Debt Market Update – Q2 2024

In recent times, venture debt market conditions have been challenging, and Q2 2024 was no exception. The level of activity in the venture debt market continued to decline in Q2 2024 as there were only 160 deals completed in the quarter. This represents a 25% decrease from the number of venture debt deals completed in the prior quarter, which was already at a low point, and a 35% decrease relative to the same quarter in 2023.  For perspective, the high point was in Q1 2021 when a whopping 463 venture debt deals were completed.

Paradoxically, the total value of venture debt deals completed in Q2 2024 was $13.1 billion, which represents a new high watermark. However, this can be a little misleading as more than half of this total came from a single $7.5 billion debt deal in the tech sector (more on this below).  When backing out this large deal, which many people would not consider to be “venture debt”, we see a total deal value of $5.6 billion for the quarter.  This represents a 43% decrease relative to the prior quarter, but a 14% increase year over year.

On a brighter note, the venture equity market appears to be improving. Quarterly venture capital deal count increased for the third consecutive quarter. Importantly, early stage venture capital deal count increased as well. Given that venture debt often follows venture equity, this may be an indicator that venture debt activity will increase in the coming quarters.

Sector Activity – Tech Rebounds While Healthcare Slows

Healthcare

Are we facing headwinds or are we just stuck in the doldrums of the healthcare debt financing market? Right now, it’s a bit difficult to discern. After a promising rebound in Q1 2024, the healthcare debt market retreated in Q2 by more than 65% from the prior quarter to remain flat (in total deal value) with the same period in 2023. In addition, according to PitchBook, total deals completed (just 36), is at an all-time low since the organization began collecting such data in 2021. We view these trends as reflecting the truth of a difficult equity financing environment. Fewer deals at larger amounts are typical of a “haves and have nots” scenario where those companies that have successfully raised equity from top tier investors are able to secure solid venture debt rounds. However, credit considerations have tightened and those companies on the margin that may have had difficulty raising equity from brand name investors, are simply not attractive debt financing candidates in this environment. On a positive note, healthcare equity financing (biotech and pharma primary) did increase in Q2 by 24% over the prior quarter, and by more than 35% over the same period last year. As with the debt market, however, total deal count fell by 22% from the prior quarter. Private financing is forced to carry the market for now since public offerings remain elusive. According to BioPharma Drive, we saw just four successful public offerings in the second quarter of this year which collectively raised just over $600 million.

We expect to see the Fed begin cutting rates later this year and, if that trend continues, we’ll be entering into a new economic environment that may open public markets or other avenues of financing for healthcare companies. Until then, we expect healthcare venture lenders to continue to be selective as they seek new deal opportunities.

Technology

At first glance, Q2 2024 appears to be a banner quarter for venture debt within the tech sector as the value of completed deals came in at a record $12.8 billion. However, digging deeper, this total includes a $7.5 billion debt deal with a single cloud infrastructure company. While the Company is venture backed, this deal is not what we typically think of as “venture debt”.

When we back out this single large deal, it brings the value of venture debt deals down to $5.3 billion across 123 different deals. Quarter over quarter, this represents a 40% decrease in value and a 25% decrease in deal volume. Q1 2024 represented the lowest volume of venture debt deals in the past five years, so a further 25% decrease in activity in Q2 represents a significant new low point over the period.

In market conversations, lenders have noted that while market conditions remain challenging, things do appear to be improving albeit at a gradual pace.