Pre-Commitments Sting Silicon Valley Bank
A unit of Silicon Valley Bank is looking for ways out of some $200 million of private equity fund commitments, in a replay of a
situation that led to the downfall of client HRJ Capital.
The Palo Alto, Calif., group, SVB Capital, sees a secondary-market offering as its most likely option and has been showing the
package to prospective buyers. But interest so far has been tepid.
SVB committed to the funds over the past 18 months under a "warehousing" strategy, in which it would line up investments and then
raise money for a fund of funds to finance those positions - mostly interests in venture capital and growth capital vehicles. But a
brutal capital-raising environment, marked by especially weak demand for venture capital funds, kept the fund of funds from even
reaching a first close.
SVB's parent responded by taking the investments onto its balance sheet, despite the fact that regulatory-capital concerns make it
difficult for the institution to keep money in vehicles with the long lockup periods that are typical of private equity funds.
In the meantime, Silicon Valley Bank has been meeting capital calls with its own money while continuing to market the fund of funds.
It can't keep doing that forever though - hence the secondary-market offering.
The bank is facing a major snag as it changes gears: The underlying funds have called down just 20-30% of their commitments,
which is too much to assemble a primary-market fund of funds around them, but too little to draw in secondary-market buyers
without agreeing to substantial discounts. "Some people call it a late primary, some people call it an early secondary," said one
market player familiar with the offering, noting that the portfolio doesn't contain stakes in the most desirable funds. "There's no
[Kleiner Perkins] in there - no really hot funds."
Offers so far are said to be coming in around 30 cents on the dollar.
The situation marks an odd twist of fate for Silicon Valley Bank. Just a few weeks ago, the failure of fund-of-funds manager HRJ
Capital to re-pay a $68.9 million bridge loan it had taken out from Silicon Valley Bank to cover a similar "pre-commitment" strategy
partly led that firm to agree to sell itself to Capital Dynamics of Zug, Switzerland.
Like SVB, HRJ had failed to raise enough capital to cover its investments. Capital Dynamics is now assuming the obligations and funds
of the Woodside, Calif., company, which was founded in 1999 by former professional football players Harris Barton, Ronnie Lott and
Joe Montana.
Silicon Valley Bank at one point was expected to take over HRJ after it defaulted on the loan. But word has it that the bank was
hesitant to take that step because HRJ's outstanding private equity fund commitments would have compounded its own predicament.
In the robust private equity business that prevailed prior to last year's financial-market meltdown, a warehousing strategy often
helped fund-of-funds managers raise money. By identifying and committing to investments ahead of time, the vehicles' operators
could give prospective backers a direct line of sight into how their money would be put to work. Now the approach is seen as a
liability, in part reflecting declining asset values.
Many industry players have come to view HRJ's collapse as a cautionary tale of what can go wrong when money managers get too
reckless in a booming market. But SVB's predicament suggests the problem may be more widespread.