Nonbank lenders are looking to grab more market share after the failure of Silicon Valley Bank, anticipating that a gaping hole in the venture debt market will create new opportunities.

SVB's lending business may yet survive. The bank, now doing business as Silicon Valley Bridge Bank under FDIC control, announced overnight that it has resumed its deposit and lending services.

The bridge bank said it intends to make new loans and honor all existing credit facilities. It remains unclear if the bank has found a buyer for its loan book, but several private equity firms including Apollo Global Management, Blackstone and KKR reportedly are considering purchasing the assets.

Nevertheless, more private lenders are seeing rising demand from venture-backed companies scrambling for new loans. These dealmakers also expect that shrinking sources of debt capital will allow lenders to charge higher rates, resulting in a more attractive risk-return profile for new venture loans.

Some advisers also anticipate that lenders will be more conservative in lending practices until the fog of uncertainty clears.

SVB's collapse and the private market fallout: Complete coverage

The VC ecosystem is worried that other banks could encounter similar issues as SVB, heightening the appeal of nonbank lenders for startups and their investors on the hunt for debt financing. Unlike banks, this class of lenders doesn't depend on deposits to make money, making them appear safer in the current environment.

"We are seeing quite a bit of demand from high growth companies and from venture capital firms that are supporting these companies," said Theodore Koenig, CEO of Monroe Capital, a middle-market lender.

Even though the US government stepped in to protect depositors, the failure at SVB —along with the shutdown of New York-based Signature Bank—rocked confidence in regional and small-sized banks.

"The market is stable now, but it's not going to satisfy all these concerns," Koenig said.

Monroe, which is known for making direct loans to companies that have positive cash flows, acquired venture debt firm Horizon Technology Finance in February as it sought to expand into venture lending, attracted by the asset class's appealing return profile, according to Koenig.

Lenders said demand for venture debt was frantic over the weekend and continued to pick up through Monday, with some SVB clients approaching borrowers multiple times per day.

"I'm getting texts from my investors that are like 'Merry Christmas,'" Zack Ellison, founder and CIO of Applied Real Intelligence, a venture debt asset manager, said Friday.

The pendulum shifts

SVB's attractive debt packages made it a leader in the market by offering loans that were much cheaper than those offered by nonbank lenders.

"The terms for those [nonbank lenders] are never great," said Paul Lanzi, co-founder of cybersecurity startup Remediant, which banked with SVB until it was acquired last year. "We talked with a couple of those types of companies and the terms they were offering were not as good as what we ultimately got from SVB, but they weren't that far off."

SVB's venture debt terms were especially attractive as the price of debt financing skyrocketed along with rising interest rates.

Some nonbank competitors are hoping that with SVB out of the picture, startups will be more willing to accept the higher price.

"A lot of these startup companies and venture-backed firms are going to have fewer options for borrowing," Koenig said. "You are going to see less supply and more demand, and that means pricing will invariably go up."

Lenders under scrutiny

The SVB debacle also made many people question the health of other venture lenders, even though the bank's collapse was triggered by revelations about missteps in managing its bond portfolio.

Several lenders in recent days have made announcements to bolster confidence in their financial health.

Hercules Capital on Monday provided a deep dive into the firm's financial conditions, a move meant to shore up investors' and consumers' trust in the lender's liquidity positions.

The firm said it had roughly $1 billion of liquidity to fund new investments at the end of last year. In addition, Hercules obtained credit from its banks and raised nearly $60 million in new capital so far this year through equity sales.

"We're seeing a lot of lenders become overly communicative—which is probably a good thing—to come out and say, 'Look at us. We're not in trouble,'" said Bardia Moayedi, a lawyer at Snell & Wilmer.

Some believe lenders may also become more cautious about originating new loans to startups before the uncertainty surrounding the venture banking system settles.

Thomas Smale, CEO of FE International, a tech-focused M&A advisory firm, said he expects lenders in coming weeks to be more risk-averse than usual. While it's still early days, Smale said it's possible that lenders may shift their policies and rates or even halt lending entirely until the ecosystem calms.

In the long-term, higher interest rates will be the factor that puts more pressure on startups and make them forswear debt financing.

"My guess would be in the next month or so it'll be almost business as usual and back to interest rates being the big challenge," Smale said.

Featured image by Drew Sanders/PitchBook News

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