Hercules Capital, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Hercules Capital Q3 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to turn the conference over to your speaker for today. Michael Herr, you may begin.

Thank you, Tawanda. Good afternoon, everyone, and welcome to Hercules' conference call for the third quarter of 2021. With us on the call today from Hercules are Scott Blustein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules' third quarter 2021 financial results were released just after today's market. Market closed 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 do not guarantee the 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, 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 be proved to be inaccurate, and as a result, the forward-looking statements based on those assumptions can also 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 STD filings, please visit our website. And with that, I will 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. 2021 continues to produce unprecedented levels of opportunity on multiple fronts for Hercules. Q3 2021 was no exception. Commitments, fundings, liquidity, credit quality, and portfolio company exits and liquidity events all continue to set records. The momentum that we saw in the first half across our investment portfolio accelerated even more in Q3. Our investment team delivered record Q3 2021 and year-to-date performance for both gross new debt and equity commitments and fundings. As a result of our record-breaking origination efforts through the first three quarters of 2021 and the strength of our pipeline, we now expect to comfortably exceed $2 billion of total gross new debt and equity commitments for 2021. During Q3, we continue to focus on the key themes that we have highlighted throughout the course of 2021. Maximizing liquidity, staying disciplined on new underwritings, expanding our platform capabilities through our new private funds, and driving down our cost of debt capital while strengthening our balance sheet. There continues to be an abundance of liquidity across our core markets, and we did not see any material change in this regard during the course of Q3. Let me recap some of the key highlights of our record performance for the quarter. We originated a record of over $719 million of gross new debt and equity commitments, an increase of over 35% from our previous quarterly record. and delivered record gross fundings of over $431 million, an increase of 17% from our previous quarterly funding record. With three consecutive quarters of strong origination activity, we have already established a new annual record with over $1.69 billion in gross new debt and equity commitments and total fundings of $1.07 billion, with one quarter remaining in the year. Our technology and life sciences teams both turned in exceptional performance in Q3, and our funding activity was once again balanced between our two core verticals. In addition to strong funding activity for new portfolio companies, we were also able to expand our funding relationship with numerous portfolio companies that continued to show strength during the quarter. Being able to have this type of balance between our technology and life sciences teams and our expanded ability to support existing portfolio companies through multiple value inflection points continues to give us a significant competitive advantage and remains a key differentiator of our business. Despite the general frothiness in the market, our investment team has continued to deliver strong results while staying true to our historical credit discipline. While we continue to see a large number of deals get done in the market, that do not fit our investment standards or credit screens, we believe that a disciplined approach to underwriting will serve us and our stakeholders well long term. Our expanding platform scale, brand reputation, and consistency of being in the market over the last 17 years 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 remains strong and we are seeing strong deal flow across our areas of focus. Since the close of Q3 and as of October 25th, 2021, Hercules has closed 125 million of new commitments and has 377 million of pending commitments. Based on our current closed commitments and the strength of our active pipeline, we are well on our way to comfortably break the $2 billion mark in annual debt and equity commitments for the first time in our history. During Q3, we continue to see strength in terms of portfolio company exits and liquidity events. Year to date, we've had 13 M&A events, 13 companies that have completed their public offerings through either traditional IPOs or SPAC mergers, and seven additional companies that are in registration or have agreed to SPAC transactions for a total of 33 exit and liquidity events as of today, breaking our previous annual record of 22. This, combined with continued very strong performance across our broader portfolio, again drove high levels of early payoffs. We expect this trend to continue in Q4. Early loan repayments were nearly 319 million. above our guidance of 200 to 250 million, and a significant increase from 168 million in Q2. Year to date, we have had 678 million in early payoffs, and at this pace we will exceed 2020's record of 709 million in early payoffs. For Q4, we expect prepayments to be between 200 million and 300 million, based on the momentum that we are seeing across our investment portfolio. 