28 Mar 2023
Portfolio Manager Richard Clode discusses the collapse of SVB and the likely implications for the technology sector.
There are idiosyncratic and systemic issues evident in the demise of Silicon Valley Bank (SVB). Systemically, a decade plus of very low rates followed by a very steep rate-hiking cycle has exposed some of the practices financial market participants were using to ‘juice’ returns, whether that be UK pension funds late last year, or now SVB. No doubt more practices will be exposed but it is reassuring that regulators and governments have learnt lessons from the Global Financial Crisis (GFC) and are acting quickly and decisively to reassure markets and depositors.
Idiosyncratically, banks like SVB, Silvergate and Signature all had very concentrated and fast-growing deposit bases driven by private equity/venture capital and crypto respectively. These banks have been exposed by those deposits now being run down and the mismatch to their long-dated mortgage-backed securities (MBS) exposure means they took a big hit during the US Federal Reserve’s rate-hiking cycle. This is very different to the GFC scenario, and some of the reforms post GFC are protecting the large banks. It is concerning that we are seeing these issues so early in the rate-hiking cycle, before any recession hits, and we would expect tighter financial conditions as a result of this bailout.
While SVB was a relatively small bank, there may be implications from some of its outsized exposure to solar financing, with California a key market; this is an area that we are monitoring.
More broadly within the tech sector, the impact is likely to be limited to publicly-listed companies but has the potential to have a significant impact on private companies, many of whom held large parts of their funding at SVB. This could accelerate the pivot in focus to profits and positive cash flow after a decade plus of companies focusing on ‘growth at all costs’, resulting in cash burn and losses. We see the next market cycle as returning to fundamentals and delineating between the ‘haves’ and ‘have nots’.
We continue to highlight the discrepancy between the reset in public technology valuations versus private, the latter having been much slower to take the required write downs. The collapse of SVB likely accelerates that process and we continue to view publicly-listed technology companies relative to unlisted as being much more attractive in valuation terms. Investors should also be aware that many technology funds have private exposure that has yet to be properly marked-to-market, which may impact their valuations.
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