Hercules Capital, Inc. (HTGC) Q4 2022 Earnings Call Transcript

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Hercules Capital, Inc. (NYSE:HTGC) Q4 2022 Earnings Conference Call February 16, 2023 5:00 PM ET

Company Participants

Michael Hara - MD, IR & Corporate Communications

Scott Bluestein - CEO, CIO, President & Director

Seth Meyer - CFO & CAO

Conference Call Participants

Crispin Love - Piper Sandler & Co.

Kevin Fultz - JMP Securities

Christopher Nolan - Ladenburg Thalmann & Co.

Casey Alexander - Compass Point

John Hecht - Jefferies

Ryan Lynch - KBW


Good day, and convey you for opinionated by. Welcome to nan Hercules Capital Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions].

Please beryllium advised that today's convention is being recorded. I would now for illustration to manus nan convention complete to your speaker today, Michael Hara, Managing Director of Investor Relations.

Michael Hara

Thank you, Josh. Good afternoon, everyone, and invited to Hercules Conference Call for nan Fourth Quarter and Full Year 2022. With america connected nan telephone coming from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules' financial results were released conscionable aft today's marketplace adjacent and tin beryllium accessed from Hercules Investor Relations conception astatine

An archived webcast replay will beryllium disposable connected nan Investor Relations web page for astatine slightest 30 days pursuing nan convention call. During this call, we whitethorn make forward-looking statements based connected our ain assumptions and existent expectations. These forward-looking statements are not guarantees of early capacity and should not beryllium relied upon successful making immoderate finance decision. Actual financial results whitethorn disagree from nan forward-looking statements made during this telephone for a number of reasons, including, but not constricted to, nan risks identified successful our yearly study connected Form 10-K and different filings that are publically disposable connected nan SEC's website.

Any forward-looking statements made during this telephone are made only arsenic of today's date, and Hercules assumes nary responsibility to update immoderate specified statements successful nan future.

And pinch that, I'll move nan telephone complete to Scott.

Scott Bluestein

Thank you, Michael, and convey you each for joining nan Hercules Capital Q4 2022 Earnings Call. Following our grounds operating capacity successful 2021, Hercules Capital raised nan barroom higher and erstwhile again delivered grounds capacity successful 2022. 2022 was a historical twelvemonth for Hercules Capital. And I americium incredibly proud of what our talented and increasing squad accomplished. Our record-setting capacity successful 2022 culminated pinch nan strongest full and nett finance income 4th successful nan company's history. And nan caller declaration of an accrued quarterly guidelines distribution and a caller supplemental distribution programme for our shareholders.

Hercules Capital delivered different beardown twelvemonth of grounds originations performance, grounds financial results and continued beardown in installments performance. Our capacity successful 2022 reflects nan benefits of being capable to execute and run astatine scale, support robust liquidity and a beardown equilibrium expanse and moving pinch nan best-in-class squad that is highly knowledgeable successful this plus class.

Thanks to nan maturation of some nan BDC and our backstage in installments costs business, Hercules Capital is now managing successful excess of $3.6 cardinal of assets, an summation of complete 38% from wherever we were astatine nan extremity of 2021. Despite continued marketplace and macro volatility, nan continued spot and description of our originations platform, robust liquidity position and beardown equilibrium expanse put america successful a position to present achievements connected aggregate fronts successful 2022, including grounds full gross indebtedness and equity commitments of $3.12 billion, up 18% year-over-year and nan first clip successful our 18-year history wherever we person been capable to present complete $3 cardinal of caller commitments successful a year.

Record indebtedness finance portfolio maturation of astir $600 million; grounds full finance income of $322 million, up 14% year-over-year; grounds nett finance income of $188 million, up 25% year-over-year; accrued our guidelines distribution 3x successful 2022 pinch our astir caller summation to $0.39 per stock successful Q4. Record rate distributions of $1.96 declared for 2022, an 18% summation year-over-year, 3 consecutive years of delivering supplemental distributions to our shareholders. And finally, complete $330 cardinal of investments assigned to and/or funded straight retired of nan advisor costs that we negociate done our wholly-owned RIA.

2022 was besides different twelvemonth of finance successful nan company, wherever we took further steps to fortify our platform, originations capabilities and backmost agency functionality and sophistication. These investments supply america pinch continuing optimism and assurance successful nan trajectory of our business heading into 2023. Our results successful Q4 tin beryllium summarized by grounds net beardown portfolio maturation and momentum, improving yields and unchangeable credit.

Let maine recap immoderate of nan cardinal highlights of our capacity for Q4. Our grounds originations capacity successful nan first 3 quarters of 2022 continued pinch beardown Q4 gross indebtedness and equity commitments of $645 million. Our gross fundings continued to beryllium beardown during nan 4th pinch complete $367 million, which led to beardown nett indebtedness finance portfolio maturation of complete $133 cardinal during nan 4th fourth and a grounds $598.5 cardinal for 2022.

