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For Emerging Fund Managers

When Should Fund Managers Use a Fund vs. an SPV?

In today’s private investment landscape, what’s most important to an emerging fund manager is getting into deals.

We wrote this article for the emerging fund manager trying to figure out which investment vehicle is right for them.

Specifically, this article will help you distinguish between these two (2) types of investment vehicles:

  1. The Fund
  2. The SPV

The differences are small on paper, but they can have a large impact on your eventual success as an investor.

The first decision you’ll have to make is whether you’re investing in one asset or many assets. Here’s what we mean by that …

  1. Is this a one-time thing?

When considering whether a fund or SPV is right for you, it’s important to figure out whether you’re investing in one asset or several.

If you’re investing in one asset, SPVs are your best option.

But if you’re investing in several assets, a Fund may be a better choice.

  1. Do you have a track record yet?

Emerging fund managers will almost always have difficulty raising their first funds.

It’s typical for first-time fund managers to use an SPV to attract LP capital. This reduces the initial capital risk for the investors, while keeping the upside of a solid investment.

In this case, an SPV is most likely the best option.

Experienced fund managers tend to have have less trouble raising capital, and would be able to close a fund easier than newer fund managers.

  1. To diversify or not to diversify

An SPV is a lightweight legal entity that fund managers use to pool capital from LPs and invest in a single asset.

This leaves no room for diversification. 

Funds pool together capital from LPs to invest in several assets.

More assets usually mean more diversification, depending on the investment thesis of the fund manager.

In almost all cases:

  • If you want to invest in a single asset, choose an SPV
  • If you want to diversify your investments across several assets, choose a Fund
  1. Do your LPs want rights?

Sometimes investors want rights in the company they’re investing in. They want a say on what the company does, the big decisions it makes, and the strategies they use to increase revenue.

Other times, investors just want their capital to grow.

This is important to consider when you’re deciding between a Fund and SPV.

In general, an SPV is better when your LPs don’t require rights. They’re happy investing in an asset through you, and they trust your judgment and decision-making.

A fund tends to be a better choice when your LPs want individual rights in the company. They want a say in what happens, and maybe even voting rights later on in the stage of the company.

  1. Simple cap table, simple life. Complicated cap table, complicated life.

Startups should be weary of their cap table. 

When startups are raising round after round, they run the risk of diluting theirs and their investor’s interest in the company.

If you’re investing in a startup that is attracting a lot of attention, or is doing well, it’s usually simpler to use an SPV. On the startup’s cap table, an SPV is one entity regardless of how many investors pooled their money into the SPV.

So if you’re investing in early-stage startups, an SPV is usually a less complicated way to go.

This is especially true for emerging fund managers because they’ll have the ability to get into deals because of the simplicity they offer the portfolio company.

For fund managers with a solid track record, it may make little difference to the startup whether you represent a Fund or an SPV.

  1. Smaller checks, bigger impact

Investors may want to write smaller checks to reduce their financial risk. But they still want the upside of a liquidation event down the road.

In this case, an SPV is the way to go.

When you form an SPV, you can accept check sizes much lower than you would for a Fund.

On Allocations platform, emerging fund managers have raised as little as $30,000 with check sizes as small as $1,000. Often, this means fast capital, which is how we believe the modern fund manager secures their allocations into deals.

  1. Time commitment

Fund managers must ask themselves these questions: “what is my investment timeline?”

Traditional funds typically demand a long-term commitment, which may create high expectations from investors.

SPVs have a shorter time frame, which may work better for fund managers who have less experience and want to rely on the investment's potential itself. An SPV may also mitigate your investor’s expectations around performance because their capital will be tied up for a shorter period of time.

In most cases:

  • If you have a shorter investment timeline, choose an SPV
  • If you have a longer investment timeline, a Fund may be the better choice
  1. Ask the experts

At Allocations, we’re dedicated to providing world-class, timely support for emerging fund managers. 

Our team can help you start building your Fund or SPV today. Get your fund built and start raising in hours or days — rather than weeks or months.

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.