What is a SPV?

A Special Purpose Vehicle (SPV) is a subsidiary created by a parent company to isolate financial risk. In this context, the SPV is designed to hold and manage a specific set of assets, such as loans or other receivables, which are then packaged into securities and sold to investors. The main purpose of using an SPV in securitization is to isolate these assets from the parent company’s balance sheet, thereby reducing financial risk and making the assets more attractive to investors.

By transferring the assets to an SPV, the parent company can raise funds through the sale of securities backed by these assets without exposing the entire company to the risks associated with them. This separation helps protect the parent company from potential losses if the securitized assets underperform. The SPV, as an independent entity, is responsible for managing the assets and ensuring that the securities issued are backed by them.

In securitization, SPVs often take the form of a trust, which is a legal arrangement where a trustee manages the assets for the benefit of the investors. This structure provides an additional layer of security, as the assets within the SPV are managed separately from the parent company’s other operations. This setup is particularly useful in protecting investors, as it ensures that the assets backing the securities are shielded from any financial difficulties the parent company might face.