In business, as they say, you must speculate to accumulate. In order to make money you must first spend money, and therein lies the problem for many. In today’s economic climate, with record-breaking inflation, rising interest rates, and global economic turmoil, investing in the right businesses is now more important than ever.
It’s easy to talk about the benefits of investing in certain businesses but, considering the markets and certain sectors are still so unstable, knowing how to invest your money should of course be one of your main priorities.
If you are in a position to invest in a start-up or small business, you will no doubt be looking for ways of isolating and reducing your financial risk, while simultaneously maximising your profits and boosting your return on investment. This is where it pays (literally) to know your options.
Primarily your main choices are SPVs and VC funds. But what are the differences, and which is right for you?
What is an SPV?
An SPV (Special Purpose Vehicle), also known as an SPE (Special Purpose Entity) is a legal entity which enables multiple investors to pool their money together and invest their capital in a single individual company.
The idea here is to minimise financial risk and maximise returns in a relatively short period of time. Due to the fact that, from a legal standpoint, the SPV is a separate legal person, its liabilities and obligations are separated from the SPV’s investors.
SPVs are flow-through entities, which means that investors are responsible for paying any personal income taxes on profits earned via the SPV investment. SPV entities are, however, typically not required to pay taxes.
SPVs can be used in numerous ways. Some businesses, for example, will use them in order to isolate specific holdings from the balance sheet of the parent company. Others can be used for securing a loan or simply for establishing a proven track record before a traditional venture capital fund is raised.
What are VC funds?
When talking about SPVs, you cannot overlook VC funds.
VC (Venture Capital) funds are a type of private equity and financing which investors often provide for small businesses or startups with the potential for significant long-term growth. VC funds manage pooled investments and invest their capital in multiple companies which fit the fund’s core beliefs and investment criteria.
VC is usually provided by investors with a considerable supply of capital, from investment banks, or any number of other financial institutions.
Typically, most VC funds are based around establishing a limited partnership. These limited partnerships consist of at least one GP (General Partner) and one LP (Limited Partner) who engage in business together. It is, however, becoming increasingly common for VC funds to be established as a corporate entity, such as Singapore’s Variable Capital Company.
SPVs vs VC funds
The two main differences between a Special Purpose Vehicle and a traditional Venture Capital fund relate to diversification and decision-making.
- Diversification: VC funds invest their capital in multiple companies in order to diversify their portfolios. SPVs, on the other hand, invest all of their capital into just one business, usually a startup or small business. Investors in SPVs can, however, achieve diversification by investing across multiple SPVs.
- Decision-making: VC funds are managed by a VC fund manager, who decides the fund’s investment criteria and chooses the startups the fund will invest in. Investors can choose the fund and fund manager, but can’t choose the investments. Contrast this with SPVs, where investors decide whether to invest in an SPV based on the specific investment being targeted.
Additionally, VC funds are seen as long-term investments in which VC fund managers will take years to exit every single investment within that fund’s portfolio. They provide slow and steady growth with (usually) smaller returns than SPVs.
Conclusion
SPVs are designed to provide faster returns to investors because the investment relies upon just one company. Typically, the more successful that one company is, the greater the ROI for SPV investors will be.
Many VC funds also use SPVs for various reasons. Some funds will use them to diversify the asset holdings in their portfolios, some will use them in order to provide stock liquidity, and some may even use them simply to boost the reputation of their portfolio. If one company which is not a holding in a VC fund happens to be doing very well, and has great long-term potential, the VC fund could utilise an SPV and invest in that company. This could do wonders for the reputation of that fund manager and could help to improve their performance, making them more appealing to future investors.
Ready to set up a SPV?
At Auptimate, we make it easy for Angel Investors to design, launch and operate market-leading SPVs online for a fixed, low price. If you’re ready to start your next SPV, get in touch with us at info@auptimate.com and one of our experts will be more than happy to help.
