SVB had around $2.9bn worth of loans at its UK arm as of 31 December last year, according to its regulatory disclosure. Nonetheless, this was niche financing in terms of private credit - pegged to ARR not EBITDA, and focused mainly on healthcare and venture technology. HSBC has taken over the UK exposure, but the mainland Europe branches in Germany and Sweden have had no such luck.

The news provoked initial panic among niche funds within private credit. “SVB was a giant shock as we do a lot of tech lending based on ARR. We spent the [last] weekend predicting waves of distress and rescue financing, buying against deposits, lending against deposits,” said a venture debt fund manager in Europe.

“However the reality is HSBC (and the feds in the US) have brought us back from disaster,” they added.

Of course, the exit of big competitor from the market brings some opportunities, acknowledged the second venture debt fund manager. 

“The private asset class will always benefit when there’s less capital from other sources,” said a second venture debt fund manager. “In our experience the bank-related financing had lower interest rates, and typically didn’t take warrants. That downward pressure’s gone and existing customers will have to refinance soon.”

But these opportunities are small and confined to a corner of the European private debt space. “Yes, it raises questions about the tech market being able to effectively raise capital, there’s more scope for other forms of financing in credit. There’s opportunities for part of the private credit space,” said the first venture debt manager. “But its the macro spillover that’s bad for all asset classes.”

Secondary opportunities

Over the past year, macro turbulence caused [LP’s] liquid equity portfolios to fall in value while their [illiquid] private market valuations remain stable. This created the so-called denominator effect where LPs suddenly found they have grown overweight in private markets exposure.

Volatility as a result of SVB has cranked this denominator effect higher. Many funds have capital call facilities with banks such as SVB. Depending on the legal structure around the capital call facility, LPs can be asked to repay the facility resulting in further capital calls, explained the first fund manager source. 

Although HSBC is expected honour SVB’s existing capital call facilities, explained the first venture debt fund manager, that rescue source of liquidity could falter when they come up for renewal — with the shouts for those capital calls now growing louder. 

A greater number of secondary opportunities could come to market in anticipation of this. Pension funds in particular have been offering up their private markets exposure to keen buyers, sometimes in a volume as high as £5bn.

At least two household name pension funds are ridding their private markets exposure in debt and equity in secondary at the time of writing. “It was at a significant valuation,” said the secondary markets source in reference to one of the private markets lines. “We turned it down.” Although both portfolios were being shown to investors a year ahead of SVB’s demise, more are expected to follow. 

“Pensions funds want to move to buy out or buy in with an insurer or simply want to offload because of the denominator effect,” said a second secondary markets source. 

“Private market investors historically kept their funds till maturity, with turnover as part of AUM only about 1%. However, now that’s growing to 2-3% as they rebalance their portfolios,” said the first fund manager at a direct lending fund.

They explained that it was not only the denominator effect but also asset allocation changes, team changes and mergers in pension funds, riding the wave of a trend that has been building over a couple of years. 

According to financial services firm Jefferies, global secondary volume was $108bn, in 2022, making it the second biggest year on record after 2021. Out of this, LP sellers were $56bn, half were first-time sellers, and ‘most’ LP sellers sought to rebalance their portfolios given overallocation to private equity. 

Other sources of liquidity are available to funds through NAV financing, portfolio conversions or extensions, explained two further sources. In the wake of SVB, funds are expected to make full use of this. 

“There will be a greater focus on liquidity, a greater focus on NAV lines, who the lenders are, the quality of lenders and the cost of debt and the cost of fund facility and NAV lines,” said the first fund manager source. 

The short-term fallout was to companies holding deposits with SVB suddenly unable to take cash out or make payroll. Yet sources acknowledged that the intervention of government and banks has salvaged this scenario. 

On primary

A steady march of primary direct lending deals have successfully concluded last week. These include Apera’s acquisition financing for sponsor Amira Investment’s acquisition of German digital marketing software business Factor Eleven GmbH, a €500m unitranche financing backing the acquisition of drug manufacturer Unither Pharmaceuticals, by a consortium of investors including GIC, IK Partners, Keensight, Parquest and Unither's management team, and Bain Capital Credit and Apax Credit’s unitranche financing to commodities market data and analytics solutions provider Kpler.