SVB was in the business of lending to VCs, not companies, with a trick that boosted their returns. It was not a lucrative business and that created challenges.
From his base in Boston, Jesse Hurley cultivated the relationships that helped fuel Silicon Valley Bank’s stunning rise. He negotiated deals with thousands of venture capital and private equity firms that invested in everything from experimental medicines to artificial intelligence with checks ranging from $5 million to more than $30 million.
“We are probably one of the largest fund finance practices in the world … to still fly under the radar has been surreal,” Hurley said in a 2021 podcast. “This organization is just so supportive of this business and is really all-in on fund financing.” A decade ago, SVB held $1.7 billion of fund subscription line loans, representing 19% of its total loan portfolio, Securities & Exchange Commission filings show. By the end of 2022, the bank was holding $41.3 billion of these loans on its books, making up 56% of its total book. SVB created a new business segment, global fund banking, to manage its subscription lines with Hurley in charge.
To understand the business SVB was really in, you need to understand the business of its main lending clients: venture capital and private equity firms, not the companies they backed. These investors raise money from pension funds, endowments and rich people to invest in companies for several years. The better the venture firms’ financial returns, the easier it is to entice investors to cough up more money the next time they go out to raise a new fund.
At big Wall Street banks, subscription lines are viewed as a loss leader, a way for banks to get their hooks into private equity firms that will later bring more lucrative business, like the big loans associated with leveraged buyouts.
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