Insights 2024: Rebuilding banking relationships

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The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank in the US earlier this year sent shockwaves through the private markets industry. Indeed, more than half of respondents to the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, have moved money as a result of the US banking crisis. A further 12 percent were still considering taking action while the survey was in field during summer 2023.

These high-profile demises, coupled with a challenging macro environment more broadly, have severely curtailed lending capacity in the fund finance market. “Subscription lending has tightened up and credit standards have shifted over the past several months,” says Jason Snider, chief financial officer at Gauge Capital.

“There are definitely far fewer players in the market,” adds a mid-market CFO. “And those that remain have smaller balance sheets. For our last fund, I got nine bids for a line and I could probably have got 14 if I had really wanted. For our current fund, I got just three.

“Balance sheets are so tight that lenders now only want to work with you if they have pre-existing ties to your firm. This isn’t the time to go forging new relationships.”

Alternative options

While the vast majority of respondents are still using banks for their fund finance needs, 30 percent are also tapping into institutional investor capacity for liquidity and 10 percent have borrowed from private debt funds.

“There is a lot of chatter going on in the industry as firms try to figure out who to go to for subscription lines,” says Béla Schwartz, CFO at The Riverside Company. “Flexibility, speed and price tend to be the primary drivers in those decisions.”

Kristen Laguerre, CFO and chief operating officer at MPM BioImpact, meanwhile, says that in the venture industry, accessing fund finance has become extremely challenging in the wake of the banking crisis.

“Quite honestly, it has been a disaster since March,” she says. “Approximately 75 percent of my peers in the venture space banked with SVB or else had sub lines with boutique banks such as Pacific West or First Republic. The banking crisis has completely disrupted the way in which we do business.

“Banks are no longer willing to have committed lines, which means they can be pulled at any time”

Kristen Laguerre
MPM BioImpact

I am still trying to open lines of credit with one large bank now and the banking crisis happened over six months ago.”

The crisis has also impacted MPM’s portfolio companies, according to Laguerre. “We have guided them towards working with larger banks and if they want to work with a boutique, we insist they have two relationships,” she says. “The challenge is that for some of these early-stage companies, working with a big bank just isn’t a good fit.”

Laguerre adds that, where portfolio companies have been able to secure credit, the terms have materially changed. “Banks are no longer willing to have committed lines, which means they can be pulled at any time. Annual renewals carry huge costs and, of course, interest rates are rising, and banks aren’t discounting as SVB historically did. Our portfolio companies are therefore really struggling to get the support they need.”

Of course, it isn’t only lending appetite that has been impacted by a more challenging macro environment. Borrowing appetite has also diminished in some instances, given how the economics of fund finance are now stacking up.

“Interest rates are driving up the cost of borrowing,” says Snider, “so as GPs we have to be mindful of that cost, which is being borne by investors. Many subscription lines are used as a bridge. They are more of a convenience factor than anything. But if a GP is using subscription finance to enhance performance, then I imagine they are reviewing that strategy in the wake of the price increases that we have seen.”