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March 16, 2023

Silicon Valley Bank, Signature Bank Depositor Bailouts Save Sports Industry from “Dire” Consequences

The recent collapse of Silicon Valley Bank, the second largest in U.S. history ($42 billion), and the subsequent failure of Signature Bank, the third largest all-time, have sparked fears of bank runs at other regional banks.

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board are trying to prevent a broader crisis within the U.S. banking system. On Sunday, they announced the FDIC’s deposit insurance fund would fully backstop depositors at both failed institutions.

Few worry about its effects on sports during a banking crisis.

However, had depositors not been made whole, it would have caused seen and unforeseen consequences amongst the private equity and venture communities that invest in the industry.

“It would have created an intense near-term liquidity problem for portfolio companies,” Brian Reilly (co-founder and managing partner, Will Ventures) said. “The loss of funds would have affected hundreds of existing portfolio companies and their ability to make payroll and stay in business.”

The bank failures would have also likely had an impact on future sports investments, sport’s existing ownership base and the sports capital markets ecosystem.   

“The first order effect would [have been] that those PE funds that custodied assets with SVB would be unable to deploy their dry powder into deals," Dave Mirynech (founder, FanClub Sports Capital) said. "The second order effect [would have been] that many of the LPs in VC funds custodied with SVB are clubs and owners, and they may have faced a near-term capital call as those funds struggled to make payroll. The third order effects [would have been] the liquidity crunch brought about by the first two [and their impact] on daily club operations. [And] the reality is that in the aftermath, we probably would have seen a freeze on deal making in the sports capital market ecosystem for some time." 

The collapse of SVB and Signature seem unlikely to have much of an impact on sports now that the government has decided to make depositors whole.

“But it was looking pretty dire at the beginning of [last] weekend,” Reilly said.

That is in part because several prominent private equity funds that invest in sports had custodied assets at SVB, including:

• Arctos Sports Partners - $4,754,408,399

• Ares Management Corporation - $10,116,708,041

• Bluestone Equity Partners - $300,650,000

• LionRock Capital 莱恩资本 - $10,635,233

• Silver Lake - $363,120,716

It does need to be noted that the totals presented are not necessarily indicative of liquid cash parked at the bank. “A lot of those assets represent securities held in kind and deals that have been done, particularly in Arctos’ case,” Mirynech said.

Ares and Silver Lake are large firms that invest across sectors, so it is difficult to determine how much of their money at SVB was earmarked for sports investments. LionRock had minimal exposure. It would be hard to suggest any of those firms would have been in serious trouble had regulators not bailed depositors out.

But that may not have been the case with Bluestone. “You saw they raised $300 million; they had $300,650,000 sitting in the account and to [public’s] knowledge they hadn’t deployed it anywhere,” Mirynech said.

The loss of capital would have slowed deal making activity in the sector.

It may have also made it harder for sports-centric firms to raise new capital in the future. “A lot of LPs from Fund I will invest in Fund II and Fund III. They enjoy what [the fund manager] did, so they come back,” Mirynech said. “But if they [blame the fund manager] for losing their money, it could have impact on all kinds of future deals.”

The effects would have spanned beyond PE circles.

There were also a couple of prominent sports-centric VCs that custodied assets at SVB.

• Sapphire Ventures - $2,320,534,981

• Courtside Ventures - $132,990,000

The principal concern for those firms would have been their portfolio companies making payroll. “Most venture funds are designed to not keep much cash on the balance sheet for that long, unlike a hedge fund,” Reilly said.

That is particularly true with early-stage funds like the ones cited. So, the LPs in those funds may have been asked to make capital calls.

That is noteworthy considering the LPs in Sapphire and Courtside are a collective of sports team owners and strategic partners.

While it seems unlikely the capital calls would have forced a team owner to sell a stake their team, they could have had an impact on spending (think: marquee free agent, stadium improvements). 

Capital calls “just limit liquid capital to do other things,” Mirynech said.  

Portfolio companies may have looked to more traditional players for venture debt solutions too. Though, that could have resulted in some down rounds.

“We’re in a different market than we were months ago,” Reilly said.

While Will Ventures would have secured non-dilutive capital, some GPs may have had that conversation.

SVB banks ~50% of the companies in the venture capital ecosystem. Those that are currently sponsors of, or suppliers to, teams likely would have struggled to make future payments had depositors lost their capital.  

While big four sponsorship revenue seems secure for now, there is likely to be at least one sports sponsorship casualty.

SVB has been an ardent supporter and the biggest sponsor of women’s cycling in North America. The bank was the title sponsor for the UCI professional women’s cycling TEAM EF Education-TIBCO-SVB. Now that SVB has failed, the team’s future is reportedly in doubt.

The FED’s actions, designed to give people confidence in the banking system, may have prevented imminent contagion. “If the federal government didn’t make depositors whole, there certainly would have been a mass exodus from smaller and regional banks,” Mirynech said. “Everyone would have moved to big four banks because it was not worth the risk.”

They also likely saved a host of smaller professional and/or minor-league sports properties in the process.

“If you have [a bank run] repeat situation 40, 50 times across other small banks, what is the impact on USL teams or AA baseball teams that use those banks,” Mirynech said.

Of course, a widespread bank failure would impact more than just tier-three franchises. It would affect the entire sports ecosystem. “From club and athlete deposit accounts, [to] service businesses and vendors unable to fulfill obligations, and lastly fans unable to spend on sports as a product," Mirynech said.