While credit has a lower ROI than PE, being senior-secured means the credit investment is also less risky. Risk-adjustment: Venture lending is best understood on a risk-adjusted basis.This will require a shift in analysis and underwriting, namely focusing on: Growth PE firms are more accustomed to solving for upside, rather than lenders who are focused on managing downside risk. Offering such a complementary, differentiated product that provides less dilution for entrepreneurs and management teams and adds to the long-term partnership story could help make a difference in winning deals. Support existing portfolio as well as future investments: The in-house credit team can advise on debt and cap structure issues/questions within the portfolio, as well as design competitive hybrid structures (such as structured equity, converts, etc.).It can also enhance origination from the knowledge and pipeline sharing of deals back and forth between the equity and debt teams. The existing relationship should help facilitate fundraising for the new platform and reduce ramp-up time.

Deepen relationships with large LPs: This means gaining access to other silos of capital beyond venture equity, such as credit, direct lending, etc.In addition, early ownership in a platform that can be spun out in the future creates a source of additional returns to the GP. Diversify sources of fees and income: This strategy can increase the valuation multiple of the GP over time.Since venture debt is simply private credit aimed at slightly less mature companies than typical middle-market, it follows that growth PE firms that similarly invest in younger companies could reap the same benefits, including the following:

Examples include Vista Credit, Thoma Bravo Credit and Francisco Credit-all added to firms that bear the same names. Benefits Of A Venture Debt Strategy For A Technology-Focused Growth PE FirmĪdding a credit strategy to an existing technology-focused private equity platform has been accomplished by large PE platforms. Some considerations when vetting a team would be the team’s experience during a downturn, managing distressed situations and the strength of their network in the technology ecosystem. However, there are best practices and loan histories available from publicly traded BDCs that can help guide firms.Ī credit firm looking to extend into venture lending might consider bringing in-house or forming a joint venture with a team that has already been in this segment for several years.

Specialized due diligence: For a credit firm that may be more focused on later-stage, cash-flowing businesses, making venture loans can seem like a leap of faith.

Experience with both credit and technology business models: This is needed for successful underwriting because several key markers used for credit analysis simply aren’t available, such as positive EBITDA or cashflow, hard assets, established liquidation values, predictable growth curves and default rates.

As with any credit strategy, over-extending leverage or not properly underwriting borrowers could lead to issues with the loans. Venture lending is a unique subsegment within broader private credit, and as such requires different underwriting tools and mindset, risk tolerance and internal processes to manage a portfolio of such loans. When executed properly, venture lending can be a stable, weather-resistant strategy for those looking to avoid market fluctuations.

Increase access: This strategy allows access to an underserved segment of credit with barriers to entry that have kept the supply of this type of financing low.

Define venture debt