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Venture debt sees opportunities with pre-IPO unicorns

Whether Uber’s planned $1.25 billion loan includes venture debt or not, it says one key thing about the lending industry.

The opportunity to supply venture debt to pre-IPO unicorns is a big one as public offerings appear to be ticking up a notch and companies hope to sidestep late-stage rounds that could price higher than their public market shares.

This opportunity facing the business would only be enhanced if the Small Business Credit Availability Act, introduced in the Senate in January, were to make its way through Congress. The bill would allow lenders to increase their debt-to-equity ratio to 2:1, from the present 1:1, increasing the availability of capital.

For lenders, the prospect of a more lucrative market place is a welcome shift. The business has been challenged by excessive liquidity as new competitors have entered, including direct lending platforms. Yield compression has occurred.

“We’re seeing opportunities across all levels right now,” said Manuel Henriquez, CEO of Hercules Capital.

Henriquez is equally upbeat in a higher interest rate environment, convinced they won’t impact loan volume.

“I don’t think it will have much impact whatsoever,” he said, adding that venture debt will always be cheaper than equity.

Insiders say the Uber deal could draw interest from venture lenders and interest rates below normal. Most won’t worry about the company’s ability to repay.

Longer term, prospering in the business will mean building scale, Henriquez said.

The industry is “being overwhelmed by an abundance of liquidity across the board,” he explained.

Photo of finance and business concept with dollar bills courtesy of NiseriN/iStock/Getty Images.