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 nearly 24 million after allocating or funding directly over 59 million of new fundings to our advisor funds that are managed through our wholly owned registered investment advisor. Year to date, we have managed to deliver net debt investment portfolio growth of over 163 million, which is a credit to our investment team and the strength of our platform. Although the elevated prepayments that we are seeing create short-term headwinds in terms of driving net debt portfolio growth, we believe that this is clear validation of our business model and our team's ability to select and partner with the right companies. The vast majority of our year to date prepayments are directly attributable to M&A events and enhanced liquidity for many of our borrowers as a result of the strong capital markets for the best performing companies. As an internally managed BDC, our focus is and has always been on maximizing total shareholder returns and not growing our asset base to drive incremental fees. In Q3, we generated total investment income of 70.2 million and net investment income of 38.1 million or 33 cents per share. Our portfolio generated a gap effective yield of 12.7% in Q3 and a core yield of 11.4%, which was at the midpoint of our previous guidance for 2021. With net regulatory leverage at a very conservative 84%, and continued robust liquidity across our platform, we remain very well positioned. Credit quality on the debt investment portfolio again improved in Q3, with a weighted average internal credit rating of 1.92 as compared to 1.93 in Q2, again setting another historical record. Overall, our grade one and two credits decreased slightly to 79.4% in Q3, versus 81.5% in Q2. However, Grade 1 credits increased and reached the 30% level. Grade 3 credits increased slightly to 20.2% in Q3 versus 18% in Q2. Our rated 4 and 5 credits made up 0.4% of the entire debt portfolio fair value. In Q3, non-accruals remained relatively the same. with three debt investments with a cumulative investment cost and fair value of approximately 24 million and 9 million respectively, or 1% and 0.3% as a percentage of the company's total investment portfolio at cost and value respectively. During Q3, Hercules had net realized gains of 21.1 million, comprised of gross realized gains of 25 million, offset by $3.9 million of gross realized losses, primarily due to the write-off of one legacy debt investment and the early retirement of our borrowings as previously disclosed. We ended Q3 with strong liquidity of $818 million, which provides us with substantial coverage of our available unfunded commitments of $310 million and the ability to fund our ongoing anticipated business activity. Overall, we continue to believe that our balance sheet is exceptionally strong and well positioned. Seth will discuss our recent institutional bond raise and the pay downs of the securitizations and how it will further drive down our cost of debt capital moving forward. We have made substantial progress in terms of lowering our cost of debt capital over the course of the last several years, and these efforts are ongoing. venture capital ecosystem continued to exhibit unprecedented strength in q3 after a record first half for the first three quarters of 2021 venture capital funds raised a total of 96 billion dollars and invested over 238 billion dollars in the u.s according to data gathered by pitchbook and the national venture capital association that already eclipses the 86 billion and 165 billion respectively for all of 2020. Given the positive outlook that we have on our business, in combination with our healthy level of undistributed earnings spillover, our board of directors has elected to raise our base distribution this quarter to 33 cents per share, as well as maintaining the supplemental distribution of 7 cents per share. Inclusive of Q3, we have declared $1.18 of distributions to our shareholders year-to-date, which is a 20% increase over the same period last year. Once we finalize Q4 and fiscal year 2021 numbers early next year, we anticipate announcing a new supplemental distribution policy for 2022, as we did in 2021. As of Q3 2021, we have generated record undistributed earnings spillover of approximately 181.7 million. or $1.57 per share, subject to final tax filings. This provides us with additional flexibility with respect to our shareholder distributions going forward and the ability to continue to invest in our team and platform. Throughout the course of 2021, we have continued to add talent to all levels of our organization and make investments in our infrastructure and platform. These investments are designed to best position us to source, service, and support our growing and diversified investment portfolio. As of the end of Q3, we had 89 full-time employees, which is our highest full-time employee count in our history. In closing, Q3 was another very strong quarter in what we expect to be another record year for Hercules Capital. Our record-breaking year-to-date funding and commitment numbers speak to the great work that our dedicated employees perform each day and the quality of our investment platform. We are incredibly thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. With our expanded platform, diversified business model, and scale, we look forward to being able to support these companies over the years to come. I will now turn the call over to Seth.

