Deposit insurance covers almost none of a fund's cash, so the operational question is whether the fund can still pay its next obligations if one bank stops paying.
Measure it as the share of the next 30 days of obligations the fund could still pay if its largest bank froze, because deposit insurance covers almost none of a fund's cash. In an illustrative manager with 94.5 per cent of 54.70 million at one bank, the cash elsewhere is 3.00 million against 31.9 million falling due: 9.4 per cent covered. Holding call proceeds in a government money market fund and splitting accounts across two banks lifts the worst case to 128.1 per cent.
Worked in full in Operational Due Diligence in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Deposit insurance is per depositor, per bank. In the US the standard limit is $250,000, and a fund partnership, a parallel fund and a management company are each one depositor. Three entities at the same bank are insured for 750,000 between them. For a private equity manager that rounds to nothing: the failure of a regional bank in 2023 showed that the practical risk for funds is not a loss of principal but days without access to cash, at the moment a closing, a capital call or a payroll falls due. Elsewhere, deposit protection is often lower or excludes funds altogether.
So the operational due diligence question is a liquidity question: if the bank holding most of the money is shut for a week, what can the fund and the manager still pay?
| Account | Bank | Balance |
|---|---|---|
| Main fund, including call proceeds for a closing | Bank A | 38.0 |
| Parallel fund | Bank A | 9.5 |
| Management company | Bank A | 4.2 |
| Main fund, second account | Bank B | 3.0 |
| Total cash | 54.70 | |
| Obligations in the next 30 days: deal closing | 30.0 | |
| Fund expenses | 1.2 | |
| Management company payroll and rent | 0.7 | |
| Total 30-day obligations | 31.9 |
The fund's subscription line is also with Bank A, so it offers no backstop if Bank A stops paying. Fund NAV is 600.
Uninsured at a bank = balance − insurance limit × number of depositor entities (each capped at its own balance)
Coverage if bank X freezes = cash held outside bank X, including money market funds ÷ obligations due in the next 30 days
Excel, balances by bank in B2:B4: =(SUM($B$2:$B$4)-B2)/Obligations for each bank, then =MIN(C2:C4) for the worst case
| Bank | Balance | Share of cash | Insured | Uninsured | Coverage if this bank freezes |
|---|---|---|---|---|---|
| Bank A | 51.70 | 94.5% | 0.75 | 50.95 | 9.4% |
| Bank B | 3.00 | 5.5% | 0.25 | 2.75 | 162.1% |
Of 54.70 of deposits, 53.70 is uninsured, 98.2 per cent. If Bank A freezes, 3.00 remains against 31.9 due: the closing fails, and the management company's 4.2, six months of its costs, is unavailable too. The exposure is only 8.6 per cent of NAV, which is why a NAV-based limit would never flag it.
| Holding | Balance | Share of cash | Uninsured | Coverage if this bank freezes |
|---|---|---|---|---|
| Government money market fund, call proceeds | 30.00 | 54.8% | ||
| Bank A: 4.0 main, 4.75 parallel, 2.1 manager | 10.85 | 19.8% | 10.10 | 137.5% |
| Bank B: 7.0 main, 4.75 parallel, 2.1 manager | 13.85 | 25.3% | 13.10 | 128.1% |
Uninsured deposits fall from 53.70 to 23.20, but that is not the improvement that matters: 93.9 per cent of what remains in banks is still uninsured. What changes is that either bank can fail and the fund still meets 128.1 per cent or more of its 30-day obligations. Because each entity can only pay its own bills, run the test by entity as well: in the worse case, Bank B frozen, the two funds still hold 38.75 against their 31.2 of closing and expenses, and the manager 2.1 against its 0.7. A government money market fund holds Treasuries and repo, not a bank deposit; it is not insured either, but its risk is different from a single bank's.
Asking the manager whether its cash is "with a top-tier bank" and stopping there. The questions that decide the outcome are how many banks hold operating accounts, whether the subscription line, the fund's accounts and the manager's payroll all sit with the same institution, and whether a second account is actually open, mandated and tested with a live payment. An unused account at Bank B with no signatories set up covers nothing. The same principle, test the practice and not the policy, applies to payment callback controls and to disaster recovery targets.
Ask for the bank-by-bank cash schedule on a date near a closing, not at quarter end. Concentration peaks when call proceeds arrive, and that is the snapshot a quarter-end report does not show.
Custody, cash controls and the manager's finances are each assessed in the book, and the free workbook for this case applies its rating approach.
Only up to the deposit insurance limit per depositor per bank, which in the US is $250,000 for each legal entity such as a fund partnership or management company. A main fund, a parallel fund and a manager at one bank are insured for 750,000 in total, so on 51.70 million of balances 98.5 per cent is uninsured. Elsewhere protection is often lower or excludes funds.
Size it to obligations, not to insurance limits. Keep enough outside the largest bank, or in a government money market fund, to meet the next 30 days of payments if that bank freezes. In the illustration holding 30.0 of call proceeds in a money market fund and splitting accounts between two banks covers at least 128.1 per cent of 31.9 of obligations.
Yes. Capital called ten days before closings, six times a year at 30.0 each, leaves an average of 4.93 million sitting in the bank across the year; called two days before, 0.99. Shorter notice periods need LPA support and reliable LP funding, but they cut the time the fund is exposed to a single bank.
This article is one calculation from Operational Due Diligence in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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