Hercules Capital, Inc. Q1 FY2026 earnings call

• Scott mentioned Hercules maintained a disciplined credit-first model, had strong balance sheet and liquidity, portfolio credit performance stable, net investment income in Q1 covered base shareholder distribution by 120%. • Q1 had record originations, total investment income. Managed $6.1 billion of assets, up 21.8% y-o-y. • Focused on disciplined capital deployment, diversification. Originations weighted towards life sciences and tech. • Credit quality strong with grade 1 and 2 credits at 70.5%. • M&A activity in portfolio, IPOs in portfolio. • AI impact on portfolio monitored, many companies embracing AI. • Venture capital investment activity strong in Q1, fundraising improved, M&A exit activity consistent. • Leadership team expansion announced with Seth becoming president and Andrew Olson returning as CFO.

In Q1 2026, Hercules delivered record originations of over $1.81 billion. Total investment income was a record $141.5 million. Net investment income was $88.1 million or $0.48 per share. The portfolio credit performance was stable with a weighted average internal credit rating of 2.11. Asset base was approximately $6.1 billion, an increase of 21.8% from a year ago. The balance sheet and liquidity position was strong with over $1 billion of liquidity across the platform. The return on equity in Q1 was 16.9%, GAAP effective yield was 12.8% and core yield was 12.2%.

• Expect core yield to remain relatively flat in Q2 given Fed holding interest rates steady. • Expect prepayments in Q2 2026 to be in range of 350 million to 500 million. • Expect SG&A expenses of $27.5 to $28.5 million and RIA expense allocation of approximately $4.5 million for Q2. • Expect a quarterly dividend from the RIA of approximately $2 to $2.5 million per quarter. • Continued strong business momentum expected with focus on scaling platform and capitalizing on opportunities.

• Market volatility driven by equity and credit capital market pullback, macro concerns like Middle East conflict, industry-specific concerns like private credit redemptions and AI disruption. • Uncertainty around valuation and process timing in M&A exit activity. • Impact of AI disruption on portfolio and broader markets with rapid pace of change.

Q: Given focus on venture market and strong portfolio performance, perspective on disconnect between reality/ fundamentals and perceptions, and drivers of strong results despite volatility.

A: Underwriting in venture/growth stage different, highly diversified portfolio with 50% in life sciences, non-software industries performing well.

Q: Commentary on prepayments in Q2, fee income and spreads on new deals.

A: Increased prepayment guidance positive, majority from known M&A events, slightly higher fee income expected, spread widening seen but some coming back, focus on enhancing structure.

Q: Deployment backdrop for 2026, market volatility favorable, sector deployment.

A: Focus on diversification, optimistic on originations, Q1 activity record-breaking, investment teams disciplined, continuing to pursue software loans.

Q: Deployment backdrop, M&A in portfolio, PIC decline.

A: M&A activity in portfolio, some variability in timing/valuation, PIC decline due to loans repaying and intentionally deprioritizing PIC on new investments.

Q: Deployment backdrop, prepayments influencing portfolio, use of optionality.

A: Prepayments give opportunity to reposition portfolio, not deprioritizing software, redeploying capital into other parts of technology book.

Q: Software deals, spreads, deal volume.

A: Software deals still being done, volume lower than last year but not dried up, teams evaluating high-quality software loans.

Q: Prioritizing structure over yield, AI impact on structure.

A: Prioritizing structure over yield, changes in structuring involve duration, structure, covenants.

Q: M&A activity driven by AI.

A: Little correlation of increased M&A to AI, balance of life sciences and technology companies.

Q: PIC de-emphasis motivation.

A: PIC as percentage of revenue increased to close to limit, not finding need to use PIC as frequently, prefer cash over PIC income.