The nett indebtedness finance portfolio maturation that we achieved successful 2022, mixed pinch nan existent output situation puts america successful a beardown position to beryllium capable to present beardown nett finance income maturation successful fiscal twelvemonth 2023. Our Q4 originations activity was driven by some our exertion and life sciences teams, delivering beardown capacity during nan 4th quarter. Our commitments and backing activity demonstrated equilibrium betwixt our 2 halfway verticals, and this continues to supply america pinch nan unsocial expertise to actively target some verticals depending connected wherever we are seeing amended opportunities and risk-adjusted returns.

We funded superior to 25 different companies successful Q4, of which 9 were caller borrower relationships. For 2022, we added 52 caller borrower relationships, which further expands our standard successful nan marketplace and estimation arsenic nan lender of prime for growth-stage companies looking for a semipermanent and unchangeable financing partner that has been progressive successful nan marketplace done respective cycles.

Consistent pinch what we saw passim nan first 3 quarters of 2022, we were again capable to grow our backing narration pinch galore portfolio companies that proceed to show spot and execute capacity milestones during nan 4th quarter. With complete $3 cardinal of caller commitments successful 2022 and a lower-than-typical funding-to-commitment ratio driven by blimpish in installments underwriting, we expect this inclination of accrued follow-on fundings to existing portfolio companies to proceed successful 2023.

The momentum that we saw passim 2022 has carried into 2023, and we are pleased by our capacity connected originations quarter-to-date. Since nan adjacent of Q4 and arsenic of February 13, 2023, our woody squad has already closed $189 cardinal of caller commitments and funded complete $192 million. We person pending commitments of an further $263 cardinal successful signed, nonbinding word sheets. Volatility crossed nan equity markets, peculiarly for growth-stage companies continued to stabilize successful Q4. Valuations for some nationalist and backstage companies stay nether pressure, and nan superior markets person stayed much selective connected nan equity side. This is continuing to thrust beardown request for our superior and why we expect our pipeline to proceed to beryllium patient adjacent and mean term.

We judge that Hercules is champion positioned successful nan plus people for continued and sustained success. Consistent pinch our humanities attack to underwriting credit, we are remaining diligent and disciplined connected caller originations, and we will prioritize in installments value complete chasing higher consequence transactions pinch a output premium. We judge that we are incredibly good positioned successful nan existent marketplace and that our standard and portfolio and VC diversification spend america nan expertise to opportunity nary connected caller credits that do not meet our underwriting parameters. This is peculiarly important successful today's marketplace pinch a number of growth-stage companies looking for system indebtedness has accrued dramatically.

Hercules has ever maintained a credit-first culture, and we expect this to proceed to service america well, peculiarly successful periods of volatility. During Q4, portfolio institution exits and liquidity events for nan manufacture proceed to bespeak nan ongoing unit successful nan equity markets arsenic good arsenic nan trends successful M&A that we anticipated connected our Q3 net call.

For 2022, we had 19 full exits comprised of 5 IPOs and 14 companies announced aliases complete M&A transactions. Although nan exit situation successful 2022 was suppressed comparative to 2021, our 19 exits were accordant pinch our humanities average. As nan IPO marketplace remains uncertain, we proceed to expect to spot an acceleration of M&A transactions complete nan adjacent respective quarters.

Since our past net telephone connected November 2, we person had 9 portfolio companies announced aliases complete M&A transactions. This includes Ouster announcing a merger pinch Velodyne successful Q4 and completing it successful Q1. And Evernote announcing its acquisition by Bending Spoons besides successful Q4. During Q1 quarter-to-date, we person had 7 further portfolio companies announced aliases complete M&A transactions. This includes Fungible being acquired by Microsoft. Albireo Pharma being acquired by Ipsen; Agrivida being acquired by Novus; Concert Pharmaceuticals being acquired by Sun Pharma; Logicworks being acquired by Cox Communications; AVEO being acquired by LG Chem; and Oak Street's caller announcement that it is being acquired by CBS.

This reflects nan value of our indebtedness portfolio arsenic good arsenic our team's expertise to proceed to place and target nan astir promising maturation shape companies successful nan market. Early indebtedness repayments were astir $131 cardinal successful Q4, adjacent to nan midpoint of our guidance of $100 cardinal to $150 cardinal and a humble summation from $125 cardinal successful Q3 2022.

For Q1 2023, driven successful ample portion by M&A, we expect prepayments to beryllium betwixt $150 cardinal and $200 million, though this could alteration arsenic we advancement successful nan quarter. In Q4, we generated a grounds full finance income of $100.2 cardinal and grounds nett finance income of $62.1 cardinal aliases $0.47 per share, providing 121% sum of our precocious accrued guidelines distribution of $0.39 per share.

Our portfolio generated a GAAP effective output of 14.7% successful Q4 and a halfway output of 13.8%, which exceeded our guidance for nan 4th and is suggestive of nan caller complaint increases and higher onboarding yields for definite caller loans. With nett regulatory leverage astatine a very blimpish 100.1% and continued robust liquidity crossed our platform, our equilibrium expanse remains very good positioned.

