The collapse of Silicon Valley Bank (SVB) caught many by surprise and for those that banked with the UK entity, widespread stress, panic and fear amongst those that did.
Why? Was it because we had all forgotten (or were too young) to remember what happened to Northern Rock in 2008, when borrowing short and lending long spectacularly backfired?
Almost none of us in the venture community are treasury management experts and understandably, we are focused on how best to use the cash that we have raised to grow our businesses. Where it sits and how quickly we can move it has fallen down a company’s risk register (if you have one of those too), because we have learnt to trust that all banks are ‘safe’ once again.
At Mercia’s IPO in December 2014 £70million landed in our bank account. At our first post IPO board meeting we discussed and agreed our treasury priorities which were: preservation, availability, yield. Put another way, as one of our NEDs famously said at the time “whatever you do with the cash, don’t lose it!”
As non-treasury management experts, the emphasis on preservation led us to look for a simple methodology of assessing risk. With the assessments of credit agencies being found woefully wanting during the Global Financial Crisis, we adopted Credit Default Swap (“CDS”) rates as a measure of credit risk – the lower the swap rate the lower the perceived risk. We also set the maximum amount that we could move on any one day from the current accounts at £5million.
With yields universally at very low levels, there was little temptation to be seduced by deposit rates at higher risk banks and we spread our £70million across Barclays and Lloyds based upon their CDS rates. Later we added HSBC and Santander. From an availability standpoint we put our money on varying notice periods to eek out a small yield.
When the concept of ringfenced banks came in it made little difference to our risk thinking because the £85,000 protection limit applied to both the ringfenced and non-ringfenced side of our banks.
When Covid struck yields went to zero on all of our bank accounts so we moved our deposit balances to overnight as there was no benefit of having our cash tied up for longer.
As yields suddenly started to rise in 2022 we focussed on pushing our banks to give us better rates on our overnight account balances rather than moving some of our money back into notice period deposit accounts.
Then SVB imploded and most of us didn’t see it coming. We breathed a sigh of relief because when our eight-year-old treasury policy was tested, it had worked – our shareholder’s cash was preserved and still available.
Reflecting on recent events we recommend the following simple treasury considerations for the money that you have raised from us and other co-investors:
- Make preservation your number one treasury priority – use a simple measure of assessing risk to determine who you wish to bank with and be prepared to put up with their long winded KYC;
- Make availability your second treasury priority – there are two aspects to this:
- Keep your investors cash on very short notice periods (even at the expense of yield) so that you can move it fast if need be;
- Makes sure that your single or daily cash transfer limits are high enough – there is no point having £1million on overnight deposit if you can only move £100,000 each day;
- Seek as reasonable a yield as you can on your overnight deposits
Short selling hedge funds make their money by exploiting and amplifying rumours – some well founded, others not.
They thrive in sectors which become nervous for structural reasons. The banking sector is a current target and once a rumour turns into a run e.g. SVB, Credit Suisse being able to move shareholders’ money fast is your greatest treasury/risk management strategy.