Top answer:
Investing in Special Purpose Vehicles (SPVs) should generally be avoided due to several potential consequences:
1. Tax extension for LPs: If you proceed with an SPV investment, you'll likely need to request that your Limited Partners (L...
Investing in Special Purpose Vehicles (SPVs) should generally be avoided due to several potential consequences:
1. Tax extension for LPs: If you proceed with an SPV investment, you'll likely need to request that your Limited Partners (LPs) file an extension because the K-1s from the SPVs are likely to be delayed.
2. Non-qualified investment: Such investments are considered non-qualified, and they will count towards your 20%, potentially affecting your overall portfolio balance.
3. Creation of a Blocker: To mitigate potential risks of dividends flowing through to your LPs, it may be necessary to create a blocker entity.
4. Poor Reporting from Portfolio Companies (PortCo): Investing through SPVs might result in inferior reporting from the Portfolio Company, which can hinder decision-making and performance evaluation.
5. Limited Leverage during Transactions: Having investments structured via SPVs could result in reduced leverage during M&A transactions or secondaries, potentially impacting negotiation outcomes and overall investment strategy.
