Multilayered special-purpose vehicles, where SPVs are nested inside others, are on the rise as investors clamor for slivers of hot venture-backed companies like OpenAI and SpaceX.
But the boom is also raising new questions about their complex fee structures, and their opacity has left some investors unclear about ownership of the underlying equity. Private market investment company Linqto’s recent bankruptcy highlighted those issues and sparked broader scrutiny of how these vehicles really work.
Some companies have started to denounce unauthorized sales of their equity, including in the form of digital tokens. Some prominent secondary marketplaces are opting out of allowing layered SPVs outright.
“When you have these SPVs that go into other SPVs that go into other SPVs, we don’t know whether the underlying SPV actually has the shares or the company or not,” said AngelList CEO Avlok Kohli. “We don’t want to be in a position where we are facilitating an SPV where, years later, when a company goes public or gets acquired, the investors are wondering, ‘Hey, where’s our distribution? Where’s our capital?’ And it’s like the shares weren’t there to begin with.”
SPV management fees are mounting
The proliferation of layered SPVs comes as secondary sales are soaring, with LPs and GPs looking to create some long-awaited liquidity.
SPV issuers typically impose an origination fee to cover administrative setup costs. But issuers are increasingly now charging ongoing management fees beyond that.
And recurring management fees for SPVs are becoming commonplace as competition heats up: At the top of the VC market in 2021, 41% of SPVs with more than $10 million of assets charged a management fee, according to Carta. In 2023, the latest available SPV data from Carta, 67% charged a fee.
The difficulty for many high-net-worth individuals and family offices to get into the fast-moving funding rounds for high-flying AI startups has ramped up the appeal of SPVs, said Hans Swildens, founder and CEO of secondaries firm Industry Ventures.
Private wealth advisers have also been pushing SPVs onto their clients, he added.
“SPVs have gone mainstream, as you’ve seen, and yes, people are starting to monetize them more through fees and carry,” said Swildens. Rising fees are disproportionately hitting smaller investors, while fund managers often waive SPV fees for existing LPs they invite to co-invest.
Read more: Private wealth capital adds pricing pressure for secondaries market
Larger SPVs are getting cheaper to set up, according to Anthony Cimino, Carta’s head of public policy. But costs continue to mount for layered SPVs, he said, which are usually smaller assets.
“What we’re trying to figure out is how do we help that broader fund marketplace provide clarity and credibility?” he said. “It’s no longer a situation where the costs around NAV reporting or the [setup] fee structures are basically creating a moat, where only the biggest and most-established players can do it.”
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