Note: For the purposes of this paper, we will define “healthcare” as life sciences/biotech, medical devices, diagnostics and health tech.
Capital Advisors Group is a Boston area-based institutional investment advisor that has been helping venture-backed companies invest their cash assets for more than 22 years. Its debt finance consulting division helps venture-backed companies determine their optimum capital structure, identify appropriate lenders, source term sheets and negotiate deals.
Capital Advisors Group’s debt finance consulting division (formerly Debt Advisors Group), was founded in 2003 with the goal of tracking the debt financing markets and helping early stage companies secure the most competitive deal terms and conditions available. The goal of this paper is to provide an update on the shifting landscape of the debt financing markets, ranging from venture debt to structured debt and “synthetic royalty” based financing.
A Brief History
Corporate debt financing has been around in one form or another for about as long as there have been companies willing to take loans (i.e. a long time). However, the concept of venture debt, intended for companies that did not qualify for traditional bank financing, has only been around since the late 1960s. These start-up companies not only lacked a proven track record, but also were burning through cash. Historically, the only way such companies could raise capital was through equity financing. Then, a number of equipment leasing companies that were well prepared to maximize the value of certain types of equipment as collateral, began underwriting short term operating leases (typically three years) to these early stage companies. In this emerging form of lending, venture debt was collateral driven and almost never reached the full 100% acquisition cost level for these cash-strapped firms.
In the late 1980s, Equitec Financial Group developed a leasing product that offered full equipment cost financing. Equitec devised the concept of using an “equity kicker” on each deal to increase yield on a portfolio basis to balance the higher risk profile of the borrowers and to offset the inevitable increased loss ratio when compared to bankable credit portfolios. In these early transactions, the “equity kickers” came in the form of success-based fees or warrants. As the years passed and early stage firms became more virtual and required less equipment, other lenders entered the space and were willing to use this proven structure without specific equipment collateral utilizing a lien on all the assets of the firm. Currently most “venture debt” is referred to as a “growth capital line” which can be used for any corporate spending purpose. The cost basis of these loans is typically based on a percentage of current liquidity. The loans are structured on a 3 – 4 year term with a lien on all the assets of the firm except the “Intellectual Property”, which is usually placed under a negative pledge.
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