Tech Lending Market Overview
We often elicit reactions of surprise when describing the emerging company lending environment. Over the past few years this marketplace has evolved into a large and vibrant one with a wide array of players and well-established -- but variable -- underwriting and credit practices. Lenders have found that the tech sector offers attractive yield, and borrowers and equity investors are benefiting from access to efficient, value-boosting financing. Debt now represents upwards of 15% of all capital invested in venture stage tech companies each year; however this segment of the financing market remains relatively opaque.
The debt market for US emerging technology companies (loans to pre-profit / recently profitable tech companies) now totals over $20 billion of capital under management with over $6 billion of loans deployed annually.
Lending bite sizes, asset focus, structures, terms, subsector specialties, cost of capital, and underwriting criteria vary widely by lender and borrower.
Almost 100 lenders comprising banks, private growth debt and venture debt funds, public specialty funds (BDC) and hedge funds have meaningful capital aimed at US-based, emerging technology companies.
Nearly 20 lenders have entered this marketplace in the past 36 months, with the majority being banks and specialized private funds. At the same time, seven firms, mostly smaller private funds, have exited the marketplace typically due to fundraising challenges.
The prolonged low interest rate environment has had numerous implications, with banks holding a distinct pricing advantage versus non-bank lenders. Generalist private tech lending funds and BDCs (i.e. higher priced providers) have sought to distinguish their offering by providing larger and/or more flexible loans; tightening their sector, asset, or situation focus; and offering second or split lien loans in partnership with banks.
While the historically bright line between ‘profitable’ vs ‘unprofitable’ borrowers has blurred over the past several years, anecdotal evidence this year suggests lender sentiment has grown more cautious when evaluating pre-profit borrowers.
A number of public BDC lenders are trading around or below net asset value, creating challenges for these lenders when seeking fresh capital.
Tech company law firms are seeing a flurry of credit facility amendment and extension activity – an area prior to 2016 that has been relatively quiet – as equity capital has slowed and become more expensive.
When considering new debt financing, plan ahead and think broadly about debt providers and potential structures. Understand the track record and makeup of prospective lending partners. Thoroughly analyze tangible and intangible loan costs and risks presented by varying terms and structures. A well-planned exploration of the debt ecosystem can yield a range of flexible, low cost financing options to support growth.