Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com Slash podcast. Again, a lot of
Speaker 1: weight to this tape all throughout the day. One of
Speaker 1: the reasons is some concern about the banking sector, and
Speaker 1: the news today was our good friends over in Zurich,
Speaker 1: Credit Swiss, the story that just keeps giving and not
Speaker 1: in a good way. So we want to get the
Speaker 1: latest on what's happening at Credit Swiss. How concerned should
Speaker 1: we be about the European banking sector in general, and
Speaker 1: what is the spill of our effect, if any, for
Speaker 1: some of the larger US global banks. To do that,
Speaker 1: we welcome Alison Williams. She's a senior banks analyst for
Speaker 1: Bloomberg Intelligence. She is also a leader of the Bloomberg
Speaker 1: Intelligence business in the US, So we appreciate getting some
Speaker 1: time here, Alison. You know, give us the latest on
Speaker 1: Credit Swiss. I guess the latest news is their big
Speaker 1: Arab Investor Inc. Coming back for more? Is that kind
Speaker 1: of the story? So I think, you know, the issue
Speaker 1: with credit tweets that I think has in common with
Speaker 1: the SF The situation is just it's it's sort of
Speaker 1: a market sentiment and it's hard to make fundamental arguments
Speaker 1: against market sentiment, especially when we saw in four q
Speaker 1: that investors got so concerned they pulled over one hundred
Speaker 1: billion from the bank and you know, they said on
Speaker 1: Monday they've seen inflows. Um. You know that provided sort
Speaker 1: of a moment of confidence. But I think what's difficult
Speaker 1: now is investors are trying to get a sense of, um,
Speaker 1: you know what can turn this around. Because we had
Speaker 1: their their newest biggest shareholder saying that that that they're
Speaker 1: not going to increase their positions, partly because of regulatory
Speaker 1: statutory reasons, but then they cited also other reasons, which um,
Speaker 1: they were vague about. And you know that they have
Speaker 1: another long time shareholder, um having sold off their position
Speaker 1: in the past couple of quarters. So it does seem
Speaker 1: like we need to hear from thisis regulators. Um, there's
Speaker 1: a story that just uh that came out a little
Speaker 1: bit ago. UM. Again, I have no idea the validia
Speaker 1: of the story. But saying that, UM, they are asking
Speaker 1: for a public show of report from the regulators, Alison,
Speaker 1: what does their balance sheet look like? So that the
Speaker 1: the their balance sheet is very different from uh, you
Speaker 1: know the two banks that we saw UM fail in
Speaker 1: the US in the sense that they do not have
Speaker 1: the issue of you know, this this huge bond portfolio
Speaker 1: with unrealized losses. UM. You know that that was sort
Speaker 1: of a thing that was out there that when deposits
Speaker 1: outflow from those banks, UM, you know, they couldn't UM.
Speaker 1: You know, that really caused illiquidity and those issues. So UM,
Speaker 1: you know, for credit suites, they do have a fair
Speaker 1: amount of deposits, they do have some wholesale funding, they
Speaker 1: just raised capital, They have a fourteen point one percent
Speaker 1: CET one ratio, They had tons of excess liquidity at
Speaker 1: least at the end of the fourth quarter. You know
Speaker 1: that The concern is just that you know, that can
Speaker 1: shift very quickly UM. And so I think that's why
Speaker 1: investors are looking for, UM, you know, some sign of
Speaker 1: stability or some disclosure to provide some comfort. Unfortunately, when
Speaker 1: when when people reference their CET one ratio as I
Speaker 1: just did, or banks come out and say they don't
Speaker 1: need to raise capital. There's obviously a little bit of
Speaker 1: skepticism because of things that we saw in the past.
Speaker 1: But but I will I will chime into you know,
Speaker 1: Paul saying earlier that this feels very different than two
Speaker 1: thousand and eight. And I think, you know, one key
Speaker 1: difference is in two thousand and eight, we did have
Speaker 1: a lot of you know, we had broad issues in
Speaker 1: the system, broad issues, and in this case, we have
Speaker 1: some mismanagement at a few banks that some names that
Speaker 1: people are worried about. The deposit the deposit mismatch and
Speaker 1: the and the bond investments are brought across the US banks,
Speaker 1: but but certainly not to the you know, the couple
Speaker 1: of banks had had very unique um their their deposit
Speaker 1: bases were very weak, if you will, and so that
Speaker 1: that was what was sort of unique about them. And
Speaker 1: some are with credit sweets, and I think that's what
Speaker 1: we saw with credit speees over the last couple of years,
Speaker 1: is that a lot of their business has gone away
Speaker 1: to some of the stronger repetitors. That's that's what's led
Speaker 1: to the pressure. And and I'll just say, I'll just
Speaker 1: say one thing that I know Paul remembers. But you know,
Speaker 1: when Lehman failed, there was a significant period of time
Speaker 1: between bear Stearns and Lehman, and I think where banks
Speaker 1: were reducing risk, managing their counterparty risk, and so you know,
Speaker 1: when we had that moment with Lehman, it was a
Speaker 1: big money market fund. It was something that people didn't anticipate.
Speaker 1: But again with Credit Suis, this is not an overnight
Speaker 1: situation like it was with Silicon Valley bank shares. This
Speaker 1: is something that's been happening over a couple of years.
Speaker 1: They don't have the prime broberge business anymore, and so
Speaker 1: I think there's a lot of the systemic risk that
Speaker 1: we would normally worry about have been reduced. So, Alice,
Speaker 1: that's kind of where I wanted to go. I think
Speaker 1: one of the things I learned as a newbie to
Speaker 1: the kind of the bank, you know, the bank and
Speaker 1: bank accounting and how it all works is void confidence
Speaker 1: is so key, and when you lose the confidence of
Speaker 1: your counterparties, basically it's game over. And that's kind of
Speaker 1: what we saw for during two thousand and eight for
Speaker 1: a number of players. Does Credit Swiss have that risks
Speaker 1: today credit suis. It is a crisis of confidence happening
Speaker 1: right out and they do need and I think that
Speaker 1: is why they're asking regulators to come out and show
Speaker 1: some kind of support. There needs to be there needs
Speaker 1: to be something that provides a floor under the market
Speaker 1: and gives some kind of confidence. Um. And again, you know,
Speaker 1: over the last year or so, they did have a
Speaker 1: one big shareholder that was sticking by them, Um, they
Speaker 1: raised a capital Those were both kind of signs that
Speaker 1: things were studying. They said that flows had sort of studied.
Speaker 1: And then you know there's now some questions around those
Speaker 1: disclosures and how accurate they were, and so that that
Speaker 1: makes it tough for the bank to come out and
Speaker 1: make comments. And I think that's why they do need
Speaker 1: a third party to um, you know, come in and
Speaker 1: stab wise things and give some confidence. That's that's what
Speaker 1: the FED did when with the banks, right, so they
Speaker 1: not only did they take over the banks, they said
Speaker 1: that the deposits are going to be insured, and they
Speaker 1: provided a facility to you know, cut the worries across
Speaker 1: a broader banking system and so UM, I think that's
Speaker 1: that's sort of what we need at this moment from
Speaker 1: from the good place. Could somebody buy them take over
Speaker 1: what's happening on that front of anything, So that you know,
Speaker 1: and I think we've talked about before. You know, people
Speaker 1: have long speculated about m and A with kret suite.
