No ‘immediate exposure risks’ to portfolio in wake of Silicon Valley Bank’s collapse, Mistral Venture Partners says

One of Ottawa’s biggest venture capital firms said Monday it “has managed to resolve all immediate exposure risks” for the eight companies in its portfolio that have relationships with Silicon Valley Bank, the California-based financial institution that collapsed last week.

In a memo to its limited partners, Mistral Venture Partners said eight of the 30 active startups in its portfolio were affected by the bank’s failure “in one way or another.” 

Mistral said it has been “working closely” with those companies since last Friday, when the Federal Deposit Insurance Corporation shut the bank down. 

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SVB’s fall marks the second-biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008. 

U.S. regulators closed the California-based bank after a bank run, where fearful depositors concerned about its solvency withdrew billions of dollars all at once. SVB had more than US$200 billion in assets. 

Over the weekend, U.S. regulators announced measures to safeguard the financial system, including a guarantee that all deposits at the bank would be honoured, even those above US$250,000, which had been the insured limit. They promised the same for Signature Bank, which regulators forced to close on Sunday.

Many of Silicon Valley’s startup tech customers and venture capitalists had far more than US$250,000 at the bank. As a result, as much as 90 per cent of Silicon Valley’s deposits were uninsured. 

Canada’s banking regulator said late Sunday that it had temporarily seized the Canadian assets of Silicon Valley Bank, while emphasizing the limited nature of the crisis and the fact that the bank doesn’t hold any commercial or individual deposits in Canada.

“This situation is the result of circumstances particular to Silicon Valley Bank in the United States,” said Superintendent of Financial Institutions Peter Routledge in a statement.

Routledge also gave notice of an intention to seek permanent control of the Canadian branch’s assets and is requesting the Attorney General of Canada apply for a winding-up order.

Mistral said early Monday that only one firm in its portfolio still had “meaningful funds” remaining in the beleaguered bank.

The Ottawa-based VC said it expects those funds to be transferred to an account at the Royal Bank of Canada “within the next 24 to 48 hours,” adding it has “no other short-term risk across the portfolio.”

In the memo, Mistral said it expects there will be “many strategic discussions” about where funds that were previously deposited at SVB will end up.

“Like several of our portfolio companies, many SVB clients were in the process of negotiating lines (of credit) and these will need to be shifted to other banks,” the memo said. “We are currently working with our portfolio companies to replace those relationships in short order.”

A number of other Ottawa-based enterprises also have relationships with SVB. 

For example, the bank participated in a US$24-million series-A funding round in 2021 for Fellow, a local startup that develops meeting-management software. Executives at Fellow did not immediately respond to requests for comment on Monday.

Another Ottawa software developer, FigBytes, raised US$14.5 million worth of funding late last year that included a $4.5-million debt facility from the bank. In an email to OBJ on Monday, the firm’s senior manager of public relations, Dwayne Weppler, said the company “would prefer not to comment on SVB at this time.”

The Business Development Bank of Canada, one the country’s largest investors in tech companies, said it is “standing by” business owners who may be affected by the SVB collapse.

“Members of the BDC team are currently reaching out to our direct and indirect clients with potential exposure, including fund managers, to better understand the impact of this news on them,” BDC said in a statement. “We will continue to monitor the situation closely and will evaluate what additional support we may offer to our clients.”

As regulators move to address the bank’s stunning collapse, analysts say there is limited fallout risk for the Canadian financial sector.

“Not only should the failure of Silicon Valley Bank not have significant negative implications for our banks, but this crisis should actually be viewed as further vindication of the Canadian banking model,” said Scotiabank analyst Meny Grauman in a client note Monday, highlighting the stability of Canada’s diversified major banks.

SVB had a heavy lending focus on emerging technology and biotech companies, which experienced massive growth during the first two years of the pandemic before the sector pulled back. Tens of thousands of tech workers have been laid off in recent months, from both large and small companies, amid the downturn.

As well, the bank’s investment portfolio was overly reliant on long-term fixed-rate bonds, which dropped in value as interest rates climbed. That scenario is not really a concern for Canadian banks, said Grauman.

“The reality is that both the largest U.S. banks and the Canadian and Latin American banks we cover have much less significant securities holdings on a relative basis.”

Canadian banks are also much less exposed to the technology sector, said National Bank analyst Gabriel Dechaine, pointing out that financial disclosures among banks that break out the sector in their reporting have exposure of between one and three per cent on their loan books.

Mistral also stressed that the Canadian banking sector remains solid.

“Regulated and well-funded, Canadian banks aren’t as fragmented into regional banks and employ more conservative lending practices,” the firm said. “This stability, combined with strong balance sheets, will continue to benefit startup companies, and by extension the investors, like Mistral, building the innovation ecosystem in Canada.”

However, Dechaine said any broader fallout in SVB’s home market of California could expose the Bank of Montreal to higher risk through its recent Bank of the West acquisition. Royal Bank of Canada also has a presence in the state from its acquisition of City National in 2015.

It’s unclear how the crisis will affect TD Bank Group’s pending acquisition of U.S. bank First Horizon, but it could allow TD to negotiate better terms, said Dechaine.

SVB’s collapse has also pushed down stock prices for numerous other financial institutions.

Those include The Charles Schwab Corp. that is down over 30 per cent since last Wednesday, of which TD owns a 12 per cent stake. Dechaine noted that every 10 per cent drop in Schwab’s share price translates into a $1.8-billion decline in TD’s stake in the company.

Meanwhile, the Bank of England and U.K. Treasury said early Monday that they had facilitated the sale of the bank’s London-based subsidiary to HSBC, Europe’s biggest bank, ensuring the security of 6.7 billion pounds (US$8.1 billion) of deposits.

– With additional reporting from the Canadian Press

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