How the Silicon Valley Bank Collapse Impacts Asset Managers and Owners

The recent collapse of Silicon Valley Bank (SVB) has unleashed a cascading effect on several sectors of the global economy. While the media is ablaze with opinions on who’s at fault and who should do what about it, let’s examine the impact on asset managers and asset owners and the potential operational and risk mitigation options.

The Fallout for Public Market Investments

For public market investments, the impacts appear analogous to similar events in the past. We have the resulting quagmire of ambiguous valuations not just for SVB, but also several related entities. This past week, regulators shut down Signature Bank and Moody’s Investor Service downgraded six other banks. Now, risk managers find themselves scrambling to measure their exposures to these entities and adjusting their stress-testing scenarios. Meanwhile, portfolio managers face a number of difficult investment decisions, compounded by the many compliance exceptions that will inevitably result from credit downgrades.

The Fallout for Private Market Investments

For private market investments, the impacts are less apparent. SVB served as the banker of choice for many private equity firms with billions of dollars of deposits of operational and investment cash. Regardless of federal regulators’ actions to backstop these deposits, investors in these private equity funds (limited partnerships (LPs), primarily asset owners) have been forced to temporarily put a hold on capital call requests from funds that do banking with SVB and Signature Bank until they receive clear alternate instructions. Asset owners also need to adjust their cash forecasts for potential delays in receiving distributions from the general partners (GPs).

Additionally, for many portfolio companies in the private equity funds, especially start-ups, SVB served as the banker of choice with deposits and loans, especially start-up tech firms viewed as too risky for traditional lenders. Other private lenders will surely step in, and some private equity firms like Apollo Global Management, Blackstone, and KKR are considering SVB’s loan book. However, these portfolio companies now face increased borrowing costs, potential losses, and in some cases, existential threats. As a result, some analysts believe that the fall of SVB may impact the tech industry for years to come.

It's unclear what impact these events will have on their valuations, which will not be reported by GPs until quarter end, with a lag of one quarter. Should asset owners proactively adjust any valuations downward for such impactful market events?

The Importance of Staying Flexible and Nimble

While SVB’s collapse did catch many in the industry by surprise, these events are not unique. Asset managers and asset owners with a flexible and nimble investment application and data infrastructure can respond to such events with greater agility than those struggling with manual processes. These developments present an opportunity for all firms to assess how prepared they are to address such events and at minimum, create a playbook or checklist to deal with similar situations when they occur in the future.

After witnessing the collapse of SVB and the shutdown of Signature Bank and the associated fallout, we can’t help but wonder … What’s next?

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