Speaker 1: See in the past, didn't think that was a possibility
Speaker 1: because they are are globally systemic important bank with a
Speaker 1: very complex balance sheet um and you know, there's all
Speaker 1: the regulatory aspects, especially if you're considering cross border. However,
Speaker 1: if you look at their operations today, having sold off
Speaker 1: a lot of their trading, they're not in prime brokerage,
Speaker 1: they're cutting a lot of risk assets. They're really going
Speaker 1: to a more focused wealth manager. It does seem like
Speaker 1: that that could be more of a possibility. There's you know,
Speaker 1: there's still a systemically important bank based on you know,
Speaker 1: some of the historical metrics, but you know, the way
Speaker 1: that the business looks going forward, is there an opportunity?
Speaker 1: You know that. But then the other side of that
Speaker 1: is UBS has been gaining massive flows while kred Swiss
Speaker 1: has been having outflows, and neither one is going to
Speaker 1: point to or confirm or deny what's happening on the
Speaker 1: competitive front, but it seems pretty clear. But the flows
Speaker 1: are going to UBS anyway, So that the question is,
Speaker 1: you know, is someone going to step in and buy
Speaker 1: buy this bank or will they just try to continue
Speaker 1: to win share in other ways Swiss National Bank, Allison,
Speaker 1: are you surprised that the Swiss National Swiss National Bank
Speaker 1: hasn't either made a forceful statement of support or maybe
Speaker 1: even done something more like take some actions amount But
Speaker 1: you know, I don't know what that action would be.
Speaker 1: But are you surprised we haven't seen that yet from them?
Speaker 1: I think that, you know, we in the US find
Speaker 1: it surprising. I think because it is a very different
Speaker 1: regulator right than the FED. And I think that, um,
Speaker 1: you know, from everything that we know and hear about it,
Speaker 1: they just tend to operate a little bit differently, um
Speaker 1: Whereas I think the FED is much more known for
Speaker 1: coming out and having a voice in the market and
Speaker 1: addressing things on so um. And there is a difference between,
Speaker 1: you know, if you look at sort of the universe,
Speaker 1: UM that that they're overseeing the issue with the credit
Speaker 1: suite and UBS. I think versus some of the US
Speaker 1: banks is that if you look at historically their assets
Speaker 1: and their businesses as a multiple of the SPIS economy,
Speaker 1: they're much more important to the Spis economy just these
Speaker 1: two banks. Um, so one would one would think that
Speaker 1: something would be coming again, since no one really knows
Speaker 1: what that might be, and you know, we we don't
Speaker 1: know what's going on between behind the scenes and the
Speaker 1: conversations and um, you know, if there's if if they're
Speaker 1: you know, what the conversations are between them and the
Speaker 1: credit suite and anything else. Yeah, because when I think Switzerland,
Speaker 1: I think cheese. I think I mean, yeah, yeah, chocolate
Speaker 1: and banking. So I don't know where the Swiss National
Speaker 1: Bank is, all right, Alison, thanks so much for joining us.
Speaker 1: Alison Williams, Senior Global Banks analyst at Bloomberg Intelligence. Just
Speaker 1: trying to get the latest on this credit Swiss thing.
Speaker 1: I mean, I used to work there. Man. When I
Speaker 1: was there, we were killing it, you know. But the
Speaker 1: institution before my time and since has always always had
Speaker 1: just a real blind spot for controls, you know, and
Speaker 1: bad things happen more so more frequently there than in
Speaker 1: other places. It seems. We want to break down how
Speaker 1: can those retail sales numbers looked? And how the consumers
Speaker 1: looking and how just retailers in general are looking. And
Speaker 1: when you want to do that, there's only one place
Speaker 1: to go, and that's Dana Telsea, chief Research Officer and
Speaker 1: CEO of Telsey Advisory Group. Dana, let's start with those
Speaker 1: retail sales numbers this morning. What were your takeaways I
Speaker 1: think overall? And first of all, thank you for having me.
Speaker 1: I think the takeaways overall for retail sales been mind
Speaker 1: you had January revised upward, and most of the retailers
Speaker 1: I'm talking about talking to talked about the surprise and
Speaker 1: the strength in January as frankly, goods and markdown cleared
Speaker 1: out the beginning of February. I mean, definitely a little
Speaker 1: bit wishywashy, so not totally surprised. February is not a
Speaker 1: very significant month. You had a lot of strengths in
Speaker 1: department stores in the month of January, part of that
Speaker 1: coming from the increase in social Security payments that the
Speaker 1: baby boomers were seeing to like the shop at some
Speaker 1: of the department stores. And my takeaway is that we
Speaker 1: are seeing consumers slowed down in goods. We had been
Speaker 1: seeing it. We're going to continue to see it inventory
Speaker 1: levels have gotten clean, and the uncertainty in the environment
Speaker 1: feeds through to overall consumer spending. Dana, when we talk
Speaker 1: about what twenty twenty three was supposed to kind of hail.
Speaker 1: I think it was still a couple of months of
Speaker 1: markdowns and clearances, and we weren't quite done with that era.
Speaker 1: Now that we perhaps are looking at the macroeconomic environment
Speaker 1: where easing is on the table, is that still the case.
Speaker 1: I think overall we're still going to see a challenge
Speaker 1: first u first quarter, and second quarter maybe like that too.
Speaker 1: I think overall, whether it's the level of traffic, whether
Speaker 1: it's product returns, even the normalization of increases that luxury
Speaker 1: goods is occurring right now. So overall, the guidance for
Speaker 1: particularly the first quarter is coming in below consensus. But
Speaker 1: you know what, I think whatever that consensus was, I
Speaker 1: think the whisper expectations out there was for it to
Speaker 1: be lower. If you can manage your expenses, keep your
Speaker 1: inventories levels lean in order to take advantage of whenever
Speaker 1: the consumer feels a little bit more certain that some
Speaker 1: leverage to the bottom line is the focus, and we're
Speaker 1: definitely seeing it. Cosmetics is one of the areas that
Speaker 1: that's working. It seems like there's a pickup and experiential
Speaker 1: with restaurants. The apparel part is a bit more challenge. Now, Dana,
Speaker 1: what are you the companies telling you about China reopening
Speaker 1: reopening faster than people thought. I believe the US is
Speaker 1: going to loosen pretty significantly the visa restrictions, the vaccine
Speaker 1: restrictions for Chinese travelers. On the luxury side, that's going
Speaker 1: to be a big, big plus. It is. And how
Speaker 1: did you know that? We just came out with a
Speaker 1: report on Monday all about the China reopening and who
Speaker 1: particularly benefits. So your timing, frankly, couldn't be more perfect,
Speaker 1: because you're exactly right. It does benefit luxury And if
Speaker 1: you think of what we've been seeing now, we've been
Speaker 1: seeing certainly some improvement levels, whether it was companies like
Speaker 1: Tapestry or LVMH. Who's talking about the rebound and the
Speaker 1: reopening of China? That who we're hearing about it. Who
Speaker 1: benefits It's LVMH given the diversification their portfolio, It's Urmez,
Speaker 1: It's Richmond given the penetration and luxury goods that they
Speaker 1: have right now. So I'm excited about how China reopens
Speaker 1: to the world, But there's two other elements just to
Speaker 1: note about this China reopening. Let's talk about what the
Speaker 1: travels look like. In twenty nineteen, China had over one
Speaker 1: hundred and fifty million outbound travelers who spent two hundred
Speaker 1: and fifty five billion dollars to two nineteen. The savings
Speaker 1: of Chinese consumers rose two point six trillion dollars in
Speaker 1: twenty twenty two. So exactly like you said, if they
Speaker 1: begin to travel, even in the second half of the year,
Speaker 1: they will be a big benefit to retail sales. Tina.
