From a fund accounting perspective, how does SPV lookthrough differ from SPV non-lookthrough?
It is important for finance teams to be aware of how SPVs work, the different accounting treatments used and their impacts on fund performance. In another example, an accountant could fail to eliminate inter-entity journals resulting in errors in consolidated financials. For example, a multi-layered SPV structure could lower the accuracy of LP and co-investor capital account calculation if not done correctly. These additional complexities make SPVs challenging for GPs to wrangle. This could potentially lead to complications such as incorrect allocation of fees and investments to the SPV’s participants. Calculation errors: While some funds use one SPV to invest in a single underlying asset, other funds may use one SPV to invest in multiple assets. bookkeeping, financial reporting and audits.ģ.
LOOKTHROUGH MANUAL
High management costs: When you have a SPV or multiple SPV entities as additional layers, they increase both the administrative costs and manual work required, e.g. China), the lookthrough structure can impose limitations on private equity investment from wealth management clients, for whom the number of natural person investors participating in a company is capped.Ģ. Additionally, in certain jurisdictions (e.g. Compliance issues: The guidelines for SPVs are ambiguous, so it is unclear whether a SPV needs to be filed as a fund. Maintaining a SPV can be complicated, presenting challenges that include:ġ. What complexities do SPVs add to GP operations? When handling multiple investors or fund entities, only a SPV will need to sign documents. These changes would only occur at the SPV level, which have no impact on the underlying portfolio.ħ. Reduce shareholder change impact on the underlying portfolio’s share structure in the post-investment portfolio management process, when investors have changes inequity/shareholding. For a new GP in the early stages of raising capital, this facilitates easier fundraising with a single underlying target, thus quickly increasing the fundraising amount.Ħ.
Filing a SPV as a fund can increase the company’s AUM. Allow GPs to collect fees and carried interest at the SPV level for additional economic benefits.ĥ. Enable GPs to manage allocations to private investors, staff, and partners.Ĥ. E.g., increasing its voting power and rights, thus gaining more control over the invested enterprise.ģ. Allow GPs to channel more capital to a particular asset, resulting in greater influence over said asset. A SPV is set up to execute the contract, and in the meantime the GP can continue to raise new capital without interruption.Ģ. For example, a SPV can give GPs extra time to raise capital without holding up their purchase agreements with their portfolio companies. Provide GPs with more freedom during the transaction process. What are the main advantages of using SPVs?įrom an investor’s perspective, there are several advantages to using SPVs. Therefore, the GP would set up a SPV to allow certain LPs to co-invest into the company without any disruption to other LPs who are not participating. Some LPs may wish to contribute additional capital to co-invest in one specific company, but this isn’t achievable via direct investment through the fund given the fixed allocation in place. There is another scenario where a SPV could be beneficial. A SPV is typically set up to facilitate collection of capital and ongoing management of rights and obligations, on behalf of all investors. For example, let’s say the portfolio company is seeking a $1bn financing round and the GP has several fund vehicles with allocations to participate. In the past, SPVs were often set up in the Cayman Islands, Ireland, Luxembourg or the British Virgin Islands, but more recently GPs have been turning to Singapore, in particular for investments in the Asia Pacific region.Īn advantage of SPVs is that they allow GPs to invest into a portfolio company with capital leverage from co-investors or parallel fund vehicles. There are a few key reasons GPs use SPVs – such as for tax benefits, or to fulfill specific legal requirements by the LPA/listing regulations. How are SPVs used in investment structures? non-lookthrough can impact fund performance How SPV look-through differs from SPV non-look through from a fund accounting perspective.In this blog, Quantium’s Founding Advisor, Anita Meng, as well as AVP – Client Solutions, Rae Tan, will dive into:
Special Purpose Vehicles (SPVs) are commonly used in private equity fund structures.
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