Silicon Valley Bank Provided Sought-After Loans for Buyout Firms

Miles Weiss and Dawn Lim, Bloomberg News

The Silicon Valley Bank logo on a laptop screen arranged in Riga, Latvia, on Friday, March 10, 2023. Panic spread across the startup world as worries about the financial health of Silicon Valley Bank, a major lender to fledgling companies, prompted Peter Thiel’s Founders Fund and other prominent venture capitalists to advise portfolio businesses to withdraw their money, even as the bank’s top executive urged calm. Photographer: Andrey Rudakov/Bloomberg , Bloomberg

(Bloomberg) -- The sudden collapse Friday of SVB Financial Group removes a key source of financing for smaller venture and private equity firms just as those loans have become harder to obtain.

The firm’s Silicon Valley Bank played an outsize role in financing funds that couldn’t access global investment banks. An under-the-radar market, the $1 trillion-dollar fund-financing industry provides leverage to fund managers to help them boost returns and grease dealmaking.

More than half of the bank’s $73.6 billion loan portfolio comprised fund financing, according to SVB’s most recent annual report. That came primarily in the form of subscription credit lines that funds could draw on to ease capital calls.

Subscription credit facilities have become a staple for private equity, allowing managers to make investments without having to repeatedly ask pensions and endowments to give up that cash. Silicon Valley Bank provided those loans to midsize firms, even as major lenders grew more cautious about issuing such debt and the financing became more expensive and harder to come by.

“It’s tougher to get deals than it has ever been,” said Zac Barnett, co-founder of Fund Finance Partners, which has offices in Chicago and Charlotte, North Carolina. “First-time funds and second-time funds are going to have a very challenging time getting subscription lines.”

The interest rates on subscription credit lines are now approaching 7%, up from 2% to 2.5% several years ago.

Moreover, many fund managers are having to settle for smaller credit lines with shorter durations. While three years was previously the standard term of a subscription credit line, banks now seek to limit the maturity to 364 days, according to Barnett. The shorter term lowers the banks’ cost in terms of regulatory capital.

On Friday, federal regulators stepped in and seized Silicon Valley Bank — making it the largest US lender to fail since 2008.

Read more: Silicon Valley Bank Swiftly Collapses After Tech Startups Flee

Private equity firms that have loan agreements with the bank have been calling other lenders to find replacement financing arrangements, according to people with knowledge of the matter.

--With assistance from Silas Brown.