Hercules Capital, Inc.

Thank you for standing by, and welcome to Hercules Capital Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Michael Hara. Please go ahead, sir.

Thank you, Carmen. Good afternoon, everyone, and welcome to Hercules' conference call for the fourth quarter and full year 2021. With us on the call today from Hercules is Scott Blustein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules' fourth quarter and full year 2021 financial results were released just after today's 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 final audit results. In addition, the statements contained in this release are not purely historical or 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, 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 followings with the FCC. 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 finds, please visit our website. And with that, I'll turn this call over to Scott.

Thank you, Michael. And thank you all for joining us today. 2021 was a transformative year for Hercules Capital, and I am incredibly proud of what our team accomplished. Our record setting performance in 2021 culminated with the strongest originations quarter in the company's history and the recent declaration of a new increased supplemental distribution program for our shareholders. Hercules Capital was able to deliver yet another strong year of outstanding originations performance, solid financial results, and strong credit performance. In addition, 2021 marked the establishment and launch of our new private credit business under our wholly owned registered investment advisor subsidiary, which has significantly expanded our platform capabilities and should help drive enhanced total shareholder return over time. We took additional steps in 2021 to further strengthen our balance sheet, enhance our funding flexibility, and drive down our cost of capital, which will allow us to continue to demonstrate to our existing and new borrowers the importance of having a partner with a strong and stable balance sheet and our ability to grow with these companies as they scale. In 2021, the health and vibrancy of the VC ecosystem continued strength and expansion of our origination platform and capabilities, robust liquidity position, and strong balance sheet put us in position to deliver achievements on multiple fronts, including record total gross debt and equity commitments of $2.64 billion, up 122% year over year, and our fourth consecutive year with over a billion of new commitments. Record total gross fundings of $1.57 billion, up 106% year-over-year. Increased our base distribution to 33 cents per share. Record cash distributions of $1.66 declared for 2021, a 23% year-over-year increase. Record undistributed earnings spillover of $192.1 million, or $1.65 per share. based on ending shares outstanding, closing our first index-eligible public offering of 325 million 2.625% notes, a record 40 portfolio company IPO and M&A events, and finally, over 225 million of investments assigned to and or funded directly out of the new advisor funds that we manage through our wholly-owned RIA. As much as it was a year that showed the true strength of our brand, reputation, and world-class Originations team, it was also an important year of investments in the company that we believe will lead to further growth in our platform and ultimately to enhanced total shareholder returns. Let me recap some of the key highlights of our performance for Q4. We originated a record of over $948 million of gross new debt and equity commitments, an increase of over 32% from our previous quarterly record, and delivered record gross fundings of over $503 million, an increase of 17% from our previous quarterly funding record. Our technology and life sciences teams both turned in exceptional performance in Q4. our funding activity was balanced between our two core verticals, with a slight weighting towards life sciences investments during the fourth quarter. For the full year, our funding activity was split nearly evenly between our technology and our life sciences verticals. This unique portfolio balance and diversification strategy affords Hercules the ability to navigate the market, irrespective of the macro environments. In addition to strong funding activity for new portfolio companies, we were also able to expand our funding relationship with numerous portfolio companies that continue to show strength and achieve performance milestones during the quarter. Given the magnitude of our new commitment activity during 2021, we expect this trend of increased follow-on fundings to existing portfolio companies to continue in 2022. The momentum that we saw throughout 2021 has carried into 2022, and we are pleased by our performance on originations quarter to date. Since the close of Q4 and as of February 18th, 2022, Hercules has already closed 238.5 million of new commitments, and we have pending commitments of an additional 382.3 million in signed non-binding term sheets. Our new deal pipeline currently exceeds one billion of potential investments, and we expect this number to increase and strengthen in terms of quality if the equity capital markets remain volatile. While the recent equity market volatility for certain growth stage companies may negatively impact net asset value short term, we expect it to be a long term net benefit to our business in terms of increased investment opportunities. Consistent with our historical approach to underwriting credit and our internally managed structure that allows us to focus on total shareholder return versus growth at all costs, we will remain patient and disciplined on new originations irrespective of market conditions. During Q4, we continued to see strength in terms of portfolio company exits and liquidity events. For 2021, we had 16 M&A events, 16 companies that completed their public offerings through either traditional IPOs or SPAC mergers, and eight additional companies that are in registration or have agreed to SPAC transactions for a total of 40 exit and liquidity events, 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. Early loan repayments were nearly 426 million, above the top end of our guidance of 300 million, and a significant increase from 319 million in Q3. For