Deal Dive: Maybe venture debt works for asset managers after all

Blackstone last August was looking to put $2 billion toward lending to startups and tech companies, according to The Information. But venture debt lenders remain skeptical that the asset class’s small checks are worth it for asset managers and their large LPs. Recently, a few lenders told me they didn’t think we’d ever see the large credit shops add a venture debt strategy.

Now, BlackRock is saying, “Hold my beer!”

Last week the absolutely sprawling asset manager BlackRock, with its $106 billion market cap, announced that it was going to acquire Kreos Capital, a London-based venture debt lender. Kreos lends to startups across Europe and Israel and has originated €5.2 billion (around $5.68 billion) worth of loans across more than 750 transactions. Terms of the deal were not disclosed, and BlackRock said that the Kreos team would be absorbed into its existing credit group.

BlackRock declined to comment for this story beyond the release, and Kreos could not be reached for comment.

As someone who used to cover corporate debt, this news shocked me. If any of the credit asset managers were to move into venture debt, BlackRock wouldn’t have been my first choice, my second or even in my top 10, really. The firm is just so large and spread across so many asset classes already, I thought it would likely be a pure-play credit shop first.

But thinking about this exclusively through the lens of an existing private lender moving down the stack, this deal starts to make a lot more sense — but not without some lingering questions, of course!

To start, Venture debt is a great and fruitful asset class that allows investors to get exposure to venture with a much lower risk profile. The reason many venture debt lenders didn’t think that it was a space for asset managers is largely the logistics. Is it really worth it for a firm that is used to raising huge funds to underwrite large loans to start writing tiny checks for a few million? If BlackRock were to raise a smaller venture debt fund, would its sizable existing LP base even be able to participate? It’s easy to see that it could be more hassle than it’s worth.

But buying an existing fund surpasses a lot of that. If you are rich in cash, it is generally easier to buy what you need — in this case, an entire investing strategy — rather than trying to hire or build out a team from scratch. Plus, this takes care of the LP fund issue, too, as Kreos comes with its already appropriately sized backers.

This gives BlackRock a way to get an inside look at late-stage startups that will either be hitting the public market — the firm has hedge fund and public equity strategies — or getting acquired into private equity land, something the firm does as well. Sure, it could do so through equity investing, but debt provides an in without taking on venture’s risk profile, which it wouldn’t likely do.

That all makes good sense, but there’s one thing that doesn’t quite add up: Why is BlackRock’s first foray into venture debt focused on Europe?

Not to say that there aren’t opportunities for venture debt in Europe — Kreos Capital being attractive enough to buy largely proves that — but BlackRock has a significantly stronger debt presence in the United States. The market for startups that would fit a late-stage venture debt strategy is also significantly larger in the U.S. compared to Eruope and Israel combined.

Of course you can only buy what is for sale — and Kreos is not a bad buy by any means — but could this mean that Kreos will expand into U.S. lending? Or perhaps this is just BlackRock’s first of many acquisitions in this space.

So what does this deal mean for venture debt? A few things.

One, this still won’t fill the gap left behind by SVB. Again, lending to startups at the earliest stage is a small unprofitable business that is truly only designed for banks that are getting something else out of the companies they’re underwriting. Sorry!

Two, maybe this is a sign that we will see more larger credit players and asset managers decide that venture debt is actually worth pursuing after all. Because while we give venture investors a lot of grief for behaving based on FOMO and hype, larger asset managers aren’t exactly immune from that behavior, either.

Plus, if this strategy ends up playing out favorably for BlackRock, it would be more surprising if the asset managers like KKR and Blackstone that had shown real interest in the space over the last few years didn’t look to pursue a similar strategy.

While BlackRock isn’t really my favorite asset manager because of their continued bets in the fossil fuel industry, venture debt becoming an asset manager strategy means we could see some scale in the asset class. While operating a big fund to do very small loans may be a logistical and staffing nightmare for the firm, it also sounds like a growing source of nondiluted capital for established startups. But more options are not a bad thing by any means — especially with how the market is faring.