On the Fly Fundraises and Last-Minute Diligence: How Allocators Handled the SVB Crisis

Much of the predicted turmoil never came to fruition — but asset owners were ready to act.

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When news began to spread that Silicon Valley Bank was facing a bank run, asset owners went into triage mode.

As they worked to understand their exposure, allocators spent their weekends not only pulling capital calls, but also underwriting deals.

Most of the anticipated pain never came to fruition, as the Federal Deposit Insurance Corporation announced Sunday evening that it planned to make all depositors whole. But allocators were ready to act. Here’s what they had planned — and what they’re thinking now, in the wake of SVB’s failure.

“Bank runs happen,” said one public pension CIO. “They are caused by panic. Our job was to look at our direct exposure in the portfolio and to assess that. Our exposure luckily was pretty minimal.”

The CIO, like other allocators who spoke to Institutional Investor for this article, asked to remain anonymous given the sensitivity of the situation. He told II that his pension fund first focused on its equities exposure to SVB, then on its underlying venture and private equity exposure to the bank — a pattern that many allocators followed as the weekend unfolded.

Andy Lee, founder at investment firm Parallaxes Capital, said his team received a “flood” of calls from limited partners who were contacting every manager that had ever banked with SVB. Parallaxes, incidentally, had moved away from banking with the firm in 2021. “That helped assuage a lot of concern,” Lee said.

For one family office chief investment officer, the SVB crisis was eerily similar to the Lehman Brothers collapse. He was traveling, just like he had been for Lehman’s 2008 bankruptcy, and had to react to the situation on the go. The family office he works for had two capital calls scheduled to be routed through SVB on Friday — but at the last minute, his team was able to pull those calls, keeping that capital from being locked up.

An endowment CIO who spoke to II likewise had several capital calls scheduled over the next few weeks that were set to be routed through SVB. He spent Thursday and Friday canceling or rerouting those calls.

The real work began soon after. Both CIOs were presented with deal opportunities to help shore up firms that were affected by the unfolding crisis.

The family office CIO said he had seeded a venture manager that was just about to complete its first portfolio company acquisition when SVB began to go under. With little cash on hand, the manager was relying on a line of credit from SVB — only to watch it evaporate along with the bank.

The deal target began to get antsy, and it threatened to shop itself to other buyers if the venture manager couldn’t pull through. So the family office stepped in: After doing some diligence, the CIO offered “a creative warehousing structure” that would use the family office’s cash on hand to help the venture investor execute the deal. Once the venture firm was able to rectify the banking situation, the family office would get paid back.

“A family office, it’s all proprietary capital,” the CIO said. “That’s why you can act quickly.”

In the end, of course, the deal wasn’t necessary.

“Basically, we did a lot of work for nothing,” the CIO said. “It was one of those situations where it’s kind of a close relationship for us.”

It wasn’t the only last-minute deal that got cooked up over the weekend.

Members of the university endowment CIO’s team spent their weekend doing diligence on two potential deals with portfolio companies in the payments sector that were seeking emergency funding. One company in particularly piqued the endowment’s interest.

“We assembled a few people over the weekend and dug up what we could about that company,” the CIO said. “It’s a company that we haven’t met directly.”

Members of his team did what they could to get up to speed, but with commitments due on Sunday, they ultimately decided the investment wasn’t right for the endowment. According to the CIO, both potential deals included convertible preferred structures that would have relied on valuations from nine months prior.

“We weren’t seeing the valuation discipline that you’d want to see given what’s going on in the markets,” he said.

While looking at banking relationships was already a part of the endowment’s diligence process, the collapse of SVB means that allocators will place more emphasis on this type of research in the future.

“When we evaluate our relationships going forward with GPs, we will definitely look at that,” the pension CIO said. “One is always nervous about having single relationships. . . There will be a greater focus on that in our process moving forward.”