Additionally, we person nary semipermanent indebtedness maturing successful 2023, which affords america nan expertise to beryllium opportunistic and selective connected raising caller capital. Credit value connected nan indebtedness finance portfolio remained beardown and stable. Our weighted mean soul in installments standing of 2.23 was somewhat higher than nan 2.20 standing successful Q3, but it remains astatine nan debased extremity of our normal humanities range.

Our Grade 1 and 2 credits decreased to 61.5% compared to 67.4% successful Q3. Grade 3 credits were higher astatine 36.3% successful Q4 versus 31.1% successful Q3. Our rated 4 credits made up 2.1% of nan portfolio and rated 5 credits were 0.1% successful Q4. As of our astir caller reporting, 100% of our indebtedness portfolio companies are existent pinch respect to contractual payments of main and interest. As of nan extremity of Q4, we had only 2 indebtedness investments connected nonaccrual pinch an finance costs and adjacent worth of astir $18 cardinal and $1.7 million, respectively aliases 0.6% and 0.1% arsenic a percent of nan company's full finance portfolio astatine costs and value, respectively.

We ended Q4 pinch beardown liquidity of complete $606 million. Subsequent to year-end, we signed a caller missive of in installments statement pinch SMBC, which provides for a missive of in installments installation of up to $100 million. In addition, we amended and extended our MUFG led facility. The task superior ecosystem vanished 2022 pinch fundraising activity astatine a grounds $163 cardinal and finance activity astatine $238 cardinal according to information gathered by PitchBook and nan National Venture Capital Association.

With nan magnitude of disposable superior to put astatine historical highs, we stay optimistic that task superior activity will accelerate successful 2023. Despite much selectivity and valuation sensitivity from task superior investors, superior raising crossed our portfolio remained beardown passim 2022, pinch 58 companies aliases much than half of our portfolio companies raising complete $5.6 cardinal of caller capital.

In Q4 alone, we had 20 different companies raised complete $1.6 cardinal of caller capital. We exited Q4 pinch undistributed net spillover of astir $125 cardinal aliases $0.94 per share. The undistributed net spillover continues to supply america pinch nan added elasticity pinch respect to our shareholder distributions going guardant and nan expertise to proceed to put successful our squad and platform.

For Q4, we accrued our guidelines distribution to $0.39 from $0.36 and declared a caller yearly supplemental distribution of $0.32, which will beryllium paid arsenic complete nan adjacent 4 quarters opening successful March 2023. This was our 3rd summation to our quarterly guidelines distribution successful 2022 and our 3rd consecutive twelvemonth of being capable to salary retired supplemental distributions to our shareholders. We will proceed to measure nan quarterly, adaptable guidelines distribution pinch a peculiar attraction connected nan indebtedness portfolio maturation and NII maturation that we are expecting to materialize.

In closing, our momentum remained beardown passim 2022, and we stay good positioned successful 2023 from each aspects to return advantage of marketplace conditions and turn our halfway income generating assets, and arsenic a result, nan net powerfulness of nan business. Our halfway themes for 2023 will mostly stay accordant pinch 2022, and they bespeak maintaining a beardown equilibrium expanse and liquidity position and staying disciplined connected caller underwritings, while continuing to put successful our finance teams and platform.

We are thankful to nan galore companies, guidance teams and investors that proceed to make Hercules their partner of choice. I will now move nan telephone complete to Seth.

Seth Meyer

Thank you, Scott, and bully afternoon, ladies and gentlemen. As Scott mentioned, this was different grounds 4th for Hercules Capital, capping disconnected a record-breaking 2022. In summation to grounds finance activity successful 2022, we proceed to fortify our team, grow and heighten our equilibrium expanse and guarantee our costs of leverage was optimized successful a rising liking complaint environment.

Throughout nan year, we were capable to further validate nan benefits of operating astatine standard by demonstrating meaningful operating leverage arsenic we grew AUM to grounds levels. This allowed america to present an NII separator of 62% successful Q4, nan highest that we person achieved since 2007. During 2022, our weighted mean costs of indebtedness remained beneath 4.6%, putting america successful a very beardown position comparative to others successful our plus class.

We were capable to do this by refinancing much costly bequest instruments successful 2021 and into early 2022. And past focusing our equilibrium expanse elasticity erstwhile nan markets became much challenging from a complaint perspective. As a recap, successful June, we completed 2 organization indebtedness financings and expanded our capacity connected some in installments accommodation to support nan continued maturation of nan portfolio.

In total, $470 cardinal of further indebtedness financing and in installments installation capacity was made disposable to Hercules Capital, demonstrating our expertise to raise important amounts of superior astatine charismatic rates successful a play of important volatility for nan superior markets. We've started 2023 pinch nan aforesaid success, amending and renewing early, our largest in installments installation led by MUFG and putting successful spot a caller missive of in installments installation pinch SMBC to screen $100 cardinal of our available, unfunded committedness successful a much cost-effective manner.

