Special Purpose Entity (SPE)

Brief Definition

A Special Purpose Entity (SPE), also known as a Special Purpose Vehicle (SPV), is a legal entity created for a specific, narrow purpose. Typically, companies establish SPEs to isolate financial risk.

Further Explanation

A Special Purpose Entity (SPE), also known as a Special Purpose Vehicle (SPV), is a legal entity created for a specific, narrow purpose. Typically, companies establish SPEs to isolate financial risk. They might be used for asset securitization, to undertake a specific project, or to hold a specific asset. By creating an SPE, a company can transfer risk associated with the assets to the SPE, protecting the parent company’s financial health.

Example:
Suppose a real estate development company wants to build a new office complex but doesn’t want to take on the financial risk directly. The company can create an SPE, transfer the land and the development project into the SPE, and finance the project through the SPE. If the project fails, the financial risk is contained within the SPE, protecting the parent company’s assets.