Blackstone in August 2023 sought to put $2 billion in loans to new companies and technology companies, according to The Information. But venture debt lenders remain skeptical that the small checks from this asset class will be worth it to managers and their large LPs (Limited Partnerships). Recently, some lenders said they didn't think we would ever see the big credit vendors add a venture debt strategy.
Now, BlackRock has come into play.
Recently, sprawling asset manager BlackRock, with its $106 billion market capitalization, announced it was acquiring Kreos Capital, a London-based venture debt lender. Kreos lends to startups in Europe and Israel and has originated loans worth €5200 billion (about $5680 billion) in more than 750 transactions. Terms of the deal were not disclosed and BlackRock said the Kreos team would be absorbed into its existing credit group.
BlackRock declined to comment on this beyond the release, and Kreos had no comment.
As someone who knows corporate debt, this news is shocking. If any of the credit asset managers moved into risky debt, BlackRock wouldn't have been my first choice, or my second, or even in my top 10, really. The company is so big and It is spread across so many asset classes which I thought would probably first be a pure credit store.
But if we think about this purely through the lens of an existing private lender moving down the ladder, this deal starts to make a lot more sense—but not without some lingering questions, of course.
To begin with, venture debt is an excellent and fruitful asset class that allows investors to expose themselves to risks with a much lower risk profile. The reason many venture debt lenders didn't think it was a space for asset managers is largely logistics. Is it really worth it for a company that is used to raising huge funds to underwrite large loans to start writing small checks for a few million? If BlackRock created a smaller venture debt fund, could its sizable existing LP base participate? It's easy to see that it could be more trouble than it's worth.
But buying an existing fund answers many of these questions. If you have a lot of cash, it's usually easier to buy what you need (in this case, a complete investment strategy) rather than trying to hire or build a team from scratch. Additionally, this also solves the LP pool issue, as Kreos comes with its backers already sized appropriately.
This gives BlackRock a way to get an inside look at late-stage startups that will hit the public market (the firm has hedge funds and public equity strategies) or be acquired on private equity grounds, something the company company also does. Sure, you could do it through equity investment, but debt provides an entry without taking on the risk profile of the company, which you probably wouldn't do.
That all makes sense, but one thing doesn't add up: Why is BlackRock's first foray into venture debt focused on Europe?
That's not to say there aren't opportunities for venture debt in Europe (the fact that Kreos Capital is attractive enough to buy goes a long way toward proving this), 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 United States compared to Europe and Israel combined.
Of course, you can only buy what's on sale (and Kreos isn't a bad buy by any means), but could this mean Kreos will expand into lending in the United States? Or perhaps this is just the first of many BlackRock acquisitions in this space.
So what does this deal mean for venture debt? Some things.
First of all, this still won't fill the void left by SVB (Silicon Valley Bank). Again, lending to startups in their earliest stages is an unprofitable small business that's really only designed for banks that get a little more out of the companies they back.
Second, perhaps this is a sign that we will see more credit players and larger asset managers decide that risky debt is worth turning to after all. Because while we give venture capitalists a lot of grief for behaving based on FOMO and hype, larger asset managers aren't exactly immune to that behavior either.
Furthermore, if this strategy ends up working out favorably for BlackRock, it would be more surprising if asset managers like KKR and Blackstone, who had shown real interest in the space over the past few years, didn't look to pursue a similar strategy.
While BlackRock isn't really a "favorite" asset manager in the market due to its continued bets on the fossil fuel industry, the fact that venture debt becomes an asset management strategy means we could see some scale in the asset class. While operating a large fund to make very small loans can be a logistical and staffing nightmare for the company, it also sounds like a growing source of undiluted capital for established startups. But having more options isn't a bad thing by any means, especially considering how the market is doing.