The consequence of these steps is greater flexibility, little financing costs and consistently beardown liquidity to support our business and portfolio companies. We will proceed to attraction connected these themes successful 2023 arsenic good arsenic attraction connected different operational efficiencies and standard of nan platform. With that successful mind, let's reappraisal nan pursuing areas: number one, income connection capacity and highlights, number two, NAV, unrealized and realized activity; number three, leverage and liquidity; and past finally, number four, nan financial outlook.

Focusing first connected nan income connection capacity and highlights. Total finance income was different grounds astatine $100.2 cardinal driven by 27% maturation successful nan indebtedness portfolio complete nan twelvemonth connected beardown caller business underwriting mixed pinch little prepayments and an summation successful benchmark rates.

Net finance income was a grounds $62.1 million, a 24% quarter-over-quarter summation aliases a grounds of $0.47 per stock successful Q4. Our effective and halfway yields successful nan 4th fourth were 14.7% and 13.8%, respectively, compared to 12.9% and 12.4% successful nan 3rd quarter.

The summation successful nan halfway output was owed to an summation successful coupon liking arsenic a consequence of guidelines complaint liking increases. While we expect this inclination to proceed successful nan first 4th pinch nan afloat quarterly effect of nan 4th fourth Fed argumentation liking complaint changes and nan partial effect of nan astir caller complaint change, we are forecasting a leveling of halfway output thereafter owed to expected indebtedness onboarding yields and little activity from nan Fed.

Turning to expenses. Our gross operating expenses for nan 4th accrued to $40 cardinal compared to $36.1 cardinal successful nan anterior quarter. Net of costs recharged to nan RIA, our operating expenses were $38 million. Interest disbursal and fees accrued to $18 cardinal from $16.7 cardinal successful nan anterior 4th owed to nan maturation of nan finance portfolio and somewhat higher weighted mean costs of debt.

SG&A expenses accrued to $22 cardinal from $19.4 cardinal successful nan anterior quarter, supra my guidance connected higher backing for nan 4th versus our forecast. Net of costs recharge to nan RIA, nan SG&A expenses were astatine $20.1 million. Our weighted mean costs of indebtedness was 4.6%, a flimsy percent summation compared to nan anterior quarter, reflecting greater utilization of nan in installments accommodation owed to maturation of nan finance portfolio.

Our ROAE aliases NII complete mean equity accrued different 350 ground points to 18.2% for nan 4th fourth and ROAA aliases NII complete mean full assets was 8.8%. Switching to NAV and unrealized and realized activity. During nan quarter, our NAV accrued $0.06 per stock to $10.53 per share. This represented an NAV per stock summation of 0.6% quarter-over-quarter.

Net finance income accretion owed to humble usage of nan ATM was offset by nan dividends paid successful nan quarter, including nan $0.15 per stock spillover distribution of 2021 earnings. Net realized nonaccomplishment of $1.7 cardinal related to nan write-off of nan bequest equity and warrant positions.

Moving connected to leverage and liquidity. Our GAAP and regulatory leverage were 113.7% and 101.3%, respectively, which somewhat accrued compared to nan anterior 4th owed to nan nett maturation of nan investments, offset by nan humble usage of nan ATM. Netting retired leverage pinch rate connected nan equilibrium sheet, our GAAP and regulatory leverage was 112.6% and 100.1%, respectively. We ended nan 4th pinch much than $600 cardinal of disposable liquidity.

As a reminder, this excludes superior raised by nan costs managed by our wholly-owned RIA subsidiary. We judge our beardown and elastic liquidity positions america very good successful nan existent complaint environment. With nan renewal of nan MUFG in installments installation and nan summation of nan SMBC missive of in installments facility, we person nary near-term indebtedness maturities, giving america nan expertise to beryllium opportunistic should we determine to raise further superior to support nan business.

We continued to opportunistically entree nan ATM marketplace during nan 4th and raised astir $40 million, resulting successful an $0.08 per stock accretion to NAV. For nan year, we raised astir $230 cardinal from nan ATM program. Finally, connected nan outlook points, for nan first quarter, we're expanding our halfway output guidance scope to 13.5% to 14%, excluding immoderate early benchmark liking changes.

As a reminder, astir 95% of our indebtedness portfolio is floating pinch a floor, truthful nan caller liking complaint hike and immoderate further successful 2023 will use our halfway output going forward. Although very difficult to predict, arsenic communicated by Scott, we expect $150 cardinal to $200 cardinal successful prepayment activity for nan first quarter. We expect our first 4th liking disbursal to summation compared to nan anterior 4th owed to nan equilibrium expanse maturation knowledgeable successful nan 4th fourth and anticipated successful nan first quarter.

For nan first quarter, we expect gross SG&A expenses of $21 cardinal to $22 cardinal successful a akin level of RIA disbursal allocation compared to nan 4th quarter. As a reminder, nan first 4th ever has higher payroll taxes and use costs. In closing, arsenic we bespeak connected nan achievements of 2022 and our expertise to present some grounds AUM and grounds NII per share, we stay optimistic astir 2023 and our expertise to proceed to thrust maturation crossed nan level while remaining focused connected delivering best-in-class full shareholder returns.

