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Claret Capital Partners tied up its largest venture debt fund to date, raising €575m for Claret European Growth Capital Fund IV, according to an announcement shared with 9fin ahead of publication. The fund has already financed 27 companies across life sciences, technology, and impact. Investors include the British Business Bank, European Investment Fund, and KfW Capital.
Fund IV closed over its €500m target and raised 93% more capital than Claret’s third European venture debt fund, which closed in 2022 with €297m.
The opportunity set for venture debt has grown in the last 18 months, driven by developments in AI, cleantech, and big data. Deal values reached €13.2bn in H1 26, up 43% from H1 25 figures, per Pitchbook data.
9fin sat down with managing partner David Bateman to unpack the lesser-known world of venture debt, including its risks, lender protections, and growth areas.
1. Why did Claret decide to focus on venture debt?
I co-founded Claret Capital with Johan Kampe in 2013, though at the time it was part of a platform called Harbert Management Corporation. We’d helped US lenders build European venture debt platforms between 2002 and 2012, where we saw the growth of US venture debt.
During my time in tech investment banking, I noticed debt products kept finding their way into technology. I had this conviction that it would become a very key tool in the European venture ecosystem as banks aren’t really present in the space. In the US, there’s at least half a dozen banks with domain-specific teams focused on late-stage tech and providing them with banking services and lending.
There’s also a big incentive for ventures to look towards debt instead of equity. If they raise more equity, they risk dilution and loss of control over the business. We can help them save 5-20 points of dilution, and if we time our product right, we can change the odds of success for earlier-stage investors.
That being said, we're not the only player in the game. Proprietary transactions do still happen, but the market has become more competitive in the last four or five years. There are certainly more banks in European venture than there were 10 years ago, and there are generally 2-4 people interested in most transactions now.
2. What differentiates venture debt from small-cap direct lending?
Venture debt is really focused on high-growth sectors like life sciences, technology, and businesses that, at the time you lend to them, are actually loss-making and dependent on venture capital backing. This is counterintuitive for many traditional lenders.
That's the big distinction from SME lending, which focuses on small, usually profitable companies that aren’t necessarily high growth across a broad range of sectors. There's nothing wrong with them from a credit point of view. They could be restaurant chains, car dealerships, et cetera, but they typically have lower long-term organic growth potential.
SME lenders are not necessarily expecting their portfolio companies to turn into Google. They're not trying to monetise intellectual property, they're not trying to focus on innovation. Instead, they’re focusing on businesses that are underserved by European banks. On our side, we're financing for growth. These companies have very aggressive growth targets because they’re growing to be acquired.
Lastly, both SME lending and venture debt are risky, but the risks are quite different. The risk in small-cap private credit is based on the overall macroeconomy and can largely be underwritten, while [in venture debt], we’re making bets about the future shape of a company and its sector.
3. One thing people associate with venture investing is, well, risk. What’s your take on that?
There are certainly risks in venture debt to worry about. For one, we lend to loss-making businesses, and if you’re not careful, there’s an infinite supply of loss-making businesses, which means there’s an infinite number of ways to lose money.
Lending too early can also be a bit of a problem. In fact, that’s what causes us more problems than anything else. It’s also not always an actual credit problem, it’s about the reputational friction. A few years ago, there was a fair bit of criticism of venture debt for lending to individuals with big risk appetites, then circling for the downside. Basically, if the business fails and you’re not careful enough, you’ll get blamed if the business goes down. So as lenders, we’re conscious of how we play in the marketplace itself.
At the end of the day, we have to imagine a world where, for whatever reason, the private equity investors have been hit by a meteor and the company is not performing. In this scenario, if we have to sell the business in its current state — never mind what people are telling us about its future — how are we going to get our loan back? We work out roadmaps for that, as well as a deal structure we can live with and which still works for the company.
4. What kind of lender protections are there if a borrower struggles to repay a loan, is in distress, or has to default on a loan?
This happens regularly, so we have a fairly stable playbook.
Often, if they’re optimistic, these companies will come to you with a business plan. Then some combination of forbearance from us and additional support from the investors will usually help them get where they were ultimately going. If we’ve done our job right and selected real businesses with real business models and real customers, then that is, and should be, the most common outcome.
But there will always be cases where it gets worse.
The first port of call when they start to really deteriorate is to work with the investors. Do they actually want to fully restructure this business? Or is there an investor among the syndicate who has either the appetite or money to continue backing it? Sometimes there might be one among three or four who will continue to invest. It's one of the reasons we like the venture market, because venture syndicates are quite broad, meaning there can be anywhere between one and four different potential problem solvers at the table already.
But there are also cases where none of the problem solvers continue to invest, so you work directly with the management team. Usually at that stage, you're trying to find a buyer for the business. Again, if we've done our job right, there's very often a competitor, potential partner, or even a customer willing to take it over. If there is an acquisition, proceeds of the sale get paid to us first since we’re a secured lender, so we have a pretty good record of recovery in these cases.
And if you fail to have something a customer, competitor, or partner wants, then you’re taking a loss. You’re liquidating this business while trying to do as little damage to the ecosystem around it as possible.
We don’t generally take over businesses. I won’t say it never happens, but we've done 210 deals and we've only done it once. Loan-to-own is not our strategy, and it's not really our culture, nor is it really the culture of the market.
At the end of the day, you have to just respect the outcome and move on. You get it wrong sometimes. If you're going to run a credit business, you know the risks are asymmetric, so you have to err on the side of safety.
5. You said that if you’ve “done your job right”, you don’t necessarily have to pull these levers. So how do you source and evaluate the loans in your portfolio?
