Debt is not Equity

We’ve closed almost 25 deals in two and a half years, and with that deal volume has come the opportunity to spread the word a bit about the various debt products available from specialty finance firms such as ourselves.

Despite our best attempts, however, the fabulous and dedicated folks that track deals for the Thomson database still seem to have a hard time articulating to the universe what the debt industry is actually doing. This is partly our industry’s own fault, as some people pretend that their secured debt is “venture capital”; but Thomson is the custodian of the database and is the ultimate arbiter.

To make matters worse, by categorizing tens of millions of dollars of secured loans as venture capital, Thomson is actually overstating the amount of venture capital invested in Canada in recent years.

These figures are relied upon by provincial and federal governments when making policy decisions that affect the industry. If they believe the VC industry is healtier than it really is, they might pull the plug on the labour-sponsored fund industry, for example. Oh, that’s right, they did pull the plug under the mistaken belief that the VC market was entirely healthy and well-sponsored.

As well, potential limited partners looking at investing in a venture capital general partner might think the venture marketplace is awash with capital (which it isn’t), when in fact the data reflects higher equity investment levels than is actually the case. If a potential LP believes the industry is very robust, they might assume that valuations are high and that a new entrant isn’t warranted. Or worse, they might not re-up with an existing GP.

And the recent annual Goodman and Carr / McKinsey “Mezzanine” survey is just another reminder how much work our sector has to do…. The Mezz market is a subset of the Canadian non-bank debt market. But it isn’t the entire non-bank debt market by any means.

In 2006, for example, Thomson tracked about $509 million of disclosed debt transactions, and lumped them together as “Mezzanine Debt”. Some were certainly mezzanine debt (or sub debt, which refers to a shorter term version of junior debt), such as the $29 million deal we led for Ventus Energy. But our $8 million financing for Air IQ reflected an operating line and term loan, which together had the senior security; Thomson calls this mezz as well. And the US$10 million debt financing provided to Simpler Networks is also “mezz” in their eyes, even if the funding isn’t five year bullet term money.

Work to be done here.

I’ll follow this post with a primer tomorrow.

MRM