White Paper: Venture Debt - 10 Things To Know

EXECUTIVE SUMMARY

• Venture debt includes debt products for companies which have previously received institutional funding. Venture debt is usually provided in the form of short duration, senior secured term loans combined with equity warrants. This mix provides the lender with capital protection, current income, and unlimited potential return.

• Venture debt is provided to technology-enabled companies that use technology hardware, software, tools, platforms, libraries, and frameworks to make products or provide services that increase efficiency and effectiveness. Technology-enabled businesses are valued significantly higher than businesses that are not given the shift towards a digital, on-demand, economy.

• Over 75% of the venture debt market is controlled by fewer than 10 commercial banks and Business Development Companies (BDCs).

• The market is expanding rapidly and is expected to grow to $20-25 bn by 2021YE.

• Returns have typically ranged from 15% to 25% annually through a combination of contractual interest and fees, and equity returns (via warrants) from 2005 through 2020.

• Venture debt has surprisingly low historical loss rates. From 2005 through 2020, a period that includes the worst years of the Global Financial Crisis during 2008-2010, losses in venture debt have averaged less than 0.50% annually,

• There are several factors that are unique to venture debt that significantly de-risk the loans and limit downside risk. The downside protection arises from a triumvirate of high performing operating companies, strong deal structures, and supportive VC-sponsors. Existing investors have a vested interest in the borrower’s success.

• The three primary benefits of venture debt for investors are:1) Superior risk-adjusted return; 2) Security of capital; 3) Strong portfolio diversification. Additional benefits that investors appreciate about venture debt: no “J-Curve” effect, relatively short duration, low volatility, no interest rate risk, and the opportunity toco-invest.

• The majority of institutional investors classify venture debt as an absolute return strategy that lies within their income generating or credit portfolios. For investors seeking direct exposure to venture debt, co-investment opportunities, and lower short-term volatility, private closed-end fund structures offer the only opportunity.