Hercules Capital, Inc. Q2 FY2024 earnings call

• Recorded total gross fundings of $461.5 million in Q2 2024, with first half totaling $1.07 billion, marking the first time over $1 billion in the first half of a calendar year.
• Origination and funding performance reflects benefits of operating at scale as a market leader in venture and growth-stage lending.
• Q2 origination activity included over $686 million in debt and equity commitments and nearly $462 million in gross fundings.
• Generated record total investment income of $125 million, net investment income of $82.4 million (0.51 per share), and 128% coverage of base distribution despite conservative GAAP leverage of 94.8%.
• Return on equity in Q2 was 19.2%, portfolio GAAP effective yield was 14.7%, core yield 13.7%.
• Focus on quality and diversification, with origination activity driven by technology and life sciences teams.
• Credit quality: weighted average internal credit rating 2.18, Grade 4 and 5 credits at 1.8% of portfolio; two loans on non-accrual with investment cost and fair value ~$91.8 million and $32.1 million respectively.
• Net realized losses of $5.8 million, NAV per share $11.43; strong liquidity of $482 million; fourth SBIC license approved in July, and retired July 2024 unsecured notes.

Hercules Capital achieved record total gross fundings in Q2 2024 with $461.5 million, leading to a first half total of $1.07 billion, the first time over $1 billion in the first half of a calendar year. In Q2, origination and funding performance was driven by scale and market leadership. Technology and life sciences teams contributed to origination activity. Total investment income was a record $125 million, net investment income was $82.4 million (providing 128% coverage of base distribution), return on equity was 19.2%, GAAP effective yield was 14.7%, and core yield was 13.7%. Approximately 63% of Q2 fundings were to technology companies, while 55% of commitments were to technology companies. Available unfunded commitments decreased to approximately $479.5 million from $483.4 million in Q1.

• Expect Q3 core yield to be between 13.3% and 13.5% (excluding benchmark interest rate changes).
• Anticipate prepayments in Q3 to be in the range of $200 million to $300 million.
• Interest expense expected to be slightly up due to balance sheet growth.
• SG&A expenses expected $22 million to $23 million, RIA expense allocation ~$2.5 million.
• Quarterly dividend from IRA expected $1.25 million to $1.5 million.

• Higher than normal market and macro volatility in second half due to Presidential Election and geopolitical changes.
• Credit risks with certain sponsor-backed companies affected by higher for longer rate environment.
• Uncertainty around prepayment activity and its impact on weighted average debt balance.

Q: Can you discuss how lower rates might impact VC deal activity?

A: Scott Bluestein expects increased demand from quality late-stage companies as rates decline.

Q: Any color on credit quality write-off?

A: Scott Bluestein mentioned weighted average credit rating at 2.18, Rated 4 and 5 credits at 1.8% of portfolio, and a small write-off from a sold company's assets.

Q: Interest rate sensitivity and NII impact?

A: Seth Meyer said NII impact from 25 bps cut could be offset by investment volumes.

Q: Outlook for growth in coming quarters?

A: Seth Meyer discussed expected prepayments and ongoing strength in private fund business.

Q: PIK income increase?

A: Seth Meyer cited factors like later-stage deals, company options to toggle between cash and PIK, and selective use of PIK in certain transactions.

Q: Situation with Khoros on non-accrual?

A: Scott Bluestein discussed impairment to $32 million, put on non-accrual due to collateral-based impairment and transition to PIK income.