Special Purpose Vehicle (SPV)

A Special Purpose Vehicle (SPV) is a legal entity created for a specific, limited purpose, often to isolate financial risk. SPVs are typically established by a parent company to separate financial Assets and liabilities, facilitating investments, managing risks, or securing financing without affecting the parent company’s balance sheet. SPVs are commonly used in structured finance, Asset-backed Securities, and project financing.

Examples of SPVs include:

• Asset-Backed Securities (ABS): An SPV may be created to hold a pool of loans (e.g., mortgages, auto loans) and issue Securities backed by these loans.
• Project Financing: An SPV can be established to develop a specific project (e.g., a toll road or power plant), isolating the project’s financial risks from the parent company.
• Real Estate Investment: An SPV may be set up to acquire and manage real estate properties, allowing investors to participate in real estate investments without direct ownership.

Notable cases involving SPVs include:

• Enron: The company used SPVs to hide debt and inflate profits, ultimately leading to its Bankruptcy and a major scandal.
• Lehman Brothers: The firm utilized SPVs to manage and offload risky Assets, which contributed to the financial crisis in 2008.