Wall Street's private banks are aggressively increasing lending to individuals with significant but illiquid wealth tied to artificial intelligence companies, particularly in Silicon Valley. This surge in lending is driven by the unprecedented wealth creation in the AI sector, prompting entrepreneurs to seek cash before their companies go public. For banks like JPMorgan Chase and Goldman Sachs, these loans are a strategic move to secure top underwriting positions for future IPOs and broader wealth management roles once these companies become public entities. JPMorgan's private bank has seen a tenfold increase in global lending demand recently, while Goldman Sachs' private wealth management in San Francisco reports a 50% rise in loan balances since 2023.
Banks are becoming more comfortable offering loans collateralized by pre-IPO stock, a practice that was once highly selective. Laura Uberoi, head of private wealth finance at Addleshaw Goddard, noted a "skyrocketing" increase in such lending, with her firm doubling the number of deals globally compared to the previous year. Deals as small as $150 million are becoming more common, indicating that banks are extending these loans beyond just founders to a wider range of employees whose stakes have appreciated significantly. This shift comes despite historical caution, such as the 2019 incident with WeWork founder Adam Neumann, whose $500 million credit facility pledged against his pre-IPO stock ran into trouble.
JPMorgan is also increasingly offering short-term, unsecured recourse loans, typically due within 12 to 18 months, to these individuals. The rationale is the opportunity for future liquidity events, such as IPOs or company-sponsored tenders. The development of a more robust secondary market for private shares has also made banks more comfortable with pre-IPO lending, as it offers a clearer path to debt repayment. However, risks remain, as a sharp decline in a startup's valuation or IPO prospects could significantly impact collateral value for both lenders and borrowers. Despite these risks, banks are willing to proceed, focusing on employees from companies expected to IPO within three years.
The competitive landscape for this new wealth is intense. Solenn Seguillon, head of the technology practice at JPMorgan’s private bank in San Francisco, highlighted the speed of wealth creation in the Bay Area, with $10 billion valuations occurring weekly. This rapid pace necessitates quick relationship building and value addition from banks. The $75 billion SpaceX IPO, where Goldman Sachs and Morgan Stanley served as lead banks, generated approximately $100 million in fees for each, with Morgan Stanley anticipating even more in annual revenue from managing the newfound wealth, illustrating the long-term potential for banks in these deals. SoftBank also secured a $10 billion margin loan against its OpenAI stake from a consortium of banks including Goldman Sachs and JPMorgan, further highlighting the trend of leveraging illiquid AI assets.
Conversely, some individuals, like Travis Kell, co-founder of Metropolis Technologies, have opted for alternative financing. Kell turned down proposals from banks, including Silicon Valley Bank, in 2022 due to their demanding collateral requirements and short repayment terms. Instead, he secured a deal with investment firm Ion Pacific, exchanging a share of future profits on his stock for upfront cash, without personal liability if the stock's value decreased.
