What Is a Special Purpose Entity?
A special purpose entity, also known as a special purpose vehicle, is a sophisticated financial structure that is separated from a company’s balance sheet. These structures are primarily designed to provide an efficient form of raising money in the debt markets, but can mislead investors about the amount of debt a company is carrying. Special purpose vehicles can be controversial entities, and the creation of these structures was largely to blame for the demise of former US energy conglomerate Enron. A special purpose entity can also be a means for a company to obtain funding at favorable rates, and if used appropriately, can lead to future profits.
A special purpose entity, also known as a special purpose vehicle, is a sophisticated financial structure that is separated from a company’s balance sheet. These structures are primarily designed to provide an efficient form of raising money in the debt markets, but can mislead investors about the amount of debt a company is carrying. Special purpose vehicles can be controversial entities, and the creation of these structures was largely to blame for the demise of former US energy conglomerate Enron. A special purpose entity can also be a means for a company to obtain funding at favorable rates, and if used appropriately, can lead to future profits. The reason a company might form a special purpose entity is to raise funds for an event, such as an acquisition or construction project. Another option could be to issue stock in the equity markets, but this method dilutes the percentage of shares held by existing shareholders. Often, this is not looked upon favorably by equity investors. O
