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Key Takeaways
- Growth credit is a distinct and fast-evolving segment of private credit, markedly smaller than direct lending but offering differentiated opportunities.
- Growth credit targets smaller, faster-growing companies—often venture-backed—where capital scarcity increases lender negotiating power and enhances return potential.
- Asset-level returns in growth credit often exceed 15–20%, with additional upside from warrants that may benefit from favorable tax treatment.
- Structural features such as prime-rate indexing with rate floors insulate growth credit returns from declining interest rates, in contrast to most SOFR-indexed loan products.
Private credit has enjoyed widespread adoption by institutional and individual investors in recent years, with direct lending franchises leading the charge. Yet, within the broader private credit space lies an underexplored but increasingly relevant strategy: growth credit.
Growth credit represents debt financing provided to high-growth private companies, often backed by minority venture capital or growth equity sponsors. Growth credit is sometimes viewed as an extension of direct lending. However, it is distinct not only in scale but also in structure, borrower profile and return potential. Whereas direct lending is dominated by large, well-capitalized platforms focused on private equity-owned companies, growth credit deals tend to be smaller, with positions in the publicly traded venture debt BDCs averaging around $14 million, and often include equity kickers in the form of warrants.
This paper breaks down the strategic rationale for growth credit, its market dynamics, and its role within a well-diversified portfolio that includes a robust allocation to private credit. It also highlights key differentiators to direct lending given the latter’s status as a well-understood and bellwether strategy within private credit.
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Definitions:
(SOFR) Secured Overnight Financing Rate is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
(BDC) Business Development Company is a type of investment vehicle that provides capital (primarily debt and equity financing) to small- and mid-sized U.S. companies that often cannot access traditional bank loans or public capital markets.
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