At Evergreen Gavekal Michael Johnston provides some insights into the operations of Silicon Valley Bank worth reflecting on:
Taking a step back, SVB carved out a distinct and riskier niche that catered to early-stage technology and science/healthcare companies. Venture Capital (VC) firms and their portfolio companies often turned to SVB for venture debt due to its attractive debt packages that were much cheaper than those offered by nonbank lenders. SVB was also more willing to lend to higher-risk growth companies that many traditional banking institutions would only lend to at a premium or avoided altogether.
While SVB’s lending business is attempting to stage a comeback under FDIC-controlled Silicon Valley Bridge Bank, it’s unclear whether the bank with find a buyer for its loan book. It’s also likely that traditional bank lenders will take a more conservative approach that limits venture debt exposure while the dust settles.
This uncertainty opens the door for nonbank lenders and PE firms to fill a huge void in the venture debt market. Given that capital is the lifeblood for growth companies, and many of these companies are facing a triple whammy that includes (1) depressed valuations, (2) a more challenging fundraising environment, and (3) tech’s most popular banking partner on life support, founders may be more willing to accept higher borrowing costs offered by private credit lenders. This is bullish for nonbank lenders and PE firms that were previously boxed out of venture debt opportunities by Silicon Valley Bank.
Additionally, companies will naturally gravitate to private lending companies given the heightened solvency concerns with banks and bank liabilities. Unlike banks, private credit vehicles do not have a deposit base that can just leave. This should create less competition and increase returns for private credit – whether that’s through higher cash flow, more points up front, or larger equity kickers/warrants.
I for one think that commercial banks should be prohibited from engaging in investment banking, especially as long as the federal government is underwriting all deposits in them.
“SVB was also more willing to lend to higher-risk growth companies that many traditional banking institutions would only lend to at a premium or avoided altogether.”
“I for one think that commercial banks should be prohibited from engaging in investment banking,…”
Making “standard commercial loans,” mezzanine debt loans, or equity contributions is not investment banking. (the latter two which are not appropriate for a commercial banking function.) These activities use the banks balance sheet.
Investment banks engage in 1) capital raises of equity and debt from investors, 2) in conjunction with “1,” they syndicate through their sales and trading desks to those investors , advise on mergers and acquisitions, do proprietary research, and provide wealth management services. The only time an investment bank uses its own balance sheet is when it agrees to hold unsold securities, or engages in proprietary trading.