Speaker 1: When we're talking about the China story, I feel like
Speaker 1: we also have talked about other regions of the world
Speaker 1: to what extent. Is the Middle East becoming a more
Speaker 1: and more important region for some of those luxury names.
Speaker 1: So when you think about the Middle East overall, it
Speaker 1: is becoming more important. But when you think about where
Speaker 1: sales are coming from, where there's companies like LVMH just
Speaker 1: that smallest part of the world, the Middle East and
Speaker 1: some other areas, it's still only seven percent of sales,
Speaker 1: so it's certainly not as significant when you look at
Speaker 1: the carryings of the world to who owned Gucci, it's
Speaker 1: still a relatively small piece of the pious seven percent. Also,
Speaker 1: there's a ways to go. Europe, Asia, North America are
Speaker 1: the areas where is the most beneficial impact. So we
Speaker 1: touched on luxury. How about on the other end of
Speaker 1: the retail spectrum. I'm thinking like the you know, the
Speaker 1: dollar stores and Dollar General and maybe maybe even you
Speaker 1: know Walmart and Targe. If I'm an investor, do I
Speaker 1: feel like, if times get tough, if there's a recession,
Speaker 1: if inflation persists, are we seeing people trading down to
Speaker 1: those types of stores. It's interesting many of the companies
Speaker 1: overall have not said that they've fully seen the trade
Speaker 1: down yet. But yet when you talk to the off pricers,
Speaker 1: the tjxes of the world, whose recent camps were up
Speaker 1: seven percent and we talked about an uptick in apparel
Speaker 1: and the pickup in traffic, Well they're getting they're getting
Speaker 1: that share. I think, like Walmart, Target is definitely planning
Speaker 1: cautiously for twenty twenty three. You'll look at their camp
Speaker 1: guidance of download single digits to upload single digits. Yet
Speaker 1: the margin recovery given Target expects operating income to grow
Speaker 1: double digits in twenty twenty three. That's encouraging. So yes,
Speaker 1: I do think you see the benefits of the trade
Speaker 1: down that way, and you see it in merchandise with
Speaker 1: the newness. You'll look at beauty ALTA, you have ALTA
Speaker 1: and target that should be a benefit. You look at loyalty,
Speaker 1: You look at that target circle. Loyalty member base of
Speaker 1: one hundred million plus today. There's opportunities for improvement and
Speaker 1: continued improvement in conversion at discounters. Dana thirty seconds here
Speaker 1: talks us a little bit about card spend. Are people
Speaker 1: still willing to spend on their credit cards or are
Speaker 1: we kind of looking at people buying from their savings
Speaker 1: a little bit buying from their savings at the lowered
Speaker 1: to middle income level. Credit card data has become a
Speaker 1: little bit more cautious lightly, and we're seeing a little
Speaker 1: bit of an uptick in some of those dead dats.
Speaker 1: All right, Danny, thank you so much for joining us.
Speaker 1: We really appreciate getting your perspective on all things retail.
Speaker 1: Danta Telsey, chief Research Officer and CEO of Telsey Advisory Group.
Speaker 1: Before that, she was a senior managing director at bear
Speaker 1: Stearns and chief was a former analyst at a firm
Speaker 1: called c J. Lawrence. And if you're of a certain generation,
Speaker 1: you know c J. Lawrence. You want to get right
Speaker 1: over to those regional banks and get back to see
Speaker 1: what has really been a big, big issue for this
Speaker 1: market over the last week or so with some of
Speaker 1: these failures of some of these small regional banks. Herman Chan,
Speaker 1: senior analyst US Regional Banks with Bloomberg Intelligence, joins a program. Also,
Speaker 1: we have Arnold Kakuta. He is credit analysts and we're
Speaker 1: intelligence focusing on the banks. Arnold, want to start with
Speaker 1: you because we were just talking to Katie Greifeld and
Speaker 1: she was talking with the source Anastasia Amarosso over at
Speaker 1: I Capital, and Anastasia was saying, hey, you gotta take
Speaker 1: a look at some of these bank bonds. There's some
Speaker 1: real quality out there and they're trading it very effective
Speaker 1: or very attractive yields it there. What are you seeing
Speaker 1: on the credit side of some of the regional banks
Speaker 1: out there, Arnold, Yeah, I mean definitely yeah. If if
Speaker 1: the storm passes and then you know, we got another
Speaker 1: curveball today with creditsis you know, having some issues and
Speaker 1: kind of bringing some you know, counterparty risk issues, you know,
Speaker 1: to to the bigger banks here. But uh, yeah, I
Speaker 1: think it's still not over though, right, Um you had,
Speaker 1: um what is it? I think Moody's h SMP coming
Speaker 1: in with a downgrade to um FRC you know, uh
Speaker 1: doubt from AAA minus to junk rating. Right, So, um,
Speaker 1: you know there's still definitely concerns on the deposit flow
Speaker 1: out risks, UM, the deposit out outflow risk and uh yeah,
Speaker 1: you know we might get an update, you know, one
Speaker 1: of these guys report quarterly earnings and saying, you know,
Speaker 1: do they have to tap this new you know, bank
Speaker 1: funding facility and whatnot. So I think, you know, there's
Speaker 1: still some risk out there, but you know, if you
Speaker 1: believe that things may stabilize and some of the bigger
Speaker 1: players may benefit. I you know, we got the news
Speaker 1: that b of A got fifteen billion of depolsits. You
Speaker 1: know probably you know, if that's the case, then JP
Speaker 1: Morgan probably got a lot more right, But there's still
Speaker 1: things out there that might be kind of a little
Speaker 1: bit dicey. Herman hop on into this conversation because in
Speaker 1: addition to all of this kind of craziness happening in
Speaker 1: the bond market, and of course some of these bank
Speaker 1: bonds spread. First Republic, one of the regional banks we
Speaker 1: were following getting downgraded today. Why there's a lot of
Speaker 1: asserts a new with their positive base. Management had an
Speaker 1: opportunity to discuss that when they've been on media reports
Speaker 1: and have been a bit avoiding the matter. So until
Speaker 1: we some more clarity on where deposits stand, there's going
Speaker 1: to be some uncertainty with the name. I do think
Speaker 1: that the liquidity facility that arnoldists articulated does shield them
Speaker 1: from some issues in terms of managing the balance sheets.
