HSBC’s Silicon Valley implant makes sense
The bank’s rescue of the tech-focused lender is a logical step in the bank’s global push to embrace growth companies
The collapse of Silicon Valley Bank may not have yet proved to be a Lehman Brothers’ moment but HSBC has snapped up the tech-focused lender’s UK arm at that sort of price — just £1, the same that Barclays paid for the stricken US shop’s North American investment banking business. The deal won’t prove as transformational to HSBC as it did when its UK rival bought a foothold on Wall Street in 2008. Nor is there’s not the same obsession with growth companies as there was in 2020 when firms were falling over each other to bank the latest start-up. But HSBC’s move is more significant than simply rescuing SVB’s depositors and underlines that, while technology companies have fallen out of favour, they remain the companies that big banks covet most.
Anna Cross, Barclays chief financial officer, was keen to point to the bank’s support of early-stage technology companies by talking up its UK Eagle Labs initiative, before swiftly underlining its loftier ambitions. “The [other] opportunity for us is in terms of building our ECM and M&A business," she told told Morgan Stanley’s European financials conference on March Tuesday. "Where we’ve sought to grow is precisely in healthcare, in technology, in bio-pharma where we’ve sought to gain clients and recruit bankers. The current environment may offer some opportunity for us in that space organically and I hope it does. We’ll definitely be alert to it.”
Cross’s rhetorical leap from talking about its work with early stage entrepreneurs to hiring bankers capable of steering a big M&A deals underlines the conviction that today’s start-ups are the global behemoths of the future. Over the last 20 years this is how JP Morgan, Morgan Stanley and Goldman Sachs have built a dominant position. By covering technology companies from an early stage, helping them to grow, then bringing the full suite of investment banking products to bear by working on initial public offerings for the likes of Facebook and Twitter, this trio of banks now owns the sector when it comes to corporate finance business.
This is why HSBC’s CEO Noel Quinn talked up the potential of the SVB UK deal. After spending the weekend thrashing out a deal in talks with the UK government and its advisers, Quinn clinched a deal at 3am on Monday before markets reopened. “This acquisition makes excellent strategic sense for our business in the UK," he said in a statement. "It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”
As at March 10, SVB UK, which will move into HSBC’s ring-fenced bank, had loans of around £5.5bn, deposits of around £6.7bn and tangible equity is expected to be around £1.4bn. For the financial year ending December 31, 2022, SVB UK recorded a profit before tax of £88m.
In terms of scale this barely seems relevant to HSBC’s global banking and markets division, but in fact the rescue of SVB’s UK arm plays into a strategy that that the bank has been pursuing for more than three years and which drew inspiration from SVB itself and has its roots on the US West Coast.
HSBC’s investment banking strategy in North America focuses on companies with international operations and aspirations — the bank knew it was coming to the party late. “SVB was the only bank that lent to these companies in their its early stages, one senior banker told GlobalCapital. "By the time these companies moved on to an international footing we faced stiff competition from big US banks and had already missed the boat."
HSBC’s solution was to establish HSBC Ventures, a West Coast-based business dedicated to provide early-stage lending and debt financing to private companies. Launched in 2020, it is led by Martin Richards, a then San Francisco-based banker, who has now relocated to London to globalise the business, and has more than $1bn of balance sheet firepower the bank provides.
HSBC Ventures adopts a ‘funder and founder’ coverage strategy and lends to venture capital-backed companies, copying the model pioneered by SVB but with the added advantage of having HSBC’s global reach and product range. It also provides revolving creditfacilities where traditional early-stage funders offered mostly term loans, offering clients greater flexibility.
It served as a way for HSBC to cover start-ups before they became big and JP Morgan started covering them. The tight knit team operates like an autonomous unit and as such can move fast. “We have a quick approval process,” one source said.
HSBC Ventures specialises in loans of $20m-$50m but it has offered them as small as $9m, which it provided to Global Shares, an Irish fintech company which was acquired last year by JP Morgan for $730m.
