Alternative investments as an asset class, are well positioned to resist and even take advantage of funding pressures and volatility. (UBS)

According to its website, SVB was banking with nearly half of all US venture capital-backed startups and 44% of US venture-backed tech and healthcare companies that went public last year. SVB also held a loan porfolio of about USD 74bn, with over USD 40bn of that in capital calls and subscription lines to private equity and venture capital funds at the end of 2022. The bank also stated that it had USD 3.2bn in clean tech financing commitments as of end 2021.

Rising rates have been painful for high-growth oriented companies with elevated cash burn rates. Combined with a challenging fundraising environment, this made SVB vulnerable to a wave of deposit withdrawals. The realization of heavy mark-to-market losses on SVB’s bond holdings held against those deposits led to the abrupt halt of its operations requiring the Federal Deposit Insurance Corporation (FDIC) to step in and take control. The creation of the Fed’s Bank Term Funding (BTFP) Program provided a much-needed backstop, shoring up SVB and other regional banks from a potential bank run. But even though the latest available information suggests SVB’s collapse was not driven by a VC or startup-linked credit event, questions have arisen regarding the outlook for high-growth startups and the broader impact on the alternatives asset class. Some of these questions also addressed financing for green and broader sustainability technologies in the light of the Inflation Reduction Act and the focus on the energy transition.

Investor takeaways

  • Recent bank challenges are likely to exacerbate funding availability in the coming quarters. But the health of the overall banking system is not at risk, and we do not expect a rerun of the global financial crisis. Alternative investments as an asset class, are well positioned to resist and even take advantage of funding pressures and volatility. Signs of stress in selective areas of the marketplace are nevertheless a risk to monitor on a forward-looking basis.
  • In the current environment, investors should ensure that their alternative portfolio is in line with their target allocation and make sure they are still comfortable with the risks inherent with investing in alternative investments. These may include reduced liquidity, complexity, higher costs and leverage. For those considering building exposure or adding to the asset class, we see very attractive opportunities.
  • Investing fresh capital in private equity in times of stress has historically rewarded investors with above-average returns. To take advantage of these opportunities, we recommend seeking exposure to value-oriented buyout and secondaries. In private credit, we see opportunity in direct lending, distressed and special situation funds.
  • Within hedge funds, we continue to see select funds as a potential source of defensive alpha and uncorrelated returns. We still favor discretionary macro funds, low-net equity long-short strategies and multi-strategy funds.
  • In real estate, we expect niche investments in logistics, healthcare and medical centers, self-storage or data centers and telecommunication towers to fare better. We expect significant divergence within the office and retail sectors depending on location and property type.
  • Investors should nevertheless seek exposure to longstanding managers with solid track records, experience in navigating difficult environments, and those with portfolios that are well-diversified across strategies and geographies.

Read the full report, Are alternatives impacted by recent banking stress? (4 April 2023), which provides deep dives into CIO's views on hedge funds, real estate, and more.

Main contributor: Karim Cherif

This content is a product of the UBS Chief Investment Office.