Alex H: Alright, welcome to the GP Fund Solutions podcast. This episode is focused on the treasury function and particularly the landscape post 2023 banking crisis. I am your host Alex Huebner, Associate Director of the treasury team here at GP Fund Solutions. And I have Ray on the phone as well.

Ray C: Welcome, everyone. Thank you for joining.

Alex H: So, quick intro. I'm the Associate Director on the treasury team.

I've been with the company for about three years joined in about 2021. My previous experience was in the banking industry, most recently doing some compliance work at a small regional bank, but I also have worked at large national bank as well. Ray, do you want to give a quick background?

Ray C: Thanks, Alex. My name is Ray Caouette. I am the manager here on the treasury team.

Similar to Alex, I got my start in retail banking and then shifted into private equity fund administration in 2018.

I've been with GP Fund Solutions for the last two and a half years and enjoying it very much.

Alex H: That's great. So like we said a lot has happened since the banking crisis in 2023 and we'll do a quick summary of that and how our client's behavior has changed since then, and how they're kind of viewing the treasury function and their banking relationships overall.

We'll also touch on some of the enhancements we're making from a technology perspective to kind of move the business forward because of the higher demand on the treasury function.

So, Ray, do you want to give us a quick synopsis of what happened in 2023 during that banking crisis?

Ray C: Thanks, Alex. I'll keep this as an abbreviated summary so we can focus on some of the other main points within the podcast.

Let's first discuss the pre-COVID economic landscape of low interest rates. This led to high deposits at banks such as Silicon Valley and First Republic that had favorable terms.

In return, these banks invested in long term bonds, and this is kind of where the downfall began. As COVID hit, this led to a high amount of cash burn coupled with increased interest rates to help fight inflation.

These long term bonds lost their value. And as that happened, SVB unsuccessfully tried to unload these bonds, which then caused panic amongst their depositors and investors and led to the bank run that we saw in March of 2023.

Alex H: Yeah. It was kind of a wild time. The cash that the banks had on hand had to be invested in something. And so the kind of default mechanism were these long term bonds and once COVID hit and that cash burn started to happen because there was less money flowing into these companies and they were burning through cash, the bank needed to sell some of these bonds and because of the increased interest rates, because the Fed was raising the rate to fight inflation, they couldn't unload them because nobody wanted them.

So yeah the bank run was tough because they were kind of consolidated in this industry and this industry is hyper aware of macroeconomic issues and they saw these writing on the wall and they all decided to jump ship on the same weekend which was March 10th of 2023 which anecdotally was about exactly a year before my daughter was born so I have this like permanent memory into my mind of, the bank crisis, which is which is terrible. But, anyways, talk about the current ownership of these banking institutions that kind of failed? What what happened to them post banking crisis?

Ray C: Yeah. So what we saw happen with Silicon Valley Bank was they were acquired by First Citizens, and they are kind of operating business as usual. Right? So Silicon Valley Bank is still operating on the same platform.

The bankers that we're dealing with, the relationship managers are pretty much the same. So there's been a little bit less, I guess, interruption with that, transition.

What we saw happen with First Republic Bank, they were auctioned off to JPMorgan Chase.

And Memorial Day weekend, we saw the actual formal transition and merger of these two banks. And I guess the biggest difference is, the First Republic platform is no longer operational. Right? So everything is being done and migrated to JPMorgan, which has been a very large lift for their team and all other, you know, private equity fund administrators, I'm sure.

Alex H: Yeah. It's easy to deal with SVB still because it's a subsidiary of First Citizens but that bank merger that occurred on Memorial Day weekend 2024 so about a year after the banking crisis was very disruptive and we'll kind of get into that more later in the podcast. But, yes, they're still kind of operating and we do see clients still staying with those institutions in some form or another but there has been quite a few changes.

So I'll kind of go through how our clients reacted that weekend and how they're behaving differently now.

So during that weekend there was a bank run, so what did that look like?

Everybody was trying to move their money out of SVB. There is an FDIC loan of 250,000 and anything in excess of that was at risk of being lost.

Every depositor at any bank institution of the United States is covered up to 250,000, and anything above that could be lost if a bank fails.

If a bank fails, it will go into receivership, they'll auction off all the assets. And in a year, two years, five years, you may get a portion of your balances back. But for all intents and purposes, you can kind of consider anything over 250,000 as lost. So there was panic.

They were trying to move money outside of that bank and they had nowhere to send it to because they only had one bank. They needed to move it to a like titled account, and they didn't have that at a different bank. So since the banking crisis, we've seen all of our clients, mostly all of our clients, open up what we call redundant bank accounts at a larger, what we call too big to fail banking institutions. This is a a bank that it would be viewed as a huge impact on the kind of macroeconomic environment of the United States if they were to fail.

So they would be bailed out by the government, and so they are kind of deemed to be the safe harbor and a safe place to put your cash. So all of our clients are opening accounts at these institutions in case something happens, they can move their money there. And they're doing that because of pressure from their investors. When their investors send them money they are the custodians of that cash.

If something should happen to that money it's lost and the PE firm or venture firm will not be able to recoup those funds easily and the operations will kind of really have huge disruptions.

