A Look Into SPV's and Sidecar Entities
General Overview of SPVs and Sidecar Funds
SPVs are typically used in the financial sector every day and if you are not familiar with it, we are here to help you out. A Special Purpose Vehicle (SPV for short) allows your company to get into higher-risk investments, acquisitions, or different projects. Picture it as a separate entity created by a parent company, or General Partner (GP), that has assets, liabilities and balance sheets completely isolated from it. Once the SPV is created, other Limited Partners (LP) can invest their money there, creating one big pool of money, which then can be used for their goals. In this particular sector and at OGCP, this set-up is primarily used to pool money from multiple investors and then invest in an opportune company.
SPV funds are layered with 2 key fee components, one being Management Fees, which typically covers costs of launching and managing the fund; the second is known as the Carried Interest, which is a percentage amount of capital gains the “passive” partners must pay the GP for a successful outcome from the investment.
Now, what is a sidecar entity? The key is in the name. There is one investor who controls a pooled committed fund, conducts due diligence, sources the deal, and other co-investors who drive in the sidecar and just place the capital. Essentially, every SPV is a sidecar entity, and although there are many distinct types, the most popular undoubtedly is the SPV.
The foremost reason for setting up a sidecar fund is to invest in excess pro-rata allocations that cannot be fulfilled by the main partner or if there are investors who just want to have a passive role once they invest in a company. There are other benefits to raising one of these funds, including access to better deals that could not have been possible otherwise, generating more opportunities, better professional diligence, and an overall efficient structure.
Direct Co-Investments or SPV?
Another way for LPs to co-invest is without any vehicle at all. This premise has been around for many years, where an LP makes a direct investment into a company alongside other firms. Such arrangement gives partners more control over their investment, rendering them stakeholders in the company or even taking a board seat; they can control their role within the company to a large extent. Although such a co-investing scenario sounds simpler than an SPV, it is far more complicated to pull off and, without correct expertise, can put the partners' reputations at stake.
With the SPV, the partners are only looking to invest, reduce fees and make the deal happen, rather than taking any kind of role in the company. With a sidecar, the GP co-invests into a certain company or deals on behalf of the other LPs and provides for a better fee structure, alongside less burden or work for LPs prior to the investment being made.
OGCP's SPV Investing Model
OGCP’s ecosystem of selected partners co-invest with us on numerous deals. Our investing model entails creating an SPV when an ideal opportunity presents itself, whether that is through LPs and other investors seeking to fill pro-forma allocations or looking for liquidity. Given our success with this model, we have recently launched our $100MM Ventures SPV fund, which utilizes an LLC structure, and makes use of several SPV shops for each of our elite investment opportunities. Clients can pick and choose their investments as we assure that these will be completely isolated from one another, guaranteeing an enhanced risk-return profile.