Thanks, Scott, and good afternoon and evening, ladies and gentlemen. Q3 was an extremely active and strong quarter for Hercules Capital. The investments that we made in our team and platform have contributed to our success through the first three quarters of 2021, and we are very well positioned heading into Q4. From a finance perspective, we had a very active Treasury quarter. As previously announced, we completed the redemption of $75 million of 5.25% 2025 retail notes at par on July 1st. We took steps in the quarter to refinance the two securitization vehicles that are in runoff by issuing $325 million of institutional unsecured notes as our first index eligible offering at a very attractive fixed coupon of 2.625% in September. The proceeds were utilized in October to redeem in full 289 million of the two securitization vehicles also at par value. As a reminder, the securitization vehicles bore interest rates of 4.6 to 4.7% resulting in approximately 200 basis points of annual interest savings. These targeted actions further shift the composition of our debt portfolio to unsecured, institutional-based financing and help us further drive down our overall cost of debt capital, which has been a primary focus for us on the Treasury side. As usual, I'll focus on the following areas. Number one, the income statement performance and highlights. Number two, NAV, unrealized and realized activity. Number three, leverage and liquidity. And number four, finally, the outlook. Turning our attention to the income statement and performance highlights, net investment income was $38 million or $0.33 per share in Q3, an increase compared to the prior quarter attributable to the growth in the net interest margin. Total investment income was $70.2 million, also an increase compared to the prior quarter. The increase in fee income was at a lower rate than the increase in payoffs, largely due to the vintage and size of the one-time and unamortized fees associated with the loans that paid off. Our effective and core yields in the third quarter were 12.7 and 11.4% respectively, compared to 12.7 and 11.5% in the second quarter. The slight decline in the core yield was due to a modest decrease in coupon interest. Turning to expenses, our gross operating expenses for the quarter decreased to $33.4 million compared to $33.8 million in the prior quarter. Net of costs recharged to the RIA are operating expenses worth $32.1 million. Interest and fees decreased to $14.7 million from $16.7 million in the prior quarter. The acceleration of the unamortized debt issuance costs on repayment of the 2025 notes is shown separately as a realized loss in the current quarter. SG&A expenses increased to $18.7 million from $17.1 million in the prior quarter, higher than my guidance. The increase compared to the guidance and the previous quarter was driven by higher compensation expenses primarily related to the record funding levels in Q3 and higher excise tax accruals due to the record level of spillover income. Net of cost recharged to the RIA, the SG&A expenses, were $17.4 million. Our weighted average cost of debt was $4.9 million, which represents a 20 basis point decrease compared to the prior order of 5.1%. The reduction is due to the refinancing of the $75 million 2025 notes and higher utilization of the lower cost SBA loans. The impact of the refinancing of the securitization vehicles will be realized only in the fourth quarter, and we expect the cost of debt to further reduce compared to the third quarter. Now switching the focus to NAV, unrealized and realized activity. During the quarter, our NAV decreased by 17 cents per share to $11.54 per share. This represents a NAV per share decrease of 1.5% quarter over quarter. The main driver for the decrease was the $35.6 million of change in unrealized depreciation, offset by $21.1 million of realized gains, resulting in a $14.5 million decrease to NAV. The $14.5 million decrease was primarily related to the mark-to-market movement on our publicly traded equity positions. The net realized gain in Q3 of $21.1 million comprised of $25 million of gains from the disposal of equity and warrant positions offset by $2.2 million of realized loss pertaining to one legacy debt and warrant position that was impaired and had been on non-accrual in previous quarters. In addition, we had the $1.7 million of realized loss relating to debt extinguishments. Moving to leverage and liquidity, our gap in regulatory leverage was 106.4 and 101.6, respectively. which increased compared to the prior quarter due to the one-month overlap of the new debt issuance of $325 million and the repayment of the two securitizations in October. This also resulted in a higher cash balance at quarter end, netting out the leverage with the cash on the balance sheet Our net gap in regulatory leverage was 88.8% and 84%, respectively, putting us in a very strong position heading into the next quarter. We continue to utilize our third SBA license, drawing down an additional 10.8 million of debitors at an attractive annual interest cost of 1.58%. We have access to an additional $110.5 million of SBA debitors for qualifying investments. As a result, we ended the quarter with strong liquidity of $818 million or on a pro forma basis, $529 million adjusting for the cash used to repay the securitizations in October. As a reminder, this excludes capital raised by the funds managed by our wholly owned RAA subsidiary. Further, our liquidity continues to be enhanced by our normal course monthly principal and interest collections, as well as early payoffs and the liquidation of public equity positions. Finally, on the outlook points, our core yield guidance of 11 to 12% continues to apply for Q4 2021, although we do expect to be at the lower end of that guidance as we were in Q3. For the fourth quarter, we expect gross SG&A expenses of $17.5 to $18.5 million, consistent with the third quarter. We expect our fourth quarter cost of borrowing to decrease due to the refinancing completed in October. We expect approximately $2.7 million, or two cents per share, of loss on debt extinguishment related to the acceleration of the unamortized debt issuance costs. of the securitizations to be reflected as a realized loss. Although difficult to predict, as communicated by Scott, we expect $200 to $300 million in prepayment activity for the fourth quarter. Consistent with Q2 and Q3, we expect Q4 prepayments to result in the acceleration of fee recognition at a rate approximately of 2.5% due to the average vintage of the prepayments. For the fourth quarter, we expect a similar level of RIA expense allocation that we saw in Q3. In closing, we are pleased with the strength of our balance sheet and our platform and look forward to closing out a very strong year. I will now turn the call over to the operator to begin the Q&A part of our call. Tawanda, over to you.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Crispin Love with Piper Sandler. Your line is open.

