SVB shutdown causes havoc for client managers, portcos

Update: This article, published on Friday, March 10, before the closure of Signature Bank and news of the guarantee of all deposits at SVB and Signature, is part of ongoing coverage.

The bank known to some as the “bank for private equity” was put into receivership on Friday, sending shudders through PE banking clients as they face an unknown period of tied-up funds and frozen accounts.

Silicon Valley Bank’s crisis also comes at a time when the subscription line market – which has essentially become an integral part of the private equity machine – has experienced supply side constraints, forcing hardships for some borrowers in the midst of dealmaking and fundraising.

And many of those clients own portfolio companies who bank with SVB, meaning some could face operational and funding challenges in the near term, or at a minimum hasten to obtain new bank relationships.

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.

A source familiar with some of SVB’s clients told 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 at one of his peers was scrambling to find a way to continue forward with dealmaking and ongoing or upcoming capital calls.

“I can’t even imagine what they are trying to figure out,” the CFO said.

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.

That CFO said his firm had moved all accounts in excess of more than $250,000 with SVB to a large international bank, and is also in communication with another relationship, First Republic Bank, about its financial situation. (FRB’s stock, which tumbled in sympathy as the SVB situation unfolded, partially recovered as of Friday. UBS bank analyst Erika Najarian said on Friday that FRB’s exposures weren’t comparable to SVB’s.)

Portco exposures

Right now, much of the focus of SVB’s PE clients is assessing the exposure of their portfolio companies, borrowers tell Private Funds CFO. One was in the midst of doing so when contacted. Though SVB can hardly be described as a “regional bank” – it boasted offices across the US, as well as in Europe, Asia and one in the Middle East – some clients are also reviewing their portcos’ exposures to regional banks seen as peers to SVB, as well as ones active in cryptocurrency. Lender to the crypto industry Silvergate also said earlier this week that it was winding down operations and liquidating its banking unit.

The FDIC indicated on Friday that it would pay uninsured depositors advanced dividends within a week, and said that uninsured depositors would be given receivership certificates for the remaining amounts of their funds, though without giving a date or further details.

“It’s uncertain if any [portcos with exposure to SVB] will take losses, or if most owe more than they had in deposits,” said a third CFO via email. In which case, it becomes unclear if such a portco would legally still be obligated to the debt but lose its deposits, he said.

“At a minimum, any fund or portco who uses SVB is hamstrung for days to weeks, because things like sending wires to close deals is off the table with SVB, and it’s unclear when it will be up and running. And since many, many funds and portcos who are at SVB now need to set up shop at other banks, even those that are in great financial shape might be tied up for days or weeks,” the CFO added, saying it can take significant time to set up new bank accounts, and that now it will take longer given the volume of clients likely hoping to move to new relationships.

Clogged pipeline in sublines

As of the fourth quarter last year, SVB’s Global Fund comprised 56 percent of its Banking nearly $75 billion loan book, with VC firms representing 19 percent of that, while growth and buyout firms together were 43 percent.

The event takes place almost exactly two years after Silicon Valley Bank disclosed, in an unrelated incident, a $70 million exposure to a fraudster in its subscription credit line portfolio.

SVB has been said by fund finance professionals to have been on the sidelines of active lending for some six months or more, now – although the market remains relatively private and often bilateral, so actual activity is hard to estimate.

But even as sub lines become a more essential part of PE fund operations, and demand grows, supply has been constrained as lenders hit concentration limits and balance sheet caps, or reassess whether the low-yielding market is worth being active in at all, if it doesn’t bring in more lucrative ancillary business. Where a year ago, market players estimated some 75-80 global players of significance in the sub line market, the general number cited now is around 50. Borrowers and service providers have said it has become much more challenging to obtain and refinance lines in the last 12-18 months.

SVB was reportedly engaged in sale talks when the FDIC stepped in. And even before its troubles began, some banks with large private wealth arms had been said to be “sniffing around” its loan book, said the person familiar with some of SVB’s clients.

“There’s a lot of value in that book,” the person said. The question, he added, is how much value will evaporate as a sale pends, with clients leaving the bank as time goes on.

SVB didn’t respond to requests for comment.