Venture Debt - the non-dilutive path to growth for companies

At Anterion, we also advise European Venture Debt Funds.

 

Venture Debt is, to most investors in Europe, an unknown asset class. It is exactly what the name suggests; a loan to a venture company. A venture company is new with a little proven business model. However, when a company moves from the seeding stage into later-stage, risks for capital providers change dramatically. It is in this space that Venture Debt plays an important role in the US, and in the future increasingly so in Europe.

Venture Debt is typically a senior secured loan with an equity kicker (warrant) and, hence, has the potential to yield higher returns than traditional senior secured loan to a more established business.

At Anterion, we strive to widen the knowledge of Venture Debt in Europe and deliver bespoke advice to select Fund Managers.

Ultimately, the largest challenge for a newly founded company, or "start-up", is bridging the large gap between having an idea to having a profitable business. 

In the US, and to a lesser extent in Europe, private capital from "Angel Investors" is available, but at a very high cost. The reason is that many start-up's fail and investors have a high risk of losing their money. In order to compensate for this risk, the investors apply the "1-in-10" principle ("spray & pray") that make it, to compensate for the lost ones. This may seem unfair, but is a financial equilibrium as supply of capital meets demand.

The Venture Debt market has grown out of this imbalance. Credit investors see opportunity in accessing the venture company's balance sheet and cash flow via a specific asset collateral (senior secured) which provides the lender with a higher degree of security compared to junior or unitranche credits. The potential borrower that is in a growth-and-burning-cash phase, faces the alternative of a heavy dilution from taking on capital in the form of equity from third parties, or the more attractive non-dilutive option of taking on cash flow/asset based lending in the form of venture debt.

The outcome is a higher yield to the lender, with some upside through the warrant. The borrower gets the capital and retains the control of the company.

Anterion believes that Venture Debt is an attractive asset class for credit investors, provided that they can source the right assets, either directly or indirectly through a talented manager.