Private Credit vs Venture Debt

Private credit is the natural financing solution for companies that have moved beyond the venture stage and can demonstrate consistent, underwritable cash flows. The following scenarios represent the core situations where direct lending is clearly preferable to venture debt, delivering lower total cost of capital and avoiding the equity dilution that makes venture debt economically unattractive for established businesses.

PE-backed portfolio companies requiring acquisition or recapitalisation financing. Once a private equity sponsor has acquired a platform company, the financing needs shift fundamentally from growth capital to leveraged debt. A PE-backed business with GBP 15m EBITDA seeking GBP 75m of acquisition debt has no reason to consider venture debt - the company has stable cash flows, institutional ownership, and a credit profile that direct lenders will underwrite at 5.0x leverage without requiring any equity dilution. The absence of warrants in private credit means the sponsor retains 100% of the equity upside, which can be worth tens of millions of pounds over a typical 4-5 year hold period. For a company that exits at 12x EBITDA, the 1-2% warrant coverage that a venture debt provider would have demanded could represent GBP 2m-4m of value transfer that was entirely avoidable through the private credit channel.

Profitable technology companies that have outgrown the venture ecosystem. Many technology businesses reach a stage where they are generating GBP 5m-20m of EBITDA, growing at 15-30% annually, and no longer need venture capital to fund operations. These companies sit in a financing gap: too mature for venture debt economics (where the warrant dilution is disproportionate to the risk), but potentially unfamiliar with the institutional private credit market. Direct lending provides these businesses with significant non-dilutive capital for acquisitions, international expansion, or shareholder liquidity events. A SaaS company with GBP 40m ARR and 25% EBITDA margins can access GBP 50m-75m of private credit on a recurring revenue multiple basis, preserving the founder equity that venture debt would have eroded.

Businesses with contracted or recurring revenue but limited equity investor appetite. Certain sectors - infrastructure services, B2B software with long contract durations, managed services businesses - generate highly predictable cash flows but lack the hypergrowth narrative that attracts venture investors. Venture debt is not a viable option because the underlying VC signalling is absent and the growth profile does not fit venture lender underwriting models. Private credit lenders, by contrast, are specifically attracted to predictable, contracted revenue streams and will structure term loans against this cash flow visibility at pricing that is 300-500bps cheaper than the effective cost of venture debt including dilution.

Companies seeking longer-dated capital without amortisation pressure. The 36-48 month tenor and mandatory amortisation of venture debt creates refinancing pressure within 18-24 months of drawdown. For businesses investing in multi-year growth initiatives - building out a European sales organisation, developing a new product platform, or executing a buy-and-build acquisition strategy - the 6-7 year bullet maturity of a private credit unitranche provides the time horizon needed to realise returns on invested capital. The absence of amortisation means the business retains full access to the drawn capital throughout the facility life, rather than seeing its available funding erode as principal repayments begin.

As companies transition from high-growth to mature-growth or profitability, a hybrid approach to debt financing can bridge the gap between venture debt and institutional private credit. These structures are particularly relevant for late-stage technology companies, venture-backed businesses approaching or achieving profitability, and PE-backed growth equity portfolio companies that retain some venture characteristics.

Recurring revenue facilities as a bridge between venture debt and private credit. A growing category of specialist lenders offers term loans underwritten against annual recurring revenue (ARR) multiples rather than traditional EBITDA multiples. These facilities - typically sized at 0.5x-1.5x ARR - are available to SaaS companies with GBP 10m+ ARR, even if EBITDA is minimal or slightly negative. The pricing (SONIA + 600-900bps with no warrants) sits between venture debt effective costs and traditional private credit margins, reflecting the transitional risk profile. This structure allows companies to escape the dilutive warrant economics of venture debt while they build toward the EBITDA thresholds that institutional direct lenders require. As the company scales toward 20%+ EBITDA margins, the facility can be refinanced into a conventional private credit unitranche at tighter pricing.

Growth equity financing with private credit characteristics. Several European credit funds have raised dedicated growth lending vehicles that blend elements of both markets. These facilities offer GBP 15m-75m of non-dilutive debt to companies with GBP 15m-100m revenue, positive unit economics, and a clear path to profitability within 12-24 months. Unlike venture debt, there are no warrants and the tenor extends to 4-5 years with limited or no amortisation. Unlike traditional private credit, the underwriting framework accommodates negative EBITDA if revenue quality and growth trajectory meet specific thresholds. This hybrid category has expanded significantly since 2023 as both venture debt providers and direct lenders have extended their mandates to capture the growing pool of late-stage, near-profitable technology companies that fall between traditional categories.

Sequential structuring across the company lifecycle. The most sophisticated capital structure planning treats venture debt and private credit as sequential instruments in a deliberate financing roadmap. A company might raise GBP 5m of venture debt alongside its Series B to extend runway, draw GBP 15m of recurring revenue-based growth debt as it reaches GBP 25m ARR and break-even, and then refinance into a GBP 60m private credit unitranche once EBITDA reaches GBP 8m-10m and a PE growth equity investor takes a significant stake. Each stage optimises the cost and structure of debt capital for the company stage, minimising total dilution across the lifecycle while maintaining continuous access to leverage. Advisers who understand both markets can plan this sequencing from the outset, ensuring that each facility is structured with refinancing optionality that facilitates the transition to the next stage.