Hercules Capital, Inc. Q2 FY2025 earnings call

• Hercules concluded the first half of 2025 with record fundings, seeing a $192.1 million net debt portfolio growth in Q2 and over $461.9 million in the first half. • The company closed a $350 million institutional investment-grade bond offering and extended/upsized its credit facility to $440 million. • Achieved the first close of the Adviser subsidiary's fourth private credit fund, with approximately $1.6 billion in committed equity and debt capital. • Recorded total investment income of $137.5 million and net investment income of $88.7 million in Q2. • Maintained a conservative balance sheet with a high first lien exposure, and GAAP leverage decreased. • Originations were balanced between life sciences (53%) and tech (47%) companies. • There were 3 M&A events and 1 IPO in the portfolio during Q2. • Net asset value per share increased to $11.84 in Q2.

In Q2, Hercules Capital originated total gross debt and equity commitments of over $1 billion and achieved record gross fundings of over $709.1 million. Record total investment income was $137.5 million, and record net investment income was $88.7 million or $0.50 per share. First lien exposure remained at approximately 91%. GAAP leverage decreased to 97.4% in Q2. The company ended Q2 with over $1 billion of liquidity across the platform. Approximately 53% of Q2 commitments and fundings were directed to life sciences companies, while approximately 47% were for tech companies.

• The core yield in Q3 is expected to be at the high end of the 12% to 12.5% range. • Anticipates prepayments in Q3 to be in the range of $200 million to $250 million. • Interest expense is expected to increase in Q3 due to the growth of the debt portfolio. • SG&A expenses are expected to be between $24 million and $25 million in Q3. • The quarterly dividend from the RIA is expected to be approximately $1.9 million to $2.1 million per quarter.

• Equity and credit markets remain volatile. • Uncertainty related to the tariff and trade environment could have an impact on portfolio companies. • Some lenders in certain sectors have been aggressive with a lack of structure and willingness to go below yield thresholds, affecting the competitive landscape.

Q: Your debt fundings have been extremely strong year-to-date. On the fundings outlook or commentary, you seemed a little cautious on the immediate near term, but positive on longer-term funding. So as you look forward to the fourth quarter and into '26, do you think funding levels that you put up late last year and the beginning of this year, are those types of levels attainable based on what you're seeing today? Or any reasons why you may pull back for an extended period of time on the funding basis?

A: Thanks for the question, Crispin. No sense that there's going to be a pullback. I think what we did in the second half of last year is likely indicative of what we'll do in the second half of this year. Q3 is typically our slowest quarter. In addition to it just being sort of a seasonally slow Q3, we have pulled back slightly to start the quarter just given some of the observations that we're making in terms of the current market environment. But we are very bullish with respect to our overall funding activity for the second half of this year, and we expect to end 2025 with both record fiscal year commitments and record fiscal year gross fundings.

Q: Can you discuss the competitive environment you're seeing in venture lending from other nonbanks as well as the bank space? Have you seen meaningful changes in the landscape? You alluded to -- or I believe you did a little bit that some lenders might be behaving a little bit irrationally in the third quarter. Is that right? And if so, can you just dig a little bit deeper into that?

A: Sure. I would not characterize what we're seeing necessarily as anything specific to banks or nonbanks. We continue to see certain banks that we compete with from time to time. We also, as I think you now, Crispin, we continue to partner with certain commercial banks for certain profile of transaction. On the nonbank side, we've seen a handful of lenders recently, particularly in certain sectors, be very aggressive with respect to a lack of structure and a willingness to go well below our threshold from a yield perspective. And so that's what has caused us to be a little bit more patient to start Q3. We don't think that's a permanent shift. We think that's largely a result of just an abundance of liquidity in the system and some managers desperate for asset growth. We've always taken a long-term approach to the space. That's what we're going to continue to do. We're still finding pockets. We expect Q3 to be strong, but seasonally slow, and we expect the second half of the year to be strong from my earlier comments.

Q: As you reach these new levels of scale and as the business continues to perform incredibly well, what does all of this mean for attracting and retaining top talent? I'm assuming it's been a very positive dynamic, and you'll continue to hire at a strong clip, but any thoughts here would be great?

A: Sure. Thanks for the comment and the compliment, Brian, certainly appreciate it. Our culture continues to be of utmost important to us. I think if you look at this business, particularly over the last 5-plus years, we've done a tremendous job in terms of not only attracting talent to the platform, but retaining the strong talent that we have. And that will continue to be a focus for us. We have a really high bar with respect to new hires, particularly at the senior level. We're not afraid to make new hires, but we are very selective when we do so. If you think about sort of the environment, particularly over the last 2 to 3 years in the immediate aftermath of the SVB situation, we hired a handful of individuals who have been very accretive to the platform. Over the last year or so, we've added some significant senior talent to the originations team in certain markets. And then we just recently year-to-date have continued to do so selectively. So continuing to focus on finding the right talent to add to the platform, focused on particular sectors, focused on particular geographies, but maintaining a corporate culture where our employees want to be here, want to stay with the platform and want to continue to help us drive the company forward is of the utmost importance to us.

Q: Given your comments about the strong pipeline for funding in the second half, can you talk about kind of how you think about funding that, whether that be through increasing leverage from current levels or using the ATM or both?

A: Sure. So I think we're in really good position, Doug, with respect to liquidity. If you look at just the BDC, ended Q2 with $785 million of available liquidity. If you look at it across the platform, inclusive of the private fund business, a little bit over $1 billion of liquidity. We ended the quarter sub-100% from a GAAP leverage perspective. We ended the quarter sub-82% from a regulatory leverage perspective. So no imminent plans to raise additional capital. We think the business is very well capitalized, strong balance sheet, very conservative balance sheet, and that should put us into a position to, again, gradually take leverage up. And if we see pockets of opportunity to deploy more capital than our current pipeline shows, obviously, we have the ATM. But we are very sensitive to using the ATM despite where the stock trades. We use the ATM on an as-needed basis to maintain our leverage ratios. Right now, we're a little bit underlevered relative to where we would like to be. So we would anticipate taking that leverage ratio up back to that 100%, 105% range before using the ATM again.

Q: Given all the changing currents with all the tariffs and these tariff deals announced, how does Hercules stand to benefit given many of these countries are going to be supposedly making large dollar investments into the United States?

A: Yes. I think it's a great question, and it's something we've spent a lot of time thinking about as an organization. I think our current assessment, and this can change daily just based on the changing messaging. But our current assessment is that the biggest driver of positivity for our portfolio companies will be increased interest and investment in the United States. In a lot of these tariff deals or trade deals or just deals in general, you're seeing things announced where these countries are committing to certain investments in U.S. infrastructure, U.S. technology, et cetera. And so we think just from a portfolio perspective, the increased investment into the U.S. markets will be a net positive for technology-oriented growth stage businesses broadly.

Q: With the recent IPO activity, understanding that the [indiscernible] issuance is still at a pretty low level, but it's still recovering. But with performance that we've seen CoreWeave, Cicle, [indiscernible], Figma, do you think that that's changed sort of BC's mindset in terms of kind of the exit pathway and potentially looking closer at the IPO route versus just the buyout, even if it means potentially like a lower multiple than kind of where the peak valuation was?

A: Yes, it's a great question. I think our assessment is that it's still too early to make that assessment. We did see some improvement in terms of you mentioned a couple of the names, including the one from today. But that's really early just in terms of sort of that projecting out to be an indicator of what's to come and what's going to change potentially with respect to VC sentiment. This does conclude today's Hercules Capital Second Quarter 2025 Financial Results Conference Call. You may now disconnect your line, and have a wonderful day.