Silicon Valley Bank 3Q15 Earnings Call Notes

Assuming no rate rises through 2016

“Given the unusual level of uncertainty over whether the rate increases will actually materialize in 2016, we believe that it’s prudent at this time to assume no market interest rate increases between now and the end of 2016.”

There’s frothiness in the markets for sure, but we do not believe we’re in a bubble

“Although we are positive about 2016, there are a few areas we’re watching closely. These include valuations, VC investment levels, and exits. Our view has been consistent. There’s frothiness in the markets to be sure, but we do not believe we are in a bubble.”

The best companies are getting the most attention

“First, the best companies are getting more attention. They’re raising larger rounds of equity and are staying private longer. This, more than anything, is what’s behind the higher valuations, and one of the reasons VC investment is at such high levels, because they’ve been able to access healthy equity funding, these highly valued companies general have low leverage. In addition, many of them have significant customer and revenue traction, and many are disrupting industries and creating significant new market opportunities.”

Some companies will prove overvalued, others will grow into valuation and some will breakout

“Of course, some companies will prove to be overvalued and some will fail. Others will grow into their valuations over time, even if they’re somewhat ahead of themselves at the moment. And some will become breakout companies.”

There are signs that fewer VC rounds are being raised. At some point some companies will have trouble raising funds

“Second, despite solid overall new company formation, backed by a growing group of sources for startup capital, there are signs that fewer venture capital rounds are being raised. Although we haven’t seen a trend yet, at some point, companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds. This is more likely given some of the market pullback we’ve seen. But let’s be clear, this is the venture capital innovation model: truly innovative companies and early movers will succeed while others will fail.”

IPO activity slowed significantly in the third quarter

“Third, we’re watching exits. IPO slowed significantly in the third quarter. It’s too early to say whether this is the beginning of a longer IPO pullback, but volatility in the markets may be a reason for companies to stay private longer.”

We do not see these issues having a material impact at this point

“So we’re paying attention to these potential issues and we do not see them having a material impact at this point.”

We could experience losses if a meaningful disruption were to occur

“If a meaningful disruption were to occur, it could result in deleveraging by our clients, lower VC investment in warrant gains, and possibly unrealized losses, and higher loan losses in our early-stage loan portfolio, although it’s very important to note that early-stage loans constitute a relatively small part of our loan portfolio at less than 10% of total loans.”

Experience tells us that even if there is a problem the innovation economy will be more resilient than the broader economy

“Our experience suggests these negative impacts will be short-lived if they occurred, as the innovation economy has repeatedly proven to be more resilient and has shown higher growth over time than the broader economy.”

Larger companies have plenty of liquidity. It wont impact them if they can’t go public

“if these companies stay private longer, that’s not necessarily a bad thing. They have a lot of liquidity, whether they’re public or private, they have a lot of liquidity. And so, quite honestly, very few of them borrow money. So there isn’t that big of an impact.’

We think it could be manageable for the rest of the industry

“The question is, what happens to the rest of the industry, right, if there’s more challenges with some of these larger companies. And that could have a ripple effect. I think it’s manageable, and the question would be, if that were to happen, how severe could it be? I think right now we feel would definitely be manageable.”

Money is flowing to the higher profile companies

“We did see a drop in the number of financings in the third quarter, although the dollars were still exceptionally strong. And it goes back to what I said in my comments, money is really being more highly allocated towards the higher-profile companies, which makes sense. Again, a few of them are going public. There’s still — they’re growing revenue and they’re able to raise capital. So they’re just taking private longer.”

There is definitely a slowdown in the number of companies that are being invested in

“One of the things we’re looking at is the number of companies that are being invested in, and that is a slowdown. We are not seeing that impact our portfolio yet, either from a credit perspective or, clearly as you saw in the third quarter, from a total client funds perspective, which was incredibly strong.”

We can see a slowdown clearly but we don’t expect anything dramatic

“as I mentioned in my comments, we can see a slowdown clearly, but we don’t expect anything what I’ll call dramatic.”

It’s tough to see VC funding growing in 2016, although more companies will stay private longer

“When I look out at the 2016, for me, I’d say more of a stable number is probably what I would look at. I’m hard-pressed to see it grow from where it is right now, even though you’re going to see I think more companies stay private longer.”

Three LBO loans are now in non performing

“We’ve been in the buyout lending business for nine years now, the currently portfolio is 130 loans, of which three, to your point, are now in our non-performing. And so, yeah, hopefully that helps.”

There’s an aspect to this that’s the seasoning of the portfolio

“I would first say that, yeah, there’s a portfolio seasoning aspect to this that, as we’ve made more loans and they’ve been on the books for larger period of time, inevitably you’re going to have a couple of that turn out this way. Having said that, there really is little that these companies have in common. ”

There’s no systemic issue or emerging trend in this portfolio

“The two from the current quarter are from our life science segment. They both sell to hospitals. That’s really where the similarities end. I would liken these to sort of individual circumstances, company-specific issues with all three of them, which by extension is not indicative of any systemic issue or emerging trend that we can see at this time in the portfolio segment.”

We think that companies will adjust down their burn rates in 16 but we haven’t seen it yet

“it’s being talked about. Have we really seen it a whole lot? The answer is no. Yeah, I’d just say we just haven’t seen it yet. Do I expect it to occur? Yes. I do expect that companies are going to be more disciplined as they go into 2016. And we’ve seen this before where there becomes noise in the market about different people talking about high burn rates and giving advice to their portfolio companies to be disciplined, and it takes a quarter or two or three quarters for them to realize that and start incorporating it in their plans. So, do I think it’s going to happen in 2016? Yeah. I think that’ll happen. But as of yet, we haven’t seen it.”

The number of rounds being raised was lower especially at the seed and early stage

“Just to be clear, the amount of venture capital is, you know, was very strong in this quarter. When you look at the number of rounds being raised, that was lower, and that was especially true at the seed and early stage.”

It’s slow in series A and seed rounds

“when I think about the level of the series A or seed round, again it’s slow.”

We think that the rest of the PE portfolio is positioned well even though we did have rapid growth

“while we did have rapid growth that really has slowed over the last seven [ph] quarters, and I think that is a function of the discipline that we’ve maintained in terms of loan structure leverage levels, etcetera, and that’s the first point. I think that the portfolio we have today is positioned pretty well.”

A lot of clients have never seen interest rates at all so it’s difficult to know how they will react to rising ones

“it’s very difficult to understand how our clients will be thinking about what will happen when rates do go up, because nobody has been around these last few years to even understand what an interest rate is. So the behavior is a little bit uncertain.”