Why venture debt deserves a place in family office portfolios

Family offices are no strangers to innovative investment strategies. They embrace alternative asset classes, deploy capital in niche markets and often take the lead in identifying overlooked opportunities. Yet one strategy within private credit that remains underused in family office portfolios is venture debt.

This absence is puzzling, because venture debt can offer a compelling combination of steady returns, downside protection and access to high-growth sectors—attributes that align perfectly with the goals of many family offices.

Venture debt is a form of financing extended to venture-backed companies, typically alongside or shortly after a round of venture capital. Unlike venture capital, which focuses on outsized returns through equity ownership, venture debt provides loans that generate predictable income through interest payments. Borrowers often use venture debt to extend their runway, finance capital expenditures or bridge to the next equity round.

For family offices, the potential advantages of venture debt are multifaceted. It can generate stable returns in the high single to low double digits through interest and fees, prioritizing capital preservation over the exponential growth sought by equity investments. This focus on downside protection is attractive, given volatile equity markets.

Additionally, venture debt can open the door to high-growth sectors like technology and health care — industries that dominate venture capital portfolios — and provide family offices exposure to these innovative sectors without assuming the full risk of equity investments.

Risk vs. reward

Depending on the specific investments at hand, venture debt can offer a unique risk-reward profile and serve as an effective diversifier as well as offer a low correlation with traditional asset classes like equities and fixed income. Consistent cash flows also align with the long-term goals of many family offices, which often prioritize wealth preservation and steady income over short-term gains.    

While default rates across private credit can vary from quarter to quarter, I view venture debt for late- and growth-stage companies as a fundamentally lower-risk category. These are typically established businesses with recurring revenue and more predictable cash flow — very different from early-stage startups that are still navigating product-market fit or validating their business model.

For example, according to Preqin data from 2019-24, venture debt sits in the middle of the pack in terms of risk-adjusted returns. During this time, venture debt delivered stronger returns than direct lending and mezzanine.

While it may be less volatile than buyouts and distressed debt, it’s not the lowest-risk strategy overall. Rather, it can offer a compelling balance — a reliable return profile with moderate risk, making it a smart play for investors seeking predictable performance without taking on equitylike volatility.

The knowledge gap

Despite its benefits, venture debt remains virtually unknown to many family offices due to a few factors. First, venture debt is a niche asset class that has historically been dominated primarily by institutional investors and executed by specialized lenders and regional banks. Second, family offices often rely on traditional wealth advisers, who may not be familiar with venture debt or lack the expertise to evaluate its potential.

Additionally, venture debt has long been overshadowed by its more glamorous sibling — venture equity. Media attention to unicorn valuations and IPO windfalls leaves little room for discussions about venture debt providers’ steady, behind-the-scenes work. This narrative has created a perception gap where venture debt is ancillary rather than integral to a robust investment strategy.

Addressing a key misconception

One common misconception about venture debt is that it is a form of rescue financing for struggling companies. In reality, venture debt is not meant to bail out failing businesses but, rather, support well-capitalized, high-growth companies that are strategically using debt to extend the borrower’s runway, finance expansion or bridge to a key milestone. Unlike distressed debt, which is used to restructure or save a faltering company, venture debt is deployed proactively to strengthen companies with strong fundamentals and investor backing.

The opportunity for family offices

The current economic climate makes the case for venture debt even stronger. With interest rates elevated and equity valuations under pressure, venture debt can offer a relatively stable income stream and attractive, risk-adjusted returns. Additionally, venture-backed companies increasingly turn to debt financing to avoid dilutive equity rounds, creating a larger pool of potential borrowers.

Family offices have an opportunity to explore venture debt as part of their alternative investment strategies. While the majority of venture debt investors have traditionally been institutional, some family offices are beginning to see the benefits of investing in venture debt funds, which offer diversified exposure to high-growth companies while leveraging professional fund management. In turn, family offices can gain exposure to this asset class without needing to directly structure deals themselves, benefiting from fund managers’ expertise in underwriting and risk assessment

Taking the first step

For family offices interested in venture debt, the first step is understanding how venture debt funds operate and identifying reputable fund managers. Investing through established venture debt funds allows family offices to gain exposure to this asset class without the complexities of direct deal structuring. Evaluating venture debt funds involves assessing the fund's track record, underwriting approach and risk management strategies to ensure alignment with the family office’s investment objectives.

Additionally, family offices should consider allocating a small portion of their portfolio to venture debt, treating it as a pilot program. Over time, they can expand their exposure as they become more comfortable with the asset class.

Venture debt can provide a unique opportunity for family offices seeking to enhance their portfolios, support innovation and achieve their long-term financial goals. Rather than being seen as a niche product, venture debt deserves recognition as a critical component of a diversified strategy, and more family offices should consider this for their portfolios.