Private Equity's New Venture Debt Strategy

The IPO market is on track for its worst year in two decades.

The largest venture capital firms are now in a perpetual state of fundraising.

The mega multi-strategy firms are recording record inbound cash flows and looking for new places to invest record returns.

Put these trends together and you have a market where companies don’t want to go public, venture firms that don’t want them to raise down rounds, and multi-strategy firms want access to sustainable capital deployment in great companies for the long-term.

As a result, mega private equity and multi-strategy firms are getting into venture debt in a big way.

The move makes complete sense, especially for multi-strategy firms with an eye on long-term holds in the public market.

These investment vehicles create the opportunity to see high flyers up close over a long period of time, can be re-written if the company goes public with an investment from the long-only hedge funds, or in the base case be paid off with interest.

Energy transition and sustainability startups should see this move as a big positive.

• Most, if not all, of these firms have a publicly stated ESG mandate.

• Venture debt is a great option in uncertain macro markets and valuations

• Generalist firms stay away from energy transition and sustainability startups in downturns due to their complicated sales cycles and occasionally non-traditional economics. Venture debt only cares about your ability to service the debt.

Software companies focused on the energy transition and sustainability can mature to have the perfect profile to service debt - hard won, but sticky revenue from customers with budgets often unaffected by macro conditions.

An increase in financing options is always a win and this is no different. Hopefully, startups in the energy transition are able to catch the eyes of these new funds and leverage them for even more growth.