Bank runs only exist if you believe in them. In other words, bank runs are narratively driven. Unfortunately that narrative appears to have taken hold of SIVB (SVB Financial Group, commonly referred to as SVB or Silicon Valley Bank). Trading is halted while they seek a buyer, and as this post was being published, California regulators have closed the bank (as of about 12:30pm 3/10/2023). What story should SIVB tell to be allowed to reopen? What would a potential rescuing acquirer want to hear?
First, the basics of the Silicon Valley Bank model, according to a former SIVB private banker.
“SVB tended to be on the front end of more aggressive funding. We tend to look at Fund I’s where other companies won’t even look at lending the Fund I
The way the SVB typically works is they’ll go into a company, let’s say a venture capital fund has infused $10 million of capital, SVB goes in and does their own underwrite, but we are really a follow-on round. Oftentimes we’re lending the same amount as the venture capital fund did.
After that’s all said and done, then C-suite gets referred over to private bank, because we know that the time has now started. The clock has now started for, let’s say, a two-year out event or a three-year out event because of the typical turnaround of a portco within this current venture fund.”
The path of “underwrite VC deals -> make loans to executives of those VC deals -> model inflows in 2-3 years -> all VC inflows stop -> not enough deposits” seems like a problem, but that’s not how it works. The investment side is different from the banking side (at least it’s supposed to be. We don’t know the full story yet). This is probably a classic liquidity crisis, a mismatch between long-term assets and short-term outflows (note: in this particular case, it appears to be high ownership of long-term fixed rate bonds, ie assets that go down in value when interest rates go up), but how did that happen? SIVB is run by very smart and experienced VC financiers, and they would not make a mistake like that. At least not usually. Was there anything unusual going on at SIVB?
SIVB’s recent acquisitions: Leerink and Boston Private.
Per this same former SVB banker, the Leerink acquisition was a straightforward healthcare bolt-on, but the Boston Private acquisition changed the culture…
“With the Boston Private acquisition and prior to that, Leerink, those were two very expensive acquisitions in some ways. Leerink is healthcare-focused. Boston Private was a company that has had a completely different culture, focus, and way of operating. Leerink was a bolt-on. Boston Private was a full acquisition.
While Leerink has been able to keep a lot of its culture, and in a lot of ways, it is almost like a sidecar, Boston Private infiltrated the private bank in a pretty significant way, culture shifted, and the way that they do business significantly shifted. Some would like to venture to say that maybe was not the best decision. It was a very expensive decision and there was a lot of risk that was taken, and we’ve yet to see how that shakes out.
Boston Private focused on manufacturing, lawyers, kind of professions that SVB has never focused on. To be a part of the private bank at SVB, you had to be in the innovation sector, and we, as private bank employees, had to actually verify that. SVB was mostly interested in working with innovation sector who are on a trajectory of having a $10 million net worth or more within three years… Part of the secret sauce of SVB is that we would get in at seed start-up, Series A, Series B with founders or investors and be there when the significant exit happened. We would invest the assets because we were the trusted source before any of the wealth had been really made real for people.
With Boston Private, they’re essentially just a blue-blooded northeast, broad-focused investment advisory firm that was very traditional. There was almost no technology clients at Boston Private. There was a steep learning curve. Some advisors were interested in learning, others had no interest. That was particularly challenging because that was really the focus of our client book.”
This is just one data point, and from the SVB perspective (a Boston Private banker would likely dispute this!), but this is a reasonable story to tell a buyer. “We bought a company that we thought would be a good fit, but we were wrong. Integration challenges distracted us from the basics of our business. Our fundamental business model is still sound.” That’s a totally reasonable story. That sounds like the kind of story that Warren Buffett would like.
For potential rescuers, here are a couple of points in SIVB’s favor.
“The strength is definitely the people. The relationship, that’s the main strength of the bank by far because the competitors like Mercury bank and Azlo and other digital banks that are digital-first, but they’re still made for start-ups. At the end of the day, when you’re a start-up and you need to raise money and you’re burning money, you really need to be able to talk to a human being. The relationship side of SVB is hands down the main benefit.”
–Former Silicon Valley Bank – Vice President, Southwest
“One part of the business is underestimated and underappreciated in public markets. The banks that I was working with when I was issuing ABS or high yield debt just make their money on like two, five points on transaction fees and they call it a day then you move on. For SVB, every single transaction that you do, you take a portion of the company in the form of warrants. If you’re holding that off for 10 years and you own 70% of the space then you’ve got a pretty solid exit all around and you’re able to monetize all the warrants. That’s a very big uptake.”
–Former Silicon Valley Bank – Vice President, Asset Backed Lending
On the one hand, it’s reasonable to question the expected value of those warrants in a post-ZIRP world, but on the other hand, accounting rules obscuring a huge payoff in ten years sounds exactly like a Warren Buffett situation. The flip side of that: this is very tough situation for SIVB.
This blogger wishes the best of luck to SIVB, its clients and its investors in getting through this.
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Austin’s primary experience is in consulting and private equity, though he’s also a published author.
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