SVB Implosion Could Blow Half-Billion-Dollar Hole in VC Sector as Valuations Become More Clear
Venture capital (VC) firms should prepare for a whole new level of scrutiny in the wake of the Silicon Valley Bank (SVB) implosion, market watchers say, a likely outcome of which will be a trimming of current valuations by up to a half trillion dollars.
According to a March 24 Bloomberg Intelligence report, “The $2 trillion venture capital industry could see portfolio markdowns of 25% to 30% — a ‘haircut’ of possibly $500 billion — following the Silicon Valley Bank debacle.”
Bloomberg Intelligence analyst Gaurav Patankar wrote that “After the failure of SVB, we expect greater valuation scrutiny and disclosure, especially as a large chunk of ‘fiduciary’ capital from pension funds has flowed into these markets — and unlike endowments and family offices, there are no avenues to extend and pretend.”
Patankar took specific aim at “extend” and “pretend” strategies employed in some quarters of the VC ecosystem in which investment firms “hold on to assets or prop up capital to avoid true price discovery.”
He cited examples, including net asset value loans “that let general partners borrow against a pool of portfolio companies within a fund, GP-led secondary structures where a fund sponsor sells one or more assets from a fund it already manages to a new fund, and alternative financing via private credit.”
Patankar explained that such strategies “delay” and “deny” what he termed as the untenable and unrealistic nature of certain venture valuations, at least up until the SVB collapse and its eerie similarities to previous banking fiascos where true valuations were difficult to determine.
“There are enough zombie companies with frothy valuations that need restructuring, price discovery and of course re-tooling of their business models to a world of tighter credit, subdued revenue and higher rates,” Patankar said.
Meanwhile, First Citizens Bank, a North Carolina lender with a long history of purchasing failed banks, announced Monday (March 27) that it was assuming ownership of all of Silicon Valley Bank (SVB's) loans and assets.