SVB Collapse Could Mean a $500 Billion Venture Capital ‘Haircut’

Diana Li, Bloomberg News

Signage at a Silicon Valley Bank branch in San Francisco, California, US, on Monday, March 13, 2023. The collapse of Silicon Valley Bank has prompted a global reckoning at venture capital and private equity firms, which found themselves suddenly exposed all together to the tech industry's money machine. Photographer: David Paul Morris/Bloomberg , Bloomberg

(Bloomberg) -- The $2 trillion venture capital industry could see portfolio markdowns of 25% to 30% — a “haircut” of possibly $500 billion — following the Silicon Valley Bank debacle, according to Bloomberg Intelligence.

“After the failure of SVB, we expect greater valuation scrutiny and disclosure, especially as a large chunk of ‘fiduciary’ capital from pension funds has flowed into these markets — and unlike endowments and family offices, there are no avenues to extend and pretend,” Bloomberg Intelligence analyst Gaurav Patankar writes in a note Friday.

Some VC and private equity firms are turning toward strategies to “extend” and “pretend,” meaning they would hold on to assets or prop up capital to avoid true price discovery, Patankar added in a Friday interview. Examples of this include net asset value loans that let general partners borrow against a pool of portfolio companies within a fund, GP-led secondary structures where a fund sponsor sells one or more assets from a fund it already manages to a new fund, and alternative financing via private credit.

But those methods can only delay but not deny the ultimate fundamental problem of “untenable” and “unrealistic nature” of venture valuations, he said. “There are enough zombie companies with frothy valuations that need restructuring, price discovery and of course re-tooling of their business models to a world of tighter credit, subdued revenue and higher rates,” Patankar said.