Hercules Capital, Inc.

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Again, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. . . . Thank you. Ladies and gentlemen, take your stand by and welcome to Hercules Capital Q1 2021 earnings conference call. At this time, all participants are listened on the mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press a star then zero on your touchstone telephone. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Michael Hara, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Charlie. Good afternoon, everyone, and welcome to Hercules Capital Conference call for the first quarter of 2021. With us on the call today from Hercules are Scott Blustein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules' first quarter 2021 financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at htgc.com. We have arranged for a replay of the call at Hercules' webpage or by using the telephone number and passcode provided in today's earnings release. During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements and including, without limitation, the risks and uncertainties, including the uncertainty surrounding the current market turbulence caused by the COVID-19 pandemic and other factors we identified from time to time in our findings with the SEC. Although we believe that the assumptions on which these forward-looking statements are reasonable, any of those assumptions can prove to be inaccurate And as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit our website. And with that, I'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining us today. We hope that everyone is staying safe and healthy. Q1 2021 was another strong quarter for Hercules Capital. We delivered solid operating results, strengthened and expanded our investment platform, and continue to emphasize credit discipline across our investment portfolio. Our investment team hit the ground running in 2021 with record Q1 performance for both gross new debt and equity commitments and fundings. Even as the population continues to progress with vaccinations, more states announce plans for reopenings, and the broader markets continue to show strength. We continue to conservatively manage the business by maximizing liquidity, staying disciplined on new underwritings, ensuring a strong balance sheet, and maintaining substantial operational flexibility. The public and private equity markets continue to perform exceptionally well. and an abundance of liquidity across our core markets requires us to prioritize prudent underwriting and investment discipline more than ever. Let me recap some of the key highlights of our performance for Q1. We originated nearly $531 million of gross new debt and equity commitments and delivered gross fundings of over $355 million. Our debt and equity commitments and fundings in Q1 were weighted towards new portfolio company relationships and were balanced nearly evenly between our core technology and life sciences verticals. We saw strength across each of our areas of focus during the quarter. As we saw throughout 2020, many of our portfolio companies continue to achieve certain performance and capital raise milestones during Q1, which allowed us to once again expand our lending relationships with several companies in our existing portfolio. Even though our new business originations were strong in Q1, we chose to stay disciplined and focused on strong underwriting parameters as an abundance of equity capital and loosely structured debt has continued to create certain challenges in terms of prudent new business origination. Our platform scale and brand reputation continue to give us exposure to an active pipeline that currently exceeds $1 billion of potential investments. The quality of the companies in our pipeline is the best that we have seen in some time, but we will continue to evaluate each opportunity with a focus on staying true to what has made us successful on a sustained basis over the last 16 years. Since the close of Q1 and as of April 27th, 2021, Hercules has already closed 135 million of new commitments, and we have pending commitments of an additional 152.9 million in signed non-binding term sheets. We expect the majority of our Q2 funding activity to be weighted towards the back end of the quarter. Through April 27th, 2021, our closed and pending commitments total 818.8 million, which puts us on pace to comfortably exceed over 1 billion of total new commitments for the fourth consecutive year. During Q1, we continued to see strength in terms of portfolio company exits and portfolio company liquidity events. This, combined with continued very strong performance across our portfolio, again drove high levels of early payoffs. Early loan repayments were at the high end of our guidance of $150 to $200 million at over $191 million. but decreased from 282 million in Q4. For Q2, we again expect prepayments to be between 150 million and 200 million, although this could change materially as we progress in the quarter. Even with the continued elevated levels of early payoffs, our strong fundings during the quarter produced net debt investment portfolio growth of over 82 million, after allocating over 47 million of new fundings to the private fund that we now manage through our wholly owned registered