SVB UK has been sold to HSBC and continues to exist as a legal entity. For technology companies and their investors, now is the time for reflection and preparing for any future risk of a similar collapse. According to Allen & Overy, the “collapse of SVB
at the heart of the global tech ecosystem was a surprise to many in the industry. It highlighted the concentration of banking functions within the tech sector and gave tech companies little time to work out their contingency plans in the event of a liquidity
crunch following an insolvent collapse of their primary banking provider.
This is an excerpt from The Future of Fintech in the UK 2023: An Innovate Finance Global Summit and UK Fintech Week special edition' report.
Allen & Overy stated that technology companies and their investors should ask themselves the following questions:
- Can the business diversify its banking relationships, to reduce the risk of being over-reliant on one banking partner for their cash deposits and access to credit?
- Does the business have an emergency liquidity "Plan B" in place, in the event its banking or credit provider fails?
- Does management have a strategy as to how they will react? Which advisers will they engage to help navigate the crisis?
- How might the business source emergency liquidity to plug any funding gap? Consider any contractual restrictions on incurring emergency liquidity, understand what consents the business will need, and build a picture of what sort of debt or equity instrument
might be the best way of getting emergency liquidity into the business and capital structure at short notice.
- Is an emergency funding provision within the company's constitutional documents necessary or desirable? If so, what consents are required to make that change?
- Is the business able to articulate its risk strategy convincingly for future fundraising exercises? We expect banking arrangements to have renewed focus in due diligence questionnaires.
- When considering new investors, will they be willing to support the company should a crisis arise?
The collapse of SVB will “have a long-term impact on fundraising terms and the oversight that investors will demand when it comes to the cash that is invested in tech companies. In particular, it is possible that covenants will be included in subscription
documents that require that cash is held in a designated list of well-capitalised banks,” Allen & Overy revealed.
Roshni Patel, head of risk solutions, Quantexa, agreed that now is the time for fintech firms to be focusing on stability and strength. “The bank’s collapse is evidence of how the continuous economic uncertainty, coupled with weaker risk governance can impact
a bank’s balance sheet. With the bank’s clients accounting for 71% of all fintech IPOs since 2020, the mid-market banking sector in particular will likely need an injection of capital to ensure the risk of damage is minimised.”
Patel added that in addition to capital injection, the UK needs “greater investment in pro-active, robust, and real-time risk assessment from financial institutions if we’re to thrive in increasingly volatile economic, political and social conditions.
“The challenge companies face is that many are currently unable to understand how first-order and second-order impacts combine to affect their risk profile. Risk assessments are too often made in isolation and too long after the fact to be of use in real-time.
In rapidly changing circumstances, siloed and laborious risk assessments have left financial institutions exposed.” In 2023, financial institutions are likely to increase their spend on risk governance and risk management.