Speaker 1: But longer term is what happens with deposits and when
Speaker 1: can they stabilize and move on? So that's the underlying
Speaker 1: big question that the industry is trying to figure out
Speaker 1: right now. So Herman, I'm looking at the SP five
Speaker 1: hundred regional index here, stock index down thirty two percent
Speaker 1: year to date, down forty eight percent on a trailing
Speaker 1: twelve month basis. That's telling me that the market thinks
Speaker 1: this is more than just a blip. There's something fundamental
Speaker 1: out there. I know yesterday you did not think it
Speaker 1: was systemic per se. Right, has anything changed in twenty
Speaker 1: four hours. There's just a lot of them start to
Speaker 1: need in the marketplace, things tend to appear without notice.
Speaker 1: You've Arnold mentioned the court squee situation. That doesn't help confidence,
Speaker 1: and the there's a lot of uncertainty with where deposits
Speaker 1: are going, what happens with bank balance sheets, and where
Speaker 1: interest rates are going, and the economic repercussions of the
Speaker 1: bank fallouts, because if banks aren't going to lend because
Speaker 1: the posits are flowing out of the system, that has
Speaker 1: very strong implications for the future growth of the economy
Speaker 1: because banks are are scared at this point, so there
Speaker 1: will be some you know, domino effect of what's going on.
Speaker 1: So that's that's something that that is adding to the uncertainty.
Speaker 1: Well Herman, in addition to just some of the uncertaty
Speaker 1: that you're seeing. I thought it was interesting that Ken
Speaker 1: Griffin of Citadel bought a steak Western Alliance Bank coort
Speaker 1: w AL. The stock is down then, even though it
Speaker 1: was higher, I want to say, by like eight or
Speaker 1: nine percent in the pre market. Why that specific bank,
Speaker 1: Why are they not facing the same scrutiny or same
Speaker 1: downgrades as First Republic Yeah, I think Western Alliance is
Speaker 1: a bank that has historically been pretty well managed, low
Speaker 1: credit risk. It operates in the California, Arizona, Nevada market,
Speaker 1: so it's sort of tangential to what SPB does. They
Speaker 1: did buy a bank that does very much the same
Speaker 1: focus ass would be with startups in venture capital. So
Speaker 1: that's why they were initially lumped in. But the manager
Speaker 1: team has been very strong and they've they've come out
Speaker 1: with pretty good updates in terms of where they stand
Speaker 1: from a liquidity standpoint. So i'd point to that, Hey, Arnold,
Speaker 1: as a credit analyst, Um, what are you really looking
Speaker 1: at when you analyze a bank security? There? I mean,
Speaker 1: is it give us a sense of what you're looking
Speaker 1: at and how is it kind of look today? Yeah,
Speaker 1: So you know, traditionally we look at, you know, the
Speaker 1: loan book, how safe are the loans and you know, um,
Speaker 1: in terms of from that standpoint, right, the traditional bank
Speaker 1: credit analysis, UM, credit quality is still pretty resilient, you know,
Speaker 1: given what has been so far resilient consumer and so
Speaker 1: you know, people are paying their bills on time, um,
Speaker 1: and so but you know, slowly and steadily we've seen
Speaker 1: kind of a normalization the normalization of credit to you
Speaker 1: know where net net chargeoffs are rising, but but normalizing
Speaker 1: not you know, um, going you know anywhere haywire. But again,
Speaker 1: we're still at the start of a potential recession, right,
Speaker 1: and so I think things will get worse, But it's
Speaker 1: just a matter of you know, how much worse. And
Speaker 1: it's just a lot of this stuff that has happened. Now.
Speaker 1: This is it's almost like basic liquidity analysis, right where um,
Speaker 1: all right, you take in deposits and and and you
Speaker 1: make loans. But for a lot of these banks that
Speaker 1: kind of trouble, it's okay. They became bond managers, right,
Speaker 1: they had big bond portfolios that you know that they
Speaker 1: and then and then the regulation was more relaxed for
Speaker 1: them so that um, they didn't have to you know,
Speaker 1: really the unrealized losses on these available for sales securities.
Speaker 1: It did not hit their capital levels, so um, you know,
Speaker 1: it delayed the pain, right Like when the deposits fled
Speaker 1: and they had to sell these ass securities, that's when
Speaker 1: it really hurt. You know, that's when their capital levels
Speaker 1: will be hit. And so I think that's where the
Speaker 1: regulation might start changing, right, Uh, where where some of
Speaker 1: these mids of smaller size banks, UH might need to
Speaker 1: start accounting for, you know, how their bond portfolios are
Speaker 1: doing instead of you know, really realizing at the last
Speaker 1: moment when deposits are flinging out the door. Arnold. When
Speaker 1: we talk about spreads specifically, I think we're looking a
Speaker 1: lot at of course US and their bonds. I think
Speaker 1: it was like a one thousand basis point move or
Speaker 1: something something in like distress territory. Correct me if I'm
Speaker 1: wrong there, But I want to ask how long will
Speaker 1: it take for that to spread to some of the
Speaker 1: other banks. We're already seeing in a little bit in
Speaker 1: the equity price action, but in terms of the bond market,
Speaker 1: are they a little bit more insulated? Yeah, I mean
Speaker 1: we're starting to see you know, spreads. I think um bottom,
Speaker 1: like you know, from from a wideen in October and November,
Speaker 1: you know, kind of bottomed, uh tightened a lot until
Speaker 1: you know, early suburbins. We've been kind of on this
Speaker 1: widening path and you know, more wider today. But yeah,
Speaker 1: it's it's because of kind of the interconnectedness of these
Speaker 1: big banks, right, So that's you know, anytime one of
Speaker 1: these bigger institutions is having an issue. Yeah, you know
Speaker 1: credit Swist is a is a major trading accounting party
Speaker 1: to you know, the the JP Morgans and the Baas
Speaker 1: and stuff. So, um, I think there's definitely worry. And
Speaker 1: you know the banking model, right, it's it's it's you know,
Speaker 1: it's it's a big surprise because usually you can kind
Speaker 1: of see these things when companies are having issues. But
Speaker 1: with SBB, which um had about four billion of bonds
Speaker 1: and three three four billion of preferreds, this all happen
Speaker 1: and like in forty eight hours, right, and this is
Speaker 1: the definitely great names. So that's the fear. It's like, wow,
Speaker 1: this stuff can happen really quickly. Um. You know this
Speaker 1: competence game where if if you know, people start seeing
Speaker 1: the stocks move, oh my god, are they going to
Speaker 1: start moving their money whether it be you know, wealth
Speaker 1: management assets or deposits and and that that you know,
Speaker 1: when when when the funding goes away, you know, do
Speaker 1: you have enough liquid assets to you know, handle that outflow?
Speaker 1: And you know if if the deposit runner just so great,
Speaker 1: you know, any institution yea is almost at risk. All right, Arnold,
Speaker 1: I really appreciate getting your perspective. Arnold Ccuta, senior financials
Speaker 1: credit analysts with Bloomberg Intelligence, joining us on the phone
Speaker 1: in Herman Chan senior analysts for the regional banks, covering
Speaker 1: it from the equity side, both of them from Bloomberg Intelligence.
