Trinity Capital Inc. Q4 FY2025 earnings call

• 2025 was a banner year with record-setting net investment income of $144 million, or $2.08 per share, transition to monthly dividends, record $1.5 billion of fundings and $2.1 billion of commitments, and growth of managed funds business. - Q4 highlights: $40 million net investment income, 15% increase y-o-y; net asset value grew 10% Q-o-Q to $1.1 billion; platform AUM up 38% y-o-y; non-accruals <1% of portfolio; paid $0.51 per share dividend in Q4 and announced $0.17 per month distribution for Q1. - Return on equity and effective yield rank at or near top in BDC space; NAV grew 33% y-o-y; TRIN stock delivered 109% cumulative total return since IPO. - Diversified portfolio across 22 industries, no single borrower >3.9% exposure; largest industry concentration finance and insurance at 14.6%; average internal credit rating 2.9; non-accruals $15.2 million at fair value, <1% of total debt portfolio; 85% of total principal secured by first position liens; portfolio companies raised over $7.8 billion in equity in 2025.

In Q4, Trinity Capital delivered $40 million in net investment income, a 15% increase from Q4 of last year. Net asset value grew 10% quarter-over-quarter to a record $1.1 billion. Platform AUM increased to more than $2.8 billion, up 38% year-over-year. Non-accruals were less than 1% of the portfolio at fair value. The 5 complementary verticals include sponsor finance, equipment finance, tech lending, asset-based lending and life sciences. In Q4, fundings breakdown was 27% to sponsor finance, 25% to Equipment Financing, 20% to Life Sciences, 15% to Tech Lending and 13% to Asset-backed Lending.

• Entered 2026 with strong momentum; Q4 funded $435 million, full year investments $1.5 billion, 21% more than prior year; investment pipeline robust with $1.2 billion unfunded commitments, 93% subject to rigorous diligence and investment committee approval. - Managed funds business growing; 209 warrant positions and 130 portfolio companies with potential for incremental upside. - Proactively marketing services to SaaS companies wanting to on-prem their compute; equipment finance business active in data center, GPU, CPU and power generation equipment financing. - Rate cuts had little impact so far, additional cuts likely to have muted effect on earnings power; majority of loans have interest rate floors, further cuts could accelerate early repayments and lower cost of capital; PIK is nominal portion of income. - Continues to strategically raise equity, debt and off-balance sheet capital; closed co-investment vehicles, converted vehicle to private BDC, strong momentum in capital raising for third SBIC fund expected to add $260 million incremental capacity.

Q: On most of these calls so far this quarter, we've been talking a lot more defense than offense. But I think Trinity appears to be in a position to play offense. And because of your 5 verticals, your software position appears to be indexed below most of the peer group. So I'm wondering is there an opportunity that is going to be arising for you to take advantage of the turmoil if other platforms are unwilling or unlikely to continue with software loans, is there an opportunity to convert some of those to equipment finance loans where you have a collateralized position on it in front of the enterprise value and thereby earn some better spreads and better risk-adjusted rates of return.

A: Yes. Casey, thanks for the question. Yes, we see it that way. I mean, one of the reasons why our percentage of assets in that category is low is because we entered that space really in earnest in the last 2 years. And that's because valuations were significantly too high and pricing was very low. And we decided to enter when we did as valuations started to come down. And we thought that was a great entry point. Our attachment rates could be lower. We could have more aggressive pricing and -- so we are being opportunistic right now. I think, in particular, our kind of sponsor finance, I think, $3 million to $30 million of EBITDA, lower middle market software companies with AI -- that are AI-enabled, it's a massive opportunity. We think there's going to be a lot of consolidation of a lot of these companies that maybe couldn't get to scale. And so with access to the capital markets, with access in our fund management business to private capital, we have liquidity, and we will continue to be opportunistic there.

Q: This is Cory Johnson on for Doug. So我was just wondering, are there any parts of your portfolio that give you any concern or either -- perhaps areas that you've lent to traditionally, but you're a bit more cautious around currently? And are there any verticals that you're particularly looking to lean into a bit more during the time?

A: Cory, thanks for the question. So historically, we focus on industries that are emerging that are disrupt -- have disruptive technology, moats around that technology. They are well capitalized. Equity dollars are flowing into that particular industry that has always been part of our underwriting, and that hasn't changed. So our investment philosophy and kind of where we direct dollars continues to evolve and change over time as new and emerging technologies kind of ramp up. And so we'll just continue to see where the market is going, where equity dollars are flowing. And then, of course, with our loans being shorter-term duration and fully amortizing, in many cases, we continue to get paid off where industries are evolving and maybe not receiving as much equity dollars. And so that continues to bleed off in industries that are not getting the attention they used to and new dollars are being deployed into emerging markets. And so that has been our philosophy. That continues to be the philosophy going forward.

