The pause that refreshes and venture debt

Sometimes a dose of creative destruction is necessary to clear out the underbrush in an overvalued and overcapitalised market. Perhaps it took the implosion of Silicon Valley Bank, the undisputed behemoth in the venture ecosystem, and other lenders to reset a market that had become significantly overvalued and overcapitalised.

Although it’s back to business as usual at SVB, as a feature story in our July/August issue points out, there’s plenty of jockeying going on in the $35 billion venture debt space and in the void left by the shakeup there and at other regional banks, especially for debt deals under $5 million.

It wasn’t bad loans that did for SVB, but the larger issues surrounding the venture and growth world, and the dust is still settling. The market was saturated with capital at unprecedented and inflated valuations “and now the recalibration pain is greater… than in past cycles because of the deflation from the top of Mount Olympus to sea level”, Michael Gray, a partner who specialises in venture investments at Chicago law firm Neal, Gerber & Eisenberg, told us.

Meanwhile, investors in venture growth are becoming more cautious, given a slowdown in exit opportunities and a collapse in valuations for some technology and biotech companies that has led to down rounds.

But the cleansing that is taking place, along with the malaise in the large-bank syndication market that is steering direct lenders away from riskier venture debt towards less risky leveraged buyout deals, has created a huge void that some well-placed venture lenders are moving to occupy. Several of them told us that they are as busy as ever filling the vacuum in mid-market venture lending.

The opportunity hasn’t been lost on some of the behemoths, with BlackRock announcing in early June that it was buying Kreos, which provides growth and venture debt funding for the technology and healthcare sectors. That was followed by news this week that Oaktree had closed on a $2.3 billion life sciences lending fund and that Ares had snapped up a $3.5 billion loan portfolio from PacWest.

In the second half of 2022, Apollo established Cadma Capital Partners, which provides asset-backed financing to venture and growth lenders. Apollo in late May announced the hiring of two former Western Technology Investment partners for executive positions at Cadma.

On the heels of the SVB bankruptcy Hercules Capital launched Hercules Adviser, a private credit lending platform to back venture and growth-stage companies – and even before the shakeout, Monroe Capital bought venture lender Horizon Technology Finance Management.

As Hercules CEO Scott Bluestein told us, the turmoil at SVB has created “a massive opportunity” for the venture debt business development company. Look for it to get even larger.