A quick guide to SPVs for VCs: Supercharging fund growth.

Over the last year, as traditional LP sources have slowed, more funds and founders have turned to SPVs to help them to continue to raise and deploy capital in a challenging environment.

But there’s still some confusion on how exactly SPVs work and how best to utilize them. So here’s a quick guide on SPVs for VCs, from picking the right jurisdiction to asking your provider the right questions.  

Simply Raise & Deploy Capital

KAPITAL helps Funds, Founders and Asset Managers with the setup and management of their SPVs (Special Purpose Vehicles) to simplify their fundraises - handling everything from investor onboarding to tax reporting - in a fully compliant and digitised process.

What are Special Purpose Vehicles (SPVs) ?

An SPV (Special Purpose Vehicle) is a type of investment vehicle which is used for the sole purpose of carrying out a specific transaction - typically the acquisition or financing of specific assets.

• These vehicles are isolated from the operational risks of its initiators, for this reason, a special purpose vehicle is sometimes called a “bankruptcy-remote entity”.
  
• SPVs have been used since the 80's to structure numerous types of transactions - but they've become popularised by VCs and Startups who use them to raise and deploy capital during fundraising rounds.
  
• While known for their use in private stock - SPV's can be used to pool and deploy capital into almost any underlying asset - like the purchase of a factory, machinery, carbon credits, farmland, and so on.

How Fund Managers use SPVs ?

SPVs can be used for an array of transactions, with some of the most common use-cases for Alternative Investment Fund Managers (AIFM) and VC Funds being:

• Deal-by-Deal SPVs
  Fund Managers will typically use SPVs to structure LP co-investment opportunities that fall outside of their core fund mandate (ie: follow-ons or opportunistic deals).
  
• Feeder Fund SPVs
  Both established and emerging fund managers use SPVs to bring in smaller ticket or international investors which are then pooled together as a single LP - otherwise known as Feeder Funds.
  
• Simplified KYC-AML
  SPVs can be used to simplify the KYC / AML and onboarding of investors in a fund by having investors complete KYC at the SPV level rather than at the fund or administrator level.
• Clearinghouse & CSDRs
• Funds are turning to Clearable SPVs with XS-ISINs for their fundraises, enabling them to easily raise capital from institutional investors, private banks and asset managers.

What are the benefits of an SPV for the different parties ?

• For the end Asset (e.g. the company the SPV invests in) SPVs ensure that they can maintain a clean cap table and maintain good governance as fewer investors are subscribing directly.
• For the Fund (i.e. the SPV initiator) SPVs make it easy for them to pool, subscribe, collect funds, charge fees/carry and manage multiple underlying investors in one place.
• For the Investor (i.e. the SPV participant) SPVs make it more accessible to take part in an investment opportunity where everything from KYC to capital calls to tax reporting is in one place.
• For all parties - dedicated SPVs providers are typically able to significantly reduce the time and costs associated to closing funding from multiple investors compared to traditional route.

How does an SPV work ?

For a simple co-investment vehicle into a single asset, the steps for setup and closing the SPV would be as follows:

1. Once a target asset has been identified and early interest has been expressed, the fund will setup an SPV with a third party provider which will pool the multiple investors taking part in the deal.
2. The fund will typically take a fee (e.g. Management and Carry) on all the investors taking part via the SPV, and appoint themselves as the representative of the investors for simple governance.
3. All investors in the SPV sign a subscription agreement with the SPV provider that matches the terms of the underlying investment - which has been negotiated by the fund.
4. All investors then wire the funds to the SPV associated bank account. Once all wires are collected, the SPV provider transfers the total funds to the bank account associated with the end asset.
5. The SPV representative signs the deal terms directly with the end asset (e.g. the startup) for the total investment amount that has been pooled via the SPV.
6. Ongoing tax reporting for the SPV investors is handled by the SPV provider, and ongoing Asset reporting is the responsibility of the Fund who initiated the SPV.
7. If / when an exit is realised, the funds for each investors stake is transferred to the SPV bank account and distributed to underlying investors, minus the carry, which is sent to the Fund.
8. Once all transactions have been completed and vehicle is no longer needed, the SPV is dissolved.

Are SPVs only for investing in startups ?

No, SPVs can be used to raise and deploy capital into almost any underlying asset. With KAPITAL, we support multiple assets types including :

• Private Stock (e.g. the purchase of company shares)
• Infrastructure (e.g. the purchase of a factory or equipment)
• Real Worlds Assets (e.g. the purchase of land or real estate)
• Mezzanine Finance (e.g. a mix of both debt and equity)
• Project Financing (e.g. the financing of a solar farm)
  
  and so on..

What to ask when selecting an SPV provider ?

• Where will the SPV be domiciled? Certain jurisdictions (like Luxembourg) have tax advantages for your underlying investors, while others might cause issues further down the line upon exit.
• What is their fee structure? Most SPV providers charge an upfront setup fee, and then some level of action based and/or annual fee.
• Do they charge enough? Last year, SPV provider Assure shut down after not capturing enough fees to administer the lifetime of their SPVs. Pick a provider that charges their costs + a healthy margin. 
• What is their track record? Who has this SPV provider worked with, what type of investors have they supported, have they handled institutional capital before and which countries can they support.
• What other solutions do they offer? Depending on the SPV provider, they might be able to support you from your first deal-by-deal SPV, to your first fund, and beyond.

Why choose KAPITAL to structure your SPVs?

Built for international transactions, KAPITAL specializes in Luxembourg based SPV's which are the preferred jurisdiction for pooling institutional investors, making it easy to raise and deploy capital into any underlying asset.

• Fully Digitzed: The entire investment process from investor onboarding to distributions is handled digitally, no wet ink required.
• Luxembourg based: Thanks to its AAA-rated economy, political stability and robust regulatory framework - Luxembourg is the preferred choice for institutional and international investors.
• Faster and less costly: Kapital customers typically report saving 3x on costs and half the time in closing compared to traditional structuring firms.
• Tax Transparent or Opaque: Structure either fully tax transparent vehicles or choose to go opaque to benefit from double tax treaties.
• Maximum flexibility: On the underlying asset, capital call structure, closing dates, fees, carry and frequency of distributions.
• Peace of mind: You set the strategy, KAPITAL handles the rest from investor onboarding to annual tax reporting.

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