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Snapchat Deal Shows High Cost of SPVs

Small individual investors have more access to the hottest private tech firms nowadays, thanks to the growing popularity of special purpose vehicles raised to invest in a single company. But the fees are high, particularly when investors buy through one SPV investing in another SPV.

One Snapchat case illustrates the example. At some point in the past 18 months, a group of investors bought stock in Snapchat through a fund set up for that purpose. This past April, a second fund described as an SPV raised money to invest in the first fund. The fees for the second SPV totaled 10%, as each fund charged between 2% and 3% for fund management and 2% for placement, said a person who invested in the second fund. That compares with the 6% to 7% typically charged when one fund is involved. The identity of the investors in the two funds wasn’t disclosed.

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“Part of the reason investors are willing to suffer the inefficiency of the SPV structure and pay related fees is because of the returns they anticipate.”