The private credit market remains challenging, particularly within the technology sector; though, lenders are leaning into higher quality credits. Skepticism around the health of regional banks persists, with borrowers opting for non-bank venture debt, even if they are of capital year to date, and with $800 million of debt raises currently in market.
Technology Market Observations
While there is continued aversion to venture bank financing, reasonable receptivity in the non-bank lender market exists.
- Concerns about assignment of loans if a bank fails and/or deposit loss given a typical requirement of a bank loan is that all deposits must be held at loan-originating bank. Thus — we are seeing market demand for debt much more heavily weighted towards non-banks as a percentage of total originations, despite the significant difference in pricing.
From Conversations with over 100 lenders following the SVB collapse and our experience in the market, we believe lenders recognize the current market volatility has little to do with the quality of banks’ current venture loan books, but with their liquidity positions from mismatched duration books and deposit beta.
Closing and deal count activity remains slower as lenders are more selective of opportunities; however, we are seeing pockets of increased activity for fundamentally strong companies.
- Lenders continue to sift through their pipelines, passion on tougher deals and chain higher quality deals; we’re hearing from lenders that the number of higher quality deals has thinned considerably since Q1 2023.
- Lenders will work through portfolio activity created from i) lack of exit opportunities (e.g., no IPO market, down valuations discouraging sales); ii) slower growth than initially forecasted; and iii) unattractive refinancing market.
- Credit funds that focus on smaller direct lending opportunities have closed meaningfully fewer deals as risk tolerance has decreased, creating a shortfall to origination targets. We’ve seen this market loosen as lenders feel more pressure to deploy to hit origination targets.
- For high-quality and larger ($100m+) deals, lenders are willing to price in the S+525-600 range, representing a 100-200 bps improvement in last 3 to 6 months.
The higher rate environment has led to more proposals with longer non-callable periods and warrant coverage has returned to the market to supplement debt yields.
Bank syndication market is starting to thaw although limited number of players is limiting size for cash flow negative opportunities.
Cash runway remains paramount — runway under 12 months is a non-starter without additional equity closing with the debt; 18 months is preferred; 24+ months commands myriad debt opportunities.