In-kind contribution to an SPV's equity
I kindly need help from the forum..
Let's say that I have an SPV with 4 sponsors and they have all put 25$ of equity thus having a 25% share each. There is also debt at SPV level (think project financing) but it is not so relevant for the example. The SPV is needed for a project that has a Project IRR of 20% (each sponsor will therefore have the same return on equity).
Now, I have an alternative case. One of the sponsor decides that he doesn't want to put 25$ as cash, but will put some feedstock once the SPV is in operation. The amount of feedstock is such that the sponsor will get a 25% share. What I don't get is: the feedstock provided by the sponsor will be in exchange of shares (to reach the 25%) but it will decrease the opex of the SPV since it will have to buy less feedstock, thus increasing the Project IRR.
How is this possible? I'm not able to understand why the Project IRRs are not the same. I'm clearly missing something but I cannot understand what.
Not exactly an expert, but:
Opex doesn't decrease, it was still bought and it is still expensed as usual under accounting standards. The difference being that in the second scenario, instead of the SPV buying feedstock using capital contributed by the sponsors, you can imagine that they skipped a step and the sponsor's equity contribution went directly towards paying for the feedstock, rather than going through the SPV's bank account first.
Thanks for your point of view.. I actually hadn't thought about that one
No worries. Under accounting standards, expenses are matched to the period in which the revenues those expenses were used for are generated. In this case, even if the feedstock was bought and paid for before the creation of the SPV, it doesn't show up as an expense until it is used
Pardon, but what is feedstock in this situation? Intuitively, it doesn’t sound like you’re talking about the raw material?
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