The opportunity set [in venture debt] is very large. I think there are more people that are seeking it and more opportunities to go out and find funding outside of traditional banks that may be more advantageous. Venture debt specifically is interesting. One of the things as I’ve reviewed it over the last couple of years is the low LTVs with high yields. The LTVs on most of the venture debt deals that I have looked at are so low. There’s a lot of protection there for the credit investor. If there is a default, there’s the ability to come in and there’s plenty of coverage to be able to cover the amount that’s being lent there. So that’s really interesting.

I think there is a big opportunity for smart investors as venture debt markets develop over the next decade. I think venture debt in a full capital stack, as a complement to other financing tools and solutions, is going to be part of the landscape. Post-Great Financial Crisis, private credit became mainstream and the non-bank lenders in that space have had a tremendous tailwind and tremendous growth. They’re very, very important now in the ecosystem for middle market companies and even large size companies that are doing private credit. The same is going to be true, I believe, for venture debt for the earlier stage and early growth stage companies.

Look at banks’ willingness to lend to private companies. That’s going to be diminished. And then you factor in potential regulation coming down that’s also going to further diminish their ability to lend to private companies. Someone’s got to fill that gap. So, it’s going to be private lenders. I like that. And then additionally, given the valuation adjustments we’re seeing in venture capital and in growth equity right now creates a much lower valuation to come into the door at. You’re getting bigger warrant packages and lower strike prices. So, the IRR potential here…I’m putting well over 20% IRR expectations on venture debt right now. I think additionally, because there’s so much demand, the ability to increase the quality of loans and create a more covenant heavy loan package right now is also more beneficial for the venture debt lender.

With banks pulling out – regional banks especially – there’s going to be less players in the [venture debt] space. Because there are fewer lenders, they can demand a higher return. The supply demand dynamics make the space more attractive moving forward because there should be higher demand with less supply. There will be more opportunities to ask for a higher return by investors.

Usually, you have only been able to invest in venture as an equity investor. Now, your group [A.R.I.], is trying to help folks invest in the debt side of venture. Venture capital companies do take on debt, rather than just equity investors as well, and they usually pay some pretty nice coupons, and there is some good opportunity there. So that’s one thing that we’re looking at right now.

What are the hallmarks of alpha? Great inefficiency and smaller size. You want to be fishing in a nice little pond with nobody else around versus having these big haulers with nets next to you. You probably are in some deals where you don’t have a lot of competition. And you can take a closer look at the company and be a little bit more thoughtful and have a bigger say in terms of covenants and protections. And I think these all yield better outcomes to the end investor. With venture debt, you get some yield, which de-risks the portfolio and the holding early on. Oftentimes, there’s some conversion features so you get a little bit of an equity play as well.