- This article explains what special purpose vehicles (SPVs) are and why they are crucial for asset securitization and other modern financial structures.
- The information is intended for asset managers and investment advisors seeking to understand the benefits of SPVs.
- At FlexFunds, we provide asset securitization solutions to launch exchange-traded products (ETPs) through dedicated Irish SPVs. For more information, feel free to contact our expert team.
In the field of modern financial structuring, various tools and solutions exist to enhance liquidity and improve the distribution of investment strategies. Among the most significant is asset securitization.
This process groups and transforms diverse financial assets, whether liquid or illiquid, into exchange-traded products (ETPs), offering numerous benefits.
To execute a securitization, a special purpose vehicle (SPV) is required.
What are special purpose vehicles?
SPVs are independent legal entities created by a sponsor or parent company to manage investments in specific projects.
To function, the sponsor must transfer foundational assets to the special purpose vehicle through a contractual agreement and the establishment of a trust.
The importance of SPVs in asset securitization
SPVs play a pivotal role in asset securitization due to several advantages they offer the involved parties:
1. Risk isolation
Special purpose vehicles provide limited liability for capital investors. In the event of default, personal assets remain legally protected, and risk is confined to the capital initially invested in the SPV.
By segregating assets and liabilities from the parent entity, SPV asset managers can better manage risks, limit exposure, and reduce potential losses.
According to Gary Gorton, economist and finance professor at Yale School of Management, SPVs “are set up so that they cannot declare bankruptcy and so their assets cannot be seized if their sponsor goes bankrupt. Investors in SPV securities are therefore insulated from the risks they would shoulder dealing directly with the sponsor.”
Operational and tax efficiency
Special purpose vehicles are vital for asset securitization as they can be structured in various ways to meet client objectives. Specifically, they can be set up as equity, debt, or hybrid vehicles.
They also enhance tax efficiency through their establishment in tax-friendly jurisdictions, reducing income and capital gains taxes.
For instance, FlexFunds and many other financial service providers set up their SPVs in Ireland. As of Q2 2023, according to the Central Bank of Ireland, there were 3,493 SPVs registered in the country with total assets worth €1.14 trillion.
Facilitating access to global markets
Asset securitization through the creation of a special purpose vehicle simplifies global market access and boosts investment strategy distribution.
At FlexFunds, this process packages strategies into “Euroclearable” ETPs with their own ISIN/CUSIP codes, making them easily tradable through brokerage accounts and private banking platforms worldwide.
FlexFunds: A trusted partner
FlexFunds offers various investment vehicles tailored to different client needs and objectives:
- FlexPortfolio: Allows asset managers to securitize a wide range of listed liquid assets, such as stocks, bonds, and ETFs.
- Flex Private Program: Ideal for securitizing illiquid assets like real estate.
- FlexFeeder: Enables asset managers to securitize private fund shares, enhancing global distribution.
In each case, the five-step process begins with a detailed analysis to deliver a fully customized solution, culminating in the issuance and listing of the ETP within 6 to 12 weeks.
FlexFunds stands out for offering tailored solutions compatible with all client types, backed by internationally renowned service providers like CSC, Interactive Brokers, Bloomberg, Bank of New York, among others.
For more information about FlexFunds’ ETPs and the asset securitization process, don’t hesitate to contact our expert team.
Sources:
https://www.centralbank.ie/docs/default-source/statistics/data-and-analysis/other-financial-sector-statistics/financial-vehicle-corporations/2024q2_irish-special-purpose-entities.pdf?sfvrsn=dfb5611a_3
https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/enron-aside-special-purpose-vehicles-spvs-are-legal-innovative-and-widely-used/
