The challenge of VC access and the SVB fund of funds sale

Sources said a concern among potential buyers is that, without the SVB branding and operations, access to top VCs may not be as robust for a third-party buyer.

One of the challenges that has emerged as potential buyers explore an acquisition of SVB Financial’s fund of funds platform is continuing access to the top names in venture capital, sources tell Buyouts.

“That’s what it comes down to: will someone buy it and just milk the cash flow stream and wind it down, or pay up to buy the goodwill and brand name and hope they can get into those venture names in the future,” a secondary buyer said.

Silicon Valley Bank was seized by regulators earlier this month amid a panic run by depositors attempting to withdraw $42 billion. The bank’s holding company, SVB Financial, which filed bankruptcy March 17, has been exploring a sale of various business units including the fund of funds called SVB Capital.

The $9.5 billion fund of funds, which is not part of the bankruptcy process, has backed some of the biggest venture funds, including those raised by Accel, Bessemer Venture Partners, Felicis Ventures, Frazier Healthcare Partners, Index Ventures, Sequoia Capital and Spark Capital, among others, according to its website. “SVB Capital is one of our most value-added limited partners,” Doug Leone, general partner at Sequoia Capital, stated in a testimonial on the website.

Numerous shops have taken a look at the platform as part of the strategic options process, according to two sources with knowledge of the process. “Everyone has taken a look,” one of the sources said.

Opportunity exists as well for a straight secondaries sale of LP fund stakes, though that is more likely based around holdings on SVB Financial’s balance sheet or through its private wealth platform, sources said.

One name that has emerged as a natural buyer of either the entire platform or through a large secondary is StepStone Group, which acquired VC-focused secondaries and fund of funds operation Greenspring Associates in 2021.

StepStone last year closed one of the largest venture-focused secondaries funds on $2.6 billion, Secondaries Investor reported at the time. The pool was raised by the Greenspring team, according to the story. A spokesperson for StepStone declined to comment.

The size of the SVB portfolio may put it out of reach of some smaller secondaries players. For example, Industry Ventures, which bought at least nine VC fund stakes from Washington Mutual during the Global Financial Crisis, has about $5 billion in AUM, and its most recent secondaries fund closed on $850 million in March 2021. In 2009, Industry paid $3.5 million for three FTV Capital fund stakes and agreed to pay $3.2 million for stakes in six funds managed by Arch Venture Partners, Madrona Venture Group, Maveron and others. It also agreed to pick up the remaining unfunded commitments for the funds. An Industry representative declined to comment.

The portfolio of fund stakes is considered high quality and the platform could represent a strong move by a third-party buyer into forming relationships in the VC world.

But … sources said a concern among potential buyers is that, without the SVB branding and operations, access to top VCs may not be as robust for a third-party buyer. SVB was able to form relationships with the biggest names in VC in part because of its business model. The company provided capital to their start-ups, served as their custodian and became an LP in their funds.

A new buyer is not going to provide that kind of holistic service and therefore may not be able to continue the same sort of deep relationships developed over time by SVB.

That’s the concern, anyway. “SVB had deep relationship access, which might not carry over to a new buyer, i.e., they might lose part of their roster,” said a fund of funds manager.

Another fund of funds executive said the fear is the potential for overpaying when the business could be weaker “without the bank’s money going into the venture companies and the associated [GPs].

“At the right price, it might be worth the risk on the clients and GP relationships,” the executive said.

A buyer with an existing built-out venture platform and deep relationships makes the most sense. And, if a platform buyer doesn’t materialize, could the situation represent a major secondaries opportunity? That’s some of the chatter we’re picking up these days.

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Lawrence Aragon contributed to this report.