Hercules Capital(US:HTGC)2023-08-03 23:53Financial Performance - The company generated record total investment income of $116.2 million, up 61% year-over-year, and record net investment income of $75.7 million, up over 88% year-over-year, equating to $0.53 per share [6][41] - The return on equity reached over 20% for the first time in the company's history [6][41] - The net asset value per share increased to $10.96, representing a 1.3% quarter-over-quarter increase [22][38] Business Line Performance - The company funded debt capital to 19 different companies in Q2, with six being new borrower relationships [7] - Approximately 30% of fundings in the quarter were from unfunded commitments, while 70% came from new commitments, indicating healthy new deal volume [58] - The weighted average internal credit rating improved to 2.24 from 2.26 in Q1, with Grade 1 and 2 credits remaining stable at 59.4% [97] Market Data - Capital raising across the portfolio was strong, with 21 companies raising nearly $1.9 billion in Q2, up over 100% from Q1 [9] - The venture capital ecosystem saw $40 billion in investments in Q2, slightly lower than Q1's $46 billion, but still on track to meet or exceed pre-pandemic levels for 2023 [98] Company Strategy and Industry Competition - The company emphasized diversification in its asset base, managing approximately 50% in technology and 50% in life sciences [29] - The company is optimistic about capturing market share due to the absence of Silicon Valley Bank, which was a dominant player in the market [75][76] - The focus for the second half of 2023 will remain on prudent underwriting and maintaining liquidity [13] Management Commentary on Operating Environment and Future Outlook - Management noted that the venture capital ecosystem remains healthy despite being more selective, with a significant decrease in the number of individual investments [69] - The company expects prepayment activity to remain healthy but decrease to $175 million to $250 million in Q3 [37] - Management expressed confidence in the quality of the loan portfolio, which has led to higher prepayments compared to peers [86] Other Important Information - The company ended Q2 with strong liquidity of over $670 million, which supports both existing portfolio companies and new opportunities [46] - The company raised $65 million through the ATM market, resulting in a $0.07 per share accretion to NAV [25] Q&A Session Summary Question: What is the company's strategy regarding diversification? - The company is managing its asset base at roughly 50% in technology and 50% in life sciences, with plans to adjust based on macro conditions [29] Question: Are there advantages in terms and conditions due to market position? - The company believes it can negotiate better quality deals rather than focusing on tougher deals, maintaining a strong pipeline [10] Question: How is the company responding to changes in the venture capital landscape? - Management noted that while the VC ecosystem is volatile, it remains robust, with significant capital still being deployed [69] Question: What is the outlook for prepayment activity? - The company expects prepayment activity to remain healthy but to decrease in Q3, reflecting the quality of its loan portfolio [37] Question: How does the company view the competitive landscape post-SVB? - Management believes the absence of SVB has created opportunities for market share gains and expects this trend to continue [75][76]