Global equities remain shaken following the closure of California based, tech-focussed Silicon Valley Bank (SVB). The US Dow Jones Bank Index has plummeted by a fifth since the beginning of March, when America’s sixteenth largest bank went under, provoking memories of the 2008 global financial crisis (GFC).
Nerves were agitated further as the Swiss National Bank stepped in to facilitate a merger between UBS and Credit Suisse, sparking concerns that a systemic crisis could spread overseas. While the impact confronting US and European banks was discrete, the underlying culprit was the same for both.
A cascade of deposit withdrawals sparked an industry-wide credit crunch and a bank run, forcing the US Federal Reserve and the European Central Bank (ECB) to intervene. By reassuring market participants that emergency lending would remain available, a much larger crisis was avoided, but money managers are taking noticeable precautions in response.
Ying Wang, Singapore-based partner at Simmons & Simmons, told FinanceAsia that while central banks were successful in their negotiations to prevent SVB contagion from spreading to other parts of the market, tech funds have taken steps to mitigate concentration risk through reallocation across financial institutions and geographies. In doing so, fewer resources remain earmarked to support innovation.
Given SVB’s niche as a loan provider for tech funds, this cautionary approach is expected to further weigh on a sector that is already grappling with a bevy of challenges. US technology stocks have lost more than a quarter of their market value since the beginning of 2022, as several high-profile names have cut staff and cancelled projects to save costs, resetting growth projections for the sector.
Confidence is shaken, said Daniele Servadei, CEO of Sellix, an online marketplace for digital products. He told FA, “This negative sentiment forces industry specialists to further tighten their scrutiny on new offerings coming to market.”
He posited that while the tech industry has demonstrated resilience in the past, a larger onus now falls on a company’s existing, proven technology and its ability to generate revenue in the near-term, which could derail meaningful technological advancements.
A different pathway
Despite the obstacles, new liquidity channels are providing alternative capital options. In October, the Hong Kong Exchanges and Clearing (HKEX) announced plans to introduce updated listing rules to encourage the development of emerging tech. The directive reduces the listing threshold, enabling smaller companies to raise capital during the earlier stages of development.
Hong Kong-based Simmons & Simmons partner Claudia Yiu, echoed FA’s previous reporting, noting that the new rules “strike the right balance between enabling growth and managing risks”, by considering their earning potential alongside inherent risks as a result of little track-record. Among the notable changes, are extended lock-up periods and more extensive disclosure requirements.
The timing is fortunate, as investors have begun to move money back into Asian tech names and towards new economy assets. Year to date (YTD), industry bellwether firms have rallied as investors expect a more supportive policy outlook from Beijing.
Tencent is recovering losses from a year ago after the country’s online regulator renewed its video game import licence. Meanwhile, Alibaba’s shares jumped more than a tenth after the e-commerce group behind Taobao announced plans to split into six separate units.
Such hopefulness appears visible even in the digital money space. Bitcoin’s value has doubled since the start of the year, as investors cheer major financial hubs for becoming more accommodative to retail participation in decentralised finance. This summer will see Hong Kong’s Securities and Futures Commission (SFC) require all virtual asset trading platforms to obtain licences, which follows the regulator’s invitation for market feedback on virtual asset trading.
The SVB fiasco becomes a litmus test for investors. While regulatory moves help mitigate risks, less capital becomes available for start-ups, noted Wang, who remains unsure which retail bank might be able to fill the niche market left behind by SVB. But Yiu considers recent listing revisions as likely to support the equity side of the sector, reducing dependency on the traditional bank loans, as well as potential for more unpredictable deposit withdrawals and other threats to market liquidity.
While this should provide some breathing room for both tech funds and the firms they invest in, it seems unlikely that anyone will rush back into the market as quickly as they had left.
