Delve deeper into the benefits of ‘why fund managers might choose to use SPVs’, such as the ability to invest outside of a fund’s investment period or to establish a track record before raising a traditional venture fund.
Venture capital fund organizers are always looking for innovative ways to make investments and generate returns for their limited partners (LPs). One strategy that has been gaining popularity in recent years is the use of Special Purpose Vehicles (SPVs). SPVs offer a flexible and efficient way for fund organizers to invest in opportunities outside of a traditional fund structure and for LPs to gain exposure to specific investments without committing to a larger fund.
As many of you already know, fund organizers are the individuals or entities responsible for creating and managing investment funds, such as venture capital funds, private equity funds, and hedge funds. Meanwhile, SPVs, or special purpose vehicles, are separate legal entities created to hold specific assets or investments.
Let’s dive deeper into how fund organizers and SPVs are related. One of the primary ways that fund organizers use SPVs is to invest in opportunities that fall outside their fund’s investment strategy or timeline. For example, suppose a fund has already deployed all of its assets, and the investment period has expired. In that case, the fund managers can use an SPV to invest in an opportunity that falls outside the fund’s investment period.
Similarly, if the fund has already invested most or all of its capital, but the fund managers want to pursue another deal, they may launch an SPV and use it to make another investment. This can be an effective way to continue making investments without raising a new fund.
SPVs can be the debut fund
For first-time investors, raising capital for a debut venture fund can be difficult, especially during difficult fundraising periods. Before trying to raise a first-time fund, some aspiring fund managers will start by forming one or several SPVs to invest in individual companies. Even a small portfolio of SPVs will give LPs a tangible track record to consider when it comes time to invest in a new manager’s first VC fund.
Let’s say – John had a passion for investing in startups. However, like many aspiring fund managers, John found raising capital for a debut venture fund challenging. Instead of giving up, John decided to start small by forming an SPV to invest in individual companies.
Through his first SPV, John invested in a startup that became a massive success, generating significant returns for his investors. This success allowed John to build a track record and establish himself in the venture capital industry. He used the same strategy for his following few investments, using SPVs to invest in individual startups and build a portfolio of successful investments.
After several successful SPVs, John established a reputation as a successful investor and was able to raise a larger venture fund. By this point, he had built a strong track record and gained experience by making investments through his SPVs. He was now ready to take his career as a fund manager to the next level.
Another scenario in which fund organizers may use SPVs is when investors are looking to extend the life of investments. If a VC firm has a fund nearing the end of its 10-year lifecycle, but the fund managers aren’t ready to sell the remaining assets, they can set up an SPV to hold those specific assets. This is known as a continuation fund or a continuation vehicle. In this scenario, LPs usually have the option to sell their stakes in the portfolio company or transfer their stakes into a new SPV, which will give the fund managers more time to prepare the business for a sale.
How to Launch an SPV as an Aspiring Fund Manager?
Aspiring fund managers can use SPVs to build their portfolios by following these steps:
- Identify the startups to invest in: The first step is to identify the startups that fit your investment criteria. You can research the market and identify promising startups that align with your investment goals.
- Create an SPV: Once you have identified the startups you want to invest in, you can create an SPV. This involves setting up a legal entity, such as a limited liability company (LLC), that will be used to pool the investment capital from investors.
- Attract investors: After setting up the SPV, you will need to attract investors to invest in the startups through the SPV. You can do this by reaching out to your network, pitching to potential investors, or partnering with other fund managers to raise capital.
- Invest in startups: Once you have raised the capital, you can use the funds to invest in the startups through the SPV. The SPV will hold the investment on behalf of the investors, and the returns will be distributed to the investors based on their investment in the SPV.
- Monitor the investments: As a fund manager, it is important to monitor the investments to ensure that they are performing as expected. You can do this by staying in touch with the startups, tracking key performance indicators, and providing regular updates to the investors.
Learn more about the complete lifecycle of an SPV here
SPVs can be complex
SPVs offer a flexible and efficient way for fund organizers to invest in opportunities outside of a traditional fund structure and for investors to gain exposure to specific investments without committing to a larger fund. However, it’s important to note that there are also potential downsides to using SPVs.
One of the main concerns with using SPVs is that they can add complexity to the overall fund structure. Fund organizers must ensure that they comply with all relevant securities laws and regulations and properly disclose information to investors. Additionally, SPVs may have different fee structures and terms than the main fund, which can lead to confusion for investors.
Furthermore, creating an SPV requires additional legal and administrative work, which can be time-consuming and costly. Fund organizers must weigh the potential benefits of using an SPV against the costs and complexity of creating one.
The bottom line
The relationship between fund organizers and SPVs can be a beneficial one, providing fund organizers with a flexible and efficient way to invest in opportunities outside of a traditional fund structure and allowing investors to gain exposure to specific investments without committing to a larger fund. Novice fund managers like John can use SPVs to establish a track record, gain experience, and ultimately raise larger funds.
However, fund organizers must carefully consider the potential downsides of using SPVs, including added complexity and cost, and ensure that they are complying with all relevant regulations and properly disclosing information to investors.
With SPV Hub, you can be confident that you’re following all the mandates and keeping your fund secure. SPV Hub is a fintech platform to manage syndicate deals more efficiently. Are you looking for an SPV provider? Book a demo today to learn how SPV Hub can be the perfect partner.
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Disclaimer: The information provided is for educational and informational purposes only and should not be construed as financial or investment advice. Always research and/or consult a qualified financial advisor before making investment decisions.
