What a week last week was! It likely felt interminable to many allocator investment teams who were scrambling to sort out the impact of Silicon Valley Bank’s collapse - the second biggest bank failure in US history and the most significant bank failure since Washington Mutual (2008) – on their portfolios.
For institutional investors, bank failures and other significant events immediately turn into a fact-gathering exercise to determine and quantify their exposures. They need to be able to quickly understand which of their managers are affected so that they can shore up risks accordingly. But sifting through all the information they have on their managers can feel like boiling the ocean…unless they have the right investment office technology to quickly identify potential problems.
Let’s consider the case of the SVB failure specifically. For an allocator, there were 4 types of risks that SVB’s failure could have presented to them:
1) As a direct position: the allocator might have held SVB outright in their public portfolio. The right portfolio management software can isolate that quickly.
2) As an underlying position: the allocator is invested in a manager who holds SVB in their portfolio. The right portfolio management software can determine the allocator’s net exposure to SVB as an investment position across all of their managers.
3) As a known counterparty: the allocator could be invested in managers who had cash deposits at SVB, or who have portfolio companies who had cash deposits at SVB. The right investment office software would allow an entity to be tagged as a service provider, at which point a quick search would surface which managers were using SVB in this way.
4) As an unrecognized exposure: it is entirely possible that an allocator has exposure to SVB that isn’t covered in one of the above 3 scenarios. For example, a venture fund may have discussed in one of its letters that its portfolio companies were using cash or lending facilities at SVB, or that. Or perhaps a venture fund completed a DDQ that showed that they utilize five custodial banks and SVB is one of them. Or perhaps the information was shared during a meeting, and therefore captured in a meeting note. Having a robust data management system with a centralized repository of documents would mean that a quick text search could surface these insights on this unknown or unrecognized exposure immediately.
In essence, to isolate the exact impact of SVB on an allocator, investment teams needed to be able to access, aggregate, and analyze many data points that might be tucked away in numerous corners. The right investment office software would have facilitated this fact-gathering and enabled the real work of shoring up risks to begin immediately.
When unexpected market changing events happen, the allocators who are able to respond, address and adapt the quickest will find themselves in the best position for the long term. SVB only highlighted the importance of being able to meet these challenges head on. At Backstop, we’re happy we can enable our clients to be well-prepared investment offices – because the next market disruption is always around the corner.