Venture Debt BDCs + Intel from a Tech Banker

Perspectives and Quick Takes From Bigfoot and Our Community of SaaS Operators and Investors

May 24, 2023

Thanks for joining me for another Bigfoot Bi-Weekly Roundup. With the newsletter, my goal is to provide an informative, conversation-provoking, and action-oriented read that enables our operator and capital provider peers to learn, grow and connect.

This week I cover:

Q1 activity for the 5 venture debt business development companies (BDCs)
Tech M&A/private credit market intelligence from tech investment banker
A gentle reminder to keep health and efficiency at the top of the list

If you enjoy what you read, we'd appreciate you sharing our insights with your network!

1. Activity

The 5 venture debt BDCs provided $760M in new commitments in Q1. One lender, Hercules accounted for ~70% of that and 3 of 5 venture debt BDCs signed up <$50M in commitments in the quarter combined. It will be interesting to see what Q2 looks like. I’m also curious about what % of these commitments were funded at close. That is, how much $ was actually put out.

2. Dry Powder

In total, the 5 BDCs had roughly $1.2 billion in available liquidity via cash and credit facilities.

That doesn’t seem like very much, maybe 3-4 quarters of supply across the 5 BDCs providing venture debt. Pair the $1.2BN of liquidity with the $1.6BN of unfunded commitments as of Q1 and you have 73% coverage on unfunded commitments, so undersupplied at the moment.

3. Pricing

Lenders, both public and private, have noted that the market volatility and banking crisis will continue to push pricing to the favor of the lender. Hercules pushed its effective yield to 15.1%, up from 14.7% in Q4 2022, and with a coupon rate of 12.0%. TriplePoint’s high returns were generated on the back of an 11.8% coupon income.

These pricing increases are driven as a function of Fed rate increases (floating rate loans) + some spread expansion. I don’t know the mix b/t the two, but it’s probably more driven by Fed rate hikes at this point. Expect further spread increases to come over the next few quarters as equity markets remain challenged.

4. Warrants

TriplePoint holds warrants on 124 companies as of Q1 2023, and the value of those warrants has an unrealized gain of 53.7%. A full realization of that amount would cover a full loss on roughly 1.7% of the firm’s debt investments at current fair value.

Warrants are not a get-rich thing in venture debt; they're a downside hedge to cover losses. Also, an unrealized gain of 53.7%, doubt it. Wonder if those warrants have been marked down yet.

5. Borrower liquidity

71% of Hercules’ portfolio companies have more than 12 months of liquidity, and a mere 0.3% have liquidity that lasts for three months or less.

Curious what the definition of liquidity is here. Does that include unfunded commitments from their facilities? If so, a bit overstated in my opinion, especially with the BDCs’ liquidity being less than their unfunded commitments. If not, and it’s just cash on the balance sheet (plus maybe some A/R), not terrible, but these companies will obviously need to go back to the well by 1H 2024.

6. Just strange!

Trinity took pride in running a rigorous due-diligence process and made a remark of having a standalone credit team, a unique feature in the industry, where the sole job of employees there is evaluating incoming credits.

Really, a lending business (a publicly traded one at that) having a stand-alone credit team is unique rather than being table stakes? I must just be way out of touch 🤷

Bigfoot Capital offers growth-oriented loans for B2B software companies with $2M- $20M in revenue. We pride ourselves on partnering with companies and their stakeholders to provide a capital partnership that comes with stability and support.

If you operate or support a B2B software business and want to learn more about alternative capital options that preserve equity, get in touch with our team today.

Get in touch

Portfolio Announcement 🎉

Check out Don White, CEO of Satisfi Labs on Nasdaq's TradeTalks discussing why verified answers are a major gap in new AI systems (4-minute watch).

Don shares that an AI solution needs to combine the technologies of NLPs and generative AI models to be functional.

If interested to chat with him/the Satisfi team, you can email him at don@satisfilabs.com

🔊 Bigfoot Quick Takes 🔊

Tech Banker’s Take on Tech M&a and Private Credit Markets

I wanted to share some notes from a call I had with a bulge bracket tech banker last week re: tech M&A and leveraged loan/private credit markets (this is all late-stage stuff)

M&A

All action has been centered on take privates (given the below dynamics with strategics and PE)
Strategics have been very selectively doing smaller M&A (~$100M deals), now having more dialogue and receptivity to doing bigger deals, but they're not happening yet
PE Sponsor themes: 1) all have more money than they know what to do with and don't know where to put it, 2) sponsor to sponsor market on hold last 18 months, 3) some velocity in the sub $300M range but not much, bigger deals have been on pause
Prices being so sticky in private markets relative to dramatic repricing in public markets has put private market activity on hold. Everyone waiting for a better deal.
Family offices say their private books are on hold, as they’re focused on publics.

Late-stage Debt Markets (leveraged finance)

Large private credit has stopped "throwing money around". $5BN ARR club deals that were getting done are now $2.5BN deals.
Spreads - SOFR + 750 (on unitranche $2BN+ deals), 200 bps spread increase.
Leverage - 2.25-2.5x ARR, got as high as 3x ARR
Covenants - EBITDA performance covenant within 18 months now common

Note: Pitchbook put out a good piece on the leveraged loan market. This jumped out "share of the Morningstar LSTA US Leveraged Loan Index rated B-minus or lower was at a record level of 36% as of April 30."

5 Interesting Learnings from RingCentral at $2.1 Billion in ARR

Some more beating of the “health drum"

Contribute / Get in Touch

Thanks for joining us for our bi-weekly Roundup! Whether you’re a software operator, investor or supporter -- we hope that you will find value in our newsletters.

If you’d like to contribute to an upcoming edition, reply to this email and we’ll be in touch!

Bigfoot Capital