Speaker 1: He joins us here in our studio getting the latest
Speaker 1: on this regional bank challenge slash crisis. We get a
Speaker 1: sense of what all this turmoil in the world means
Speaker 1: for emerging markets and other parts of the world. Let's
Speaker 1: check in with Nick stot Miller. He is head of
Speaker 1: Global product for Medley Advisors. He joins us live in
Speaker 1: our Bloomberg and an active broker studio. So Nick, we've
Speaker 1: got Credit Swiss news today. We've had a couple of
Speaker 1: bank failures, granted, smaller banks in the US, a lot
Speaker 1: of uncertainty. We just had some bank anilys in here
Speaker 1: talking about all the uncertainty in the financial sector. How
Speaker 1: does it spill over to your world, to emerging markets
Speaker 1: and things like that. Well, Credit Swiss is obviously quite
Speaker 1: a large bank and quite active globally. But the banks
Speaker 1: that failed in the US, there's not really any direct connection,
Speaker 1: but I think the indirect connection, which is as you
Speaker 1: have increased in certainty in the financial sector in the US,
Speaker 1: banks becomes less willing to lend, and so that tightens
Speaker 1: global credit conditions and it makes a lot harder for
Speaker 1: these emerging markets to raise funding. So the tighter credit
Speaker 1: conditions will spill over into em and crimp growth. And
Speaker 1: then also you have the broader risk off move and
Speaker 1: you were talking about the strengthen the dollar, and you
Speaker 1: have a lot of the higher beats at EM currencies
Speaker 1: just getting whacked today on the move. Well, I love
Speaker 1: that you mentioned kind of the dollar going into this
Speaker 1: because your background is actually in the Middle East a
Speaker 1: little bit, and it's fascinating to me because a lot
Speaker 1: of these European banks that are getting hit have extra
Speaker 1: exposure to the Middle East that I would argue a
Speaker 1: lot of day the Silicon Valley banks or the regional
Speaker 1: banks that created the chaos earlier in the week, don't
Speaker 1: so walk us through kind of the connection there. Well,
Speaker 1: particularly in the Gulf, which is where I spent quite
Speaker 1: a bit of time, there's plenty of liquidity in terms
Speaker 1: of the sovereign wealth funds. In fact, you know the
Speaker 1: thing that really got kretty sweet moving today was the
Speaker 1: Saudi banking executive saying that they're not willing to put
Speaker 1: more money into it. So I don't think that this
Speaker 1: is blowing back on the Gulf. But if you remember
Speaker 1: back to the two thousand and eight crisis, it was
Speaker 1: Katar and some of the other Gulf sovereign wealth funds
Speaker 1: that provided backstops to some of the global banks. So,
Speaker 1: if anything, I would look for the Gulf to be
Speaker 1: a stabilizing force rather than experiencing instability as a result
Speaker 1: of this. It's amazing, I mean, and they're from your experience,
Speaker 1: they're still willing to invest in Western financial institutions. It's
Speaker 1: just this is a credit Swiss maybe specific issue. Yeah,
Speaker 1: and also the sovereign wealth funds don't want to be
Speaker 1: the first ones to pile in. You know. It's you know,
Speaker 1: as they say, it's sort of like catching a falling
Speaker 1: knife and you're trying to invest in these markets. So
Speaker 1: I would expect them to wait for the dust to
Speaker 1: settle a bit and then try to pick the strongest
Speaker 1: institutions that they think have, you know, the best prospects.
Speaker 1: Where where are you seeing opportunities these days? Because I'll
Speaker 1: tell you a lot of people are just very nervous
Speaker 1: across the board. We see that in the moves in
Speaker 1: the treasury market every day, just whipsawing all around. Where
Speaker 1: are you guys spending some time these days? Well, I
Speaker 1: think you know, there are a lot of decent fundamentals
Speaker 1: out there, particularly in Asia. And it's interesting that you know,
Speaker 1: the Korean one has actually benefited from a lot of
Speaker 1: this turmoil, even though you know their economy. A lot
Speaker 1: of these export dependent economies are probably going to have
Speaker 1: a bit of a slump and the second off of
Speaker 1: the year, assuming that there is a hard landing in
Speaker 1: the US. But you know, there seems to be some
Speaker 1: more fundamental strength there and much less financial instability. I
Speaker 1: think the key here is really just to wait until
Speaker 1: the dust settles on this, and if you do start
Speaker 1: to get some serious easing from the global central banks,
Speaker 1: there probably would be a rally down the road, but
Speaker 1: probably stay on the sidelines for now. I'd say, what
Speaker 1: does it then mean for say a country like in
Speaker 1: Latin America, for example, It has a lot of commodity exposure.
Speaker 1: And the reason I ask this is because if you're
Speaker 1: looking at the moves in oil for right now, or
Speaker 1: looking at a sixty seven handle on NIMEX crude, and
Speaker 1: it feels like ordinarily you wouldn't necessarily see oil react
Speaker 1: to something like the credit suite move, but it almost
Speaker 1: feels like it's a ripple effect of FED pricing. How
Speaker 1: does a em investor focus on Latin America or commodity
Speaker 1: exposed economies navigate that. Yeah, it's really tough, and I
Speaker 1: think you're one hundred percent right that a lot of
Speaker 1: the moves we're seeing commodities right now are more about
Speaker 1: financial ripples more so than necessarily the macro ripples. Because,
Speaker 1: of course, if the US goes into a deep recession
Speaker 1: as a result of all of this, of course that's
Speaker 1: going to pair demand for all of these commodities. But
Speaker 1: in the first instance, you know, a lot of these
Speaker 1: investment banks and trading desks are just really derisking, which
Speaker 1: means they need to dump a lot of the You know,
Speaker 1: I was just that because you know, having used to
Speaker 1: be on a trading desk, you know, I used to
Speaker 1: it's solemn brothers. I'd walk onto the government you know,
Speaker 1: to the fixed income bond trading floor. It maybe row
Speaker 1: after row after row of people trading government bonds. That's
Speaker 1: liquidity to me, that's not there is what I'm hearing,
Speaker 1: you know, really since Great Financial Crisis, that's really been
Speaker 1: winnowed down, and that can be a problem in certain times.
Speaker 1: And I'm hearing from a lot of people like you
Speaker 1: that that liquidity is an issue or lack of liquidity
Speaker 1: is an issue, absolutely, And when the markets are more volatile,
Speaker 1: market makers just aren't as aggressive and providing type pricing
Speaker 1: or that the size that people want, so that exacerbates
Speaker 1: the move. So volatility almost begets volatility In that case,
Speaker 1: what do you expect the FED to do next Thursday? Here,
Speaker 1: I'm looking at our world interest rate probability function warp warp,
Speaker 1: and it's showing that we've we're at or near peak
Speaker 1: rate and the rate check can start going down. I mean,
Speaker 1: is that way you think our our view is for
Speaker 1: another twenty five basis point hike coming up in March,
Speaker 1: and then another twenty five in May and then they're done. Okay,
Speaker 1: But that of course is caveat said on this not
Speaker 1: getting worse. If the banking system issues get worse, then
Speaker 1: the Fed's probably going to have to do something. And
Speaker 1: to the point about FED cuts being priced in the
Speaker 1: second half of the year. If that's what in fact happens,
Speaker 1: that things get so bad that the FED has to
Speaker 1: cut from June onwards, I think risk assets are going
Speaker 1: to be in a very different place. It's very hard
Speaker 1: for me to reconcile credit and equity markets, which have
Speaker 1: sold off but are still relatively resilient to these massive
Speaker 1: moves we've seen on the front end and just a
Speaker 1: complete repricing of the FED, and one of them has
Speaker 1: to be wrong. I don't think they can both be right.