I will now move complete nan telephone to Josh to statesman nan Q&A information of our call. Josh, complete to you.

Question-and-Answer Session


[Operator Instructions]. Our first mobility comes from Crispin Love pinch Piper Sandler.

Crispin Love

In your prepared remarks, you talked astir really half of your companies -- portfolio companies raise equity superior successful 2022 for, I think, you said astir $5.6 cardinal and that's pinch -- arsenic nan manufacture activity fell disconnected meaningfully. So tin you conscionable speak to why you judge that your portfolio companies were successful a position to raise important superior while nan manufacture arsenic a full wasn't capable to?

Scott Bluestein

Sure. Thanks, Crispin. I deliberation a batch of it really has to beryllium attributable to nan value of our team. We person complete 55 professionals connected nan finance team. This is an incredibly knowledgeable finance team. The mean manufacture acquisition crossed that finance squad is astir 10-plus years, and they person a agelong way grounds of moving successfully together to place and past triumph transactions pinch immoderate of nan champion value companies successful nan market.

So I deliberation a batch of nan in installments has to spell to nan team. The 2nd point that I would constituent retired is that astatine slightest from what we're seeing, location has surely been immoderate unit successful position of valuation. But nan companies that stay beardown companies are capable to raise caller equity capital, and that's really what we saw crossed our portfolio successful 2022. And those numbers that you cited were precisely wherever they came retired for us. In Q4, we had 20 different companies raised complete $1.6 cardinal of caller capital. And for nan year, we had astir 58 companies raised astir $5.6 cardinal of caller capital.

Crispin Love

And Scott, really does that $5.6 cardinal compared to 2021? .

Scott Bluestein

I don't person nan information for you for 2021. So I'd person to get backmost to you connected that. .

Crispin Love

Okay. Not a problem. And then, Scott, you besides mentioned during nan prepared remarks astir being diligent and disciplined connected caller originations. Are you capable to drill into that a small spot deeper and what that mightiness mean for your expectations for caller indebtedness fundings aliases indebtedness fundings maturation successful 2023 aliases astatine slightest what you're seeing complete nan adjacent term?

Scott Bluestein

Sure. So arsenic a firm, we are incredibly optimistic astir what nan situation will look for illustration for america successful 2023. We're disconnected to a awesome commencement successful Q1, and I provided immoderate quarter-to-date closed commitments and quarter-to-date pending committedness numbers, and we're disconnected to a awesome commencement successful regards to some of those numbers. The squad is continuing to look astatine and measure a grounds number of transactions.

So erstwhile we look astatine our pipeline activity, it is arsenic ample arsenic it's been successful a agelong time. Having said that, and this was besides portion of nan prepared remarks, because of nan turbulence that we're seeing successful nan equity markets, some nationalist and private, we're seeing a tremendous summation successful nan number of companies that are looking for task indebtedness aliases growth-stage indebtedness backing solutions. And arsenic you know, having followed this business for a agelong play of time, you simply can't deed nan bid for each institution that's looking for indebtedness financing.

So our squad is being very thorough successful position of our screening, very diligent pinch respect to nan number of companies that we are progressing on successful our pipeline activity. And we judge that we are closing transactions pinch nan champion qualified companies that we are seeing connected a quarterly basis.

I would besides reference, past year, we did $3 cardinal of commitments. When you look astatine our funding-to-commitment ratio, past twelvemonth was astir 55% to 60%. So location are a batch of backing that we expect taking spot from nan existing portfolio complete nan people of nan adjacent 6 to 12 months.


Our adjacent mobility comes from Kevin Fultz pinch JMP Securities.

Kevin Fultz

Congratulations connected a awesome year. Clearly, nan portfolio in installments value is successful fantabulous shape. I'm conscionable funny if you've seen an summation successful amendment requests astatine all. And if you could talk your expectations that perchance prime up successful nan adjacent term.

Scott Bluestein

Sure. Thanks, Kevin. We person not -- and we really -- we conscionable looked astatine this -- we look astatine it each quarter. But complete nan people of Q4, we really did not spot immoderate uptick successful amendment requests broadly. And specifically, we did not spot immoderate amendment requests that were related to accent aliases liquidity-related situations. So I deliberation overall, we're continuing to spot a unchangeable and beardown in installments situation crossed our portfolio.

We person 2 loans connected nonaccrual. It makes up little than 0.1% of nan portfolio from a adjacent worth perspective. We're surely expanding our monitoring. We're tightening our underwriting screens fixed nan volatility that we person seen complete nan people of nan past respective quarters and that we expect to spot connected a go-forward basis. But overall, we person not seen immoderate uptick pinch respect to amendment requests from our portfolio companies.

Kevin Fultz

Okay. That's awesome to hear. And I conjecture conscionable to proceed connected that statement of question. You mentioned nonaccruals evidently successful awesome shape, pinch only 2 investments connected nonaccrual. I was conscionable funny if you could supply immoderate high-level colour connected nan 1 caller finance that was added this quarter. .

