Coming off of a down year in 2023 for the private credit technology sector, activity has picked up in the first quarter as lenders are approaching 2024 with a focus on deployment. We remain the most active and trusted debt advisor to venture-backed companies having raised ~$5 billion in debt capital in over the past two years and have closed or are in the processing of raising $1.7 billion in this market.
Technology Market Observations
- We sponsored the second annual Venture Debt Conference, which took place at the beginning of March and was well-attended. John Markell presented the “State of Venture Debt” which can be viewed here. General themes of the conference included:
- Private credit continues to attract fundraising dollars as the asset class is expected to maintain an upward trajectory. This has resulted in an expansion of the lender landscape via a flood of new credit platforms, strategy expansion, and acquisitions into the space.
- Lenders are focused on deployment given the high levels of dry powder and a year of under deployment in 2023, particularly as lenders look to take advantage of fundraising interest, which may prompt a need to show a return on capital.
- Lenders are expecting defaults within their portfolios later this year and into 2025 as borrowers face maturities in a less favorable market compared to when the loans originated. The continuation of high interest rates limits lender appetite to “amend and extend” cheaper loans given pricing in current market.
- Use of interest Paid-in-Kind (“PIK”) is expected to rise through amendment activity as borrowers are forced to refinance cheaper debt in today’s market. PIK is also being used in new loan issuances to help borrowers manage their cash interest expense.
- Lenders are relying less on equity syndicate to continue to fund businesses and focusing more on business model and cash runway.
- Private credit took market share from banks while the syndicated market was on pause for the majority of 2023; however, the syndicated market has shown some resurgence in Q1 and may cause compression in spreads through increased competition. Refinancing activity is expected to be the main driver of supply, with a potential uptick in M&A activity, prompting borrowers to tap into the syndicated market.
- For top-quality, $100m+ deals, lenders willing to price in S+600 range, a 100-200 bps improvement in last 3 to 6 months.
- IPO markets are showing some momentum, potentially creating an exit path that didn’t exist last year. First quarter saw 14 “traditional” (non-SPAC) IPOs, compared to 35 in 2023, and 20 total IPOs, compared to 66 in 2023. Two of the Q1 IPOs were in the tech sector – Reddit and Astera Labs – both of which have growth stories tied to AI-related demand and saw significant gains on their debut.
- Rumblings of potential interest rate cuts in 2024 may increase deal volume throughout 2024.