Being heavily concentrated within one sector in the economy, especially one that was always going to be open to economic shocks, made the bank very vulnerable to what ultimately happened, noted one analyst.
The collapse of Silicon Valley Bank (SVB) in the United States is a “tragedy”, said analyst James Morton on Monday (Mar 13), three days after regulators pulled the plug on the lender.
“This bank was playing a very constructive role in the venture capital industry and the venture capital industry will miss it,” the chief investment officer at Santa Lucia Asset Management told CNA’s Asia First.
He noted that the failure of the bank will have some effects.
“We won’t see too many unicorns hitting a public market in the foreseeable future. People with venture capital portfolios need to expect valuation markdowns for the next 12 months,” he said.
According to its website, SVB, a key lender for US tech start-ups since the 1980s, was founded to meet the needs of venture capitalists and innovative companies.
US regulators on Friday seized SVB’s assets after a run on deposits made it no longer tenable for the medium-sized bank to stay afloat on its own.
“The real problem here has been duration mismatch – short-term deposits, long-term assets and that doesn’t work very well if there’s a problem,” said Mr Morton.
Associate Professor Mark Humphery-Jenner from the University of New South Wales Sydney’s School of Banking and Finance described the failure of the bank as “a little bit of a slow-moving trash fire”.
Being heavily concentrated within one sector in the economy, especially one that was always going to be open to economic shocks, made the bank very vulnerable to what ultimately happened, he noted.
“SVB had a very shaky foundation, on which it built the rest of its asset portfolio, making the whole situation worse from a very precarious pedestal to begin with,” he said.
STARTUPS NOT OUT OF WOODS
Many of the startups that are SVB’s customers are not necessarily out of the woods despite the Federal Reserve and the Treasury stepping in to reassure depositors, said Assoc Prof Humphery-Jenner.
“They’ve managed to sidestep Silicon Valley going under. They’ve managed to avoid that train wreck, but they still have the economic situation they need to deal with,” he said.
These include the ongoing problems the startup tech sector is facing, such as a slowing economy, valuations declining and increased difficulty in getting enterprise level sales, he said.
Companies that were banking on venture debt to maybe get access to some trade credit are going to need to find an alternative, he added.
“There will be a lot of a cash flow crunch for some of these startups,” he said.
While the SVB situation may stoke fears of the 2008 global financial crisis, Mr Morton said this is not a “Lehman Moment”.
Lehman Brothers was strategically integrated with the interbank market and had “massive, massive derivatives, something like 27 times its capital base” and was an incredibly complicated situation, while this is a much more straightforward situation, he said.
“I don’t think the Asia Pacific should be too fussed about this. Really, there’s very little spillover effect, counterparty risk here should be minimal,” he said.
One concern, however, is making sure the 5,000 other mid-to-small banks in the US that may have adopted a similar strategy have a positive net interest margin, said Mr Morton.
VENTURE CAPITAL INDUSTRY THE “FUTURE”
Venture capitalist is a “seriously creative” sector in the financial industry, and it needs support, added Mr Morton.
“It’s the future and this is a completely different industry than private equity,” he said.
“Venture capital is creative, it’s startup, it’s employment. It’s improving services. It’s improving products, it needs support,” he said.
He added that there is an “enormous amount of unused firepower” that can be deployed.
“We need to encourage venture capital and continuously give it support and even tax breaks because that’s the future of better life for everybody on the planet,” he said.