SPVs Differences: Institutional vs. Emerging Managers

While Special Purpose Vehicles have become increasingly important in venture capital, their use varies dramatically between institutional funds and emerging managers. While both use SPVs to concentrate capital in winning investments and provide LP co-investment opportunities, the strategic motivations and outcomes differ significantly based on a fund's maturity and scale.

Doubling Down on Breakout Companies

For institutional funds, SPVs serve as a tool to maintain ownership in breakout portfolio companies during later-stage rounds. When a top-tier firm backs a company early, their pro-rata rights may not be sufficient to maintain meaningful ownership as valuations rise. The SPV allows these firms to deploy additional capital beyond their fund's reserved allocation without disrupting the fund's overall strategy.

The math is straightforward: if a $500 million fund writes a $10 million Series A check at a $40 million post-money valuation, they own 25% of the company. By Series C at a $500 million valuation, maintaining even 15% ownership would require deploying $75 million—far more than any single fund allocation would permit. An SPV allows an avenue to increase ownership or limit dilution.

For emerging managers operating smaller funds of $10-30 million, SPVs serve a different purpose. When a portfolio company breaks out, an SPV becomes not just a way to increase ownership but a critical mechanism to demonstrate the manager's ability to support companies through their growth trajectory. It's a credibility signal that despite running a smaller fund, the manager can allocate significant capital when needed.

Co-Investment Opportunities and LP Relationships

For many funds, SPVs provide value-added services to LPs who increasingly want and/or expect co-investment opportunities to invest specifically into a company rather than at the fund level. Some university endowments, pension funds, and family offices want direct exposure to the best-performing companies most typically where the fund has invested 1 or multiple times before and it is becoming increasingly obvious this is going to be a bigger winner. Institutional managers can be selective about which LPs they invite, using access as a relationship management tool and helping secure commitments for their next fund.

Emerging managers use SPVs differently—frequently to broaden their LP base and establish new relationships. A debut fund might have 20-30 LPs, but an SPV on a breakout company can attract 10-50+ additional investors getting their first exposure to the manager's approach. These SPV participants become natural candidates for the next fund. For emerging managers, every SPV is a fundraising opportunity to bring a high quality deal to a new LP base to establish a connection and highlight your ability to secure access to competitive startups.

SPVs as AUM Growth Engines for Emerging Managers

For emerging managers, SPVs represent a pathway to more rapidly scale assets under management without waiting for the traditional fundraising cycle. An emerging manager who closes a $20 million Fund I and raises three SPVs of $3-10 million each has effectively demonstrated the ability to deploy $26-50 million in capital. My personal opinion is that as you deploy more meaningful amounts of capital, it enhances the pitch for your Fund II which could be $50m to $100m (not to mention the additional carry earned on the SPV’s).

The AUM growth through SPVs also generates management fees that help emerging managers build sustainable businesses. While SPV management fees are typically lower than on funds, they still contribute to covering operational costs during the long gap between fund closings. For a team trying to prove they can build a durable investment firm, this financial runway can be incredibly helpful, even crucial.

Institutional funds, already operating at scale with established fee income, likely view SPVs less as AUM growth mechanisms and more as portfolio optimization tools. They don't need SPVs to prove they can raise capital—they're solving the specific problem of maintaining ownership in outlier companies without distorting their core fund strategy.

The Case Against SPVs: Operational Burden and Strategic Distraction

Despite their benefits, SPVs create significant challenges for both institutional and emerging managers.

For institutional funds, SPVs add organizational complexity. Each requires separate legal documentation, compliance work, capital calls, reporting, and tax filings. Firms with dozens of SPVs can add a bunch of administrative work. Many institutional managers conclude the operational overhead isn't worth the incremental ownership, especially when they can deploy from reserves or opportunity funds instead.

For emerging managers, the challenges are more acute. Running an SPV demands a lot of LP outreach to get a deal done which is very different from other investments from the fund. It also is less clear how many of your LPs will want to participate at a deal level and what allocations sizes you can fill. This can cause headaches and/or inability to fund SPV commitments which can hurt reputational risk.

Speaking of reputational risks… LPs expect managers to focus on generating returns from committed capital, not constantly raising SPVs. Some LPs explicitly prohibit or limit SPV activity in side letters.

SPVs also create awkward LP dynamics. If offered to all LPs, those declining may feel they're signaling lack of confidence. If offered selectively, excluded LPs may feel slighted.

If you enjoyed this article, feel free to view our prior posts on adjacent topics 

• How We Closed 14 SPVs in One Month

• Are VCs the New Bankers

• VC Scouts: Why Waiting for Lead Investors Maximizes Syndicate Success

Follow the Last Money In authors on LinkedIn

✍️ Written by Zachary and Alex