Scott Bluestein

Sure. It's a mini loan. It's astir a $5 cardinal indebtedness to a mini tech institution that is private. That institution remains existent pinch respect to its contractual payments to Hercules, but it does person stressed liquidity. They're presently exploring a assortment of options, and we're moving intimately pinch nan team. We did make nan determination successful Q4 retired of an abundance of be aware to put that indebtedness connected nonaccrual and we did return a adjacent worth accommodation connected that position arsenic well. But it's a very mini position comparative to, obviously, a $3 cardinal portfolio. .


Our adjacent mobility comes from Christopher Nolan pinch Ladenburg Thalmann.

Christopher Nolan

Scott, unfunded commitments for $645 million, 20% of nan portfolio, down somewhat quarter-over-quarter. Are you -- fixed nan volatility of nan broader environment, are you seeing companies having a tougher clip gathering their milestones to pat those commitments? .

Scott Bluestein

We're not. We've really had a tremendous tally of occurrence pinch respect to companies of being capable to unlock unfunded commitments. If you -- it's difficult to benignant of spot nan quarter-over-quarter movements because there's benignant of a operation of 2 things. Number one, successful immoderate fixed quarter, we're backing a ample information of those available, unfunded commitments and past caller unfunded commitments are being unlocked.

So what you fundamentally saw successful Q4 was we were capable to money a batch of superior to existing portfolio companies. But connected apical of that, we had respective of our benignant of larger, later-stage companies, some connected nan tech broadside and life sciences broadside execute circumstantial capacity milestones during nan quarter, which unlocked caller tranches from an readiness perspective.

Christopher Nolan

And my follow-up mobility is, successful your prepared remarks, you mentioned, if I heard correctly, $3.6 cardinal successful finance assets. The equilibrium expanse has $3 cardinal astatine cost. Should we presume that, that incremental $600 cardinal is assets successful nan RIA?

Scott Bluestein


Christopher Nolan

And what -- really do you -- I cognize it's , but do you spot nan RIAs being moreover a faster maturation conveyance than nan publically traded BDC for 2023?

Scott Bluestein

It's difficult to say. We deliberation that some vehicles are evidently growth-oriented vehicles, and we demonstrated and we delivered very beardown maturation successful nan nationalist BDC and successful nan backstage in installments money business past year. We expect that to proceed to beryllium nan lawsuit based connected what we're seeing correct now for 2023. I would constituent retired that because of nan unsocial building that we've deployed present wherever nan RIA business is operated arsenic a wholly-owned subsidiary of nan nationalist BDC, nan much successful that backstage in installments money business is, nan amended it is for nan shareholders and stakeholders of HTGC.


Our adjacent mobility comes from Casey Alexander pinch Compass Point.

Casey Alexander

Yes. I'm trying to wrap my caput a small spot astir nan cadence of nan measurement things look for illustration they're going to travel present successful nan first quarter. And you discussed nan $150 cardinal to $200 cardinal of repayments arsenic your estimate. I understand that. you had commitments successful nan first 4th already of $190 million, but you've already funded $193 million. I'm assuming that, that is immoderate of those loans that are coming disconnected of nan unfunded committedness schedule. It would suggest, particularly fixed that astir of nan time, fundings are back-ended that you would beryllium looking astatine a reasonably robust 4th successful position of nett originations. And would that, successful part, explicate why you've already sold 2.6 cardinal shares nether nan equity ATM programme this quarter.

Scott Bluestein

Sure. Thanks, Casey. So first, pinch respect to Q1, arsenic you know, we do not supply a gross backing projection pinch respect to what we expect to do. We did supply nan committedness numbers. I deliberation nan measurement you're looking astatine it, though, is nan correct measurement to deliberation astir it. The logic why nan backing numbers truthful acold quarter-to-date transcend nan committedness numbers is, we've been capable to money a batch of superior to existing portfolio companies who deed capacity milestones successful nan 2nd half of past year. And those tranches were either expiring aliases nan institution has made nan determination to tie that capital.

I mean successful nan lawsuit that what we typically spot hap pinch nan companies are achieving those milestones, we're evidently happy to money that further superior to borrowers wherever we already person nan relationships. We're besides seeing beardown request from a caller business perspective, and that's evidenced by nan caller committedness number and nan pending committedness number. So we're assured and we're optimistic pinch respect to what that Q1 backing number is going to look like. And that does lead to, a, why we've been not aggressive, but why we've been progressive connected nan ATM quarter-to-date. And I would besides show you that, that should service arsenic a beautiful beardown awesome astir really we consciousness astir portfolio maturation complete nan people of nan first half of this year.

Casey Alexander

Okay. My different mobility is what's different and precipitates nan usage of a missive of in installments arsenic opposed to a in installments facility? Is location thing different astir that? Is it securitized that allows for it to beryllium cheaper capital? Or why spell successful that direction? I'm not judge I ever retrieve a BDC really utilizing a missive of in installments arsenic opposed to a in installments facility.

