SVB Financial explores sale of fund of funds unit, LP positions

SVB Financial Group, the holding company of Silicon Valley Bank, is exploring strategic options for its various business lines, including a sale of its $9.5 billion funds-of-funds business that includes limited partner positions in funds.

SVB Financial announced Monday it formed a restructuring committee on options for its business lines, including SVB Capital and SVB Securities and other investments, none of which are part of Silicon Valley Bank. The commercial bank was taken over by the Federal Deposit Insurance Corp Friday amid a run of depositors looking to exit.

The company is working with Centerview Partners, Sullivan & Cromwell and Alvarez & Marsal on the process. “In addition to exploring potential transactions for the SVB Capital and SVB Securities businesses, the committee will explore all alternatives for addressing the approximately $3 billion of funded debt held by the holding company, which is recourse only to SVB Financial Group and is not guaranteed by the subsidiaries,” the company said.

The fund-of-funds platform, which includes commitments to venture funds as well as private credit, continues to operate, the company said Monday. The platform was raising its SVB Strategic Investors Fund XI last year, which had collected about $1.9 billion as of December, according to SEC filings.

Fund XI expected to commit to 15 managers, making up around 85 to 90 percent of the portfolio, with the remaining 5 to 15 percent allocated to emerging managers, according to an investment memo for the San Francisco Retiree Health Care Trust Fund. The fund mostly targets early stage managers, as well as expansion and growth, the memo said.

The firm also was raising a parallel pool, SIF-Plus, targeting $500 million for commitments to growth and late-stage venture funds and co-investments, the memo 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.

Buyouts understands SVB Financial also holds LP positions on its balance sheet, which will also be part of the mix, sources said.

GPs with banking relationships with SVB spent Friday and the weekend looking for new banks to set up accounts, sources told Buyouts. The situation has delayed or put on hold some capital calls and distributions, GPs who talked to Buyouts said.

Some uncertainty exists about the status of capital call lines, an important business line for SVB bank. In some cases, GPs may be forced to call capital directly from LPs if the lines are no longer available, sources said.

“The problem would be a deal that is about to close [today] for example, and a PE firm was going to fund that equity using their SVB line. Now they could not close on Monday (unless FDIC reopens SVB) and would have to call capital directly from LPs but usually that takes a couple weeks,” a GP said.

“I’m guessing most sellers will understand and grant extensions to closing. GPs will be setting up new lines asap i’m sure, so we’ll be back to normal once people switch lenders – again takes weeks (if not longer for fund lines, as they are complex).”

Immediately calling capital, instead of funding a deal through a subscription line of credit, could impact a GP’s performance, according to Igor Rozenblit, managing partner of consultancy Iron Road Partners.

Capital call lines allow for a delay before a GP calls capital from LPs, which means the IRR calculation doesn’t start right away – a helpful boost to that performance metric. In addition, the clock on the preferred return only starts when LP capital is drawn, Rozenblit said.

That boost would be erased if a GP is suddenly forced to call capital immediately. “The IRR starts ticking when you call down the capital. You can buy investments on a line of credit and keep it there, some keep it there for quite some time, sometimes years. But if you draw down your capital right away, that hits your IRR negatively, and its impact could be substantial,” Rozenblit said.