- Explore how the independence of SPVs, their structural flexibility, and their link to securitization help limit investment strategy risks.
- This information is intended for asset managers and investment advisors interested in understanding the benefits of SPVs and asset securitization.
- At FlexFunds, we offer asset securitization solutions to issue exchange-traded products (ETPs) that enhance investment strategy distribution. For more information, contact our expert team.
For retail investors and beginners, asset management is simply about determining the number of stocks and bonds, and possibly other types of assets, to include in portfolios based on clients’ needs and objectives.
However, as wealth grows or when dealing with high-net-worth investors, managers must employ more sophisticated financial structures like SPVs to address heightened risks.
Key factors driving asset managers to use SPVs in their strategies
Special purpose vehicles (SPVs) are increasingly utilized in asset management strategies due to three key benefits closely tied to risk limitation:
- Risk segregation.
- Structural flexibility.
- Risk mitigation through securitization.
Risk segregation
SPVs are independent legal entities created to manage investments in specific projects. They separate the assets and liabilities from the parent company, which also means isolating risk and limiting exposure.
According to the Corporate Finance Institute (CFI), since SPVs are distinct legal entities, “if the parent company goes bankrupt, the special purpose vehicle can carry on.”
The SPV sponsor must provide it with the foundational capital by transferring the necessary assets, which involves establishing some form of contractual agreement. Typically, trust is set up for this purpose.
The sponsor retains certain economic interests and remains active in the project but is neither a partner nor a manager, staying shielded from associated risks and liabilities.
Structural flexibility
SPVs are ideal for creating highly flexible products, as they allow for the structuring of debt, equity, or hybrid vehicles. This enables the manager to achieve a solution perfectly tailored to their needs and goals.
These entities can be established in various jurisdictions different from the parent company’s home country.
For example, they can be established in a country like Ireland, which is tax-efficient for reducing income and capital gains taxes, even if the parent company is based in Spain or the United Kingdom.
This approach reduces the risk of having to pay large amounts in taxes unnecessarily, all in a legal and transparent manner, without being restricted to the initial location.
Risk mitigation through securitization
Another factor driving asset managers to use SPVs is that these vehicles are essential for asset securitization, a process where liquid or illiquid assets are converted into bankable assets.
At FlexFunds, one of the leading firms in asset securitization, we utilize Irish SPVs to develop exchange-traded products (ETPs) with their own ISIN/CUSIP codes, facilitating broader distribution.
In this way, asset managers who securitize their strategies enhance asset liquidity and offer their clients a wider range of investment options, ultimately resulting in overall risk mitigation through diversification.
“Different asset classes react differently to market and economic situations. It’s key to have a diversified portfolio to weather market volatility,” as highlighted by HSBC.
Benefits of FlexFunds’ securitization
Through FlexFunds’ asset securitization program, facilitated via SPVs, you can:
- Reach a broader client base.
- Access alternative financing sources.
- Achieve better investment portfolio diversification.
- Optimize the liquidity of your investment strategy.
FlexFunds partners with renowned international service providers like Interactive Brokers, Bank of New York, CSC, and Bloomberg, among others.
We offer high-quality, fully customized, cost-efficient ETPs and comprehensive services, including:
- Fund accounting.
- Stock exchange listing.
- Back-office and corporate administration.
- Net Asset Value (NAV) calculation.
To learn more about FlexFunds’ ETPs and the asset securitization process, contact our specialist team. We will be happy to assist!
Sources:
https://corporatefinanceinstitute.com/resources/management/special-purpose-vehicle-spv
https://www.expat.hsbc.com/wealth/insights/learn-to-invest/meet-life-goals/protection/the-power-of-diversification
