Growth Lending: The Credit Side of Innovation

June 2026

Introduction

For many investors, venture capital represents one of the most attractive areas of private markets. The ability to participate in innovative companies before they become household names has generated significant wealth over the last several decades.

However, venture capital investing also comes with substantial risks. Equity investors are typically the first to absorb losses if a company struggles, returns are heavily dependent on a small number of outsized winners, and capital can remain locked up for many years before investors know whether an investment was successful.

Growth lending offers an alternative approach.

Rather than investing in the equity of venture-backed companies, growth lending funds provide debt financing to later stage businesses that have already demonstrated meaningful revenue growth, institutional sponsorship, and a clear path toward profitability. Investors gain exposure to many of the same secular growth trends driving venture capital returns while benefiting from the downside protection that comes with being a lender rather than an equity owner.

For investors seeking attractive risk-adjusted returns, growth lending has become one of the most compelling segments within private credit.

What is Growth Lending?

Growth lending, sometimes referred to as venture debt or growth credit, is a specialized form of private lending provided to high growth companies that are often backed by leading venture capital or private equity firms.

Unlike traditional middle market lending, these companies may not yet generate significant cash flow or meet the underwriting standards of conventional banks. However, they often possess attractive characteristics including recurring revenue, strong customer retention, institutional sponsorship, significant equity capital already invested in the business, and large addressable markets.

Growth lenders provide capital in the form of senior secured loans, structured debt facilities, or recurring revenue-based financing. Borrowers are frequently software companies, healthcare technology businesses, fintech firms, digital infrastructure providers, and other technology enabled businesses that are scaling rapidly but may not yet fit within the lending frameworks of traditional banks.

In many cases, growth lenders are financing businesses that are preparing for a future acquisition, private equity investment, or public offering. These companies are often well beyond the earliest stages of development and have already demonstrated meaningful commercial traction.

Why Do Founders Choose Debt Instead of Issuing More Equity?

One of the most common questions investors ask is why a rapidly growing company would borrow money instead of raising additional equity capital.

The answer is often dilution.

Every time a founder raises equity capital, ownership in the business is reduced. While dilution may be necessary during the early stages of a company's development, it becomes increasingly expensive as businesses mature and valuations rise.

Growth debt allows companies to fund expansion initiatives, support acquisitions, invest in product development, hire additional sales personnel, or extend their operating runway without requiring founders and existing shareholders to give up more ownership.

For venture capital sponsors, debt financing can also improve equity returns. If a company continues growing successfully, debt allows existing investors to retain a larger share of the upside while still accessing the capital needed to execute their growth plans.

Many growth lenders are providing loans to companies that already have substantial equity capital beneath them. In some cases, venture investors may have invested hundreds of millions of dollars before a lender provides a relatively modest debt facility. This creates meaningful alignment between lenders and equity investors, as both parties have a strong incentive to see the company succeed.

Venture Exposure with Less Risk

Growth lending is often seen as a way to access many of the same drivers of venture capital returns, but with a different risk profile.

Investors participate in sectors such as software, artificial intelligence, healthcare technology, cloud infrastructure, and fintech. These are often the same industries attracting significant venture capital investment and benefiting from long-term secular growth trends.

The key distinction is where investors sit within the capital structure.

Venture capital investors own equity and rely on growth to generate returns. Growth lenders are creditors. They typically hold senior secured positions, receive contractual interest payments, and benefit from structural protections that equity investors do not possess.

This positioning allows investors to participate in innovation and growth while maintaining a stronger claim on company assets and cash flows. While lenders generally do not participate in unlimited upside to the same degree as equity investors, they often achieve attractive returns with materially lower downside risk.

For many investors, growth lending represents a compelling middle ground between traditional private credit and venture capital.

The Role of Warrants and Equity Upside

One of the more unique aspects of growth lending is that lenders will often receive warrants alongside their loans.

A warrant provides the lender with the right to purchase equity in the company at a predetermined valuation. If the company experiences significant growth and ultimately goes public or is acquired, these warrants can create additional upside beyond the contractual return of the loan.

This feature is one of the reasons growth lending has historically produced returns above those of many traditional direct lending strategies.

