In the intricate tapestry of investment strategies, Special Purpose Vehicles (SPVs) and Funds stand as prominent choices for aggregating capital and pursuing lucrative opportunities. These investment vehicles offer distinct benefits and considerations. This article delves into the nuances of SPVs and VC funds, exploring their definitions, differences, advantages, and reasons for adoption.
Defining SPVs
Special Purpose Vehicles (SPVs) are legal entities formed for specific investments or transactions. SPVs enable investors to collectively pool resources and share risks and rewards linked to a particular investment endeavor. These vehicles provide tailored solutions for various transactions, making them popular in fields such as venture capital, real estate, and private equity.
Defining VC Funds
Venture Capital (VC) funds encompass collective investment vehicles managed by professional fund managers. VC funds offer diversification across multiple investments, mitigating risks associated with individual ventures. They include various forms, such as mutual funds, hedge funds, private equity funds, and venture capital funds, catering to diverse investor preferences and risk tolerances.
SPVs vs VC Funds:
Number of Investments
SPVs: Focus on singular investments or transactions, enabling direct stakes in specific projects.
VC Funds: Diversify investments across multiple ventures, enhancing portfolio diversification.
Investment Timelines
SPVs: Seek shorter return periods as they hinge on the success of one investment.
VC Funds: Pursue longer investment timelines, typically spanning years, to accommodate multiple ventures.
Reasons for Using SPVs vs Using Fund Structures
SPVs:
1. Non-conforming Investments: Used when a venture doesn’t align with a fund’s investment criteria.
2. Concentration Limits: Employed to surpass a fund’s allowable investment in specific sectors or companies.
3. Track Record Establishment: Suitable for aspiring fund managers to build a tangible investment history.
4. Deal-specific Funding: Used for investments outside a fund’s established timeframe.
VC Funds:
1. Diversification: Provide broader exposure across multiple industries and ventures.
2. Professional Management: Managed by experts making informed investment decisions.
3. Long-Term Approach: Align with investors seeking extended investment horizons.
Advantages and Disadvantages of Using SPVs
Advantages:
- Risk Isolation: SPVs shield flagship funds from poor-performing investments.
- Expanded LP Access: Simplified access for LPs, compared to traditional VC funds.
- Cost Efficiency: Setting up SPVs costs a fraction of establishing a VC fund.
- Deal-specific Focus: SPVs enable investments outside a fund’s predefined scope.
Disadvantages:
- Lack of Diversification: SPVs may lack the diversity of traditional VC funds.
- Exit Term Alignment: Challenging to align LPs and portfolio companies on exit terms.
- Double Down on Successful Bets: Limited to investing in a single transaction, would need to raise additional capital to invest in follow on rounds.
Conclusion
In the dynamic world of investment vehicles, SPVs and VC funds emerge as distinct yet complementary options. While SPVs offer tailored solutions for singular investments and allow managers to navigate specific scenarios, VC funds provide diversification and long-term management. Careful consideration of investment objectives, risk appetite, and desired involvement can guide investors toward the most suitable approach.
Ready to set up an Angel, Venture, Founder or Holding SPV?
At Auptimate, we make it easy to design, launch and operate market-leading SPVs online for a fixed, low price. If you’re ready to start your next SPV, hit the “Launch” button at the top of this page. Or get in touch with us at info@auptimate.com and one of our experts will be more than happy to help.