Crispin Love Thank you, and good afternoon. So one question on portfolio activity. Have you seen any slowdown at all in activity for life sciences when you look at it relative to technology? Just looking at the PitchBook quarterly data, it seems that the health care activity has slowed a bit following the surge in growth during COVID. So I'm curious if you're seeing that all in your portfolio. I know I heard some strength in your commentary, but just curious, life sciences versus tech, if there's been any slowdown in life sciences.

Thanks, Crispin. So we have not seen any slowdown in that regard. If you look at our funding activity in Q3, we funded approximately $431 million. We committed approximately $720 million. Our funding activity was split nearly evenly between the two core verticals, technology and life sciences, and that was also very consistent with what we saw in Q2. So that's two consecutive quarters where we've seen that 50-50 target come to fruition. In terms of what we're seeing, the pipeline continues to be incredibly robust, both for our life sciences business and our technology business.

Okay, great. Thanks. That's helpful. And then just one more question for me on liquidity, but not your liquidity, but the liquidity of your portfolio companies. Is there any color that you can give there or any metrics? I think in the past you've given some metrics in the middle of COVID of 12 months liquidity, 18 plus, et cetera. So I'm just curious. some commentary on liquidity of your portfolio companies and if there's any metrics you could give.

Thanks. So we have not updated the data that we provided during the first 12 months of COVID. It is certainly something that we do continue to track. And what I would tell you is that we continue to see record levels of liquidity across our portfolio, both with respect to our public positions and our private positions. We don't have the data in terms of 12 months or 18 months, but we do look at it holistically, and we are continuing to see record levels of liquidity across our investment portfolio.

Great. Thank you. Very helpful. Thanks for taking my questions.

Thank you. Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.

Hi. Good afternoon. This is Kevin Fulton for Devin, and thank you for taking my questions. First question, over the past few quarters, you described the deal-making environment as frothy. Just curious if you could discuss the current competitive landscape relative to what you were seeing earlier this year.

Sure. Thanks, Kevin. I think it's pretty similar to what we've discussed on each of the Q1 and Q2 calls. The biggest competitive threat that we're seeing now continues to be the strength of the equity markets, both from a private perspective and from a public perspective. When we lose transactions, the majority of cases are cases where we are losing those transactions to the equity markets, whether the companies are raising in the public markets or private markets. From a debt perspective, we are continuing to see certain lenders be very aggressive in terms of structuring transactions, and that's something, as we've always done, we're going to avoid. But there really hasn't been much change in terms of the competitive environment over the last several quarters from what we've seen in our business.

Okay, that's helpful. And then just one other question. Overall, portfolio credit quality is in very good shape. I know, as you mentioned in the prepared remarks, the grade three bucket increased a bit to 20.2%, which is up from 18 in the prior quarter. Can you talk about the investments that were downgraded and the factors that led to the increase there?

No, I can't talk about the specific investments, but that's a pretty small move for us in the grand scheme of things. You know, we tend not to focus on individual movements between grade two and grade three or grade two and grade one. We look at it from a portfolio perspective. There were a small number of loans that we downgraded in the quarter. There were also several that were upgraded. The buckets that we focused the most on are the rated four and rated five credits, and those continue to make up less than 0.4% of the portfolio at fair value.

Okay. That makes sense. And congrats on the quarter, and thanks for taking my questions again.

Thanks, Kevin. Thank you. Our next question comes from the line of Christopher Nolan with Lattenburg-Faulman. Your line is open.

Hey, guys. Given changes in the yield curve and knowing that you have an asset-sensitive balance sheet, has the change in the interest rate environment so far contributed to earnings in the quarter?