Seth Meyer

Yes. Thanks, Casey. It's Seth here. We deliberation it's a beautiful smart summation to our toolbox based connected nan truth that it's a batch cheaper installation to put successful place. We're very grateful for SMBC moving pinch america to put successful spot what we deliberation is astir apt nan first, unrelated missive of in installments that's been put successful place. And it covers nan tail extremity of nan vulnerability connected nan disposable unfunded commitment. That portion, which is improbable successful immoderate azygous 4th ever to beryllium drawn down. Historically, nan scope has been 5% to 15% of nan anterior quarter's disposable unfunded committedness is drawn down. So covering each of it pinch a higher costs in installments installation doesn't look smart to america successful nan agelong term.

Casey Alexander

Okay. I deliberation I get it. .


Our adjacent mobility comes from John Hecht pinch Jefferies.

John Hecht

Congratulations connected a bully twelvemonth and a bully quarter, and I admit you taking my questions. First 1 is, I mean, it's very clear that nan nationalist markets person gone from a benignant of difficult landing to softer landing benignant of valuation and communicative and anticipation that I'm wondering, Scott, possibly really does nan consciousness successful nan task superior world successful position of their viewpoint connected nan climate. And what does that mean for benignant of nan request for your merchandise and nan opportunity set?

Scott Bluestein

Sure. Thanks, John. What we're seeing crossed nan ecosystem is, I would say, caution, but besides optimism. The VC firms person grounds amounts of liquidity disposable to invest. When you look astatine nan finance activity numbers for 2022, you tin look astatine it 1 of 2 ways. You tin look astatine it comparative to 2021, which was nan champion twelvemonth connected record, and you tin opportunity that it was down year-over-year, which is perfectly factual.

But you tin besides look astatine it and opportunity that nan 2022 finance numbers represented nan 2nd strongest twelvemonth successful nan history of task superior activity. And truthful we chose to benignant of look astatine it location successful nan middle. We deliberation nan fundraising activity that was a grounds level successful 2022 is simply a very beardown awesome of what we expect to beryllium an acceleration of VC finance activity complete nan adjacent 12 to 24 months. We're besides continuing to spot nan aforesaid trends that we saw passim 2022.

Good companies are capable to raise money. The valuation discussions are a small spot much difficult. The VC firms are much valuation sensitive. But deals are still getting done for nan companies that merit to beryllium funded. And whether it's connected nan equity broadside aliases nan indebtedness side, location person ever been and location will proceed to beryllium a fistful of companies that astir apt should not beryllium getting financed.

And until each of that benignant of useful its measurement done nan system, and that will return immoderate time, you're going to proceed to person this benignant of volatility that we're seeing some successful nan nationalist markets and successful nan backstage markets arsenic well.

John Hecht

Okay. That's awesome color. And past nan 2nd mobility is, look, I mean, you've had a history of extraordinarily debased losses. And obviously, your existent in installments book is still really strong. I cognize you person regulatory restrictions connected leverage. But fixed your benignant of nonaccomplishment contented and your in installments book, is location immoderate imaginable appetite to benignant of move towards nan higher extremity of your leverage target complete time? Or really do we conscionable deliberation astir nan exertion of leverage you've -- fixed your -- again, that terribly debased nonaccomplishment ratio complete time?

Scott Bluestein

Thanks, John, for nan question. Two things. One, and we've talked astir this publically before. In nan task lending aliases growth-stage lending plus class, driving leverage up is really challenging. And nan logic for that is nan long of our assets. Throughout 2022 connected a quarterly basis, our mean long was location betwixt 12 and 16 months.

Right now, our mean long is astir 15 months. And truthful erstwhile your portfolio is turning that rapidly, it's very difficult to thrust leverage up connected a accordant and sustained basis. As of nan extremity of Q4, we were operating astatine astir 113.7% from a GAAP leverage perspective. Our guidance aliases our ceiling arsenic publically indicated is astir 125%. So location is immoderate room for america to thrust that up.

And if nan portfolio maturation is arsenic beardown arsenic we expect it to beryllium successful 2023, it would not astonishment america if that number gets driven up slightly, but we're not a patient that has traditionally aliases will, connected a go-forward basis, push nan letter cover pinch respect to leverage because moreover though it mightiness thief make immoderate further return. We don't deliberation successful our plus class, it's nan astir prudent point to do.


[Operator Instructions]. Our adjacent mobility comes from Ryan Lynch pinch KBW.

Ryan Lynch

First mobility I had was, I deliberation you benignant of benignant of touched connected it earlier. But tin you conscionable explicate why your -- why some your indebtedness and your equity warrant portfolio valuation held up truthful good this quarter, benignant of conscionable successful nan look of benignant of a challenging task superior marketplace.

Seth Meyer

Yes. So acknowledgment a lot, Ryan. I deliberation that erstwhile you excavation into nan item of our movement, you'll spot that nan nationalist equity positions moved up. So that's conscionable driven by nan nationalist markets wherever they landed astatine 12/31 whereas nan backstage positions move down by almost an adjacent amount. That was evidently a coincidence.

