Hercules Capital, Inc. Q1 FY2025 earnings call

• Closed $287.5 million of 4.75% convertible unsecured notes in March to strengthen balance sheet and liquidity. - Originated over $1 billion in total gross debt and equity commitments and funded over $539 million in Q1, with continued strong momentum in Q2. - Credit quality remained stable, with weighted average internal credit rating at 2.31. Only two loans on nonaccrual, making up 0.5% of the investment book at fair value. - Ended Q1 with over $1 billion of liquidity across the platform. - Had three M&A events and one IPO filing in Q1 portfolio.

In Q1, Hercules Capital achieved nearly $270 million of net debt portfolio growth. The firm is managing over $5 billion of assets, a 11% year-over-year increase. Total gross debt and equity commitments in Q1 were over $1 billion, with gross fundings of over $539 million. GAAP leverage was modestly up from Q4 to just under 100% in Q1. The firm generated total investment income of $119.5 million and net investment income of $77.5 million ($0.45 per share), with 113% coverage of the quarterly base distribution. Core yield was 12.6% in Q1, down slightly from 12.9% in Q4.

• For Q2, core yield expected to be 12% to 12.5%. - Anticipates $200 million to $250 million in prepayment activity in Q2. - Interest expense expected to increase with balance sheet growth. - Gross SG&A expenses expected to be $25 million to $26 million in Q2 with RIA expense allocation of ~$2.9 million. - Quarterly dividend from RIA expected to be ~$1.9 million to $2.1 million per quarter.

• Volatility in equity and credit markets. - Geopolitical uncertainty and evolving messaging from the current administration creating unease in global markets. - Potential slowdown in fundraising for earlier stage companies and those directly exposed to tariff policy. - Indirect impact of tariff and trade environment on the broader ecosystem.

Q: What’s driving the continuation of strong activity despite the broader macro environment?

A: Hercules tends to outperform in market and macro volatility, with equity and credit markets volatile driving demand for capital, and some banks moving to risk-off posture.

Q: What's the expectation for the all in core yield moving forward?

A: Core yield for Q2 expected to be 12% to 12.5%, with potential 25 to 50 basis point increase in new business yields not yet reflected.

Q: Are you noticing any changes in behavior from your borrowers amid recent volatility?

A: Companies are freezing decision making due to uncertainty, but credit performance quarter-over-quarter is mostly immaterial.

Q: Are you continuing to see VCs have a more deliberate approach?

A: Yes, seeing more selectivity and sensitivity with respect to valuation, but still strong capital raising in portfolio.

Q: How are you balancing increasing leverage, raising additional capital and using third-party funds?

A: Evaluating continuously to drive total shareholder return, maintaining low leverage to be opportunistic, and accessing ATM market.