Hercules Capital, Inc.

Good day, and thank you for standing by. Welcome to the Hercules Capital Q3 2022 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 this session, you will need to press star 1 1 on your telephone, and you will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, Susan. Good afternoon, everyone, and welcome to Hercules' conference call for the third quarter of 2022. With us on the call today from Hercules is Scott Bluestein, CEO and Chief Investment Officer, and Seth Meyers, CFO. Hercules' third quarter 2022 financial results were released just after today's market close, and can be accessed from Hercule's investor relations section at investor.htgc.com. An archived webcast replay will be available on the investor relations webpage for at least 30 days following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including but not limited to the risks identified in our annual report on Form 10-K and other findings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date, and Hershey's assumes no obligation to update any such statements in the future. And with that, I will turn the call over to Scott.

Thank you, Michael, and thank you all for joining us today. Despite continued market volatility and general uncertainty around the economic and capital markets environment, Hercules Capital continued to deliver strong operating results in Q3. Our results can be summarized by strong earnings growth and momentum, improving yields, record originations, and stable credit. Our record originations performance in the first half of 2022 continued with record Q3 gross debt and equity commitments of over $817 million. Our gross fundings continued to be strong during the quarter with over $307 million, which once again led to strong net debt investment portfolio growth of over $105 million during the third quarter and a record $465 million for the first three quarters of 2022. Year to date through Q3 2022, we delivered record gross debt and equity commitments of 2.48 billion and record gross fundings of 1.1 billion. Since the close of Q3 and as of October 31st, 2022, our deal team has already closed 286 million of new commitments, bringing our total year-to-date closed new commitments to 2.76 billion. which is a new company record surpassing our 2021 record of $2.64 billion. We have pending commitments of an additional $176 million in signed non-binding term sheets. Including our pending commitments, we are nearing the $3 billion mark for the year, a milestone achievement for Hercules Capital. This record level of originations and resulting record net debt investment portfolio growth is driving our core income and NII per share higher, and combined with the current rate environment, has put us in a strong position to be able to raise our quarterly base distribution to 36 cents for Q3, our third base distribution increase in the last 12 months. Let me recap some of the key highlights of our performance for Q3. Our record Q3 originations activity was once again driven by both our technology and life sciences teams. delivering strong performance during the quarter. Our commitments and funding activity demonstrated balance between our two core verticals, although our new commitments during the quarter were intentionally weighted more heavily towards life sciences companies. We funded capital to 25 different companies in Q3, of which 12 were new borrower relationships. For the first three quarters of 2022, we have added 37 new borrower relationships, which further expands our scale in the market and reputation as the lender of choice for growth stage companies looking for a long-term and stable financing partner. Continuing a theme that we have seen over the recent quarters, we were able to expand our funding relationship with numerous portfolio companies during Q3. Our continued emphasis on prudent underwriting and conservative structuring on new originations once again resulted in a lower funding to commitment ratio. This should continue to drive strong funding activity from the existing portfolio over the next several quarters, irrespective of the market for new loan originations. In addition, approximately 30% or $198 million out of the currently available unfunded commitments of $659 million will expire in 2022. We anticipate that potential fundings from the remaining unfunded commitments will help drive further portfolio growth near term and should lead to continued earnings momentum. Volatility across the equity markets, particularly for growth stage companies, continued in Q3, although we saw more stability than we did in Q2. Valuations for both public and private companies continue to be under pressure, and the capital markets have become more selective on the equity side. As a result, we expect our pipeline to continue to be strong near to medium term as companies continue to look for creative and non-dilutive structured capital solutions from debt providers that they trust and that are best positioned to thrive longer term and through periods of volatility. With four corporate investment grade credit ratings, 100 plus full-time employees, over 700 million of liquidity, a very strong balance sheet, and the ability to continue to raise new capital if needed, we believe that Hercules is best positioned in the asset class for continued and sustained success. Consistent with our historical approach to underwriting credit, we will remain patient and disciplined on new originations, irrespective of market conditions, and we do not plan to chase yields for higher risk transactions as we have seen some others do in the current market. We are continuing to be even more selective than normal in terms of underwriting new credits with a continuing emphasis on later stage and more established companies where we continue to believe that the risk adjusted profile is better at this time. And we are continuing to avoid certain industries and end markets that we believe are more susceptible