Why are banks cooling on the idea of CVC funds?

Fidelity International Strategic Investments, set up seven years ago by Alokik Advani, has become the latest corporate venture unit to be sold off to become part of a private equity investment company, in this case 7Ridge.  

For a CVC unit, this is about as dignified a parting of ways with a parent corporation as can be hoped for — the alternative is seeing the team disbanded and the portfolio sold off in piecemeal secondary transactions for pennies on the dollar. There’s still a discount in this kind of whole portfolio transaction — any secondary deal has that — but it is heartening to see whole CVC teams being taken on by PE in this way. It feels like a vote of confidence in their skills and sector knowledge. Many private equity companies are looking to expand into earlier-stage investments, and this is a good way for them to pick up the talent they need to make that transition.

Financial services companies have been some of the most likely to spin out their CVC arms. There are some — like Citi Group and Capital One — that have long-running corporate venture arms dating back more than a decade.  

But Fidelity’s FISV unit now joins a list corporate venture arms spun out from their financial service parents, including BBVA’s Propel Ventures, ABN Amro Ventures which became part of Motive Partners, and Mouro Capital which spun out of Santander. Meanwhile we are keeping a watchful eye on ING Ventures, which last year said it was halting new investments.  

Why have banks cooled on the idea of CVC funds? Part of the reason is banking regulation. The Basel 4 banking rules, currently in the process of being implemented globally, significantly increased the amount of their own capital that banks have to put aside to cover potential losses from startup holdings. In some cases, the risk weightings have increased to 250% or even 450%, effectively making a CVC portfolio now much more expensive for a bank to own.  

Banks also have to be careful about not owning too large a stake in a startup — or exerting too much influence — lest this trigger accounting rules that require it to consolidate the startup onto its balance sheet. That would mean additional reporting and governance obligations, as well as liabilities. But keeping startups at arm’s length means less influence, less contact and potentially fewer of the strategic synergies all CVCs are seeking. 

All this is clearly making many banks reconsider whether CVC is the most capital efficient way to get exposure to startups. With the IPO pipeline still slow to build (see our latest exits data here), rumour has it that many more teams are doing the rounds in the secondary market now, looking for that private equity escape hatch. We’ll keep our eyes on this space. 

And if you are on the other side of this journey — just looking set up a unit rather than spin one out — don’t forget to sign up for our webinar this Wednesday at 5pm BST: Launching a CVC: Startup Fundamentals. It’s free and if you sign up, even if you can’t make the live webinar, you will get the replay and key learnings summary direct to your inbox.   

This editor’s note was first published in GCV’s Blueprint newsletter, which tracks corporate venture news, key deals, new funds best practice and jobs.

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