Q: Okay. Great. So I know the focus today is continuing to go deeper across all 5 of your verticals. I'm curious, though, and you touched on the deployment environment a little bit, but given the pickup in volatility, there's clearly dislocation across the sector. I mean, would you ever think about leaning into any strategic opportunities here if the environment stays like this. You clearly have a strong and liquid balance sheet. You have access to debt and equity capital. So I'm wondering if this would be a period where we could actually see go from 5 verticals to 6.

A: Great question. And Sarah is kicking me no forward-looking statements here. So it's a great point. We are going to continue to be opportunistic. I mean, we are making sure that we have plenty of ample liquidity available to us so that in a market where there is volatility. And I would say most of the volatility that we're seeing so far has a little to do with kind of portfolio volatility, but much more to do with kind of valuation volatility. Our game plan all along has been to make sure that we have liquidity to take advantage of markets when there is less liquidity, less competition, maybe private companies with funds that have reached their duration where we can be opportunistic and jump in there. And so the answer is absolutely yes, and we'll continue to kind of keep our eyes open and be opportunistic as opportunities present themselves.

Q: Okay. That's helpful, Kyle. And then one more, if I may. I know growth of the RIA and your third-party asset management business is a big focus area for this year. What are you hearing from these LPs, potential investors in some of these third-party funds with all the focus, all the volatility in and around private credit today. And I'm trying to figure out for Trinity, could this actually be a positive for this business related fundraising, related growth as some of these allocators maybe look to diversify away from some of the larger players in the upper middle markets. And really, as folks look to kind of have more exposure to uncorrelated assets and performance.

A: Yes. I mean I personally love the volatility. There has been a massive amount of inflows for years going into just a small number of upper middle market firms and with rates low, they've been able to deploy and deliver decent returns. Well, that's changed. And now we have an opportunity to stand out in a unique way by delivering outperforming results. And I think investors they're going to love that. And we have the ability to generate higher returns, and we've been doing it consistently. And so there's outflows happening. You're seeing in the news often now. I think what we're seeing is more and more interest and more inflows as we continue to build out our fund management business. So I see this as a really great year and opportunity for us to stand out in a unique way in what has been a crowded space for the last 5 years. And so that's what we're hoping to achieve. And as we wrap up kind of SBIC fund and roll into kind of future fundraising, we're really positive on it right now.

Q: Just as I take a look at the kind of breakdown of your fourth quarter originations, both in terms of absolute amount in dollar terms more weighted towards the existing portfolio, which I think is just a testament that you selected solar companies to invest in, they're growing and have more needs. Curious looking towards the pipeline today? Is the mix still weighted maybe more heavily towards existing portfolio needs versus new needs and kind of curious also what that might mean in terms of your perception of the quality of new investments that you're looking at, whether tighten spreads or more competition has impacted the attractiveness there?

A: Yes. I think over the last year, we've been focused on new logos和new investments, and that has been the majority of our deployment and then I think our portfolio is unique. When we are deploying to our current portfolio, a lot of that is going to be equipment financing facilities where they have multiple draw schedules. And if they're hitting their milestones and growing, then we're building out more capacity or if they're delayed draw term loans, these companies have reached some, again, hit milestones, hit hurdles and earned their ability to receive more capital. So it's all new investments to growing companies, and that's the vast majority of our fundings, and that's not going to change. I don't think you guys want to add anything to that? Ben Malcolmson: Yes. I mean, Erik, our backlog, as you've seen, it's over $1 billion, 1/3 of that is to our equipment channel. So as they build out their manufacturing lines, they're going to fund alongside that. And a small percentage of that $1 billion is subject to legal miles -- legally-binding -- most of it is subject to milestones or additional due diligence. Michael Testa: I think it would be fair to the number of -- the number of new logos in Q4 was relatively small, right? And so I think that's idiosyncratic. So I don't expect that to continue at that level. But we're pleased to deploy to those existing portfolio companies.

Q: I appreciate the commentary from all of you there. Just turning to credit quality a little bit. It's nice to see that nonaccrual still remain very low and well below peer averages, as you mentioned, did have 2 realizations, but then 2 new credits added to the nonaccrual. To the extent that you can comment on ZUUM and 3DEO. Anything noteworthy in their developments there that have been moved to nonaccrual and then how you are approaching working with them to get them through the difficulties.