Importantly, we do not underwrite investments based on warrant value.

We view warrants as potential upside rather than a core component of the investment thesis. The primary objective remains generating attractive returns through disciplined lending, contractual cash flows, strong collateral coverage, and sound credit underwriting.

If a company is acquired or achieves a highly successful exit, the warrants can provide a meaningful boost to returns. If they expire worthless, the investment can still achieve its targeted return profile through the performance of the underlying loan.

This distinction is important. Venture capital investors often rely on a small number of exceptional winners to drive overall portfolio returns. Growth lenders, on the other hand, can generate attractive returns even if none of the warrants become valuable.

We often describe the warrant component as "gravy." It can enhance returns when successful outcomes occur, but it is not something that must happen for the investment to work. That dynamic creates a return profile that can capture some equity upside while remaining grounded in the protections associated with being a lender.

Typical Returns

Growth lending has historically generated returns that sit between traditional direct lending and venture capital.

Many established managers target net returns in the range of 12% to 18%, with numerous strategies underwriting opportunities of at least 15% net returns.

These returns are primarily driven by contractual interest income, structuring fees, original issue discounts, and strong credit performance. Warrants can provide an additional source of upside, but they are generally viewed as incremental rather than essential to achieving target returns.

Unlike venture capital, where returns are often concentrated in a handful of investments, growth lending portfolios tend to generate returns through a larger number of successful loan repayments. The result can be a more consistent return profile that is less dependent on identifying the next billion-dollar company.

Why We Like Growth Lending

We believe growth lending occupies a particularly attractive position within private markets today.

First, it provides exposure to some of the most innovative and fastest-growing segments of the economy. Many borrowers operate in industries benefiting from powerful secular tailwinds, including software, digital transformation, artificial intelligence, and healthcare innovation.

Second, lenders benefit from structural advantages that equity investors do not possess. Being higher in the capital structure creates an additional layer of protection should business conditions deteriorate.

Third, we believe the opportunity set remains attractive because many traditional banks have limited appetite for lending to venture-backed businesses. This allows specialized managers with deep expertise to negotiate favorable terms and earn attractive risk-adjusted returns.

Finally, growth lending offers the potential to capture some equity upside through warrants while maintaining a lending risk profile. We believe this combination of contractual income, downside protection, and equity upside participation is difficult to replicate elsewhere in private markets.

How We Underwrite Growth Lending Investments

Manager selection is critical in growth lending.

While the opportunity set is attractive, underwriting mistakes can be costly if lenders become overly focused on growth narratives while overlooking downside risks.

When evaluating managers, we spend significant time understanding the quality of the venture capital sponsors supporting portfolio companies. Strong sponsors often provide additional capital during challenging periods and have substantial incentives to protect their existing equity investments.

We also focus heavily on revenue quality. Businesses with recurring revenue, strong customer retention, predictable cash flows, and diversified customer bases generally provide stronger lending opportunities than companies with more volatile revenue streams.

Capital structure discipline is another critical consideration. We favor managers that maintain conservative LTV ratios and ensure meaningful equity capital sits beneath their loans. Large equity cushions can provide significant protection even if company valuations decline.

We also evaluate whether portfolio companies have multiple paths to liquidity, including strategic acquisitions, additional funding rounds, private equity sponsorship, or public market opportunities. The more options available to a borrower, the lower the probability that lenders will face repayment challenges.

Finally, we place significant emphasis on manager experience. Growth lending is a specialized strategy that requires both venture market knowledge and credit underwriting expertise. We prefer managers that have successfully navigated multiple market cycles and demonstrated a consistent focus on downside protection.

Conclusion

Growth lending offers investors exposure to many of the same innovative businesses that have historically fueled venture capital returns, but from a fundamentally different position in the capital structure.

By lending to established, venture-backed companies rather than purchasing equity, investors can benefit from contractual income, downside protection, and attractive risk-adjusted returns while still participating in the growth of innovative businesses.

The addition of warrant exposure creates the potential for incremental upside without requiring investors to rely on it for success. In our view, this combination of income, protection, and selective participation in equity appreciation makes growth lending one of the most attractive opportunities within private credit today.