A Special Purpose Vehicle (SPV), also known as SPE or Special Purpose Entities, is a subsidiary created by a parent company to isolate financial risk. This separate legal entity ensures that its obligations remain secure even if the parent company faces bankruptcy.
SPVs are used to undertake risky ventures without impacting the parent company's financial stability, often for securitizing debt, forming joint ventures, or isolating assets. While SPVs can offer benefits like lower borrowing rates and regulatory advantages, they can also be misused to obscure a company’s true financial status, as seen in the Enron scandal. Investors should scrutinize both the parent company and its SPVs to fully understand financial risks.