Evening Brief – 03.24.23

The jury is still deliberating about how much success emergency liquidity and government backstops have had on the banking sector. The trouble at Credit Suisse, and now Deutsche Bank, has contributed to more pressure on the system. On Friday, Deutsche Bank’s 5-year credit default swaps widened to levels exceeding the bank’s near-collapse in 2016 and are about to take out the Covid high of 600bps.

The banking situation will remain fluid, and while it’s too soon to draw a concrete conclusion, nonbank lenders and private equity (PE) firms seem ready to pounce on the venture debt market share in the wake of Silicon Valley Bank’s (SVB) collapse.

Venture capital firms and their portfolio companies often banked with SVB for venture debt due to its enticing packages that were much cheaper than those offered by nonbank lenders. SVB was also more willing to lend to startup companies that many traditional banks would only lend to at a premium or simply avoided.

It’s also likely that traditional bank lenders will take a more conservative approach that limits venture debt exposure until there is more clarity in the system. But this uncertainty provides an opening for nonbank lenders and PE firms to fill a void in the venture debt space.

Given high-growth companies need capital, and many of these companies are facing depressed valuations, a challenging fundraising environment, and tech’s banking partner flatlined, founders may be more willing to accept higher borrowing costs offered by private credit lenders.

This is bullish for nonbank lenders and PE firms that were previously blocked from venture debt opportunities by SVB. Moreover, companies will likely do business with private lending companies given bank solvency concerns.