Sourcing is overwhelmingly from venture capital and private equity firms. They directly or indirectly introduce 70% to 80% of the deals we do. The venture ecosystem is small enough that it’s a good setup for relatively high-trust interactions. Sponsors have an incentive to be transparent and we have an incentive to be direct and frank with them because it’s highly likely we’re all going to do this again in two years’ time. They’re also very effective partners because they’re already in the company and their money sits junior to ours.
Other sources include repeat entrepreneurs and advisors.
Loosely speaking, we like revenue-generating businesses north of €5m, usually 4-7 years from foundation. But there are different metrics for different sectors, and we’ve learned that over time.
We’ve formed an internal model and risk filter based on our experience and repeat lending into focused sectors. So we look at the stage and maturity of the company, repeat sales, and rapid sales growth. We're looking for strong margins, and most crucially, stable gross margins.
For example, if you're talking an e-commerce business, you want it to be three to four times larger than a software company, because gross e-commerce margins might be 10%-15%, whereas those for a good software company might be 70%-80%.
There’s also a general correlation between the depth of a company’s intellectual property and its gross margins. If a company has reached some level of business model maturity, it’ll have repeat sales, which means there’s time for customers to come back and decide they don’t like the product, or would like it at a different price. You can also measure operational maturity by seeing if the company knows its input costs, whether it’s labour, licensing, production, or third-party suppliers. Having a regulatory process, especially in life sciences, is also a pretty helpful marker. Regulations mean the companies have to do certain things which make them become more mature, organisationally stable, and less risky.
We've had to learn over the years when to lend to a biotech business, a software company, or a chip company. Generally speaking, it can take 3-5 years from founding for any venture business to take on debt.
But in some sectors, like software and AI, it can happen much faster. This is why we, like many others, are watching AI carefully and being very selective because these business models are evolving at such speed that you don't have the same kind of predictability. It's easier for us to operate in, for example, a more traditional software company where you get a spectrum of outcomes.
6. What does credit structuring and pricing look like?
We issue secured loans with 3-5 year terms, but there can be a wide range of drawdowns and facilities that fund in tranches. You’re not going to just write the big ticket once and forget about it for five years. You’re writing a first tranche with conditions for later tranches. The company has to hit certain milestones to draw, so your exposure goes up as the company performs. We would do this in the hope and in the expectation that this company would grow, and in 24 to 36 months’ time, within the lifespan of our fund, we can re-lend and maybe even lend it a lot more money.
In fact, we re-lend to more than half of our portfolio companies.
First tranches might be initially priced at low double digits, whereas later tranches might be priced off Sonia or Euribor. The longer a facility, the more of that you’re going to see, where you might have all future tranches priced at 750 over, for example. But while our cost of capital isn’t totally standardised, it’s fairly well understood that interest rates are somewhere between 10% and 13%. Our loans are generally fixed-rate.
Our tickets average €8m to €9m per company, but we’ve lent anywhere between €2m and €50m. It just depends on the type of facility. Earlier facilities are smaller, because the money is used to support organic growth of the company. Larger transactions are not always but very often acquisition finance.
Most debt packages will also feature an equity kicker. We don’t want huge stakes in these businesses — if anyone notices your equity kicker in the cap table, you're causing a problem because we’re not venture capital investors. But these companies can be very valuable, so while half a percent doesn't sound like a lot, if the company does well, you'll make some money on that.
We generally target, and have delivered, 16-17% asset-level returns to our LPs over time.
7. Where do you see the hottest opportunities for European venture debt?
Defence is definitely a growth area as Europe is trying to be more resilient in this area. In the past, the EU would finance companies and hope they would sell to the US market. Now, European governments want them to sell within Europe. Of course, we have the same constraints as other [lenders] in the market because we’ve got money from sovereign players, which typically have anti-defence clauses in their side letters. So there are certainly things that are off the reservation still, particularly weapons and ammunition. You can have all the political views you like, but right now, the documents say you can’t. We do anticipate there are broader initiatives coming. We hear about them, but we haven’t seen them announced and we haven’t seen many of the deals actually close.
That doesn’t mean we’re not doing anything. We’ve historically done aerospace, and activity in that space has gone up, especially as drone technology develops. We’re also seeing a lot of activity in enabling technologies that can service both civilian and military use. For example, we’ve financed Airborne Technologies, which sells composite materials and associated custom manufacturing. It makes satellite wings, but it also sells speciality engineering solutions for the likes of GKN, a big UK defence contractor.
Another example is Innalabs, which develops and sells avionics components. It makes gyroscopes used, for example, to stabilise the gun platforms on the Marder infantry fighting vehicle Rheinmetall sells. But they're also used on ESA long-range satellites to help them fly straight through the solar system.
We also see rapid growth in life sciences. We’re very active there right now, and have done a number of biotech and medical technology deals recently, including Carvolix and Inventiva. Other growth areas are climate-related technologies, deeptech (industrial and semiconductor), vertical AI and commercial space. Traditional areas that will remain strong are software and internet-based business models.
8. Claret recently closed its fourth European Growth Fund at €575m. What’s next for the firm?
The team is pumped about the fundraise. We’re very happy about the result. This is the core thing that Claret does, and we're very grateful to the LPs who backed us. We’ve managed to recruit a couple of new sizeable LPs into this fund, but ultimately the fundraising was heavily supported by existing LPs who were happy to write bigger checks. We raised money from pension funds, banks, insurance companies, et cetera.
9. What’s the best Sunday roast you’ve had in London?
There’s a pub on the edge of Kensington called The Windsor Castle. They do a very nice Sunday roast.
