Growth lending deep dive

1. Market context: Funding gap, institutionalization, and more 

The environment described above has reshaped financing behavior across the market. The growth-lending asset class has evolved to help fill the venture funding gap and later-stage private companies increasingly see the potential for its flexible, less-dilutive debt financing.

Perhaps unsurprisingly, growth lending has experienced faster growth than venture equity and has matured from a niche strategy to a central pillar of the venture financing landscape. In fact, over the past decade, venture debt has expanded at an estimated 15% compound annual growth rate (CAGR), compared with roughly 9% for total venture-equity investment.² The asset class reached US$50 billion in issuance in the first three quarters of 2025, following 2024’s record of US$62 billion (Figure 1).

Figure 1

2. So, what is growth lending exactly?

Growth lending provides senior-secured loans to venture-backed, high-growth companies that have reached meaningful scale but are not yet consistently profitable. These borrowers typically share four key characteristics:

• Demonstrated product-market fit and established customer bases
• Institutional venture investors with committed follow-on capital
• Predictable recurring revenue and/or strong unit economics
• Ambitions to extend runway, expand product offerings, enter new markets, or fund acquisitions

Unlike traditional lending, growth lending is underwritten primarily based on a company’s enterprise value and growth trajectory rather than historical cash-flow coverage. Credit analysis in this space integrates quantitative metrics such as annual recurring revenue (ARR) growth, retention rates, and gross margins, as well as qualitative factors like market leadership, business model scalability, and investor support.

3. Why growth lending works

We believe a common misconception is that lending to venture-backed companies entails excessive credit risk. In reality, structural safeguards, conservative leverage, and institutional sponsorship create a risk profile that has historically compared favorably with other forms of private credit.

Growth lenders operate at the top of a company’s capital structure, typically lending at loan-to-value ratios below 25%, compared with 40% – 60% in traditional middle-market loans. A company’s equity value would therefore need to decline by roughly 75% before principal risk would become material. Borrowers are also usually supported by experienced venture or growth-equity sponsors who have both the capital and the incentive to sustain enterprise value, providing a material equity cushion beneath the lender.

Moreover, strong loan returns do not depend on strong equity returns. Because growth loans occupy a senior-secured position and represent only a fraction of a company’s enterprise value, lenders are repaid before equity investors realize gains or losses. Interest payments also provide predictable, periodic income, and warrants and fees offer additional upside potential. Finally, even when equity returns are muted, the contractual nature of debt, combined with recurring interest payments and sponsor support, offers growth lenders the potential to generate attractive, stable returns. As of mid-2025, the average unlevered yield to maturity for loans to venture-backed companies was approximately 14% – 15%, with total return potential exceeding 20% when warrant gains are realized.⁶

Importantly, today’s environment enables growth lenders to be highly selective, focusing on fundamentally sound borrowers and structuring credit for downside protection. Growth loans also incorporate well-defined covenants and performance triggers that allow lenders to act proactively before distress occurs. In practice, realized losses in the venture-debt market have averaged less than 1% annually since 2005.⁷

4. Structural features of growth lending

As noted above, growth-lending structures are designed to combine attractive income potential with meaningful downside protection. Loans are typically issued at floating interest rates, most often 400 to 500 basis points above the prime rate and generally include rate floors to protect against declines in benchmark rates. In addition to interest income, lenders earn a mix of origination, end-of-term, and prepayment fees that can total between 1% – 7% of the loan amount. Loan maturities typically range from three to five years, although most are repaid within two to three years.

A distinctive feature of growth lending is the inclusion of warrants or success fees, usually representing 3% – 5% of the loan amount. This allows lenders to participate in a company’s upside when a liquidity event or acquisition occurs. This equity-linked element creates the potential for an asymmetric return profile that enhances total returns in favorable outcomes without materially increasing downside risk. In general, fund-level leverage is also modest, at historically around 1x, underscoring the asset class’s focus on credit quality and structure rather than financial engineering.⁸ 

Risk management is fundamental to the asset class. Unlike many middle-market loans that have become covenant lite, growth-lending facilities usually include meaningful financial covenants, such as minimum liquidity, cash-burn, or revenue/growth thresholds. These are typically paired with restrictions on leverage, acquisitions, and dividends. Lenders also conduct active portfolio monitoring, tracking operational metrics such as ARR trends, customer concentration, and cash runway. This combination of formal covenants and hands-on engagement allows lenders to identify issues early and work closely with management teams to preserve enterprise value.

Most loans are senior secured and backed by an all-asset lien, ensuring first-priority recovery in downside scenarios. Together, these features create a structure that has historically delivered consistent income and modest equity-linked upside while maintaining strong credit protections that have historically resulted in low loss rates and resilient performance across market cycles.