How Silicon Valley Bank's collapse is private credit investors' gain

Publish date: 2024-07-30
2023-03-14T18:55:24Z

As investors and startups scrambled to figure out their next moves in the chaos of Silicon Valley Bank's demise, it was a working weekend for Ranesh Ramanathan, an attorney who advises fund managers and their portfolio companies on taking out non-traditional loans.

By Monday, Ramanathan's team at the law firm Akin Gump Strauss Hauer & Feld had fielded between 25 and 30 calls in the past day alone, as companies and investors sought possible deals to secure new financing from outside the banking system. Much had remained uncertain for SVB customers until federal regulators announced on Sunday evening that they would bail out SVB's depositors, and it is still unclear whether SVB will find a buyer.

But something had already become clear to Ramanathan, who co-leads the firm's special situation and private credit practice and previously worked as deputy general counsel at private investment firm Bain Capital. He was witnessing a new willingness from borrowers to turn first to private credit, a market that has grown yet generally remains more opaque than its public-market counterparts.

"Borrowers used to look at these banks and say, 'Look, the banks, they've been around forever. They're stable. I can always count on the banks being there for me.' And now when something like this happens, all of a sudden the question is: 'Wait a minute. Can I? Is it really that stable?'" Ramanathan said in an interview. 

That sentiment may bode well for the so-called shadow-banking space, the loosely defined group of those private-equity and alternative asset management firms like Ares Management and Blackstone whose massive private credit businesses live outside the banking sector where traditional lenders like JPMorgan and Bank of America reign.

The sector has been criticized for a lack of transparency into deals, relative to loans made in the public market. The private lenders say that privacy is all part of the pitch. It is unclear which companies have actually struck deals with investors and secured private debt financing in recent days, but the opportunity set is there.

Zack Ellison, the founder of Applied Real Intelligence, an investment firm that specializes in venture debt, said he's been hustling to take advantage of the vast opportunity now available for alternative tech lenders.

"The last few days have been super busy, as you can imagine," said Ellison,  whose firm launched a venture debt fund last month. "On the phone or Zoom for 16 hours a day or more since Thursday night. It's all very good for us."

Money managers smell opportunity

The momentum already behind the secretive private credit space has gained steam as the SVB collapse pushes companies to consider alternate sources of debt and, on the other side, private credit managers seek out new targets.

The major private credit players Blackstone, Apollo Global Management, KKR, Ares Management, and Carlyle Group are among the investment firms evaluating SVB's $74 billion loan book for parts they might buy up, the Financial Times reported on Tuesday. Meanwhile Blackstone's hedge fund solutions business may consider buying SVB Capital, the bank's fund of funds unit, the FT reported. 

"We started seeing a huge increase in borrower inquiries from Friday on," said Nelson Chu, the founder and chief executive of Percent, a tech firm that operates a private credit marketplace and is backed by investors including venture firms Revel Partners and Recharge Capital. Chu said the inbounds included startups that held deposits with SVB and investors seeking so-called bridge financing through senior secured term loans to help startups. 

Whether regulators will propose new requirements, and how they might look, remains to be seen. Lawmakers and regulators may well start looking more critically at private lenders, too, as financing activity migrates there and the Securities and Exchange Commission makes a priority out of examining the growing private markets.

Phill Nelson, the head of asset allocation for the influential investment consultant NEPC, said a shift in regulatory frameworks for both banks and non-bank lenders such as asset managers was unlikely ahead of the 2024 US presidential election, even as greater scrutiny of the financial system would likely come following the SVB collapse. 

A possible catalyst for lenders outside the banking system

The fallout from SVB could be a chance for alternative asset managers to further entangle themselves in the tech ecosystem that has historically relied on SVB and other traditional banks for credit, said Joseph Silvia, a financial institutions attorney at Dickinson Wright, based in Chicago.

"This is an interesting opportunity for them to come into that industry and kind of show themselves off as an alternative that offers not only these specific kinds of products and lending opportunities but: 'Look, we're not a bank, so we don't have to worry about depositors running away,'" said Silvia, who previously worked as counsel to the Federal Reserve Bank of Chicago, where he focused on bank regulation and supervision. 

Ellison, the founder of Applied Real Intelligence, said that he's been talking with two startups valued at more than $1 billion over the last few weeks for loans that may come out to higher than 40% internal rates of return.

Venture lenders make loans at roughly the mid-teens, but also get warrants for an equity stake in the company. Warrants give a lender the right to purchase shares of the company at a set price. Historically, according to Ellison, that warrant might be worth 5% a year, but is more like 20-25% because startups are desperate for cash and willing to offer more warrants at lower prices.

"That's really the lever," he said, "that's driving the outsized returns."

This story was published on March 13. It was updated on March 14 to reflect new reporting on the private investment firms that are said to be interested in buying Silicon Valley Bank's loan books.

 

ncG1vNJzZmivp6x7o8HSoqWeq6Oeu7S1w56pZ5ufonyxvsivmK2dXZi%2FprDIrWSsoJGZvLh5wZqlpKGenHq0tcuimqimXauurbjEsmSbmZ6geqS7y6WYqauVYrmmusOipaBlYmV%2FdHmS