During 2022, the private credit market for growth-stage, technology companies mirrored a bell curve, with a slower start and finish to the year and an uptick in activity through the middle of the year. The lull in activity at the end of the year was primarily driven by volatility in the global economy and equity markets, combined with a decrease in supply as lenders over-originated through the first part of the year. We remain the most active and trusted debt advisor to private venture-backed and public companies having closed approximately $3.5 billion in debt capital commitments for clients in the last 12 months.
- Going into 2023, the venture debt market remains open with strong demand from borrowers given the desire to avoid raising equity at valuations inside of 2020 / 2021 levels. While demand has increased, there is a higher underwriting standard for most lenders. Additionally, in the second half of 2022, maximum check sizes plateaued, or even lowered, as another way for lenders to mitigate risk in the backdrop of economic uncertainty; however, this trend may be reversing from lenders that recently raised capital.
- Historically, the majority of our transactions have been funded by one lender; however, we expect to see more club (2-4 lenders) or syndicated transactions in 2023, as lenders have less appetite to commit to sizable transactions as a way of risk mitigation. In addition, the bank syndicated market continues to be unreliable, shifting more demand to private credit.
- Large asset managers with strategies able to invest in equity markets, investment grade assets, or other higher yielding opportunities, have pulled back from the private credit market given their relative value investment strategies. In late 2022, several venture lenders pulled back as well but have since returned to the market, believing equity valuations are stabilizing, albeit at lower levels than management teams would like.
- Cash runway still remains paramount for venture lenders to engage: runway under 12 months is a non-starter without additional equity closing in parallel with the debt; 18 months is preferred; 24+ months commands myriad debt opportunities.
- Acquisition debt raises continue to remain in favor. Well-capitalized companies have been ’bulking up’ their balance sheets with (additional) debt, looking to consummate lined-up transactions or to be able to be opportunistic later. Lenders remain willing to leave a portion of their commitment unfunded at close, while committing to capital availability later; however, lenders are less aggressive with the amount they allow to be unfunded at close. At the height of the market, lenders were willing to fund as little as 10% of commitment, where now are requiring funding of 50% – 75% at close.
- In 2021 through early 2022, fewer deals contained warrants compared to historical norms, however, we have seen warrants return to the market to supplement debt yields. We’ve also seen the advent of success fees, in place of warrants, as another way to supplement debt yields.
- Rising interest rates have kept lenders active. In the second half of last year, we generally saw lender pricing increase compared with the same quality of deal in the first half of the year and expect this trend to hold across lenders and subsectors.