Speaker 1: Are you going to start to see more than as
Speaker 1: we kind of see all this chaos shakeout, see more
Speaker 1: divergences in the sovereign bond world too. Paul's point, I
Speaker 1: mean it feels like German boons and treasuries on the
Speaker 1: same page at the moment, arguably guilt as well. But
Speaker 1: then you have something like Argentine debt or something. I
Speaker 1: think I read a story yesterday one hundred percent inflation
Speaker 1: there a lot of the em bond world. Are they
Speaker 1: going to be on the same page? No? And I
Speaker 1: think you saw this particularly in local currency debt and
Speaker 1: sort of the first day or two of this big
Speaker 1: sell off in risk assets that a lot of these
Speaker 1: local currency bonds were actually rallying because they said, oh, okay, well,
Speaker 1: if the FED is going to be less aggressive, that's
Speaker 1: lower global rates, which is good for all these bonds.
Speaker 1: But then the secondary effect is, you know, how much
Speaker 1: risk appetite are you going to have from global investors
Speaker 1: to be in this stuff? And you know, if the
Speaker 1: currencies are selling off and the economies are are weakening,
Speaker 1: it's not a good environment for emerging market bonds. So
Speaker 1: I think you will see this divergence. Traditional safe haven
Speaker 1: the biggest global developed markets will actually rally, but I
Speaker 1: think em is going to be in for some weakness
Speaker 1: over the next several months. We can't let an emerging
Speaker 1: markets manager walk out of our studient without talking about China.
Speaker 1: We were talking to Dana Telsley earlier. She's the top
Speaker 1: retail analyst on Wall Street, and she just came out
Speaker 1: with a big report Monday, really extolling the opportunities for retail,
Speaker 1: but particularly for luxury from the reopening of China, you know,
Speaker 1: in terms of the spending opportunities and so on and
Speaker 1: so forth. From an investment standpoint, where are we today
Speaker 1: with investing in China is that it people feel like
Speaker 1: it's a toxic a little bit, or can you still invest? Well,
Speaker 1: we've definitely seen over the last six months or so
Speaker 1: a lot of increased worry about US China trade relations
Speaker 1: and how that might spill into the wisdom of investing
Speaker 1: in Chinese assets. But from a fundamental standpoint, our China
Speaker 1: analyst is it is quite bullish on China. He thinks
Speaker 1: that growth will come in close to six percent, well
Speaker 1: above China's official around five percent forecast, and very much
Speaker 1: led by pent up demand from consumers, particularly on the
Speaker 1: services side. So we're actually quite bullish on China at
Speaker 1: this point. But with the caveat that the geopolitical risk
Speaker 1: is quite a bit higher than it has been in
Speaker 1: previous years. Yeah, because there you think about their pent
Speaker 1: up demand and they've been lockdown so much longer and
Speaker 1: harder than everybody else in the world. For travel, for spending,
Speaker 1: it's just going to be huge. And I walk to
Speaker 1: Penn Station occasionally and I walked through Time Squared and
Speaker 1: the European tourists are back in droves. They're back, but
Speaker 1: not so much Asia. That's kind of my just you
Speaker 1: primary research walking through Times Square, But man, that changes,
Speaker 1: that's just going to be so important to see how
Speaker 1: that place out across the economy. Nick stop Miller, thank
Speaker 1: you so much for joining us. Nick is the head
Speaker 1: of Global product for Medley Advisers. We appreciate him coming
Speaker 1: into our Bloomberg Interactive Broker Studio. It's always better to
Speaker 1: get these folks in persons him a gold star, don't
Speaker 1: we We give him a gold star, gold star from
Speaker 1: that whatever, all that kind of good stuff. We've been
Speaker 1: talking about this SVB Silicon Valley Bank, trying to cover
Speaker 1: it from every angles. One of the angles is there's
Speaker 1: a lot of companies that did business with sv being
Speaker 1: really dependent upon it, and what does that mean from them?
Speaker 1: And you know, you know, it's just it's really going
Speaker 1: to be an issue that I'll have a rippling effect
Speaker 1: through the valley for quite some time. And we want
Speaker 1: to get a unique angle here from the perspective of
Speaker 1: mergers and acquisition. Thomas Smail joins us. He's the CEO
Speaker 1: of FE International. Thomas nws much for joining us here
Speaker 1: in our Bloomberg Interactive Broker Studio. Give us just fifteen
Speaker 1: seconds elevator pitch. What do you guys do at FI International? Yeah,
Speaker 1: we're a m and a firm. We work with sellers
Speaker 1: of businesses in the tech space and we're up to
Speaker 1: two hundred and fifty million, and we help them ultimately
Speaker 1: exit that business to a range of acquires public companies,
Speaker 1: private equity firms, individuals, and strategic All right, so you're
Speaker 1: tied into the valley big time your clients or I
Speaker 1: mean the lifeblood. Here we are several days after the
Speaker 1: Silicon Valley kind of blow up here, What does it
Speaker 1: mean day to day for your clients that are out
Speaker 1: there in the valley in terms of I don't know,
Speaker 1: making payroll, you know, making investments in their business, paying
Speaker 1: you know, maybe thinking about strategic acquisitions that maybe they're
Speaker 1: talking to you about what's going on out there. Yeah.
Speaker 1: So interestingly, no real change. We had our team in
Speaker 1: the office all weekend cooling buyers, cooling sellers getting a
Speaker 1: field for their current appetite. No one we spoke to
Speaker 1: it change their strategy. Buyers are still buying, Sellers are
Speaker 1: still selling. Of the buyers we spoke to, less than
Speaker 1: one percent of them had exposure to SVB as as clients.
Speaker 1: So from what we've seen, it's going to be business
Speaker 1: as usual, particularly since the News on Monday, it seems
Speaker 1: like most things are beginning to pick up again. So
Speaker 1: I mean, is that simply in the context of the
Speaker 1: government is going to backstop SVB because it's I guess
Speaker 1: my understanding was the big tech players. Once you get
Speaker 1: to a certain size, yeah, alcrow SVB and you take
Speaker 1: your banking to the JPMorgan Chase or whatever. So it's
Speaker 1: really for smaller and mid sized tech companies that really
Speaker 1: rely upon SVB. So even those companies you're saying, they're
Speaker 1: not too concerned. Yeah, I mean, I think obviously there
Speaker 1: was a lot of noise about SVB, but the reality
Speaker 1: is it wasn't a large percentage of even tech companies
Speaker 1: banking with them. So there's definitely an effect, But the
Speaker 1: vast majority of people, once you get to a certain stage,
Speaker 1: you have multiple bank accounts, if you have a big
Speaker 1: enough business, you can easily move that relationship, which I
Speaker 1: know many people did. Like most companies like ass we
Speaker 1: have three banking relationships. So that doesn't really change. So, yes,
Speaker 1: you're right, FVB definitely tech focused. Definitely a lot of noise,
Speaker 1: but it doesn't really change things for the majority in
Speaker 1: the venture community out there. What's the feeling there, like
Speaker 1: if I have a really cool idea and I found
Speaker 1: myself on Sandhill Road, will I get my funding today? Yeah?
