By Richard Saperstein, Jerry Klein, and Daniel Beniak.
This series of blogs is part of the Treasury Partners white paper, “6 Best Practices in Corporate Cash Management – Key Actions for a Post-SVB World.”
Bundling certain financial services for cost savings or relationship purposes can make sense, but one area where it does not is in corporate cash management.
Successful corporate cash management involves outsourcing several critical functions which, although linked, have distinct roles and responsibilities.
These functions include commercial banks, investment managers and custodian banks, which are key ingredients to successful corporate cash management, but can also pose risks if not structured properly:
Corporate officers often bundle these functions together for administrative efficiency and economies of pricing.
For example, money-center or large regional banks serving as a company’s commercial bank may offer favorable terms on credit lines in return for the company funneling its excess cash to an investment manager or a liquidity product within the bank’s asset management unit.
March 16, 2023
“Silicon Valley Bank used financial sweeteners and strategic networking to attract both venture capitalists and their nascent tech companies. That strategy powered spectacular growth for decades—and left the sector extraordinarily vulnerable when the bank collapsed.
SVB, founded in 1983, offered banking services to startups that often weren’t profitable, in some cases didn’t even have a product, and would otherwise have a hard time getting a line of credit or a loan from a larger bank. Venture-capital firms banked with SVB too, often encouraging their portfolio companies to do the same.
When SVB nabbed a startup client, the bank often tried to grab all of its business, pressing borrowers to put all their deposits there, in part so the lender would have collateral for loans. The moves weren’t unique to SVB, but they helped to ingrain the bank more deeply in the venture world.
Mo Parikh, founder of software startup Bandwango, switched his company’s accounts over to SVB last year because his company wanted to get a line of credit and SVB’s terms were attractive. Bandwango took out a $1.5 million line of credit in exchange for doing all of its banking with SVB and giving the bank warrants. ‘It was a really interesting arrangement,’ Mr. Parikh said. ‘We didn’t really have to put anything up. We had to ensure that we were going to continue to keep our money with them.’
SVB’s tactics help explain not only the roots of its own crisis, but also the panic that swept through the startup world after its collapse.”https://www.wsj.com/articles/easy-loans-great-service-why-silicon-valley-loved-silicon-valley-bank-6b3f203e
Although bundling these functions can cut expenses, it also introduces potential (and unwelcome) idiosyncratic risks, such as principal risk and access risk:
Past banking crises have triggered serious issues for companies caught up in the chaos, demonstrating that these risks are very real.
When Silicon Valley Bank collapsed in March 2023, many corporate depositors faced the threat of crippling capital losses before regulators ultimately chose to guarantee depositors. Corporate investors must not rely on future bailouts.
Equally concerning, wire transfers became impossible as instructions weren’t being fulfilled. With deadlines looming, several of our clients had to ask us to wire funds – on short notice – from their investment account directly to payroll providers and various critical vendors.
March 12, 2023
“Startup investors scrambled over the weekend to help their portfolio companies meet immediate expenses and to shore up their own access to cash after Friday’s federal seizure of Silicon Valley Bank made some money inaccessible.
Venture-capital giant Andreessen Horowitz said it was helping founders of startups it has invested in find new banks and identify financing alternatives. Other venture leaders also said they were funding payroll for now at their portfolio companies that didn’t move cash out of SVB before it was taken over by the Federal Deposit Insurance Corp. Friday morning…
Even as executives at companies that relied on Silicon Valley Bank raced over the weekend to get access to cash, some were rethinking the wisdom of having entrusted so much of their finances to a single institution. ‘You learn some hard lessons in times like this,’ said Sara Mauskopf, CEO and co-founder of Winnie, a startup that operates a child-care marketplace.
Cameron Sepah, chief executive of consumer telemedicine startup Maximus, said SVB was the company’s primary bank. On Thursday night, Dr. Sepah attempted to pull out all but $250,000 of the millions of dollars Maximus had with SVB, but the transfers never went through. ‘We have to open up new bank accounts, new credit cards, switch everything over’ said Dr. Sepah. “Probably every day we owe someone something.”
Maximus has been told they might have access to $250,000 by Monday, that about half of their money could be available by the end of the week and that they could get the rest back in three to six months, Dr. Sepah said. The most immediate need is cash for payroll—Dr. Sepah said he would cover that with his personal funds next week if he has to, and he will consider bridge loans if the timeline to access the funds gets pushed back further.”https://www.wsj.com/articles/investors-startups-work-to-find-cash-lifelines-after-silicon-valley-bank-collapse-1b7c9ceb?mod=article_inline
These issues can all be meaningfully mitigated with basic risk management measures. In our three decades of experience, best practices generally call for each of the three critical roles – commercial banking, investment management, and custodial banking – to be performed by unaffiliated financial institutions.
Here’s a simple rule of thumb: avoid having a single institution manage two or more of these critical access-to-capital
Moreover, institutions with larger portfolios can even consider increasing the total number of commercial banking and investment management relationships:
More vendors may translate into marginally higher incremental costs in both fees and complexity (e.g., administrative time, reporting, etc.). However, the reward is greater insulation from idiosyncratic risks from any single institution’s troubles.
For over 30 years, Treasury Partners has been providing customized corporate cash management services to pre- and post-IPO companies, VCs, and Fortune 500 firms. Treasury Partners is affiliated with Hightower Advisors, a Registered Investment Advisor, the firm’s 29 team members provide outsourced investment solutions focused on the priorities of safety, liquidity, and yield. Treasury Partners Founder and Chief Investment Officer Richard Saperstein has been named to the Barron’s Top 100 Financial Advisors list for 20 consecutive years.
For access to the full white paper, “6 Best Practices in Corporate Cash Management – Key Actions for a Post-SVB World,”