by It used to be Silicon Valley’s bank of choice. Now it’s on the block.
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But instead of an overheated auction, regulators looking to sell what remains of Silicon Valley Bridge Bank so far have met with a cold reception. This past weekend, the FDIC held an auction of the SVB and was expected to announce a winning bidder on March 13th. But a single buyer failed to materialize, with major banks such as JPMorgan Chase and Bank of America apparently passing through.
Now, bids for Silicon Valley Bridge Bank and Signature Bridge Bank expire on Friday, a person familiar with the situation said.
If the FDIC fails (again) to find a white knight to buy the entire bank, it will be forced to sell it piecemeal, and that’s where private equity comes in, a group of investors the FDIC doesn’t look kindly on. Several alternative asset managers, including Blackstone, Ares and Carlyle Group, are interested in the $74 billion loan portfolio and are weighing whether or not to bid, several sources familiar with the sale process said. (Separately, Silicon Valley Bank’s parent company, SVB Financial Group, has filed for Chapter 11 protection in New York. Silicon Valley Bridge Bank is not part of the bankruptcy proceedings.)
If private equity participants are allowed to bid and are successful, the transaction would not be considered a win from the government’s point of view. Blackstone and Carlyle started out as private equity firms, typically buying majority stakes in companies, often using debt and then selling them at a profit. Many of the big PE companies went public and diversified beyond buyouts into areas such as credit, real estate and infrastructure. (Ares, by comparison, has always been a lender, but he also invests in private equity, as well as real estate and wealth management.) Now called alternative asset managers, companies would buy the SVB loans at a discount they can’t afford to lose. . price, said an acquisition executive. “I am surprised that there is not more interest [for SVB]”, said the executive.
The lawsuit is a major reversal for Silicon Valley Bank, once one of the most powerful lenders to startups. Founded in October 1983, SVB has funded nearly half of Silicon Valley’s startups. It had $209 billion in assets as of Dec. 31. More than half, or 56%, of its loans went to venture capital and private equity firms at the end of 2022, according to its annual report. SVB also pioneered the use of risky debt, which are loans to investor-backed startups, according to the company’s website. SVB served a strategically important market, which should make the bank very valuable, said the executive.. “The fact that no one is speaking out worries me that there is [SVB] loan problems”, said the executive.
The FDIC, with its SVB and Signature auction, would rather sell a bank to another bank because it cares about deposits, according to acquisitions executives. Regulators are concerned that buyers who are not regulated as bank holding companies could use the deposits to do something risky. (The Federal Reserve oversees and regulates all bank holding companies under the Federal Reserve Act of 1913.) This is one of the reasons why, after previous bank failures, the FDIC looked to other banks to buy them. For example, in 2008, JPMorgan Chase acquired Washington Mutual after it went bankrupt for $1.9 billion. JPMorgan Chase also bailed out Bear Stearns when it bought the investment bank for $10 a share in 2008 at the behest of the US government. Jamie Dimon, chairman and CEO of JP Morgan Chase, later said that he regretted buying Bear Stearns. JPMorgan Chase is not advancing this time to SVB or Signature. (On Thursday, several major banks, including JPMorgan Chase, agreed to provide $30 billion in deposits to First Republic in an attempt to rescue the creditor.)
PE companies certainly have the financial means to make a deal: Collectively, they have $1.92 trillion in dry powder, or unallocated capital, in March, according to Preqin, a data provider for the asset sector. alternatives. Private equity also has a long history of investing in financial services, including banks, but they cannot just buy large stakes right away. The Bank Holding Company Act of 1956, which gave the Federal Reserve oversight of banks, does not specifically mention private equity, but does state that a fund or company that owns 25% or more of the voting stock of a bank, or exercises a controlling influence , is a bank holding company, according to Todd Baker, a former head of strategy and corporate development at three major banks and a former partner at law firms Gibson, Dunn & Crutcher and Morrison Foerster, who teaches fintech at Columbia Law School. This means that PE firms cannot acquire more than 24.9% of a bank’s voting capital without becoming bank holding companies. If they did, it would subject the bank to burdensome activity restrictions, capital requirements, and continued oversight by the Federal Reserve, which is an “untenable position for PE companies,” Baker said.
The Bank Holding Company Act also doesn’t allow funds to “act together,” Baker said. Several private equity firms could theoretically invest in a single bank, but each would have to limit their holdings to 24.9% or less and agree to other restrictions on their influence, such as not working together, he said. “It makes no sense that PE companies don’t work together to achieve business success,” he said.
A sale of SVB loans to an alternative manager like Carlyle or a Blackstone also does not bode well for the future of SVB as a whole, the acquisition executive said. “Someone would buy wealth management, investment banking, fund of fund businesses, but commercial banking would be a very expensive start-up without loans,” said one venture officer.
Earlier this week, the board of SVB Financial Group appointed a restructuring committee to explore strategic alternatives for the SVB Capital and SVB Securities businesses, as well as other assets and investments. SVB Capital and SVB Securities are not part of the bankruptcy. Its sale generated “significant interest,” a March 17 statement said.
Private equity may not be the FDIC’s first choice for a buyer, but as the saying goes, sometimes beggars can’t be choosers.
This story was originally featured on Fortune.com
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