Speaker 1: I mean I think there's no real changed from that perspective.
Speaker 1: I'm not aware of anyone pulling term sheets at the
Speaker 1: moment or changing their deals. Like, ultimately, if you bank
Speaker 1: of SVB at the moment, you have access to your cash.
Speaker 1: A lot of the venture capital firms would be working
Speaker 1: with them. But I'm not aware of any changes from
Speaker 1: that perspective. The thing with the value as well, or
Speaker 1: just tech in general, word spreads fast. You don't want
Speaker 1: to get a reputation as a privateacity firm or a
Speaker 1: VC that's pulling term sheets from founders who are trying
Speaker 1: to make payroll. That's not good look. And people will
Speaker 1: talk how about rising interest rates? What does that mean
Speaker 1: for I mean, obviously for the publicly traded stocks, it
Speaker 1: was bad for them. In twenty twenty two, tech stocks
Speaker 1: underperformed dramatically. A lot of folks think texts may not
Speaker 1: even be a leader once we do get to the
Speaker 1: other side of this, as it's led the market for
Speaker 1: the last decade. You know, in terms of pop trading
Speaker 1: public stocks, what does it mean rising interest rates for
Speaker 1: your world out there for kind of mid sized tech
Speaker 1: m and A yeah. I think firstly, it's a great
Speaker 1: time to be a business owner in the tech space
Speaker 1: if you have a business below two hundred and fifty
Speaker 1: million invaluation. The majority of the business owners we work
Speaker 1: with the international have profitable businesses. They focus on generating
Speaker 1: positive cash flows. They don't necessarily rely on external investors.
Speaker 1: So interest rates definitely saying you keep an eye on
Speaker 1: as a small business owner, but if you're profitable ultimately,
Speaker 1: it doesn't really affect you. If anything, you're benefited from
Speaker 1: your bigger, bigger competitors being hindered maybe they have to
Speaker 1: make layoffs. If you're small and profitable, you're more nimble,
Speaker 1: you don't have a problem like that. So I think
Speaker 1: the world we operate in it's a good thing for
Speaker 1: most people. If you look at my ten fifty year
Speaker 1: view of tech, very bullish. How about the We have
Speaker 1: seen a lot of announcements from big tech companies, you know,
Speaker 1: publicly traded Microsofts of the world that Metas of the
Speaker 1: world laying off people. Meta just came out yesterday just
Speaker 1: above ten percent of their workforce. They're going to be
Speaker 1: like that, this is getting serious out there? What's the mood?
Speaker 1: And usually, like even six months ago, when we saw
Speaker 1: some of those tech laoffs, the assumption was that they
Speaker 1: were going to be hired tomorrow by somebody else. What's
Speaker 1: the mood out in the valley about this is getting
Speaker 1: serious in terms of layoffs. Yeah, So I think again
Speaker 1: there's a big difference between the big public companies and
Speaker 1: the small, nimble, profitable companies. If you're small and profitable.
Speaker 1: Of all the clients we've worked with, almost none of
Speaker 1: them are making layoffs at the moment because they don't
Speaker 1: need to. I think the larger firms, which are more
Speaker 1: affected by swings in their own stock price or just
Speaker 1: the public markets macro and like, they're definitely companies that
Speaker 1: have to be seen to be making layoffs to get
Speaker 1: closer to cash flow profitability. If you're a smaller business,
Speaker 1: less of a problem, you don't need to make layoffs,
Speaker 1: and that ultimately helps a lot of these small businesses
Speaker 1: compete and ultimately means that from an M and A perspective,
Speaker 1: there's consistent demand for those businesses because they're still making money.
Speaker 1: So what's a typical client or typical deal for Effie International?
Speaker 1: Is it like my company had a really cool idea,
Speaker 1: I built it, I had a couple of rounds of
Speaker 1: VC funding, I've grown it and now I'm looking for
Speaker 1: an exit. And is it to a I mean to do?
Speaker 1: I want to sell out to a private equity funder.
Speaker 1: I want to sell out to a strategic what's it
Speaker 1: a typical deal? Look for you? Yeah? So first thing,
Speaker 1: we've closed over twelve hundred transactions. But maybe I'll give
Speaker 1: you an example. We worked with recently a company called
Speaker 1: Thrive Car. It was in that education technology space. The
Speaker 1: founders started the business with nothing. He did not come
Speaker 1: from a rich background. He did not have a family
Speaker 1: with money, he had no investors. Started that business from
Speaker 1: zero about five years ago. Has been in contact with
Speaker 1: us for many years. We spoke to him two years ago.
Speaker 1: His business was a low seven figure valuation. A couple
Speaker 1: of months ago we helped him successfully exit for thirty
Speaker 1: five million. So there's a And what type of buyer
Speaker 1: was it? Was it a strategic buyer? Yeah? The buyer
Speaker 1: was a private equity firm called LTV Fund. They invest
Speaker 1: in tech companies generally below two hundred and fifty million
Speaker 1: invaluation if you mean, if you look at privacity as
Speaker 1: a whole. Currently there's three trillion dollars in dry powder.
Speaker 1: So you can look at the public markets and say
Speaker 1: maybe M and A isn't going to happen, But the
Speaker 1: reality is privacuity firms need to be deploying their capital.
Speaker 1: Deals like Thrive Car profitable growing are always going to
Speaker 1: be popular. There's a lot of privacty firms out there.
Speaker 1: They want to deploy their capital and that strategy isn't
Speaker 1: really going to change interesting all right, So things so
Speaker 1: maybe not quite as bad out in the Valley as
Speaker 1: we're some afearing of given on the backs of the
Speaker 1: SVB failure. Thomas Smail, thanks so much for joining us year.
Speaker 1: Thomas Smail. He's the CEO of FI International, providing M
Speaker 1: and A advice in the sas e commerce and content businesses.
Speaker 1: You know, we're talking about Silicon Valley Bank for you know,
Speaker 1: a better part of a week hearing which is starting
Speaker 1: to really understand the ripple effects across the tech and
Speaker 1: VC space. You know it's going to be profound for
Speaker 1: a lot of these companies, a lot of these VC firms.
Speaker 1: We want to check in with Josh Chapman. He's a
Speaker 1: managing partner at Convoy Ventures. Convoy Ventures is an early
Speaker 1: stage venture fund dedicated to video gaming right John Tucker's alley,
Speaker 1: the partners with founders at the earliest stages. Josh, give
Speaker 1: us your perspective on you know, Silicon Valley Bank. What
Speaker 1: does it mean for the Valley for tech for the
Speaker 1: VC community. Do we know yet or is it still
Speaker 1: too early? Absolutely? And thanks for having me back on
Speaker 1: the show. It's good to be here, Paul and John.
