Hercules Capital, Inc. earnings

Management highlights

• Hercules had a strong Q1 with record originations, investment income, and stable credit performance. • Navigated market volatility while maintaining a disciplined credit-first model. • Balance sheet and liquidity were strong. • Portfolio net investment income covered the base shareholder distribution by 120%. • Originations in Q1 totaled over $1.81 billion in new debt and equity commitments. • Focused on disciplined capital deployment and asset diversification. • Addressed the impact of AI on the portfolio, with many companies embracing AI. • Announced an expansion of the leadership team, with Seth Meyer to become President and Andrew Olson returning as CFO.

Guidance

• Core yield is expected to remain relatively flat in Q2 due to the Fed holding interest rates steady. • Originations are anticipated to moderate in Q2 and be more back-end weighted. • As of May 1, 2026, there were pending commitments of $506.1 million in signed, nonbinding term sheets. • Prepayments in Q2 are expected to be in the range of $350 million to $500 million, driven largely by M&A. • Core yield in Q2 is expected to be in the range of 12% to 12.5%. • SG&A expenses in Q2 are expected to be between $27.5 million and $28.5 million, with an RIA expense allocation of approximately $4.5 million. • A quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter is expected.

Segment performance

In Q1 2026, Hercules achieved record originations of over $1.81 billion. Total investment income reached a record $141.5 million, with net investment income of $88.1 million or $0.48 per share. Return on equity was 16.9%. The portfolio generated a GAAP effective yield of 12.8% and a core yield of 12.2%. Originations in Q1 were slightly weighted towards life sciences companies, with approximately 56% of commitments and 60% of fundings going to life sciences, and 44% of commitments to tech companies. Credit quality remained strong, with a weighted average internal credit rating of 2.11, Grade 1 and 2 credits at 70.5%, and loans rated 4 and 5 at 0.9%. Liquidity across the Hercules platform was robust, with over $1 billion available.

Risks & headwinds

• Market volatility, including a pullback in equity and credit capital markets, macro concerns such as the conflict in the Middle East and AI disruption. • Concentration in the non-traded BDC segment with retail investors and quarterly redemption rights, although Hercules is distinct with permanent capital in its publicly traded BDC. • Uncertainty in valuations and process timing for M&A exits. • The impact of AI disruption on the portfolio and broader markets, with a rapid pace of change and potential for winners and losers.

Analyst Q&A

• Q: Given the focus on the venture market, why is there a disconnect between the reality/fundamentals of the business and perceptions?

  A: Underwriting in the growth stage is fundamentally different from traditional underwriting, with targeted metrics like low debt to ARR, sub-20% LTV, and debt to invested equity less than 30%. The portfolio is highly diversified, with 50% in life sciences and non-software tech performing well.

• Q: Thoughts on fee income in Q2 and spreads on new deals compared to prepayments?

  A: Increased prepayment guidance is positive, largely from known M&A events, with slightly higher fee income expected. In Q2, spread widening was seen earlier, with some narrowing in the last 30 days, and the focus is on enhancing structure over spread.

• Q: What is the deployment backdrop for 2026?

  A: Continued focus on diversification, optimism about originations, with Q1 having record $1.8 billion in commitments, quarter-to-date closed ~$79 million, and pending ~$506 million, with investment teams being disciplined.

• Q: About M&A in the portfolio, what type of companies are involved and the decline in PIK?

  A: Investment teams identify attractive M&A targets, with 4 new M&A events year-to-date. The decline in PIK is due to loans from 2024-2025 prepaying, with accrued PIK paid in cash, and intentional deprioritization of PIK on new investments.

• Q: How will the optionality from prepayments be used?

  A: The portfolio will be repositioned, not deprioritizing software, and capital will be redeployed into other tech areas.

• Q: Are new debt deals with software companies still getting done?

  A: Volume is lower than last year but not dried up, with high-quality deals still being evaluated.

• Q: Prioritizing structure over yield in AI-related deals?

  A: Focus is on tighter structure, stronger covenants, rather than pricing.

• Q: Developments in life sciences?

  A: Portfolio balance is maintained, with life sciences companies strengthening balance sheets due to FDA uncertainty, and positive clinical results and approvals.

• Q: Is M&A driven by AI?

  A: Very little, with M&A being a balance of life sciences and technology, no specific AI correlation.

• Q: Motivation for deemphasizing PIK on new investments?

  A: PIK as a percentage of revenue was near internal limits, and there is no current need to use PIK as frequently, preferring cash over PIK income.