The collapse of Silicon Valley Bank, which was seized by regulators Friday, is disrupting the process GPs use to call capital from their limited partners, sources told Buyouts.
It’s also infused the market with uncertainty around the bank’s subscription line of credit business GPs use to bridge capital calls, giving LPs weeks or months to fulfill those obligations. SVB was one of the biggest providers of such debt.
The other question, which will become clearer over the next weeks and months, is what kind of buying opportunity the SVB situation could mean for private equity and secondaries buyers. The Federal Deposit Insurance Corp, appointed receiver on Friday, will be selling off SVB assets going forward as a way of raising capital to help the recovery of uninsured depositors.
Update: SVB Financial Group, the holding company for SVB bank that is in receivership with the government, announced this morning it was exploring strategic alternatives. The holding company includes SVB Capital (which includes the funds-of-funds business), SVB Securities and other assets and investments that are not part of Silicon Valley Bank, according to the announcement. Axios is reporting that JPMorgan, PNC, Apollo Global Management and Morgan Stanley are all in the mix on potentially acquiring the company or financing an acquisition. Read more here.
A spokesperson with FDIC declined to comment, other than to explain SVB has ceased to exist as a bank. FDIC instead created a deposit insurance national bank for the purposes of housing SVB’s insured deposits.
Private equity and secondaries buyers were watching the situation unfold Friday with an eye toward any hint of a fire sale of assets. SVB held limited partner fund stakes through a fund of funds platform called SVB Capital as well as on its balance sheet, sources said. SVB Capital managed more than $9.5 billion as of February on behalf of third-party limited partners and, on a limited basis, SVB Financial Group, according to the bank’s annual report.
Speculation Friday was that the fund-of-funds business would be spun off or acquired outright by a third party.
“I suspect in the medium term it will definitely divest. Those balance sheet commitments were made for relationship reasons,” said a secondaries buyer.
The bank conducted its capital call line of credit business mainly through its global fund banking loan portfolio, and also through its private wealth division, the annual report said. The global fund banking loan portfolio totaled about $41 billion as of Dec. 31, more than half of which was with private equity and venture managers. The vast majority of the PE and VC loan portfolio was tied up in capital call lines of credit, the annual report said.
The Federal Deposit Insurance Corporation took control of SVB following a large asset sale by the bank and a botched capital raise to cover deposit outflows. The California-based bank lends heavily to the start-up industry and venture capital, whose prospects have diminished under higher interest rates.
But smaller and mid-market private equity firms (as well as some of the industry’s biggest players) bank heavily with SVB, too. And people involved with the bank or its clients say it has caused a sense of total uncertainty among those clients, even if the FDIC’s order shuts SVB’s branches down just for the weekend.
An LP source said several of their venture managers instructed them to ignore recent capital call notifications in which they would have sent money through SVB.
“They’re saying, ‘I know we just sent out capital calls you need to fund in five days, normally that’d go to SVB. Hold off, we’re setting up a new banking entity for our fund. We’re concerned if you fund it there we won’t be able to get it out,’” the LP said.
A mid-market GP that doesn’t use SVB said capital call and distribution requests are being put on hold or being “de-routed.” A second GP said the main worry for those who did not use SVB as their primary bank was whether its collapse would spread to other financial institutions.
“There is a concern that this could have ricochet impacts to other banks and people making runs on them,” the second GP said. “LPs have been reaching out non-stop.”
A source familiar with some of SVB’s clients told Buyouts’ affiliate publication Private Funds CFO on Friday – before the bank was put into receivership – that some of them were already looking for a replacement lender. The CFO of a private equity firm, who was himself on his way to a meeting to assess portfolio company exposure to SVB, said that one of his peers was scrambling to find a way to continue forward with dealmaking and ongoing or upcoming capital calls.
Another PE CFO said: “Who knows how long sub lines [from SVB] will be frozen… For PE firms in general… that’s the biggest challenge.” He added that firms will also have to face the fact that cash deposited with the bank will be inaccessible at least until Monday.
Graham Bippart contributed to this article.