Speaker 1: These are great questions about the future for the venture
Speaker 1: capital market. First and foremost is the fear around where
Speaker 1: the operating cash for portfolio companies seems to be subsiding
Speaker 1: at least right now, you know, barring future contagion and
Speaker 1: new information for us all. So that's the first prior
Speaker 1: for every VC to work on to curing the cash
Speaker 1: for their portfolio companies, helping them navigate through this. And
Speaker 1: that's first and foremost. The second ripple effect it's happening
Speaker 1: right now is that with Silicon Valley Bank down, over
Speaker 1: fifty percent of venture capital firms have their back office
Speaker 1: banking operations effectively interrupted or at least frozen, and so
Speaker 1: that is a really interesting operational thing in the venture
Speaker 1: market right now, which is going to probably create an
Speaker 1: artificial operational slowdown for the next at least week, two weeks,
Speaker 1: four weeks. I mean, however long it would take to
Speaker 1: move those operations for a banking solution to a different bank,
Speaker 1: whether it's a Tier one or a group like the
Speaker 1: First Republic. You know, this is a very live situation.
Speaker 1: I think that'll be the second ripple effect. I think
Speaker 1: the third ripple effect here is that venture capitalism market
Speaker 1: has already been going through a little bit of a
Speaker 1: cool down, a little bit more of a correction. The
Speaker 1: words you know, profitability in ibada becoming a little bit
Speaker 1: more common, and that's healthy for the market as business
Speaker 1: models get correctly challenged by investors, and I think that's
Speaker 1: just accelerated by this current environment. I need a short
Speaker 1: primer on how the whole process works. Tell a dummy
Speaker 1: how it works. The venture capital firm finds a company
Speaker 1: it has an interest in and raises the capital, and
Speaker 1: then that capital you stick it in the bank and
Speaker 1: withdraw the money as you needed or explained to me
Speaker 1: absolutely so what we do is venture capital venture capitalist
Speaker 1: is we raise capital from limited partners or LPs. Those
Speaker 1: LPs then signed documents. Let's say for one hundred million
Speaker 1: dollar funds, our third fund is one hundred and fifty
Speaker 1: and so one hundred million dollar fund. They then sign
Speaker 1: a document saying that they are committing that capital, but
Speaker 1: they don't wire that capital immediately. As you find companies
Speaker 1: that we're excited to invest in, we then called down
Speaker 1: that capital through a capital call. Very very witty title there,
Speaker 1: but a capital call where we called down let's say
Speaker 1: five million of that That money is then used to, say,
Speaker 1: then a little bit on salaries, operations, rent, travel, and
Speaker 1: then the rest is going to be used primarily to
Speaker 1: make those investments and buy equity in what is hopefully
Speaker 1: the next Uber or Twitter or LinkedIn. Right, and so
Speaker 1: we call this capital down over time. What that means
Speaker 1: from a banking operations standpoint is that everyone at sub
Speaker 1: as well as us over at First Republic is we
Speaker 1: were calling capital into First Republic, and vcs were calling
Speaker 1: it into Silicon Valley Bank. With Silicon Valley, with Silicon
Speaker 1: Valley Bank down, where are you calling that capital too?
Speaker 1: You have to reposition your operations over to a new
Speaker 1: bank and set up with KYC and documents and everything
Speaker 1: to set up a new bank account. The difference is
Speaker 1: operating companies usually have one bank account they run all
Speaker 1: cash and all payroll, all expenses. But for us, we
Speaker 1: have two bank accounts per fund and so we have
Speaker 1: three funds and so we have over ten bank accounts
Speaker 1: with First Republic and we're a medium sized firm. Right
Speaker 1: when you look at Sequoia NA and recent they probably
Speaker 1: have hundreds of individual bank accounts that they're running. And
Speaker 1: so that's the complexity of the operational hiccup that's going
Speaker 1: on right now. Is that complexity that limits you from
Speaker 1: spreading it out over any number of different banks. We
Speaker 1: could spread it out, you couldn't head that risk over
Speaker 1: different banks. Vcs usually centralize it. I haven't met one
Speaker 1: that has different banks, but they usually centralize most of
Speaker 1: their banking operations at one location. I think that is
Speaker 1: sort of maybe a question mark here as we walk
Speaker 1: into what's next. Yeah, hey, Josh. One of the reasons
Speaker 1: Silicon Valley Bank came into existence decades ago in the
Speaker 1: first places because banks don't want to bank some of
Speaker 1: these small startup companies, you know, no profitability, and where
Speaker 1: do those companies go now. I think they'll probably stay
Speaker 1: mostly within the tech banking world. But that said, over
Speaker 1: the last twenty years, tech has contributed such a meaningful
Speaker 1: part of GDP growth in not only the world, but
Speaker 1: of course our country here in the United States, and
Speaker 1: tech has driven immense investment banking and IPO and M
Speaker 1: and A revenues for the largest groups like Boldman and
Speaker 1: JP Morgan, Morgan Stanley. It has been a huge revenue driver.
Speaker 1: And so because of that, some of these larger banks
Speaker 1: has started to come downstream to service startups, usually in
Speaker 1: the series B C or D range right ones that
Speaker 1: have you know, twenty to one hundred million in cash
Speaker 1: balances that raised large rounds, but increasingly soone. You're seeing
Speaker 1: this from groups like Bank of America, JP Morgan and
Speaker 1: even Boldman now where they're starting to move even earlier.
Speaker 1: This crisis has accelerated that trend and compressed that that
Speaker 1: trend into what feels like a week not entirely obviously,
Speaker 1: there's a lot of work to do, but I think
Speaker 1: you're going to see a lot of the tier one
Speaker 1: banks continue to open up venture capital, treasury and banking
Speaker 1: solutions for this market. What's your typical ratio of hits
Speaker 1: to missus in terms of the companies in which venture
Speaker 1: capital firm invests, and how has this banking crisis changed
Speaker 1: that ratio, if at all. The ratio is usually a
Speaker 1: high miss to hit ratio. That's kind of sort of
Speaker 1: the law of large winners. I think it's, you know,
Speaker 1: less than ten to twenty percent of the portfolio is
Speaker 1: going to contribute eighty percent plus of your return of
Speaker 1: capital to investors. And so unlike private equity that you
Speaker 1: know looks for three to five to ten x return
Speaker 1: on their investment, venture capital is looking, especially at early stage,
Speaker 1: at you know, thirty to one hundred x under investment
Speaker 1: to account for the high risk that you're taking across
Speaker 1: the board. So, you know, anywhere from fifty to eighty
Speaker 1: per cent up a portfolio might not work out, depending
Speaker 1: on the success as a VC firm. Obviously, my job,
Speaker 1: you know it, John's fall, is to get that ratios
Speaker 1: as high as I can aid. But it's a it's
Speaker 1: a high risk game for sure, all right, Josh, it's
Speaker 1: a high risk game. It's a young man's game. John
Speaker 1: Josh Chapman, managing partner at Convoy Ventures. Joining us really
Speaker 1: appreciate getting his perspective on the VC market and any
Speaker 1: impacts that may come from the failure of Silicon Valley Bank.
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 1: at Matt Miller nineteen seventy three and on ball Sweeney,
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
Speaker 1: can always catch us worldwide at Bloomberg Radio.