP) or Limited Partnerships (LP), shares aren’t considered held directly by the investors, disqualifying them from the EIS and SEIS tax reliefs.

However, Vestd Syndicates use a UK bare trust structure, which safeguards your SEIS/EIS eligibility. This means you can manage your investments on the Vestd platform without worrying about jeopardising your tax benefits.