the year, we had a record 1.1 billion of early payoffs, surpassing 2020's level of 709 million. This increase is solid evidence of the strength of our portfolio and the ability to pick the top companies to partner with. For Q1 2022, we expect prepayments to slow and be between $150 million and $250 million, although this could change materially as we progress in the quarter. The lower levels of early payoffs that we are projecting will reduce our short-term net investment income because of lower fee income but should position us to deliver greater net portfolio growth and enhance the longer-term earnings power of the business. assuming that originations remain strong. Even with the record levels of early prepayments in 2021, our record originations activity put us in position to deliver net debt investment portfolio growth of over $120 million, while at the same time allowing us to assign to and or fund directly over $225 million of investments out of the new external private funds that we now manage through our wholly owned advisor subsidiary. Our private funds business has allowed us to increase the size of our addressable market, scale further with our companies as they grow, and continues to position us well to take advantage of market opportunities when they arise. Since launching our first private fund in Q1 2021, we have secured over $500 million of equity and debt commitments to date. This provides us with tremendous optionality and flexibility in terms of new business generation going forward. The majority of our prepayments in 2021 were 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. This trend continued in Q4, where over $225 million of our early prepayments came as a direct result of M&A transactions or equity capital markets events. The velocity of capital in our ecosystem makes achieving and sustaining scale difficult, but we have proven the unique ability to do this over the last 17 plus years, which is a clear differentiator of our business and our platform. In Q4, we generated total investment income of $72.5 million and net investment income of $40.4 million, or $0.35 per share. Our portfolio generated a gap effective yield of 13% in Q4 and a core yield of 11.2%, which was consistent with our guidance for the quarter. With net regulatory leverage at a very conservative 73.9% and continued robust liquidity across our platform, we remain very well positioned. Credit quality on the debt investment portfolio remains solid in Q4, with a weighted average internal credit rating of 2.10 as compared to 1.92 in Q3. Overall, our Grade 1 and 2 credits decreased slightly to 73.2% in Q4 versus 79.4% in Q3. Grade 3 credits increased slightly to 26.3% in Q4 versus 20.2% in Q3. our rated four and five credits made up 0.5% of the entire debt portfolio fair value. In Q4, the number of loans on non-accrual remains the same with three debt investments with a cumulative investment cost and fair value of approximately 24 million and 10 million respectively, or 1% and 0.4% as a percentage of the company's total investment portfolio at cost and value, respectively. During Q4, Hercules had net realized gains of 6.3 million, comprised of gross realized gains of 9 million, offset by 2.7 million of gross realized losses due to the loss on debt extinguishment. For 2021, Hercules had net realized gains of 20.9 million, comprised of gross realized gains of 25.3 million, offset by $4.4 million of gross realized losses due to the loss on debt extinguishment. We ended Q4 with strong liquidity of $628 million, which provides us with substantial coverage of our available unfunded commitments of $287 million and the ability to fund our ongoing anticipated business activity. Seth will discuss our most recent institutional bond raise and the repayment of the convertible bond and redemption of our 2022 notes, and how it will further drive down our cost of debt capital. We have made substantial progress in terms of lowering our cost of debt capital and pushing out our debt maturity wall over the course of the last several years, and these efforts are ongoing. The venture capital ecosystem continued its sprint to an all-time records closing 2021 with fundraising activity at $128 billion, and investment activity at $330 billion, compared to $87 billion and $167 billion in 2020, respectively, according to data gathered by PitchBook and the National Venture Capital Association. To provide some reference, VC investment activity increased 98% year over year, similar to our own debt and equity commitments increasing 122% year over year. For the year 2021, inclusive of Q4, we have declared $1.66 of distributions to our shareholders, which is a 23% increase over the same period last year. Given the positive outlook that we have on our business, in combination with our record undistributed earnings spillover of approximately $192.1 million, or $1.65 per share, Our board of directors have approved a new supplemental cash distribution program of $0.60 for the next four quarters, payable $0.15 per quarter, beginning with Q4 2021, which was previously $0.07 per quarter. The undistributed earnings spillover continues to provide us with added 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 added talent to all levels of our organization and made investments in our infrastructure and platform. In addition, as we previously announced, we made two promotions that added a chief operating officer and chief credit officer to the executive management team, as well as naming a new general counsel. These investments and promotions are designed to best position us to source service and support our growing and diversified investment platform. We accomplished a lot in 2021, and I am grateful to each of our talented employees who contributed to our success this past year. We set records for new fundings and commitments. We expanded our industry leading platform with the launch of our private credit fund business. We further strengthened our balance sheet and enhanced our product offering capabilities. These achievements contributed to us being able to increase our shareholder distributions by 23% year over year and have positioned us incredibly well heading into 2022. We are 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.