Investing and allocating capital

What Should a Family Consider Before Making an Investment Through a Special Purpose Vehicle?

Short answer. Review the SPV's purpose, manager, fees, expenses, investor rights, and the family's exposure to the underlying company. An SPV can provide focused access to one investment, but it concentrates risk and requires additional documents and administration. Understand the structure's legal and tax effects with qualified advisers before committing.

By Richard C. Wilson, founder of the Family Office Club

Before investing through a special purpose vehicle, understand what it owns, who controls it, how it charges investors, and what rights you receive. An SPV can let a family invest in one company alongside a fund or sponsor. It also concentrates exposure in that investment and creates a structure to review.

Understand the Vehicle and Its Manager

Confirm whether the SPV will invest directly in the company or through another entity. Identify the manager, the decisions that manager can make, and what information investors will receive. Ask how the vehicle handles capital calls, expenses, conflicts, voting rights, and an eventual sale. Review the governing documents and confirm that the structure described in the offering matches the one in the agreements.

Clarify the fees and expenses, including management and performance fees, organizational costs, and any charges shared with the fund or sponsor. Ask what work the sponsor has already done for the investment and how that relates to the SPV's economics. Terms can vary with the sponsor's work, the investor's involvement, and the structure. The fees and expenses investors compare should be presented clearly enough to assess the net effect.

Assess the Concentrated Exposure

An SPV tied to one company does not provide the same spread across investments as a pooled fund. If the company performs well, the family has direct exposure to that result through the vehicle. If it performs poorly, the family bears the concentrated downside. Consider the commitment alongside the family's existing holdings, liquidity needs, and capacity to monitor the investment.

Understand whether the family has any direct rights against the company or whether all rights run through the SPV. Review reporting, transfer limits, distribution priorities, and how decisions are made if investors disagree. Ask what happens if the sponsor or vehicle manager cannot continue. The choice between pooled and separate investment structures is useful context for weighing governance arrangements, expenses, and exposure.

The SPV's jurisdiction, tax classification, and governing documents can affect the family and each entity investing. These specifics depend on the family's circumstances, so talk with your attorney and CPA before signing. Confirm who will receive tax reporting, when documents will be delivered, and what records the family must keep.

Check the expected life of the vehicle and how it will wind down after the underlying investment is sold. Ask whether extensions are possible, how remaining cash is distributed, and what costs continue during a delay. A focused vehicle can be useful when the family wants exposure to a particular company, but the decision should account for the single-asset risk and the full cost of holding it. Keep a record of the terms and approvals, along with the funding history, in the family's investment files.

Read next: What is co-investing and why do family offices like it?

Indirect co-investment will most often occur under a special purpose vehicle (SPV), where the co-investor allocates capital to the company via the SPV and then the investment is managed under that SPV, although co-investments may be made under different structures, such as limited partnerships and LLCs, depending on the tax treatment of the vehicle.

Richard C. Wilson, The Single Family Office

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.