Definition: Special purpose vehicle (SPV), also known as special purpose entity (SPE), refers to a legal entity that is created to isolate a parent company from financial risk, including bankruptcy.
What Does Special Purpose Vehicle Mean?
What is the definition of special purpose vehicle? SPV is a subsidiary company with the purpose of facilitating the parent company’s financial arrangements, including leverage and speculative investments, without compromising the entire group. That said. If the SPV goes bankrupt, the mother company is not affected. If the mother parent goes bankrupt, the SPV is protected. Usually, SPVs are used for securitization purposes and are allowed to finance, buy and sell assets.
Let’s look at an example.
Company ABC is a leading manufacturer of industrial equipment that uses SPVs to leverage financial risk. One of the company’s SPVs has an independent board that consists of the government that provides subsidies and permits for the operation of the SPV contract, commercial banks that provide loans and credit facility, sponsor who protect the parent company’s minority investors and provide contracted coverage of technical risk, and equity investors who are offered tax-free investments.
The SPV company acts as a solution provider for equipment, technical consulting, and IP licensing issues. Furthermore, it offers maintenance and construction engineering contracts, and it serves as an operations and commodity provider, offering continuing operations contracts and commodity supply agreements.
The advantages for the parent company ABC from operating the SPV subsidiary involve high-level project management and risk management that allows the company to efficiently collaborate with its stakeholders and chain operators. In addition, the parent company can finance its operations through long-term debt, government funding or high net worth equity investors, without compromising its core operations.
Furthermore, the parent company can use advanced analytics to manage uncertainty and classify its stakeholders in clusters depending on the key variables that drive business and their associated costs. By employing customer behavior analysis, the parent company can transfer its market behavior results to the SPV that actually has the contracts and assess potential profits.
Define Special Purpose Vehicles: SPV means an entity set up separately from a parent company for a specific task or operation in an effect to shield the parent from the risks associated with the task.