Huntington Capital and Other Venture Lenders Thriving, Despite Credit Crunch

Xconomy San Diego — 

Unlike a lot of bankers these days, Tim Bubnack of San Diego’s Huntington Capital is pretty upbeat about his business.

“It’s an exciting time for us,” Bubnack said between meetings yesterday. “While the credit markets are seizing up, we’re providing growth capital that allows companies to continue to expand, grow their businesses, and in some cases, to execute buyouts.”

Privately held Huntington Capital, which specializes in “venture lending,” seems to be thriving despite the credit crunch and broader financial woes that have sent markets tumbling and pushed the U.S. economy toward recession.

Conventional banks have clamped down on lending as bad home loans and other credit problems morphed into an international banking crisis in confidence and an acute worldwide shortage of liquidity.

But Bubnack says Huntington, which has no exposure to subprime loans or the troubled financial instruments at the core of the U.S. credit crisis, has not been subjected to the same economic pressures.

While it is small—the firm has raised about $80 million from institutional investors for its second venture-lending fund—Huntington Capital is hardly alone.

In the San Diego offices of Silicon Valley Bank, a venture lender focused solely on technology and biotechnology companies, senior relationship manager Andy Pelletier says, “We’re actively closing loans and seeing a significant uptick in activity.” Pelletier said he could not be more specific, noting that Silicon Valley Bank is publicly traded.

Hercules Technology Growth Capital also is seeing “unprecedented deal flow,” although Manuel Henriquez, a co-founder and the firm’s chairman and chief executive, says that doesn’t mean Hercules is making an unprecedented number of venture loans.

“We are busier than we have ever been—but we also are being cautious about the duration of this winter storm,” Henriquez says.

Hercules typically joins with venture capital firms in funding technology startups, which gives the new company a mix of equity investors and debt. At a time when some prominent venture capital firms are warning their companies to manage for hard times, Henriquez says he also is advising his “portfolio companies” to batten down the hatches.

“Even though we’re in the debt business, we’re telling people to use less debt,” Henriquez said. “It’s extremely expensive now. If you don’t need debt right away, you should wait 60, 90, 120 days.”

Companies that specialize in venture lending have thrived in part because they typically assume more risk in their deals than conventional lenders, which require borrowers to meet certain criteria or hold sufficient collateral before they will make a loan.

Venture lenders are willing to overlook conventional loan requirements, providing that borrowers have other positive characteristics, such as strong sales and positive cash flow. Such discretion also gives them more flexibility in making loans when commercial banks are tightening up on loan requirements.

Of course, venture lenders also seek higher rates of return—so their business operates somewhere between conventional lending and venture capital investing.

In this respect, Huntington resembles a venture capital firm because it raises funding from limited partners (the people who have contributed to its $80 million fund) such as pension funds, insurance companies, and other institutional investors.

Founded in 2001, Huntington typically lends to well-established small businesses and medium-sized companies that are privately held. The firm’s loans range from $1 million to $5 million, and the average deal size is about $3 million, Bubnack said.

Hercules Technology typically makes larger loans, which were about $5 million to $7 million in the second quarter, Henriquez says. The public company based in Palo Alto, CA, reported venture loans of $229.6 million and venture investments of $6.4 million during the three months ended June 30.

Huntington gets higher returns on its loans by offering borrowers alternative methods to repay their debt—such as combining conventional loan payments with warrants, which can be converted to stock, or through supplemental “royalties,” which are payments tied to increased revenue.

Huntington operated initially as a government-backed small-business investment company, and provided about $34 million to 26 companies—all as loans. Bubnack, who wants to raise $100 million for Huntington Capital II, says no government funding went into its second fund, which will make both loans and venture investments.

Huntington generally avoids early stage technology startups because it prefers borrowers with annual sales that range between $5 million to $50 million, and because Huntington often joins in lending deals with bigger commercial banks. Bubnack says their customers often are “bootstrapped” companies that bypassed venture capital funding, oftentimes because the borrowers didn’t want to share the ownership of their company with venture capitalists.

Yet two deals this year involved technology companies, Bubnack said. One involved an undisclosed equity investment in LifeModeler, a six-year-old software developer in San Clemente, CA, that provides computer-based modeling of human body movement. The software is used in preparation for orthopedic joint replacement surgeries, and for biomechanical modeling by sporting goods developers and others.

Huntington also provided a loan to DR Technologies, an employee-owned aerospace and defense engineering company that specializes in designing and making structural components and subsystems using composite materials.