Fund formation and first-time fund managers
What is an SPV and when should I use one?
Short answer
An SPV, or special purpose vehicle, is a separate entity formed to hold one investment, with investors pooled into it. I use one when I want a single deal kept apart from everything else, or when I bring investors into a project. Many sponsors talk to securities counsel about how to approach raising money through one.
What an SPV does in practice
An SPV is a separate entity created for one purpose, usually a single deal. Investors put money into the SPV and the SPV holds the asset. Many sponsors use an LLC or a limited partnership for this.
The appeal is simple. The deal sits in its own box. Its money, its investors and its results are tracked on their own, apart from your other projects.
I have used this myself. I created an SPV or a fund for each of our projects. We wrote one check as the largest LP in each one, and I also became part of the GP. That way the proceeds flowed through to our investors, and I received my share from the GP side of the deal.
In this podcast I explain how I structured projects so our investors came in through one SPV per deal.
When an SPV makes sense
I reach for an SPV in a few situations. They all come back to the same idea. One deal, one entity, one clear group of investors.
- You have investors who want a single deal and not a blind pool.
- You bring investors to a project run by an operator you trust.
- A larger party cannot invest in a fund but can take equity in a deal.
- You want clean reporting on one asset.
The second one matters a lot to me. If you are capital constrained, walking to the table with a group of investors gives you something to bring. You can work yourself into deals where you get equity. Your investors get access to more deal flow. You also help an operator who needs capital.
Where SPVs show up on the other side of the table
SPVs are not only a tool for sponsors. In an investor mandate interview, Charles told me he appears on cap tables three ways. He shows up as an angel, through a small family office, and as an SPV that serves accredited individuals and larger investors.
Charles describes the three ways he shows up on a cap table, including as an SPV.
Summary and key takeaways from this video
Structure also gives you options when a big party says no to funds. I have talked about this at our events. Some companies will not invest in a fund. If you know how to custom structure the deal, you still have a path.
"You have a way to work with them as a co-GP, a joint venture, or even give them full control, but you get equity participation within an SPV."
Here I talk about custom structuring and why financial IQ matters when a deal lands in front of you.
Summary and key takeaways from this video
What to check before you form one
An SPV is a container. It does not make a weak deal good. Your pro forma still has to match what your investors want. When I was asked about a project, my first question was what the pro forma looked like. Once it matched what I knew my investors wanted, I said yes.
Raising money through an SPV can raise securities questions. Securities rules can affect who can invest and how you can market, and sponsors often ask counsel about this. Many sponsors talk to securities counsel before they take any money.
What I have said on this at our events
There is a cost side to this that is easy to miss. In my experience, starting a fund can cost around $70,000 in legal and setup work, though costs vary a lot. Doing a single deal as an SPV LLC instead might save some or all of that. So before I decide on a structure, I ask whether the deal really needs a full fund, or whether one clean entity for one deal gets the job done. Many sponsors talk to securities counsel about which fits.
"If you only start a fund, that costs you $70,000 a form, versus just doing an SPV LLC. That right there might save you $70,000."
Facts from this talk
- On our real estate projects I created an SPV or fund for each one and we were the largest LP in each, writing one check.
- Charles appears on cap tables as an angel, as a small family office, and as an SPV serving accredited individuals and family offices.
- Our AI deal structuring tool has over a thousand deal structures programmed in it.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Top 3 Insights on Structuring Investments - PODCAST - Family Offices & Family Office Club, Small Business & Startup Private Investor Mandate Interview, How AI Is Changing Investor Due Diligence, Deal Structuring & Capital Raising. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around SPV entity structure, investor eligibility rules and offering documents. Do not use AI to write your own legal agreements.
Next moves
- Write down the single deal you want to hold in its own entity.
- List the investors you could bring and what return they expect.
- Build a pro forma and test it against what those investors want.
- Talk to securities counsel about options for your plan.
- Many sponsors set up the SPV and define the GP and LP roles with counsel before they raise.
More questions on this
Is an SPV the same as a fund?
Not always. A fund usually holds several investments. An SPV usually holds one. I have used the two words together, since I created an SPV or a fund for each project.
Can I be both GP and an investor in my own SPV?
That is common. In our projects we were the largest LP and I also became part of the GP. Many sponsors talk to counsel about how each role is documented.
Do I need accredited investors for an SPV?
Investor eligibility can depend on the approach a sponsor takes. Securities counsel can explain the options.
Related questions
- How do hurdle rates and catch-up work in a fund?A hurdle rate is the minimum return investors receive before the manager shares in profits.
- How much capital do I need for a first close?There is no single number.
- What is a fund of one and who uses it?A fund of one is a private fund set up for a single investor, usually a large family office or institution that wants its own terms.
- What is the difference between a first close and a final close?The first close is the date your fund accepts its first group of investors and can start operating.
Work through it with the data room checklist. See all fund formation and first-time fund managers resources.