For all investors venture debt seems to be very attractive and useful asset class. There are several reasons to it right from the predictable returns to the benefits of it. Venture debt is usually a combination of a regular and predictable income that also has an equity kicker in it. It is the risk-reward profile of venture debt due to the venture equity that makes it significantly different from others. Ideally, it has a moderate risk as compared to others but provides superior returns, both being the most significant factor to any investor. That is why venture debt is the most important asset class for all investors.
Typically, you will get an assured return of 25% to 30% net returns that will include fees, expenses, and profit sharing. However, the investment thesis and theory must be followed as the inherent risk profile of venture debt is remarkably different from the venture equity.
You will be able to generate the major part of the return from only 5 to 10% of the investments usually in the form of options and warrants. This entresol structure allows venture debt to provide superior returns to the investors.
Viewing as an investor
If you view it from the point of view of the investors, the downward drift in the rate of interest has compelled the investors to look for alternative investment opportunities to maintain their fixed income earnings.
- It is for this reason that investors are increasingly considering venture debt as the most effective and useful alternative to investing in other customary fixed-income instruments from the debt portfolio.
- That means venture debt allows the investors to take part in a strategic venture ecosystem that is high-yielding. Meticulous and speculative investors can leverage it as an additional asset class. This will further help them in their asset allocation framework which in turn will facilitate and help them to achieve their desired returns.
- Apart from the sophisticated investors, venture debt is also considered as a great option for conservative investors as well. They will get an opportunity to explore the early-stage ecosystem while at sometimes the high risk and high reward nature of venture capital may put them into an uncomfortable position.
The same applies to all international investors as well who are interested in understanding and exploring the early stage ecosystem but are still wary of the several risks involved.
Reasons for its importance
There are varied and many factors that make venture debt an important asset class for investors. The first and perhaps the most significant one is that it produces and assured return and have a low-risk factor. This means you will always have the assurance of safe, regular, and predictable interest income. This will allow you to have enough money necessary for your business to run and may not even have to look up at nationaldebtreliefprograms.com for other alternatives.
This interest income will set a floor rate of return, moderate the risks involved in a business as well as enhance the liquidity of the business. You can secure this debt via IP, any other asset or cash receivables. That means when customary assets are not available the startups still have their intangibles like brand, copyrights, trademarks or future asset purchases to fall back on.
This debt is far better than any other instruments in the capital structure simply due to that fact that it has the highest priority when it comes to liquidation. The most significant factor is that the distribution of interest incomes starts from the very first quarter of existence of the funds further making it more attractive to the investors especially those who are looking for liquidity.
Warrants and participation
The participation rights and warrants is another feature of its popularity amongst the investors.
- The equity kicker comes in the form of warrants, cashless, options or a partly paid-up share at last valuation.
- This usually varies from 10 to -25% of the loan value that typically translates to more or less 1% equity in the company.
- These warrants and options are priced now but are usually exercised at a future date at the discretion of the fund.
- The entry premium is much smaller and as the fund has discretion on the type of deals and the time of exercising it, these options give a huge boost to the overall Internal Rate of Return or IRR.
- In addition to that, the fund also has the right but no obligation to take part in any succeeding rounds of equity financing. This is done at the valuation that is then prevailing. This provides the investors to seize additional upside that helps them to add further to the Internal Rate of Return.
In short, this exposure of equity makes it stand out from any other traditional venture debt funds. You can track the record of equity investing by an equity lens and therefore instead of simply focusing on the interest payments, you can also pay a close attention to the identification of the actual winners. You can leverage your understanding of equity returns and at the same time indicate the home-runs in order to maximize the returns on your warrants and participation rights.
The risk management factor
The benefits of making re-investments using the venture debt funds also play a significant role in its popularity. This usually has a medium duration of seven years and the capital is called only when any new investments are made. This helps in minimizing the holding time of funds that are not invested.
In addition to that, the recovered capital can also be reinvested and recycled for a second time which also helps the investors to maximize their returns over the life of the fund once again boosting the IRR.
It is all due to the useful and strategic risk management framework for every specific investment made. With proper analysis taking numerable criteria into account so that nothing may fall behind. Proper portfolio diversification is ascertained so that everything is strategically kept in alignment with the interest of the investors.