Debt Market Quarterly Update – Q2 2023
Commentary
The venture debt markets got off to a historically tepid start in 2023 and continued to slow its pace through Q2. According to Pitchbook, total funding was down another 15% from the prior quarter and dropped more than 67% from the same period in 2022. As we review debt as a percentage of the venture equity markets, the Q2 2023 debt total of $3 billion rose to just over 10%, up from 8% the prior quarter. One potential positive highlight during the quarter is that venture debt deal count rose 34% from the prior quarter, showing that activity is somewhat recovering. However, average deal size is diminishing, falling to just over $5 million at the end of Q2, down from just over $9 million from the prior quarter and nearly $14 million during the same period in 2022.
Sector Activity – A Tale of Diverging Markets
Healthcare
Prior to Q2 2023, healthcare debt financing (in total deal value) had dropped each of the prior three quarters. However, in the most recent quarter, deal value recovered to $800 billion, which represented a 50% increase from the prior quarter. We also saw deal count recover by 65% from the prior quarter. We view this as a positive sign that healthcare lenders remain relatively active in light of equity markets which remain stagnant and amidst a virtually nonexistent healthcare IPO market.
We continue to see prolonged diligence processes and far greater scrutiny by early-stage lenders of companies that aren’t backed by the strongest equity sponsors. Early-stage finance has always been a story of the “haves and have nots,” and this market is no different. However, there are now fewer “haves” that can raise equity and debt with relative ease. We expect this trend to continue until venture and IPO markets recover.
Technology
Within the tech sector, venture debt remains suppressed relative to where it’s been in recent years. In Q2 2023, tech companies raised $2.9 billion, representing a 71% decrease compared to Q2 2022 and a 14% decrease compared to the already low level we observed in Q1 2023.
Interestingly, while the amount of capital being deployed in the space is significantly lower, the number of deals being done is showing signs of recovery. In Q2 2023, there were 483 venture debt deals completed with tech companies. While this is down 11% from Q2 2022, it’s up by 70% relative to Q1 2023.
With the decrease in capital deployed and the increase in deal count, average deal size plummeted from $10.2 million in Q1 2023 to $5.1 million in Q2 2023. This part is not surprising given the backdrop in the equity markets. As VCs are writing smaller checks at lower valuations, venture lenders are also scaling back the amount of capital that they are deploying.
Please click here for disclosure information: Our research is for personal, non-commercial use only. You may not copy, distribute or modify content contained on this Website without prior written authorization from Capital Advisors Group. By viewing this Website and/or downloading its content, you agree to the Terms of Use & Privacy Policy.
