The Rise of Feeder Funds and SPVs: Legal Tools for Aggregating Private Investors

The world of investments in 2025 is a heady mixture of uncertainty and opportunity. Alternative investment markets, such as private equity and private credit, are experiencing rapid growth as investors seek potentially higher yields with reduced risk.

Feeder funds and special purpose vehicles (SPVs) are on the rise as key tools for aggregating private investors, making it easier for more investors to take advantage of private equity opportunities. They offer unique benefits for both investors and issuers. 

So let’s take a closer look at these investment tools to see how they work in the private capital markets.

What is a Feeder Fund?

Originally designed to allow insurance companies to optimize capital treatment by allowing them to structure their investment as debt to achieve more favorable regulatory capital treatment, feeder funds have become a common way to access alternative investments. 

A feeder fund is a type of investment fund that invests its capital into larger (often offshore) “master funds.” The master fund is the fund that actually executes the investment strategies, while the feeder fund “feeds” its capital into the master fund. This allows U.S. investors to participate in offshore investments through a U.S.-based structure. 

What is an SPV?

SPVs are distinct legal entities created by a parent company for a single, specific purpose. For example, an SPV might be created for a limited business acquisition, or might be created as a holding company. They can also be used to pool capital to invest in startups.

While an SPV may perform a specific project rather than general business activities, its main purpose is often simply to protect the parent company from financial risk. Because the SPV is completely separate from the parent company in terms of its assets and liabilities, the parent company is protected from the financial risks associated with the SPV’s activities, including bankruptcy.  

In the past decade, the use of SPVs in private markets has risen significantly. SPVs have many legitimate uses; however, it is important to note that they can be and have been misused to hide financial losses or commit financial fraud.

The Benefits of Feeder Funds and SVPs

Both feeder funds and SPVs are mechanisms that can be used to pool capital from multiple investors, democratizing investments by allowing more investors to participate in opportunities that would otherwise not be available to them. They can also help to manage the financial risks of specific investments. 

In addition, feeder funds provide tax benefits by segregating investors into different tax jurisdictions.

These tools can lower the barriers for investors to participate in private markets while benefiting fund managers by enlarging the investor pool, making raising capital easier.  

How are Feeder Funds and SPVs Structured in Private Capital Markets?

Feeder funds can be structured in many ways. Most commonly, however, feeder funds are structured either as a limited partnership (LP) or as a limited liability company (LLC). 

A limited partnership is a business structure that limits the personal liability of some of the partners in the business. It is made up of at least one general partner (GP), who has unlimited personal liability, and any number of limited partners (LP). In the context of investments, the LPs are the “investors,” and their liability is often limited to their capital commitment. An LP feeder fund structure allows investments from many investors to be pooled into the feeder fund.

Feeder funds can also be structured as limited liability companies (LLCs). An LLC is a business structure that offers the benefits of a partnership and a corporation at the same time. Although an LLC is not incorporated, for tax purposes, it can be treated like a corporation. An LLC is made up of members and can be set up to allow all members to manage and profit from the business equally, or so that some members manage the business while others simply profit from their share in it. LLCs offer significant flexibility both in operations and in tax consequences for members, while limiting a member’s liability for acts and omissions of the LLC to the member’s capital contribution.  

SPVs can be formed by a parent company as an LP, a trust, a corporation, or LLC. They are created as independent companies with their financing, management, and ownership.

Feeder funds have what is often referred to as a “master feeder structure.” This means that investors put their capital into the “feeder fund,” which then takes the pooled capital and puts it into the “master fund.” The master fund is the entity that makes investments and conducts the trades. This “master feeder structure” is common among hedge funds. Master feeder structures often involve one onshore master fund that has both one onshore and one offshore feeder fund.

Regulatory Implications for Feeder Funds and SPVs

Both feeder funds and SPVs are subject to the federal securities laws and Securities and Exchange Commission (SEC) regulations. 

Depending on how they are set up, feeder funds must comply with the same regulations as other investment funds. However, if the feeder fund is set up as a private fund, it may be exempt from registration under sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. In addition, the feeder fund may still be subject to the rules and regulations promulgated by the Securities Act of 1933 and the Securities and Exchange Act of 1934. Finally, if the fund manager is registered as an investment adviser, the fund would also be subject to the Investment Advisers Act of 1940.  

Even though a feeder fund may be exempt from registration with the SEC, disclosures will still be required, and the fund may still be subject to reporting requirements if it has at least $150 million under management. 

Finally, feeder funds are subject to the rules and regulations promulgated by other governing agencies, such as the Internal Revenue Service (IRS) or the Financial Industry Regulatory Authority (FINRA), as well as anti-fraud provisions and reporting requirements.  

Similarly, SPVs are also subject to regulatory oversight. Because they share many characteristics with venture capital funds, they are subject to many of the same laws and regulations. Additionally, SPVs must strictly comply with regulations under the Sarbanes-Oxley Act and the Financial Accounting Standards Board (FASB) regulations. 

Some Final Thoughts 

Both SPVs and feeder funds can offer unique growth and diversification opportunities for funds and investors. When structured as private funds and used appropriately, feeder funds and SPVs can be key investment tools. They provide tax benefits, allow for portfolio diversification, and broaden the investor pool. They enable a wider range of investors, including those with smaller amounts of capital, to benefit from high-growth opportunities typically reserved for institutional investors or high-net-worth individuals. They also provide risk protection for funds and managers. 

Thus, understanding how these investment vehicles are structured and how they work is essential to those wanting to participate in private capital markets. 

But creating and managing feeder funds or SPVs is highly complex. Investors and advisers should always consult competent professionals and conduct their due diligence before participating in any investment opportunity. 

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