Friday Letter: The venture debt opportunity in the UK and Europe

Investors are finding more opportunities to play in the venture debt space, which lenders say is especially attractive following the failure of Silicon Valley Bank.

In the US, several players have launched new platforms or funds, including Hercules Adviser, which we wrote about here, and Applied Real Intelligence, which just held a first close on a $125 million venture debt fund that we wrote about here.

Across the pond, Hambro Perks is also raising a debut venture debt vehicle. The London-based investment firm, which manages multiple funds for VC, secondaries and other strategies, has closed on £65 million so far and is aiming for a final close on £100 million ($125 million; €113 million) this fall.

Hambro Perks Growth Debt Fund is co-anchored by British Business Investments and Phoenix Group, with additional commitments from Foresters Friendly Society, family offices and high-net-worth individuals.

David Hayers, head of venture debt for Hambro Perks, told me he expects “the remaining closes will be institutionally led. We’re in conversations with a few institutions right now, so we think it will be overwhelmingly, if not completely, institutional money that comes in to close out the fund.”

Hayers was previously with Virgin Money (formerly Clydesdale Bank) for 16 years, including nearly seven years as head of its growth finance business, which did about 60 deals under his watch, making it one of the UK’s most active venture debt investors. He was hired in December 2021 to lead the Hambro Perks venture debt effort and he has since added four members to his team.

The new fund has completed three deals so far and Hayers expects to do “a few more” this quarter. “The market right now is very strong for us, irrespective of the SVB collapse,” he said. “The general economic environment is lending itself more to debt than it is to equity.”

Boom time

Venture debt lenders have found themselves with more deals than they can handle as VC firms around the globe have cut back sharply on dealmaking. European start-ups raised just $10.6 billion in venture funding in Q1, a decline of 66 percent from the same period last year, Crunchbase reported. Europe’s late-stage market was particularly hard hit, with VCs putting only $4.1 billion to work in the first quarter, or 76 percent less than they did in Q1 2022, Crunchbase said.

It should be noted that Hayers and his team have no interest in distressed situations. They focus on scale-up companies, not start-ups desperate for cash to stay afloat. “We’re lending into high-growth software and hardware companies in the UK and Europe,” Hayers said.

Asked about his track record, Hayers said “the loss record is incredibly low across 10 years or so. We’ve always been quite selective, even in the venture debt market. The types of companies we lent to [at Clydesdale] were always those that could cut their cost basis and run for cash if needed and had strong equity backing.”

While high-cash-burning consumer-facing companies were in vogue for a few years, “we never lent to those companies because you were outsourcing your repayment to the ability of the company to continue to raise equity,” Hayers added.

While new private debt funds can be appealing to institutional investors, the small size of the offering from Hambro Perks has made it a tough sell for a few larger investors. “Some of them that we’ve spoken to love the strategy, love the track record we’ve got, etc, etc; however, they say their minimum check size is $50 million and they need to be no more than 10 percent of the fund,” Hayers said. “So, we’re like, ‘Great, we’ll come back to you in a couple of years when we’re raising a $500 million fund.’”

Still, Hambro Perks was able to secure a commitment from Phoenix, which has been described as the UK’s largest long-term savings and retirement business, with about £310 billion of assets under administration. In that case, Phoenix had a “very close relationship” with Hambro Perks, “so they were more prepared to take a longer-term view and say yes,” Hayers said.