Special Purpose Vehicle (SPV)
A legally separate entity created for a specific, limited financial purpose to isolate risk from a parent company.
What is Special Purpose Vehicle?
A special purpose vehicle (SPV), also called a special purpose entity (SPE), is a subsidiary or legally separate entity created by a parent company to isolate financial risk, hold specific assets, or facilitate structured finance transactions. Because an SPV is a distinct legal entity, its assets and liabilities are kept off the parent company's balance sheet. SPVs are commonly used in securitization (to issue asset-backed securities), project finance (to isolate construction risk), leveraged buyouts, and real estate investment. The bankruptcy remoteness of an SPV means that if the parent defaults, creditors cannot seize the SPV's assets. Enron's use of SPVs to hide debt from its balance sheet became a notorious example of SPV misuse.
Example
A bank creates SPV 'Auto Loan Trust 2025-1' to hold $800 million in car loans. The SPV issues $720M in ABS notes to investors and $80M in equity retained by the bank. Because the loans are legally owned by the SPV, not the bank, ABS investors are not exposed to the bank's general credit risk — and the bank removes the loans from its balance sheet, freeing regulatory capital.
Source: SEC — Special Purpose Entities