There's different quantums of those positions. And what we've ever seen is that nan backstage positions typically way astir a 4th down nan nationalist positions. And truthful it's not uncommon that we person those move successful different directions aliases differing quantums because of that hold of nan effect to nan backstage markets.

Scott Bluestein

And Ryan, I would conscionable add, arsenic Seth mentioned, nan biggest driver connected nan upside was nan nationalist equity position. And if you conscionable look astatine immoderate of our larger nationalist equity positions quarter-over-quarter from wherever they started Q4 to wherever they ended, nan immense mostly of those larger positions were up, and that was nan largest driver of nan wide activity successful unrealized depreciation.

Ryan Lynch

Okay. That's helpful. And past going backmost to conscionable nan wide environment. You guys talked astir connected nan call, there's been a batch of task superior fundraising successful 2022. I deliberation it was a grounds year. But if you look astatine nan task superior investment, while it was patient successful 2022, location was a beautiful crisp diminution passim 2022, bottoming pinch nan 4th quarter, I think, of for illustration $36 billion.

And past also, erstwhile you look astatine task superior exits, they person really benignant of dropped disconnected a cliff, and I deliberation they were down to astir $5 cardinal successful nan 4th quarter. And truthful my mobility is, while there's been a batch of superior raised successful task superior firms successful 2022. How do you consciousness -- really progressive do you consciousness they'll beryllium if exits and they're not receiving their money backmost if exits enactment benignant of astatine these very debased levels.

Scott Bluestein

Sure. Thanks for nan question, Ryan. So a mates of things. And I had mentioned this successful consequence to 1 of nan earlier questions. You tin look astatine nan 2022 finance information 1 of 2 ways. We chose to look astatine it arsenic very beardown and healthy, $238 cardinal invested by VC firms passim nan people of 2022, down year-over-year from nan grounds successful 2021 but nan 2nd strongest twelvemonth connected record.

And for us, contempt nan truth that it's down year-over-year, that still reflects what we saw successful our ain portfolio successful 2022. With respect to costs raised, that was a grounds number, astir $163 cardinal raised by task superior firms successful 2022. When VC firms make investments, they're not anticipating an exit successful 3 months, 6 months aliases 12 months. These thin to beryllium longer-term investments. We are very optimistic astir nan early of nan task superior ecosystem. And based connected nan conversations that we're having pinch our portfolio companies, pinch nan task superior firms that backmost our portfolio companies, we judge that 2023 will correspond an uptick pinch respect to VC finance activity crossed nan ecosystem.

Ryan Lynch

Well, I conjecture my mobility was much connected nan trends that we're seeing because while location was a grounds number of superior raised successful 2022, nan inclination from investing connected a quarterly ground decelerated importantly passim 2022. Fourth 4th was very weak. And past erstwhile you look astatine nan exit activity, that really dropped passim nan twelvemonth significantly.

So my mobility is really, do you expect these trends to move astir aliases to proceed successful 2023? And what does that mean for your business, moreover benignant of forgetting astir 2021, but I cognize those were benignant of years aliases possibly somewhat exacerbated by benignant of nan frothy operation of nan liking rates. But do you spot these trends benignant of turning astir that we saw successful nan 2nd half of 2022? And if not, what does that mean for nan task superior landscape?

Scott Bluestein

Sure. So Q4, some pinch respect to costs raised and dollars invested was down if you look astatine it comparative to Q3. We do expect that to move around. I'm not going to foretell whether that happens successful Q1 aliases Q2. We look astatine things connected a 6- to 12-month basis. And based connected everything that we're seeing, conversations that we're having, we judge that you will spot an uptick complete nan people of 2023. With respect to exit activity, which was different remark that you made successful position of trends, again, I would benignant of separate betwixt immoderate of nan wide manufacture information and conscionable nan empirical grounds that we spot successful our ain portfolio.

Quarter-to-date, we've had 7 companies retired of 105 companies announced aliases closed M&A transactions. We surely are not seeing immoderate uptick pinch respect to IPO activity. But arsenic we've been indicating publically complete nan people of nan past respective quarters, we expect and we are seeing a tremendous uptick successful M&A activity. And again, based connected conversations we're having crossed nan portfolio, we really expect that inclination to proceed to accelerate into nan first half of 2023.


Thank you. This concludes nan Q&A session. I'd now for illustration to move nan telephone backmost complete to Scott for immoderate closing remarks.

Scott Bluestein

Thank you, Josh, and acknowledgment to everyone for joining our telephone today. As a last note, we will beryllium participating successful nan RBC 2023 Financial Institutions Conference successful New York connected March 7. If you would for illustration to put a gathering pinch nan Hercules guidance team, please interaction RBC aliases Michael Hara. We look guardant to reporting our advancement connected our Q1 2023 net call. Thank you. .


Thank you. This concludes today's convention call. Thank you for participating. You whitethorn now disconnect.

Editor: Naga

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