What an SPV actually does
An SPV creates a clean boundary around a project. Everything inside the boundary from assets, contracts, revenues, liabilities, to obligations are legally separate from the sponsor's other activities.
This separation serves four purposes:
- Ring-fencing risk. Lenders and investors have recourse only to the project's assets protecting other non-project assets.
- Enabling non-recourse financing. Most project finance lenders require an SPV because it makes the loan non-recourse.
- Simplifying governance. A multi-party project is much easier to govern inside a single purpose entity.
- Facilitating secondary transactions. If the sponsor wants to sell the project or refinance, an SPV makes the transaction clean.
When you need an SPV
Use an SPV when you are seeking project finance debt, the project involves multiple investors with different rights, you want to protect your other assets from the project's liabilities, or you intend to sell or refinance the project in the future.
When you may not need one
An SPV adds legal, accounting, and governance costs. For very early-stage projects, small contracts, or projects that will never seek external financing, the cost may exceed the benefit.
The governance question
An SPV creates the container in which governance can be designed and doesn't solve governance problems. Who controls the SPV? What decisions require majority approval? What happens if a party wants to exit? These questions are answered in the SPV's constitutional documents.