As a planned $2.25bn capital raise at California-based Silicon Valley Bank started to unravel on Thursday, nervous venture capitalists and start-up founders began to bombard executives at the lender’s British arm with questions about the safety of their funds.
They received soothing answers.
“The entirety of your founders’ deposits are safe with SVB,” Michael Kruse, Silicon Valley Bank UK’s chief financial officer, reassured a British VC late on Thursday afternoon, in an email seen by the Financial Times.
Yet in barely 24 hours, the Bank of England would decide SVB UK was on the brink of insolvency, sparking a chaotic weekend where the government tried to execute “Project Yeti”, the search for a white knight to rescue the bank. Simultaneously officials worked on back-up measures to provide SVB’s clients, including innovative start-ups, with emergency liquidity.
While HSBC emerged as a buyer of SVB UK at the eleventh hour, British officials — including prime minister Rishi Sunak from a long-haul flight to California and Bank of England governor Andrew Bailey from Switzerland — had to work behind the scenes to prepare for a scenario in which billions of pounds worth of uninsured deposits were at risk.
Virtual bank run
On Friday morning, fears were growing that Silicon Valley Bank, a bastion of the US start-up scene for four decades, faced collapse.
Iain McGill, chief executive of UK biotech start-up Quell Therapeutics, received a call in New York on Thursday warning that the bank was in peril. At 3am on Friday morning in New York, he tried to move money he had at SVB UK — but discovered he could not.
“It could have all potentially been wiped out overnight. There was no certainty about whether we would get back between 100 to 0 per cent of funds,” he said. Under threat was the company’s ability to pay staff, pursue partnerships and launch a clinical trial, due to start soon.
Quell was one of more than 3,000 UK clients of Silicon Valley Bank UK. The Santa Clara-based lender had operated in the UK for more than decade, establishing a distinct British legal entity last summer.
While its balance sheet was ringfenced, the UK bank soon began to experience its own liquidity crisis as clients sought to withdraw their cash. Shortly after 2pm on Friday, SVB UK was forced to request £1.8bn of emergency funding under the BoE’s discount window facility, people with knowledge of the matter said. BoE officials did not meet the request but grew alarmed contagion was reaching Britain’s shores.
SVB UK’s leadership, however, continued to issue reassuring statements to clients. Shortly before 4pm, chief executive Erin Platts stressed on Twitter that it was a “standalone entity with its own balance sheet and governance”. The post was removed later that evening.
Platts and Kruse did not respond to requests for comment.
Minutes after US regulators announced they had shuttered California-based SVB, in the country’s biggest bank failure since 2008, Platts jumped on a Zoom call with 300 British tech founders organised by London venture capital fund LocalGlobe.
Platts told them the bank had continued to sign new loans that day and that she expected to continue doing business the following week, according to people who attended the call.
By then, SVB UK’s deposit balance had dipped below £7bn, from more than £10bn the previous day, said people briefed on the figures.
“We told our portfolio companies to get their money out,” said one prominent VC funder. “We didn’t start the bank run but we also couldn’t take the risk of being at the end of it.”
The Bank of England had seen enough
On Friday evening the BoE decided to put the British lender into insolvency “absent any meaningful further information”, noting it had “no critical functions supporting the financial system”. The move suggested the institution would liquidate the bank entirely, absent a white knight riding to the rescue.
Nearly half of SVB UK’s clients had deposits over the £85,000 state guarantee limit, with some exposures stretching into the tens of millions.
This prompted hundreds of UK tech executives to warn in a letter released on Saturday — written by Mention Me co-founder Andy Cockburn — of an “existential threat” to the British tech ecosystem. A call between a handful of executives and government officials — including City minister Andrew Griffith — ensued.
A UAE white knight
The Treasury meanwhile asked industry group UK Finance to suggest options to rescue SVB’s clients, including by offering them bank accounts and loans as early as Monday.
Rothschild and Slaughter and May started rallying bidders for SVB UK. One of the first was Sheikh Tahnoon bin Zayed al-Nahyan, the United Arab Emirates’ national security adviser and chair of Abu Dhabi-listed conglomerate IHC.
“The guys in Abu Dhabi were pretty keen,” said one person familiar with the bid, who identified Sheikh Tahnoon as the lead player. “It’s about opportunism.”
SVB UK told BoE officials that “the lead white knight” was “based in UAE”. Working on a plan B, government officials, regulators, UK Finance and executives at the state-owned British Business Bank focused on ways to provide a lifeline to firms, through state loan guarantees.
But by Sunday, UK challenger banks revealed their interest, including OakNorth, a lender backed by Japanese technology group SoftBank and founded by major Conservative party donor Rishi Khosla.
The BoE also courted the UK’s largest banks, including HSBC, Barclays, Lloyds and NatWest. HSBC drafted in Robey Warshaw as advisers, with founder Sir Simon Robey and former British chancellor George Osborne working on the deal, codenamed Project Scion. Sheikh Tahnoon withdrew his bid by Sunday afternoon, said two people familiar with the talks.
A “bridge bank” option, where SVB UK would be run by the BoE with government guarantees, was another option, if a sale proved impossible.
Throughout Sunday, negotiations intensified with HSBC, which had established itself as the only credible option, according to people with knowledge of the talks. The lender saw an opportunity to boost its ringfenced UK bank with customers in sectors such as technology and life sciences where it was trying to expand.
By 8pm, “there was only one name on the table”, according to another person briefed on the talks. “This deal wasn’t about us having a gun to our heads,” said an HSBC executive. “For us it makes really good sense, economically and strategically.”
End game
Rishi Sunak was mid-air at 11.30pm on Sunday night, en route to a defence summit in San Diego, when the plan to rescue the Silicon Valley Bank’s UK arm took shape.
On a call with Mark Tucker, HSBC group chair, Britain’s prime minister expressed relief that the international lender was prepared to buy the bank. “HSBC was a good home for the business and provided protection for taxpayers,” said one person close to the discussions. “We also had to get the right balance between speed and certainty of execution.”
More due diligence still had to be done and it was not until 3am on Monday that a sale to HSBC for £1 was agreed. An hour later, the sale proceeded after a call between Griffith, Dave Ramsden, Bank of England’s deputy governor, and Sam Woods, head of the Prudential Regulation Authority.
Sunak had been involved throughout Sunday and into Monday morning during the long flight to California, while Jeremy Hunt, chancellor, and Griffith were at the Treasury. The deal was announced at 7am on Monday.
McGill of Quell Therapeutics was on his way to explain to his 140 employees how he was going to look for funds to survive when the news broke. “Everybody just had a huge sense of relief,” he said.
Reporting by Robert Smith, George Parker, Owen Walker, Daniel Thomas, Arash Massoudi, Laura Noonan, Tim Bradshaw, Hannah Kuchler, Ivan Levingston, Ian Johnston, Anjli Raval, George Hammond, Simeon Kerr and Chris Giles
