The syndication process is a way to create significant investment in a project. It involves making an SPV (particular purpose vehicle), which serves as the legal entity that owns and controls the assets of a project. The SPV structure allows investors to pool their resources together.
The investors then use these resources to create significant investments in projects while protecting their interests through various legal mechanisms.
It is good to know how these vehicles work and why they are helpful for investors seeking to protect their interests in projects involving multiple parties.
The syndication process allows investors to get involved in a project they would not be able to do on their own. It’s also a great way to share the risk of an investment with other investors so that if one of them defaults, you are still protected.
For example, let’s say you have $100 million and want to invest in real estate. You could buy five properties yourself, but then if any one of them turns out poorly, your entire portfolio would be impacted by losing 20% of its value.
That means it wouldn’t make sense for you as an investor because your return on investment would drop from 15% down to 10%. Instead, you can use SPVs and other techniques such as a syndicator and partnerships with other investors.
Consider investors willing to take on some risk themselves without complete control over how things turn out at each site or building. This allows companies that specialize in managing these types of investments. They can avoid losses when things go wrong while still ensuring worthwhile projects get built!
An SPV is a company that holds assets but is not set up to make a profit. For example, if you have an investment in real estate and want to protect yourself against loss in case of your tenant defaults.
Forming a particular purpose vehicle (SPV) would be one way you could do so. In this instance, the SPV would own your building and the mortgages against it.
The benefit of using an SPV over owning the building is that if your tenant goes bankrupt or stops paying rent for some reason, you can get out from under their mortgage debt by selling off their portion of your building.
You can rent out the part they were renting from you to another buyer with no liability. They aren’t responsible for anything other than buying what’s left over after selling off all those liabilities.
The syndication structure matters. It’s what makes the investment different from more traditional designs. This can be disadvantageous for investors and limit their opportunities for access to capital.
The structure of syndication is this. Instead of investing in another entity, multiple entities co-invest in an opportunity together. Each investor has some skin in the game. There’s more accountability than single-party investments. Many parties are involved, and each party has so much at stake.
There’s more incentive to perform well as an investor. That means that when an opportunity like SPVs comes along, you have access to capital from around the world that wouldn’t otherwise be available if only one person wanted to take on all that risk by themselves.
SPVs are a relatively new way for investors to protect their interests in syndicated projects. In a traditional partnership structure, if one party defaults on its obligations to the partnership and cannot pay back its debts, the other partners may be forced to pay off those debts from their own pockets.
This can be costly and disruptive for all parties involved, especially if only one partner is responsible for the defaulted debt.
SPVs can be used as an alternative method of risk transfer in these situations by separating each investment into its own SPV vehicle that has no relationship with any other SPV vehicles within the same project or any other projects.
For example, suppose you invest $100 million into Project A, and another investor invests $100 million into Project B (separate SPVs own both). In that case, there is no need for you both to have collateral coverage over both investments.
You only need collateral coverage over your specific investment because it’s in a separate SPV vehicle from everyone else’s investments and therefore doesn’t share any joint liabilities or risks with them.
The emergence of SPVs is a welcome development for investors in syndicated projects. It gives them greater control over how their interests are protected and enables them to manage their risk exposure better.
These vehicles will play an increasingly important role in structuring deals for all types of investors, from banks to private equity funds and institutional investors.