This was evidence that HSBC Ventures has international aspirations and it is now active in offering funding to venture capitalists and entrepreneurs in Europe and Asia. The UK is its next biggest market after the US and it has also funded deals in France, Germany, Spain and Sweden. The unit also ties in with HSBC’s global sustainable finance group, which Richards runs in addition to his job as president of HSBC Ventures. Last year HSBC Ventures earmarked $250m of its for companies looking to develop solutions to tackling climate change.
The challenge is to be able to follow through on the early-stage promise. Not just the companies themselves, but HSBC in ensuring it takes a joined up approach to coverage. The bank divides its clients according to size. In the UK, its commercial banking clients, which are companies with revenues of up to $5bn sit within the ring-fenced bank. Any company bigger than that is served by its global banking and markets division. The ethos for establishing HSBC Ventures is to spot future winners early, and develop enduring relationships so that HSBC can follow their development from start-up to global behemoth. Joining the dots is no easy feat. As an early test case, HSBC did not secure a role on the sale of Global Shares to JP Morgan.
But Quinn’s claim is no idle boast to justify a deal; the acquisition of SVB’s UK arm complements its strategy. Some suggest that HSBC, by nature a conservative institution, took a gamble in buying SVB UK with limited due diligence, but its patient progress with HSBC Ventures shows this is no flash in the pan.
From unicorn chasing to cherry-picking
Now, as Cross suggested, the focus will turn to whether rivals will look to scoop up assets or people from the remainder of SVB, which was headquartered in California.
The Federal Deposit Insurance Corporation has hired Centerview Partners, the boutique investment bank that is rapidly becoming the go-to adviser on restructurings, to explore a sale of SVB, including SVB Securities, the investment banking and capital markets business.
SVB Securities said in a statement that it was unaffected by the collapse because it is operationally independent, but it remains an opportunity for bigger rivals who are engaged in the hard slog to win market share of fast-growth tech companies.
The defunct lender's securities arm grew through a series of acquisitions as well as making hires from bigger rivals. In 2021, it hired a team from UBS, including Jason Auberbach, who is global head of investment banking and global head of technology investment banking. Overall, SVBS has around 100 staff in its technology investment banking team, including equity research. But in investment banking terms it’s a minnow, ranked 81st by corporate finance fees globally in 2022, according to Refinitiv.
“The timing’s not great,” said one banker. “Investment banks lost a lot of money in their technology investment banking businesses last year but if you take a long-term view, this might be an opportunity.”
Like Cross, ask any banking executive what their hiring priorities in investment banking are and they will talk of bolstering their coverage in healthcare and technology.
In this highly competitive area of the market, rivals may be keen to point out that Goldman was lead adviser to SVB on its bungled attempt to raise capital before its collapse, while its markets business is said to have bought the bond portfolio that SVB off-loaded at a loss.
Preserving the status quo
But overall the damage appears to have been contained, as governments on both sides of the Atlantic adopted the crisis-era playbook. Unlike the UK government, the FDIC failed to find a buyer for SVB over the weekend, with regional lender PNC and the Royal Bank of Canada among those pulling out because of the risks and complexities involved.
Instead, prospective suitors will look to cherry-pick and it’s no surprise that private equity firms, which have become the de facto buyers of financial assets, are circling. Blackstone Group, Apollo Global Management, KKR, Ares Management and Carlyle Group are said to be running the rule over SVB’s $74bn loan book for pieces that might fit into their credit portfolios,
Marc Rowan, co-founder and CEO of Apollo, which acquired the securitized products group of Credit Suisse, told analysts at the company’s results in February: “Everything that was once a on a bank balance sheet is now an investment product.”
A consequence of SVB’s collapse could be a further strengthening of the non-bank financial sector, while global banks will benefit from deposit flight, and also pick-off staff. Meanwhile, the FDIC will likely tighten regulations in the regional banking sector. This does not appear to be a crisis that will damage the status quo in global investment banking. But HSBC deserves praise for moving quickly and showing ambition.