So certainly with the refinancing activities that we've done, it has. You may have noted that I mentioned that the increase in the spread really contributed to that. It's something that we've been successful for the duration of the company's existence of managing and maintaining a healthy spread between the cost at which we're lending at and the cost at which we're borrowing at. So we'll continue to try to take advantage of that and continue to lower our cost of debt as we persist and have opportunities to refinance instruments like we just did by paying off the securitizations just a week and a half ago.

And then as a follow-up, is the increase in prepayments in any way related to concerns for higher taxes or interest rate hikes in coming months?

Yeah, we don't think so. You know, we've looked very closely at our prepayment activity year to date. It's obviously a large number, 678 million in prepayments, but the vast majority continue to be from either M&A events or companies raising more equity capital than they had anticipated. We have several companies in the portfolio that are sitting on $500 million plus of liquid cash, and it just becomes a function of what makes sense for them from a balance sheet management perspective. And as we've continued to see tremendous strength across our investment portfolio, we've seen a subsequent increase in the prepayment activity. Based on what we're seeing right now, we expect that trend to continue in Q4. and then we'll reassess our expectations for next year once we get a little bit more further into the year.

Great. Thank you.

Thank you. Our next question comes from the line of Sarkis Serbetchen with B. Riley Securities. Your line is open.

Hi. Thank you for taking my question here. So you're raising the base distribution to 33 cents per share. and you're maintaining the supplemental at seven. And I think you mentioned on the prepared remarks that you'll kind of reevaluate that supplemental policy for fiscal 22. I guess I'm curious, with a spillover of about $182 million, call it, where do you think that goes, and what would the cadence look like?

It's a difficult question to answer because that's obviously a board decision, and that decision will not get made until early next year. I think we've had a very consistent theme with respect to our distributions. With respect to the base quarterly distribution, we generally set that at a level that we feel comfortable can be covered by ordinary net investment income. And that gave us comfort in terms of moving from 32 cents to 33 cents for the quarter. Going forward, when we sort of look at the supplemental distribution program, we expect to announce a new supplemental distribution program early next year for fiscal year 2022. In terms of the cadence, we would expect it to be similar to 2021 in terms of it being on a quarterly basis. But in terms of what that ultimate number will be, that'll be something that we will finalize in discussions with our board after we finalize the tax dividend numbers at the end of this year.

No, no, understood. And I guess the real premise of my question is as you lower the cost of debt capital and as you're net interest margin increases, you know, it seems like you're more than comfortably going to cover even the base distribution here at 33 cents per share. So just wanted to kind of get a sense for, you know, your core earnings relative to this big spillover. It seems like there's an opportunity to increase that distribution. Is that the right thought process?

I think it is. You know, we are incredibly well positioned with respect to our balance sheet and our distributions going forward. Again, what that number ultimately is for next year is to be determined, but all else being equal, I think what you characterized to that is a fair characterization.

Got it. And just kind of looking at your quarter to date here in 4Q, closed commitments and pending commitments, any reason why you shouldn't be able to continue to have net origination activities?

It's still early in the quarter. We've given guidance that we expect between $200 million and $300 million of payoffs. That is our best estimate based on what we have in front of us today. That could change up or down, obviously, as we get further into the quarter. We've already either closed or have signed an additional roughly $500 million of commitments. We expect the funding-to-commitment ratio to be consistent with what it historically has been in that 60% to 65% range. So we never give guidance in terms of what we expect the net growth to be, but we are very comfortable that Q4, based on what we are seeing right now, will be another very strong quarter for us.

Great. Thank you. That's all for me.

Thank you. Our next question comes from the line of Brian Lynch with KBW. Your line is open.

Good afternoon. First one, Scott, I just wanted to talk about kind of market activity and portfolio activity. You know, obviously you mentioned there's a lot of equity capital in the venture capital ecosystem that's been driving a lot of prepayments in your portfolio. based on the market data, that doesn't seem like that's slowing down anytime soon. So that seems like that's going to be something that's with us for a while. So my question is, is there anything or are there any strategic things that you guys can do when you guys are looking to deploy new capital and structuring these deals to potentially slow down the level of prepayments in your portfolio for the deals that you guys are putting out today? Or is it just a matter of of kind of continuing to grow that top line origination number to outpace the prepayments?