So similar to other cash controls we have within treasury to make sure funds don't move inappropriately or fraudulently the investors are really focused on the cash controls and the counterparty risk of the institutions that their PE firms are banking with. So our clients have dug into the balance sheets of banks that they've never done before to make sure that they are strong and that they are liquid and there's not risk of receivership and failure so they are being good fiduciaries and custodians of their investors' cash. Another repercussion was the lending environment changed quite a bit post banking crisis. The credit market tightened quite a bit because the banks were not doing well, and they were not willing to lend as much money at what they viewed as kind of riskier terms. So the availability of some of the lending products that our clients used became less available and at less favorable rates in terms. So there was higher fees and higher interest rate.

So they are less inclined to use those products and go different routes in managing their cash flow because of the less favorable terms available to them in those lending products.

Ray, do you want to add anything on that topic around due diligence questionnaires, from the investors or any other thoughts there?

Ray C: Yeah. I've certainly been spending more of my time doing bank paperwork lately. That's for sure.

Ray C: One thing that you touched on, Alex, that I think was really important was the FDIC limit and some of the options that our clients are utilizing, products such as sweeps and off balance sheet options. So I wanted to quickly discuss how these sweeps work. So, essentially, at the end of the day, any balance exceeding that $250,000 will be sent to another or multiple other bank accounts.

And banks are also letting clients, you know, send those sweep funds to mutual funds and other government backed bonds that are very secure.

Alex H: Yeah. The Insured Cash Sweep product is really interesting because they allow you to transfer in $250,000 chunks to other FDIC insured banks. So if you have a million dollars of the account, they're go identify three other banks to send the 750,000 that's over the 250,000 at that bank and deposit it at those banks so you have full FDIC insurance coverage. It was a very popular product when the banks were looking less solvent. And then the other options are great too because you can also get a better yield from investing in these kind of mutual funds that you were talking about: index funds, borrower backed by the treasury or government backed bonds so they're kind of viewed to be very safe similar to being in a FDIC insured bank.

Ray C: Yeah. It's been a big change. Previously, when I first started in fund administration with Silicon Valley Bank, I could request a new bank account at 9:00 AM, have one piece of documentation signed, and by 12:00 PM, I would have a bank account that I could send out and put on capital call notices.

And that timeline has just changed drastically. We're seeing it take anywhere from three to five days for an existing relationship and sometimes even up to two weeks for a new relationship to get these bank accounts opened. I think that just even plays more on the importance of having a strong fund administrator that has a, you know, good treasury team that can help facilitate these multiple bank relationships and really uphold that white glove service that our clients are used to with Silicon Valley Bank and First Republic.

Alex H: Yeah. It's a great point. And I think a big indicator of that or a kind of example of that was the First Republic Bank to JPM bank merger that occurred Memorial Day weekend. So JPMorgan has owned First Republic for over a year, but they decided to merge systems Memorial Day weekend.

And that didn't go well, essentially. The service that they were receiving at First Republic is completely different now that they're at JPMorgan. The systems aren't working as well. They can't pick up the phone and talk to a banker like they used to.

So it's really impacted their day-to-day. And, you know, like you talked about the timeline of opening an account. If you're needing to fund a capital call or populate a capital call notice because you're funding a deal, you sometimes don't have two or three days to wait for an account number to populate on that notice. So it's been a bit of a disruption with how our clients are interacting with their banking partners.

And like you said, that's just enhancing the focus on the treasury function at the fund admin level and making us, you know, much more under the microscope and more demand for our clients to make sure this process is running smoothly.

Our clients don't want be worrying about the treasury function of their operations. It was previously viewed as kind of not something they had to worry about too much because it was so easy. But now because of this disruption and the lack of service they're receiving from these large banking partners, our team has had a lot more demand on it to be able to bridge the gap and allow that white glove service to continue to happen. Essentially, we're the white glove service right now. Right, Ray?

Ray C: Yeah. That's definitely right. I think this also has led to an increased use of technology within the treasury field as well, so the use of treasury management systems to help have a single log on point for all your bank relationships and being able to review your balances across multiple banks, have live data that can help you make decisions to help drive your fund forward is really important, and having accurate data that you can rely on is very important to help make decisions.

Alex H: Yeah. Investment in technology is critical for a lot of our clients' job functions and treasuries is that's true as well.

We've focused on that and we got a project currently to make it a lot easier to make that experience with treasury a lot cleaner and smoother.

Ray, what do you think our treasury function will look like over the next 12 to 18 months?

Ray C: I would just say that, you know, we're continuing to have strategic conversations with our clients on how to kind of structure their bank relationships. And that piece of it is only going to continue as we move forward. That enhanced due diligence and the importance of selecting a good banking partner is going to definitely have an increased value moving forward.

Alex H: And there are a lot of new banks that are coming into the space because of this void that's been created from SVB and FRB kind of exiting the space. You know, JPM, where everybody has migrated to, may not be best suited to service this industry moving forward. So, there could be a shift in the banks that we're dealing with, but ultimately we're still going to have a lot more banks that we're going to be interacting with than we used to. It used to just be a handful of banks that we had to deal with and we knew their operations well but all of our clients are going to kind of go in different directions as they are pulled and develop relationships with different bankers. And so we have to be kind of nimble in being able to interact and deal with those different bankers and situations.

But, yeah, there's a lot of interesting new banks that have come on the scene to kind of service this industry that you had never heard of before now, but it's kind of an interesting landscape moving forward.

Thanks everybody for joining, it was a great conversation. Ray, appreciate your insight and, until next time.

Ray C: Thanks for having me.