An SPV is a lightweight legal entity that allows you to diversify your portfolio.
Investors can write smaller checks and deploy their capital faster than they would with a traditional fund.
Also, an SPV has more flexible rules regarding who and how much they can invest.
Many new VC funds are setting up SPVs to enable their LPs to participate on a deal-by-deal basis. This is a popular approach to build AUM and scale the number of LPs quickly for proven and emerging fund managers.
This means outsized returns and fast feedback loops, leading to smarter investment decisions in the future.
There are 5 benefits to adopting a hybrid SPV + Fund strategy. The first one is a no-brainer.
1. SPVs can increase AUM
SPVs allow fund managers to increase their total Assets Under Management.
Think of an SPV as a lightweight tool that allows you — the fund manager – to raise and deploy capital.
The old way to increase your AUM was to raise capital every 3-5 years. The fundraising process would take 3-6 months, sometimes longer. And when you get enough commitments, the process to close and start administering the fund could take weeks.
SPVs make it possible for fund managers to grow their AUM whenever they’d like.
2. SPVs increase your number of LPs
There are 3 benefits to increasing your number of LPs:
- Build your credibility
- Raise capital faster
- Add more value to your portfolio companies
Building trust with investors and founders is difficult. It’s even more difficult when you’re raising new funds and investing in startups every 3-5 years.
But with SPVs, you can accept lower check sizes and bring on more investors, allowing you to bring in more capital more often.
More LPs means more opportunities to help your portfolio companies, build trust, and raise capital in the future.
3. SPVs can lower the minimum check size
SPVs democratize private equity for fund managers and LPs.
The minimum check size for an SPV can be as low as $5,000 — in some cases, it’s even lower!
The smallest fund someone has created on Allocations was a $30,000 fund with a minimum check size of $1,000. This means more investors, more capital in the market, and more access for emerging fund managers.
Fund managers — seasoned and emerging — are able to start and grow their private equity funds faster and easier than ever before.
4. SPVs increase support for portfolio companies
When it’s easier for LPs to provide capital to startups, founders win.
Founders can bring on strategic investors that might have a vital skill set that their company needs. Or maybe they want to bring in an investor later in the fundraising process.
With a hybrid SPV + fund model, fund managers can accept lower check sizes, therefore increasing the pool of available investors. With more investors comes more support for portfolio companies. This increases the chance of success for LPs, portfolio companies, and fund managers.
Without SPVs, founders are left to raise money using old and annoying methods. They have to raise funds through family offices, or high net worth individual investors, which is expensive and takes a ton of time. They also may be forced to take on capital that makes their cap table messy.
When fund managers support portfolio companies, everyone wins.
5. SPVs increase co-investing opportunities for your LPs
Fund managers that use a hybrid SPV + Fund strategy give their LPs more opportunities for return on their investment capital.
Typically when a fund manager raises money, LPs have one opportunity to invest or pass. When the round is closed, it’s closed.
When LPs invest in a fund manager’s main fund, they’re locked into one check size and one method to get a return on their investment.
But SPVs bring a new model: LPs now have the ability to invest in companies on a deal-by-deal basis, outside of the main fund. They can also take on larger stakes in companies they believe in.
An SPV also gives an LP the opportunity for additional exposure to investment opportunities they’d otherwise miss out on.
Co-investing through an SPV benefits both fund managers and LPs.
10,000+ investors and fund managers build, raise, and close funds on Allocations — the fastest and most advanced fund platform in the world.
Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.