Sure. Thanks, Ryan. You know, I think it's twofold. So number one, we have done several things to increase the pie and increase the addressable market for us. Biggest driver of that year to date has been the initiation of our private fund business, which we launched in Q1, and that has continued to grow very nicely. That is certainly one of the big drivers of the tremendous funding and commitment activity that we've delivered year to date. So one of the things that we are doing to potentially offset some of the prepayment activity is to continue to grow the commitment numbers and the funding numbers. In terms of sort of a more granular response, there are absolutely things that we are doing structurally in some of these deals to try to dampen down some of those prepayments. But at the end of the day, we continue to be of the view that the prepayments that we are seeing really are a credit to the work that our team does. Because in a market like this where liquidity is as strong as it is, if companies are not paying off, to us that would be a pretty negative signal. And the fact that we're seeing prepayments, yes, it creates some headwinds, but we clearly think and believe that it validates our business model and validates the work that our team does in selecting the right companies.

Okay, fair enough. The other question I had was you mentioned the new supplemental distribution policy you guys will likely enact for 2022. I know the distribution policy is set by the board, but as CEO and a board member, is it your preference to maintain the same sort of distribution policy where you set the a certain level of dividend distributions that are then going to be at a set number that would be paid throughout the year? Or is it your preference to set sort of a varying dividend policy where you have a core dividend on a quarterly basis, and then on a quarterly basis on top of that, a supplemental dividend will be paid out based on various factors that you see fit?

The former. I think our objective is to drive to the best possible total shareholder return. And I think we continue as a company to believe that doing that is best accomplished by doing what we did in 2021. Making sure that our base quarterly distribution is a number that we feel confident is covered by net investment income. And then setting a supplemental distribution program payable on a quarterly basis. based on where we end the year. And obviously that can change on a quarterly basis if there are events that are positive or negative. But the policy that we put in place in 2021 in terms of paying out a set amount on a quarterly basis is likely to be what we do in 2022, obviously with the potential for it to be a higher number given the strength of our current spillover.

Okay. Thanks for that. I appreciate the time this afternoon.

Thanks, Ryan.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is open.

Hi, everyone. Good afternoon. A follow-on on the funding mix. It looks like a lot of the newer companies are in the life science area. Can you talk about any sort of, you know, if that's something you agree with, any sort of, you know, competitive dynamic in software that's kind of pushing you away from new companies or if it's just the LifeSci available volume is much higher or perhaps something else

Thanks, Ben. If you look at the Q3 funding activity, whether you look at it on a dollar basis, the $431 million, or if you look at it in terms of the number of companies that we financed, it's pretty evenly split in each case between our technology and life sciences business. So we really did not see any significant differentiation between technology and life sciences in the quarter. whether it's with respect to the dollars being committed, the dollars being funded, or the number of companies that we're funding. Every quarter, our mix within our two core verticals in terms of industry subsector will change, and that's just based on our team's evaluation of where we see the best risk-adjusted returns. Last quarter and in Q2, we talked a little bit about this on the call, We did pull back a little bit on the software space, just given how competitive that market has become, and the team did not see strong risk-adjusted returns. We saw the same trend there in Q3, but that's something that we evaluate on a quarterly basis, but there was really no change in terms of that technology-slash-life sciences mix in terms of those key metrics.

Okay, that's helpful, and Just a follow-up on, are you able to comment at all higher level on Gibraltar? That seems to be, you know, moderately fading sequentially, looking at the different security tranches there. Anything you could kind of provide us with color on that?

Sure. As we say every quarter, it's a portfolio company, so we're not going to provide any specific information that the company doesn't disclose individually. But I can tell you from a high-level perspective, we continue to be very pleased with the investment, and we are very supportive of that investment. The fair value mark will fluctuate quarter to quarter, as does each of our investments, and I wouldn't read too much into what it is on a quarterly basis, up or down.

Okay, makes sense. Thanks so much.

Thank you. I'm sure no further questions in the queue. I will now turn the call back over to Scott Lucene for closing remarks.

Thank you, Operator, and thanks to everyone for joining our call today. As a note, we will be participating virtually in the Jefferies BDC Summit on November 17th and the JMP Securities, Financial Services, and Real Estate Conference on November 18th. If you would like to arrange a meeting with the Hercules Management Team, please contact each of the financial institutions directly or Michael Harrow. We look forward to reporting our progress on our next year-end earnings call. Thanks, everybody, and have a great day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.