Venture Debt: The Rising Interest in Alternative Financing for Startups
By: Bobby Dormanesh
The tailwinds from the Global Financial Crisis of low interest rates, available credit, and rising valuations are shifting. Private debt is gaining popularity as the pendulum begins to swing in a different direction. Regardless of the type of asset, private markets have continuously outperformed public markets.
What is happening in private debt?
Interest rates are rising, creating more attractive debt yields – the rate of return an investor can expect to earn if they hold debt instruments until maturity. Private debt fundraising grew last year to help make up the shortfall in bank financing. Rising rates, coupled with its senior position in the capital stack, has attracted investors with its ability to earn high single-digit to low double-digit returns on the asset class.
What is happening in private equity?
Starting in the second half of 2022 and continuing into Q1 of 2023, deal making has slowed down, global fundraising is down, and dry powder continues to grow. The rising rates noted in the private debt market has caused both, the cost of capital and the opportunity cost of investing in private equity, to go up. The increasing cost of capital makes it more expensive for PE firms to finance their purchases, while at the same time decreasing the valuations of their portfolio companies. Lastly, the opportunity in the private debt market creates an even higher hurdle for private equity to beat (i.e., if an investor is going to invest in a riskier asset, the returns must not only beat the less risky debt asset, but it has to pay a premium).
How we can help
We have teams of industry specialists that understand the life cycle of your investment and we are available to walk alongside you. PE firms continue to optimize operations, invest in people, and find growth opportunities. Our team members will leverage other specialists in the industries that you are invested into to help you deliver value to your investors, identify talent solutions, and help you execute on your strategy.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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