Venture debt lending offers new growth horizon for Monroe Capital

“When the stock markets are down, IPO markets are closed, and exits are down, that’s when this business does really well.”

Monroe Capital, a Chicago-based mid-market asset manager, will be acquiring investment adviser Horizon Technology Finance Management (HTFM) from venture lender Horizon Technology Finance Corporation (NASDAQ: HRZN). The latter is a Farmington, Connecticut-based business development company that provides secured loans to venture capital companies in the technology, healthcare services, sustainability and life sciences industries.

HTFM manages almost $1 billion in venture debt loans and has deployed over $3 billion in loan commitments for over 315 venture-backed companies since its inception in 2004.

Venture debt lending is a growing specialty in the lending space. “Venture debt lending is a very specific niche area in finance. In my view, it’s going to be one of the fastest growing areas in credit because of several factors: the stock market valuations for high growth venture capital backed companies are down, IPOs are very difficult to execute on today, and many of these venture capital backed companies don’t have acceptable ways to raise money”, said Ted Koenig, CEO and chairman of Monroe Capital, in a conversation with PE Hub.

Difficult underlying markets actually mean good business for venture lenders.

“When valuations are down, these companies don’t want to do highly diluted equity financing. They need liquidity and capital and the only place for them to turn is venture debt lending,” Koenig added.

“When the stock markets are down, IPO markets are closed, and exits are down, that’s when this business does really well.”

A new report from Fitch states that the growth prospects for venture debt lending “look good” as it proved to weather the storm better than venture capital in 2022. Venture capital lenders closed $31.8 billion worth of deals in 2022, compared with $33.3 billion in 2021 – a 4 percent decrease. Contrastingly, venture capital deal values came in at $238.8 billion in 2022 compared with 2021’s $344.7 billion – a whopping 31 percent slump, Fitch reports.

When asked what will happen when underlying markets begin to correct, Koenig stands firm that growth in the sector will endure.

“This area has grown significantly in hot IPO markets. The overall market keeps expanding in this space and what will happen when the market comes back is we will see a lot more IPO and exit action as this market matures. It’s not as mature as private credit or buyouts in leveraged finance, but over time, this market will continue to grow and I think with Horizon we can be a significant player because the people and the platform is so good” said Koenig.

Koenig adds that the asset manager’s plan for HTFM is growth. No financial terms were disclosed.