The investment firm has examined an important segment of the alternative assets space and one that perhaps is not as well known as private equity and venture capital.

Singapore-headquartered Lighthouse Canton, which has been building out its business in jurisdictions such as India, has lifted the lid on the venture debt sector and its impact on India’s startup business ecosystem.

The firm’s study finds that the top reason why founders prefer venture debt over traditional debt and equity is its less dilutive nature (40 per cent), with repayment schedule flexibility also being a significant factor (30 per cent). This preference shows a growing recognition of the strategic advantages venture debt provides, especially in capital-intensive and rapidly-evolving industries, Lighthouse Canton said. Its report is called Silent Bloom: Venture Debt’s Growing Influence. 

Venture debt is a type of loan offered by banks and non-bank lenders which is targeted at early-stage, high-growth companies with venture capital backing. Crucially, venture debt does not replace equity; it follows it. According to one explanation from Silicon Valley Bank (as it used to be called), the amount of venture debt tends to be calibrated to the amount of equity the company has raised, with loan sizes varying between 25 per cent and 35 per cent of the amount raised. (As an example of coverage, this publication interviewed Innoven Capital SEA about the venture debt sector.)

Avoiding undue dilution
Indian founders are increasingly turning to venture debt to bridge funding gaps and avoid excessive equity dilution, the Lighthouse Canton report said. This shift has been primarily driven by the scarcity of equity funding in the market and the desire to preserve ownership while accessing the capital necessary for growth. 

The study examines how venture debt works in different sectors, such as in the electric vehicles space.

The EV sector, for example, has become heavily reliant on venture debt to drive its growth. About 67 per cent of EV startups rely on venture debt for more than half of their debt funding. 

In Asia, the report said, the private credit market has rapidly adapted to small and medium sized enterprises’ needs while mitigating investor risks, growing nearly 30 times from $3.2 billion in 2000 to over $90 billion by June 2022.

The report was recently launched at the IVCA Private Credit Summit in Mumbai.

Lighthouse Canton, which oversees over $3.7 billion in assets under management and advisory as of 30 June 2024, has offices in Singapore, Dubai, India, and London. It made a number of appointments in Asia earlier this year.