Silicon Valley Bank (SVB) has long been an essential player in the private markets, providing lending, banking, and investment services to startups and venture funds alike.
With non-interest-bearing deposits nearly doubling from $67 billion to $126 billion in 2021, SVB was comfortable at the beginning of the COVID-19 pandemic. However, as interest rates rose, its long-term securities portfolio, which had grown to $98 billion, lost nearly $15 billion, and the bank’s interest expenses soared to absurd levels.
Furthermore, the influx of non-interest-bearing deposits slowed as startups and other customers burned cash. That caused the composition of SVB deposits to change drastically and forced the bank to replace those with higher-cost liabilities.
These factors led to SVB’s doors being closed by the California financial regulator on Friday, a stunning turn of events for a bank flying high not so long ago.
The Rise of SVB
SVB has always been a prominent lender to startups, venture funds, private equity funds, and a wealth manager to wealthy entrepreneurs. With its fund of funds investing in Accel or Sequoia Capital and investing directly in startups, the bank effectively touches every part of the private markets.
In 2021, as the venture market soared to new heights, SVB was also flying high. The bank had a commanding presence in the private markets, being the lender and banker to some half of the industry’s startup companies. Many of these startups would park their newly-won funding at SVB, then draw from it as needed.
Venture funds would borrow from SVB while waiting for limited partner dollars to hit the bank. As Silicon Valley Bank required some funds to park money as collateral for those loans, SVB was sitting pretty.
The Fall of Silicon Valley Bank
However, as interest rates rose, SVB’s long-term securities portfolio, which had grown to $98 billion, lost nearly $15 billion, and the bank’s own interest expenses soared to absurd levels.
Furthermore, the influx of non-interest-bearing deposits slowed as startups and other customers burned cash. That caused the composition of SVB deposits to change drastically and forced the bank to replace those with higher-cost liabilities.
The events of the last two and a half days also contributed to SVB’s downfall. On Wednesday, the company said it had sold its liquid securities portfolio, recognizing a $1.8 billion loss. It was trying to sell shares to garner over $2 billion in capital. The bank also revealed some updated projections: a decline of around 30% in net interest income from its 2022 outlook.
On Thursday, venture capital investors were warning their portfolio companies to withdraw funds, founders were panicking, and it sparked a good old-fashioned bank run. By mid-afternoon Friday, California regulators had closed Silicon Valley Bank, and the FDIC had taken over its operations.
Conclusion
The rise and fall of Silicon Valley Bank is a cautionary tale for the private markets. Despite being a prominent player in the industry, SVB’s fortunes quickly changed as interest rates rose and the composition of its deposits changed.
While it remains to be seen what will happen to SVB, this is a reminder that even the most successful companies are not immune to market forces.
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