investment advisor. In Q1, we generated total investment income of 68.8 million and net investment income of 34.6 million, or 30 cents per share. The decline in both total investment income and net investment income was consistent with our guidance and due to the lower debt portfolio balance attributable to the record Q4 payoffs and lower fee income as a result of a lower level of prepayments during the first quarter. Our portfolio generated a GAAP effective yield of 13.2% in Q1 and a core yield of 11.6%, which was above the midpoint of our previous guidance for 2021. With net regulatory leverage at a very conservative 83.5% and continued robust liquidity across our platform, we remain very well positioned. Credit quality on the debt investment portfolio again improved in Q1 with a weighted average internal credit rating of 2.01 as compared to 2.16 in Q4. This was our strongest internal credit rating since 2011. and it speaks to the strength that we are seeing in our core markets. Overall, our grade one and grade two credits increased to 79.6% in Q1 versus 68.7% in Q4. Grade three credits decreased to 19.5% in Q1 versus 29.7% in Q4. Our rated four and five credits made up 0.9% of the entire debt portfolio fair value. In Q1, we had four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $24.1 million and $8 million, respectively, or 1% and 0.3% as a percentage of the company's total investment portfolio at cost and value, respectively. As a result of continued strong performance across our portfolio, the exceptionally strong equity capital markets, and robust exit and IPO activity, our Q1 net asset value per share increased by nearly 1% to $11.36. We ended Q1 with strong liquidity of $550 million. which provides us with substantial coverage of our available unfunded commitments of $258 million and the ability to fund our ongoing anticipated business activity. Overall, we believe that our balance sheet is exceptionally strong and well-positioned. The venture capital ecosystem continued to exhibit strength in Q1 after a record year in 2020. For Q1, venture capital funds raised a total of $32.7 billion and invested over $69 billion in the US, according to data gathered by PitchBook and the NVCA. The overall vibrancy of the VC ecosystem has continued to positively impact our portfolio. As of the most recent data that we have, we estimate that approximately 80% of our portfolio continues to have at least 12 plus months of current liquidity. And since just our last earnings call, we've had an additional 12 of our debt portfolio companies raise new capital, totaling over $655 million. Year to date, we have had four new M&A events, two of which have closed, and seven companies that have either filed registrations for their initial public offerings or have agreed to SPAC transactions. In addition, several of our companies are currently working on either new capital raises or strategic transactions, and we expect M&A and IPO SPAC activity to remain strong over the next few quarters. I would also like to discuss our supplemental shareholder distribution program for fiscal year 2021. In addition to our ninth consecutive quarterly cash distribution of 32 cents per share, We are also declaring a supplemental distribution of 28 cents per share for fiscal 2021, which will be distributed equally at 7 cents per quarter for the next four quarters, beginning with the first quarter distribution payable in May 2021. As of Q1 2021, we have generated undistributed earnings spillover of approximately 109.1 million. or 94 cents per share, subject to final tax filings. This provides us with additional flexibility with respect to our variable-based distribution going forward and the ability to continue to invest in our team and platform. Finally, I would like to briefly touch on the progress that we made in the first quarter in terms of strengthening and expanding our investment platform. After establishing Hercules Advisor as a wholly owned registered investment advisor in 2020, we are very pleased to have raised and closed our first institutional private credit fund. Having this first fund and potentially future funds gives us the opportunity to expand and diversify our investment platform while enhancing our level of service and capabilities to our current and future venture growth stage companies. While we anticipate that it will take time to ramp up our activities under our RIA, we do expect that over the short term, Hercules Capital will benefit from being able to share certain expenses with Hercules Advisor and having a more diverse platform for the funding of new investments. Longer term and subject to the ultimate performance and size of the funds managed by Hercules Advisor, We expect Hercules Capital to potentially benefit from distributions from the advisor as that business ramps up. In closing, our employees have continued to work tirelessly to ensure that Hercules Capital remains the premier provider of growth capital to venture and growth stage companies. I am grateful and thankful to each of them for their work, effort, and commitment. I would also like to thank each of our 100 plus portfolio companies and their institutional investors that have chosen to make Hercules Capital their preferred financing partner. I will now turn the call over to Seth.