Image Source: Unsplash.com
Special Purpose Vehicle sounds more complicated than it is.
In private-market investing, an SPV is essentially a legal entity created for a particular investment. A group of investors contributes capital to the vehicle, and the vehicle makes the investment on their behalf.
Craig Bonn, who serves as managing member of a firm focused on pre-IPO investments through SPVs, has spent years working with this structure.
For investors encountering SPVs for the first time, understanding the basic mechanics can make the rest of the terminology much easier to follow.
What an SPV Actually Is
Suppose a group of accredited investors wants exposure to the same private company.
They could potentially invest individually if the opportunity allowed it. An SPV gives them another way to participate: they pool their capital into one entity, and that entity makes the investment.
The investors then hold interests in the SPV instead of each appearing individually on the private company’s capitalization table.
That’s the basic structure.
SPVs can be useful in private markets because access to a particular investment may come with minimum investment sizes, allocation limits, or other restrictions that make individual participation difficult or impractical.
Pooling capital doesn’t eliminate those limitations in every transaction, nor does it change the risk of the company itself. It can, however, give qualifying investors a way to participate collectively in an opportunity offered through the vehicle.
How the Structure Works in Practice
The firm led by Craig Bonn organizes its investments using a series structure.
This allows separate investment opportunities to remain within a broader organizational framework, rather than establishing an entirely unrelated structure for every transaction.
For an individual investment, the process is relatively straightforward.
The vehicle acquires securities in a private company. Investors hold their interests through the vehicle, and the investment may remain there until some form of liquidity becomes available.
That could happen if the company goes public or is acquired, although neither outcome is guaranteed and the timing can be difficult to predict.
Until then, the investment is generally much less liquid than a publicly traded stock. An investor can’t assume they can simply sell an SPV interest whenever cash is needed.
That is one of the practical differences between private-market investing and buying securities through a conventional brokerage account.
Who Can Participate
The types of private investments Bonn works with are generally offered to accredited investors.
Securities regulations determine accredited investor status, which can be based on financial criteria or certain professional qualifications.
The restriction is particularly relevant in private markets because investors may be taking on risks they don’t encounter in the same way with publicly traded securities.
Information may be more limited. Investments can remain illiquid for years. Valuations can change substantially between financing rounds, and a company expected to pursue an IPO or acquisition may do neither.
An SPV doesn’t remove those risks.
It provides the legal structure through which investors participate in the investment.
For anyone considering an SPV, understanding that difference is crucial. Access to a private company and the quality of the investment are two separate questions.
Where Bonn’s SPVs Tend to Focus
Bonn’s vehicles focus on pre-IPO and late-stage private companies, including businesses in technology, artificial intelligence, cybersecurity, robotics, and software.
Companies in these areas can remain private well into their development.
That creates opportunities for private investors to participate before a potential public offering, but it also means investing without the liquidity, disclosure requirements, and continuous market pricing associated with public companies.
Bonn’s strategy is to evaluate individual opportunities and use an SPV when he believes a particular private company fits the investment approach.
The vehicle itself is only the structure.
The harder questions concern what goes inside it: the company, its valuation, the terms of the investment, the expected holding period, and the possibility that the anticipated liquidity event may take longer than expected or never occur.
Why Use an SPV?
One reason is administrative.
If multiple investors want to participate in the same private investment, an SPV lets the position be held through a single entity.
Another is access.
An individual investor may not have enough capital to meet the requirements of a particular transaction alone, while a group investing through an SPV may be able to reach the required allocation.
There can also be practical advantages for the private company. Instead of adding numerous individual investors to its capitalization table, the company may have a single SPV holding the investment.
But an SPV shouldn’t be confused with diversification.
If the vehicle was created to invest in one company, investors remain exposed to what happens to that company. Pooling money with other investors doesn’t change that concentration.
For Bonn, that makes the evaluation of the underlying opportunity particularly important.
What Happens When the Company Goes Public?
A potential liquidity event is often a major part of the investment thesis in a late-stage SPV.
If the private company eventually completes an IPO, investors don’t necessarily receive freely tradable shares immediately.
What happens next depends on the terms of the investment, the structure of the SPV, any applicable restrictions, and how the vehicle handles distributions.
An acquisition creates its own set of possibilities depending on the terms of the transaction.
And sometimes the expected event doesn’t happen on the original timeline.
A company may postpone an IPO, raise another private round, pursue a different strategy, or remain private much longer than investors expected.
That’s why the anticipated exit is better understood as part of the investment thesis than as a promised date on the calendar.
Putting SPVs in Context
SPVs are one tool within private-market investing.
For Bonn, they sit alongside his work as managing partner of an independent broker-dealer. The roles are different, but both have given him experience with investors looking beyond conventional publicly traded securities.
The SPV solves a fairly specific problem.
Several investors want to participate in a particular private investment. Instead of each holding the position separately, they invest through a vehicle established for that purpose.
From there, the complicated part isn’t understanding what an SPV is.
It’s evaluating the investment itself.
What is the company worth? What securities is the vehicle acquiring? What fees and expenses apply? What rights do investors have through the SPV? How long might their capital be tied up? And what happens if the expected IPO or acquisition doesn’t occur?
Those questions tell an investor much more than the acronym does.
Understanding What the Structure Can and Can’t Do
For accredited investors considering private markets, an SPV can let them participate alongside others in an investment that may otherwise be difficult to access individually.
It can organize the investors and simplify how the collective position is held.
It can’t make the underlying company successful.
It also can’t guarantee an IPO, an acquisition, a particular return, or a way to exit the investment when an investor wants their money back.
For Craig Bonn, understanding the structure is the starting point. Once an investor knows what the SPV is doing, attention can turn to the questions that matter more: what it owns, what the terms are, and whether the opportunity makes sense given the risks and the possibility of a long holding period.
Additional information about Bonn and his work is available through his public profiles and published material.
Craig Bonn is the managing member of a firm specializing in pre-IPO investments through Special Purpose Vehicles and the managing partner of an independent broker-dealer. He has more than three decades of experience in alternative investments and private equity.
Written in partnership with Tom White
