Silicon Valley Bank was at the heart of a tech ecosystem before it was seized last week by federal regulators. Amid all the short-term pain and anxiety, however, Kroll’s Karan Kapoor sees longer-term opportunity for M&A in the tech sector. Here’s how:

“As the loans made by SVB come due, whether in a few months or a couple of years, firms will be forced to access different sources of capital and may have to consider a full recapitalization or sale,” says Kapoor.

This is where private equity firms can step in, Kapoor says. Funding will be a problem for earlier-stage startups that relied on SVB to provide loans even though they were not making any profit. Some companies may even face a distressed sale, but many will need cash to keep going.

“The bank’s collapse will accelerate the timing for a liquidity event,” says Kapoor. This longer-term fallout won’t be evident for a while. For PE firms themselves, the impact is still to be determined, he adds.

“This not something that started last Friday [March 10],” Kapoor notes. While the first half of 2022 was characterized by optimism, buyers had grown more cautious by the second half even though sellers were slower to realign with the new reality. Bid-ask spreads widened.

After the shock of the SVB collapse, there will be a period of uncertainty and even “chaos” through the end of the second quarter.

“Some firms will have the luxury to slow down,” Kapoor says, “but there is a limited runway for many.”

Kapoor focuses on the tech sector, but he thinks the impact will go further. “There is a ripple effect,” he says. “Tech is pervasive. It has permeated all other sectors.” Real estate and construction, for instance, are not considered tech industries, but they, too, have become reliant on tech innovations.

SVB was an unconventional bank, Kapoor believes, and made unconventional loans that were not based on cash flow. Michael Bell, who focuses on bank M&A at the Honigman law firm in Detroit, agrees that SVB was not your typical bank.

“It served an interesting niche,” Bell says. “Other banks have been hit, but that’s unfair. There’s a moment of hysteria that there is a bank problem.”

Bell, who pioneered credit union purchases of community banks, says he has several transactions in the works that are going ahead. “I don’t think these banks, or bigger regional banks, will get caught up in this.”

For one thing, smaller institutions have developed alternatives for securing deposits beyond the $250,000 level of FDIC insurance, using letters of credit or securities collateral. “This is Banking 101,”says Bell. “It happens all the time.”

A new analysis from S&P Global Market Intelligence has found that SVB and Signature Bank, which was closed by New York state regulators last weekend [March 12], were among U.S. banks with the highest portion of uninsured deposits. Other banks at the top of this list – BNY Mellon, State Street, and Northern Trust – are trust/custodial banks, and their ratios dropped dramatically when comparing total loans and held-to-maturity securities to total deposits.

Bell thinks that the Federal Reserve and other regulators, as well as the big banks, acted properly to contain a ripple effect in the banking sector and things will calm down once logic prevails.

“Their actions prove these closures are one-offs, not a systemic problem,” says Bell. This contrasts with the 2008 financial crisis, where thousands of institutions were involved in mortgages and mortgage-backed securities. “This is different,” he says. “This is not that.”

Bell has spoken to numerous bank executives in the past week. They have consistently affirmed, “We’re OK,” he says.

How long it will be before things calm down is difficult to say, however. “Time does fly,” says Bell, “but I don’t know how long it will take.”

Darrell Delamaide