Hercules Capital(US:HTGC)2020-10-30 05:02Financial Data and Key Metrics Changes - In Q3 2020, Hercules Capital generated total investment income of $70.3 million, an increase of 3.5% compared to the prior quarter, and net investment income of $38.7 million or $0.34 per share, reflecting a $3 million or $0.02 per share increase from the previous quarter [21][49] - Year-to-date, total investment income reached $211.9 million, up 7.4% year-over-year, while net investment income increased by 11.4% year-over-year to $115 million [21][22] - The weighted average internal credit rating improved to 2.22 in Q3 from 2.30 in Q2, with rate 1 and 2 credits increasing to 64.4% from 59.7% [24][25] Business Line Data and Key Metrics Changes - Hercules Capital originated over $514 million in new debt and equity commitments in Q3, with gross fundings of nearly $266 million [15][21] - The investment activity was skewed slightly more towards life sciences companies, with strong performance from both technology and life sciences teams [17][18] - The debt investment portfolio grew by $4.8 million at cost and $48.2 million at fair value during the quarter [20] Market Data and Key Metrics Changes - The venture capital ecosystem raised a total of $56.6 billion and invested over $112 billion in the U.S. through the first three quarters of 2020, indicating strong market activity despite the pandemic [41][118] - Approximately 90% of current life sciences debt investments at cost are in publicly traded companies, with a weighted average public market capitalization of about $1.5 billion [39] Company Strategy and Development Direction - Hercules Capital continues to focus on maximizing liquidity, ensuring balance sheet strength, and maintaining operational flexibility amid the pandemic [12][29] - The company emphasizes diversification and controlled growth, particularly in technology and life sciences sectors, which provide a competitive advantage [16][18] - The recent approval of a new SBA license allows Hercules to access an additional $175 million of flexible capital, enhancing its liquidity position [31][48] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the credit quality and investment opportunities, noting a strong pipeline exceeding $1 billion [70][118] - The company anticipates early payoffs in Q4 to be between $100 million and $150 million, although this could change [31][60] - The core yield guidance remains at 11% to 12% for the remainder of 2020, with expectations for SG&A expenses to be slightly lower than prior guidance [59][60] Other Important Information - Hercules Capital wrote off two impaired loans during the quarter, which had been on non-accrual, but overall credit performance remained solid [14][25] - The company has a cumulative investment of over $11 billion in venture and growth stage companies since inception [23] Q&A Session Summary Question: Can you provide details on the improvements in credit quality? - Management noted that the migration of grade three loans to grade two was primarily driven by successful fundraising activities, with no specific credit trends indicating broader issues [64][65] Question: Are there more opportunities with new companies compared to earlier in the year? - Management indicated a strong pipeline of approximately $1 billion, with continued selectivity in evaluating new deals [70][72] Question: What attributes contribute to the strong credit quality and competitive positioning? - The quality and experience of the investment team were highlighted as key factors, along with strong fundamentals in the venture capital ecosystem [78][80] Question: Can you provide an update on Gibraltar? - Gibraltar continues to perform well, benefiting from the current environment for credit-oriented ABL lenders [81] Question: How do you view the cadence of investing in the near term? - Management acknowledged that Q3 was typically a slow quarter but noted strong performance this year, with ongoing activity into Q4 [82][85] Question: Can you update on the Strategic Initiatives regarding the RIA? - Management confirmed the exploration of opportunities following the SEC's no-action relief for creating a registered investment advisor [88][90] Question: What was the nature of the recent exits? - The two exited loans were previously impaired, with one linked to COVID impacts and the other being a long-term non-accrual situation [92][95] Question: How did you achieve strong funding despite a virtual environment? - The investment team adapted well to remote work, leveraging technology and existing relationships to conduct due diligence effectively [100][102] Question: Can you provide details on the equity positions sold during the quarter? - Management clarified that no larger equity positions were liquidated, focusing instead on smaller names [124] Question: How will the new SPI subsidiary be funded? - The plan involves putting in additional equity into the SPV as needed to draw down debentures [125] Question: Has the remote working environment led to operational efficiencies? - Management stated it is too early to determine long-term efficiencies related to real estate and operations [127]