A: Thanks, Erik. This is Ron. Yes, those two clients, those are legacy borrowers. They've been in the portfolio for quite some time. They're a bit storied and at the highest level, they got in positions where they stop making payments in Q4. So they're put on the nonaccrual list. We're actively working them as we speak. And we expect to have -- as of today, we'll see what the outcomes are.

Q: Gerry -- I think it was Gerry or Ron. You mentioned that you're seeing portfolio companies raise more capital equity. Can you give a little color? Is this private equity sales or these follow-on investments from existing investors, are these things mostly or tangentially related to AI.

A: Well, it's all of the above, right? We've got some portfolio companies accessing the public markets. We've got other portfolio companies raising through their VC or PE sponsors. I don't know that within our portfolio, I would say much is directly related to AI. Ronald Kundich: I mean, yes, I've nothing to add to that. Kyle Brown: Yes. This -- I mean, I think what you're seeing is just what you've been seeing for years now, which is the VC market is robust. There's nearly $100 billion deployed in Q4. And so the companies we're lending to, they're growing, they're raising capital and so it's just -- it's really not a surprise that they were able to raise it with the size of the market where it is today.

Q: The only issue with that point is 70% of the VC dollars going towards AI or AI-related stuff. So it seems to be pretty concentrated.

A: Yes, I would agree with that, Chris, except if you think about it, right, because our portfolio, we enter at that growth stage, right? So we're entering in businesses that are actively growing revenue base, right, and not sort of new entrants into a space. So I think maybe some of the newer VC dollars are going into AI-driven companies, but companies that were founded, say, 5 years ago that are now in growth stage and are raising equity, that's more what the trend portfolio looks like.

Q: Great. And then as a follow-up question, given all the turmoil that's affecting software and things like that, is there any consideration of having the entire investment portfolio valued more frequently than currently is?

A: Yes. I mean the answer是no. And I think maybe that would make more sense if you had a significantly larger exposure to enterprise SaaS. Our exposure is relatively low and it's relatively new. With -- in every 1 of those deals already had an AI filter and underwriting filter put into it. So meaning我们are looking at these companies and understanding their moat, right, understanding how and what their AI road map looks like and so the investments we've been making, I mean, 2.5 years ago, they called the machine learning, and that's what we were looking at. And now it's called AI, right? And so I think AI will continue to evolve, and it will continue to be tools that a lot of our companies are utilizing, but it's not necessarily changing. And we have not seen within our portfolio any detriment to those companies. Michael Testa: Yes. And I would add, Chris, as Kyle said in his prepared remarks, right, enterprise software is about 9% of our assets. About 3/4 of that is originated by our sponsor finance team, so these will be 18 months or newer cohorts and backed by private equity, where we're in front of their dollars, right? They've got significant cash in these businesses. So from a valuation standpoint, we feel good about where we are in a first lien role there. Now has their equity valuation changed? Probably, right? But from our debt standpoint, we don't see degradation in the debt valuations in that case.

Q: Most of the high-level questions have been asked. Just one high-level question on my behalf. We see different ways of定义portfolios in terms of industry segments across the space. I do see your software allocation that you mentioned of, what was it, 9.3%? Is there software buried elsewhere in the portfolio or is that the total amount?

A: Yes. I mean the answer is that is the total amount of enterprise software companies that we are currently invested into. Michael Testa: Yes. I mean that's the concentration of where Software-as-a-Service business model, right? Certainly, within other types of portfolio companies, they're going to be using software and AI and machine learning tools. And so yes, there is some embedded inclusion there. But this是something that as we underwrite these companies, we're keenly aware of that they've got to show how this AI revolution is accretive to them and not an imminent threat in underwriting. So yes, pure SaaS, 9.3% embedded elsewhere, sure. I couldn't tell you exactly where and how much, though.

Q: Could you also give us a sense of the proportion of the portfolio that's invested in second lien investments?

A: Yes, it's 15%. I think that was in the prepared remarks. So we're going to be 85% attached to first lien on enterprise, equipment or both.

Q: Terrific. And lastly, was there anything nonrecurring in interest expense for the quarter because interest expense went up more than your debt balances and the incremental debt was at lower cost. So I'm just trying to triangulate that.

A: Yes, Mickey, this是Mike. There was a tick up in early repayments this quarter. So you'll see there was some acceleration of OID included in interest income.

Q: I was referring to interest expense.

A: On the expense side? No. I mean, I think你'll see that tick up with average outstanding loan balance of our revolver. But yes, on the expense side, it's been -- we actually improved our cost of debt this quarter with the secured term financing. But that's going to be fluctuated. The floating rate is the revolver in the term loan.