From crisis to opportunity: Navigating SVB’s collapse

The failure of SVB creates both challenges and opportunities for investors

March 24, 2023, 3:22 PM

SVB — By understanding the economic landscape, investors can generate returns even in the face of uncertainty

The collapse of Silicon Valley Bank on March 10 has shaken the financial world and sparked concerns about the stability of the global economy.

The bank, which had a staggering $212 billion in assets and boasted a clientele of some of the most powerful tech investors globally, failed with astonishing speed, forcing regulators to take it over.

The reasons behind SVB’s collapse are numerous, with one of the primary causes being an asset-liability mismatch.

The bank had purchased securities worth $100 billion in 2020 and 2021, but without hedging them. This resulted in an imbalance between the bank’s deposits and its assets, leaving it with a negative net equity position.

As outflows began to occur, SVB had to sell these securities to meet its obligations, realising significant losses. This, in turn, quickly eroded the bank’s equity until it was deemed insolvent.

However, the problem is not limited to SVB alone. The last 12 months have seen over 290 global rate hikes, and while regulators and governments may implement monetary policies to support the global economy, the effectiveness of these policies remains uncertain.

The current environment is prompting investors to consider potential risks, such as contagion and ripple effects that could spread to other areas of the market where leverage sits, leading to a large event shock similar to that witnessed with SVB.

There is also the risk of a potential slowdown in the real economy as a result of reduced spending, de-risking, increased cash holdings and mass layoffs, which could lead to lower earnings per share and equity values.

Despite these challenges, SVB’s collapse also presents several opportunities for those who are able to navigate market conditions effectively, and know where to look, and where to put their money.

It’s no secret that many early-stage tech investors could be in trouble. According to recent reports, four out of five startups are at risk of failure this year, with less than 12 months of runway on their balance sheets.

Few venture capitalists (VCs) have factored this risk into their balance sheets, which means they will need to mark their investment portfolios materially lower, which could come as a surprise to many of their limited partners.

What’s more, many early startup employees waited too long to get liquidity, and they will now be forced to look for buyers or liquidity providers at the worst possible time.

The result could be a period of unmet liquidity needs lasting six to 18 months, with even more companies facing similar challenges.

Opportunities for investors

One opportunity stems from the fact that SVB was a general liquidity provider to VCs and private tech companies.

A portion of this capital flowed to stockholders, but that capital is now gone. As a result, the market will see a significant reduction in capital availability, leading to more opportunities for investors with accessible capital.

Finally, crossover investors and family offices, among others, are now holding off on deploying capital in private markets for the remainder of 2023.

These capital sources are gone, creating an opportunity for providers who are able to deploy capital and make investments in private markets where others may not be able to.

In short, the collapse of SVB has created significant challenges for the financial industry and the wider economy, generating uncertainty and regrettable job and business losses.

However, it is expected that the repercussions from this event will be contained and short-lived in the Middle East.

Despite the difficulties, the situation also presents opportunities for investors who are able to navigate the current market conditions effectively.

By understanding the landscape and identifying potential opportunities, investors can position themselves for success and generate returns even in the face of uncertainty.

Hussain Al Alawi is founder and managing director at Noorwood Group, the Middle East partner of Goanna Capital, which invests in private companies in the global internet, software, consumer and financial technology industries