Silicon Valley Bank: NEPC Update

NEPC is vigilantly monitoring the fallout from the collapse of Silicon Valley Bank (SVB). In this quickly evolving situation, we are committed to being a trusted resource. The sudden and stunning failure of the U.S. bank—the largest since Washington Mutual went under in 2008—underscores our continued emphasis on prioritizing liquidity (Art of Liquidity Management and NEPC’s 2023 Annual Investment Letter).

The events of the last few days also bring to the forefront the importance of diversification through the use of different asset classes, managers and styles. At this time, we would like to remind our clients that focusing on longterm investment goals and avoiding rash, short term decisions, especially in times of crisis and chaos, are critical for long-term financial success.

We understand the magnitude of what is at stake—the financial implications and uncertainties—for the venture capital community and beyond. To that end, we will provide regular updates and guidance to the best of our abilities.

What Happened?

• SVB experienced a liquidity crisis starting Wednesday, March 8, triggered by its announcement of a concurrent asset sale and failed equity capital raise. This was followed by a run on the bank’s deposits.
• With a less diversified depositor base and concentration in the technology sector, the flight of deposits from SVB was precipitated by private market companies receiving less funding from General Partners (GPs) given the broader liquidity constraints. On Friday, March 10, the FDIC took SVB into a receivership.
• GPs we have spoken with have limited operating account or uninsured deposit exposure to SVB.
• If there is SVB exposure at the fund level, it exists with short-term credit lines (used for aggregating capital calls and cash management).
• At this time, GPs will shift focus from working capital needs to working with companies on cash management and account diversification.
• A joint statement released by the Treasury, Federal Reserve, and FDIC on March 1 stated that all deposits would be available to SVB customers and action has been taken to fully protect all depositors.

What We Expect to Happen

• GPs will halt any current wires from going to SVB and redirect to more secure institutions.
• GPs will replace SVB short-term credit lines with other providers.
• Working capital will be necessary for those portfolio companies with SVB account exposure. As a result, we believe there will be an increase in capital calls within venture.
• We think there will be a greater likelihood of fraudulent capital calls – we highly recommend operation teams thoroughly verify new account information before sending any wires.
• GPs will provide further updates on the underlying portfolio companies’ exposures.
• Liquidity will be available but it may come at a higher cost. Credit hedge fund strategies report potential loan acquisitions at <50 cents on the dollar. There likely will be rescue capital from credit hedge fund and private market GPs. This may present an interesting opportunity for some investment strategies to provide financing to quality companies. There may also be lower-quality companies with liquidity management issues unable to find financing.
• Within public equities, the S&P 500 Index will replace Silicon Valley Bank (SIVB) with Insulet Corp (PODD) on Wednesday, March 15.

A Note from NEPC’s Asset Allocation Team

• We do not believe there is a spreading insolvency risk in the banking system. Overall, banks are well capitalized. We see the recent closing of Silvergate Bank, Signature Bank, and SVB as isolated liquidity events that largely are the result of asset-liability mismatches relative to the deposit profile for each bank.
• The Federal Reserve Board announced a new Bank Term Funding Program (BTFP) to address liquidity pressures that may arise due to elevated deposit withdrawals. Under the new program, loans of up to one year will be available to banks and posted collateral will be valued at par to mitigate asset-liability risks relative to a bank’s deposit profile.
• For many of us shuddering at memories of the financial markets in 2008, we believe the market and government response to SVB being placed in receivership has been relatively healthy, reflecting a rational assessment of the risks in the financial system.
• SVB was the 15th largest bank in the U.S. ranked by deposits. Following the news of its closure on March 10, the S&P 500 and NASDAQ retreated 1.5% and 1.8%, respectively, while the response from credit markets was muted. Overall, we believe the contagion risk for the banking sector is low and the fallout from SVB’s failure will be largely contained.
• As conditions evolve in the coming days and we see a broad sell-off in credit and equity markets, we encourage investors to be prepared to step back into equity markets to rebalance exposures in line with policy targets.

Please note that it will take time to fully assess the impact of the bank’s collapse on the industry, but we will continue to send updates as we have greater clarity. Meanwhile, please do not hesitate to reach out to your NEPC consultant with any questions you may have.