- On Tuesday, Wells Fargo said it racked up $935 million in impairments during the first quarter on its own investments including venture capital and PE bets.
- Wells Fargo, the fourth-largest US bank by customer assets, said the investments involved were made through Norwest Venture Partners, Norwest Equity Partners, and Wells Fargo Strategic Capital.
- Overall, securities impairments took a $950 million bite out of the bank's net income for the quarter.
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Wells Fargo said tanking valuations for its venture capital and private equity investments took a bite out of profits in the first quarter.
The San Francisco-based bank said in its quarterly earnings report on Monday that it racked up $935 million in securities impairments "reflecting lower market valuations," primarily from its affiliated venture capital and private equity partnerships, as well as its wholesale business.
Specifically, the firm referred to impairments on investments and activity through its own Wells Fargo Strategic Capital arm and partners Norwest Venture Partners and Norwest Equity Partners. That hit represented 17% of the carrying values of these businesses' portfolio investments that are subject to an impairment assessment, the bank said.
Overall, hits to debt and equity securities took a $950 million toll on the bank's net income for the quarter, cutting earnings per share by 17 cents.
Wells Fargo reported an 89% drop in overall profit for the first quarter as it also set aside billions to cover loan loss reserves amid the pandemic's economic devastation. For weeks, analysts have warned investors that banks and other financial services firms are likely to turn in dismal results this earnings season as US stocks logged the worst first quarter in years and interest rates cratered.
A Wells Fargo spokesperson responded to a request for further comment by referring to the statements made within the bank's earnings presentation. Norwest Venture Partners and Norwest Equity Partners representatives did not respond to requests for comment.
Business Insider could not determine which investments were impacted by the impairments.
When asked by an analyst about whether any near-term reversal to write the equity investments back up was in the cards, Wells Fargo CFO John Shrewsberry pointed to the economic uncertainty that has been created by the coronavirus pandemic.
"I wouldn't expect that to happen in the early stages of a recession, if that's where we are in the next few quarters," he said, according to a call transcript from the platform Sentieo. "Obviously, there are lots of ways to earn that back over the life of those investments, but it will take a while for that to reveal itself."
Palo Alto, California-based Norwest Venture Partners, to which Wells Fargo is the main institutional limited partner, has invested in startups that have seen public market debuts in recent years, like Uber and Spotify, and acquisitions like Plaid.
It's also backed companies that have had a tumultuous time more recently. Knotel, a New York-based flexible-office provider that raised $50 million from Norwest Venture Partners in 2018, has struggled with a backlog of payments and has stopped paying rent for some locations, Business Insider previously reported. Knotel also laid off or furloughed half of its staff last month.
Norwest Venture Partners has also backed real-estate startup Opendoor in multiple funding rounds. Business Insider reported in March that Opendoor had paused purchases, along with other so-called iBuyers like Redfin and Zillow.
The earnings hit highlighted the wider venture landscape's historically difficult moment. SoftBank, which has also backed Opendoor, warned earlier this week of a nearly $17 billion annual operating loss in its massive tech-focused Vision Fund.
Norwest Equity Partners, meanwhile, makes equity investments in the range of $30 million to $250 million-plus, and targets industries including agriculture, business services, consumer, distribution, industrials, energy, and healthcare, according to Wells Fargo's website.
Wells Fargo Strategic Capital unit makes principal investments directly from the bank's balance sheet via equity and debt capital.
Its investments this year have included DadeSystems, a financial technology firm, and Elliptic, a crypto-asset risk management provider. In 2019, the unit took part in an $80 million Series D round for flex-office startup Industrious, as well as a $60 million Series D for commercial real-estate startup Reonomy.
Norwest Venture Partners has also backed Casper, the online mattress vendor that went public earlier this year in a disappointing stock market debut, and had invested in the online marketplace Jet.com, which Walmart bought for $3 billion in 2016.
When asked about the venture capital and private-equity portfolios on an earnings call in October 2019, then-CEO Allen Parker was optimistic about the firm's investments, though he noted deploying capital could be difficult since "asset prices are so high." He also noted a change in its accounting rules would lead to volatility for some of its investments' values.
"It's a great time to be realizing from both private equity and venture portfolios," Parker, who retired from the bank a month later, said. "And so our teams have been selling into that and that's where we've been at the high point in the cycle for a while now."
Broadly, analysts expect the S&P 500 financials sector to report a 20% drop in profits compared to a year ago, according to a Bank of America and FactSet analysis published on Monday. Revenue for the sector is expected to drop by nearly 4% over the same time.
