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April 30, 2024Why and How To Setup a Special Purpose Vehicle / Fund of Fund?
Special Purpose Vehicles (SPVs) and Funds of Funds (FoFs) are investment strategies used as a way to consolidate capital and fund other opportunities such as real estate, startups, etc... While they have some similarities, they serve distinct functions too. Understanding their "why" and "how" can be beneficial for investors and businesses who work on similar concepts. The following blog will serve the purpose of shedding light on the why and how to set up a special purpose vehicle/ fund of fund, so you can get a better idea to tackle the situation.
What Are Special Purpose Vehicles (SPVs)?
SPVs, or Special Purpose Entities (SPEs), are legal entities created for a specific, well-defined purpose.
Why Should You Use an SPV?
Isolate Risk
An SPV acts as a separate legal entity from the investment that capital is being placed into. This isolates the parent company's assets and liabilities from the risks associated with the SPV's specific purpose. Imagine a company wanting to invest in a risky startup – an SPV can hold that investment, shielding the parent company's core business from potential losses.
Supports Fundraising
SPVs can be used to raise capital from a specific group of investors for a particular project. This allows for targeted fundraising efforts and caters to investors with specific risk appetites. For example, imagine you have a group of friends at work who have individually expressed interest in investing in real estate. You’ve historically invested with and trusted a particular Deal Sponsor. Instead of just introducing those individuals to the deal, you could set up and manage the SPV and legally receive compensation both in terms of fees and equity.
Where do those fees and equity come from? Negotiating with the Deal Sponsor for better investment terms. It’s advantageous to the Deal Sponsor to have fewer points of contact and as such can offer more favourable investment terms.
Streamline Transactions
SPVs can simplify complex transactions by acting as a single point of contact for all parties involved. This can expedite processes and improve overall efficiency.
Tax Advantages
In some cases, SPVs can offer tax benefits that depend on the jurisdiction and the specific purpose of the vehicle. It's crucial to consult with a tax advisor on this aspect.
Maintain Ownership Secrecy
The ownership structure of an SPV can be designed to be opaque, protecting the identities of the investors involved. This might be desirable for certain investment strategies.
How to Set Up an SPV
Define the Purpose
Be specific about the purpose for which the SPV is being created. This will guide the overall structure and legal framework.
Choose a Jurisdiction
Select a jurisdiction with favourable laws and regulations for SPVs. Consider factors like tax implications, ease of formation, and regulatory requirements.
Establish the Legal Entity
This involves registering the SPV as a limited liability company (LLC) or a similar legal structure, depending on the jurisdiction.
Secure Funding
Depending on the purpose, the SPV might need to raise capital from investors. This could involve creating offering documents and adhering to relevant securities regulations.
Open Bank Accounts
The SPV will require separate bank accounts to manage its finances independently from the parent company (if applicable).
What Are Funds of Funds (FoFs)?
It is an investment tool that collects money from investors and then invests that money in other funds, rather than directly investing in single assets.
Why Use a FoF?
FoFs invest in other investment funds, offering investors diversification across multiple underlying assets.
Diversification
FoFs provide instant diversification by pooling investments across multiple funds with different asset classes or investment strategies. This helps spread risk and potentially improve portfolio performance.
Expertise
FoFs are managed by professionals who research and select underlying funds. This enables investors to benefit from the experience of these fund managers without having to pick individual funds themselves.
Access to Exclusive Funds
FoFs might invest in hedge funds or private equity funds with high minimum investment requirements. This allows smaller investors to gain access to such opportunities through the FoF structure.
Reduced Management Fees
While FoFs have their management fees, they might offer lower overall fees compared to investing in multiple individual funds due to economies of scale.
How to Set Up a FoF?
Setting up a FoF asks for a more complex procedure as compared to a Special Purpose Vehicle:
Create An Investment Strategy
Discuss the investment objectives and risk tolerance of the FoF. This will guide the selection of underlying funds.
Put The Legal Entity In Place
Depending on the jurisdiction, similar to SPVs, FoFs are typically structured as limited partnerships or similar legal structures.
Ticking Off The Regulations
When setting up FoFs are required to follow some investment regulations based on jurisdictions and the type of underlying funds they prefer to invest in. This is something crucial to meet.
Management Of Funds
It is better to assign a qualified investment manager, who holds immense expertise in managing and selecting a portfolio of funds.
Distribution and Marketing
You cannot attract investors without a good marketing strategy. Therefore it is necessary to come up with innovative ideas to make your FoF appealing to potential investors. To achieve this goal, you might have to arrange meetings with financial advisors and plan marketing materials.
Conclusion
This blog has explored the world of Special Purpose Vehicles (SPVs) and Fund of Funds (FOFs), highlighting their unique functionalities within the investment landscape. We've seen how SPVs offer a structured approach to isolating assets and liabilities, while FOFs provide a diversified basket of underlying funds, managed by experienced professionals.
By understanding the "why" and "how" of SPVs and FOFs, you can make informed decisions about incorporating them into your investment strategy.
Who is Gold MF
At GOLD MF, we got our start in the small multifamily rental and residential construction space. After spending years focusing solely on renovating and ground up development, we transitioned with laser focus to multifamily. True to our values, we shifted our obsession to growing a full scale, vertically integrated company. Bringing with us is the ability to effectively build and execute on a business plan which includes extensive due diligence and ensuring that the asset will meet our client’s expectations.
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