to a potential downturn. We anticipate that this approach will continue at least through year end. During Q3, portfolio company exits and liquidity events for the industry continue to reflect the ongoing pressure in the equity markets. Year to date, we've had five companies complete their IPOs, including one in Q3, and 10 companies announce or complete M&A transactions, including three in Q3 and two recently in Q4. In addition, we have one company that has registered for their IPO. We are starting to see the uptick in M&A transactions that we anticipated on our last earnings call, as evidenced by the five M&A transactions that have taken place within our portfolio since our last earnings call. As the IPO market remains uncertain and virtually shut down, we continue to expect to see an acceleration of M&A transactions over the next several quarters. Early loan repayments were approximately 125 million. at the upper end of our guidance of 50 million to 150 million, and a significant increase from the 33 million that we experienced in Q2 2022. This level of early loan prepayments allowed us to once again deliver strong net debt investment portfolio growth in the quarter, which positions us well for continued strong earnings growth in the last quarter of 2022 and into 2023. For Q4 2022, we expect prepayments to remain between 100 million and 150 million, although this could change as we progress in the quarter. In Q3, we generated record total investment income of 84.2 million, and net investment income of 50 million, or 39 cents per share, providing 108% coverage of our recently increased base distribution. Our expectation is that both core income and net investment income will further increase in Q4. Our portfolio generated a GAAP effective yield of 12.9% in Q3 and a core yield of 12.4%, which exceeded our guidance for the quarter and is indicative of the recent rate increases and higher onboarding yields for certain new loans. With net regulatory leverage at a very conservative 96.1%, and continued robust liquidity across our platform, our balance sheet remains very well positioned. Credit quality of the debt investment portfolio remains strong and stable. Our weighted average internal credit rating of 2.20 was slightly higher than the 2.13 rating in Q2, but still at the low end of our normal historical range. Our grade one and two credits decreased slightly to 67.4% compared to 70.4% in Q2. Grade three credits were slightly higher at 31.3% in Q3 versus 29% in Q2. Our rated four credits made up 1.5% of the portfolio and we do not have any rated five credits in Q3. As of our most recent reporting, 100% of our debt portfolio companies are current with respect to contractual payments of principal and interest. During Q3, the granularity of our debt portfolio also improved. Our top five debt positions now make up less than 18.5% of our total portfolio at cost, and our top 10 debt positions now make up less than 31.5% of our total portfolio at cost. Both represent improvement from previous quarters and speak to our continuing focus on building and maintaining a diversified debt portfolio. In Q3, the number of loans on non-accrual decreased by one as we were able to successfully work out a loan that was both impaired and on non-accrual. That workout resulted in a full recovery of our cost basis. and the receipt of 5.1 million of cash proceeds above our Q2 fair value mark on that debt position. As of the end of Q3, we had only one debt investment on non-accrual with an investment cost and fair value of approximately 13.3 million and 0.7 million respectively, or 0.5% and 0.0% as a percentage of the company's total investment portfolio at cost and value respectively. During Q3, Hercules had net realized gains of $5.3 million. This was comprised of gross realized gains of $8.4 million, offset by $3.1 million due to the write-off of legacy equity and warrants and the termination of warrants. We ended Q3 with strong liquidity of over $700 million. which provides us with coverage of our available unfunded commitments and the ability to fund our ongoing anticipated business activity. The venture capital ecosystem continued its healthy pace for the first three quarters of 2022 with fundraising activity at a record $151 billion and investment activity at $195 billion according to data gathered by PitchBook and the National Venture Capital Association. After only three quarters, the venture capital ecosystem continues to exhibit a healthy level of activity. Investments have turned in the second highest year on record, and fundraising has achieved an all-time record high. To put this into further perspective, over $386 billion has been raised in the last three years. With the amount of available capital to invest at historic highs, we remain optimistic that venture capital activity will begin to accelerate in the coming months and extend well into 2023. Capital raising across our own portfolio remains strong in Q3, with our active portfolio companies once again raising nearly $1.5 billion of new capital during the quarter. We exited Q3 with undistributed earnings spillover of over $134 million, or $1.03 per share. The undistributed earnings spillover continues to provide us with the added flexibility with respect to our shareholder distributions going forward and the ability to continue to invest in our team and platform. Year to date, we have added to our investment team, credit team, and legal team in anticipation of a more challenging macro environment, and we will continue to invest in our platform to ensure our ability to thrive in any environment. For Q3, we increased our base distribution to 36 cents from 35 cents, and we once again declared a supplemental distribution of 15 cents. We will continue to evaluate the quarterly variable base distribution with a particular focus on the debt portfolio growth and NII growth that we are expecting to materialize. Further, we expect to announce another supplemental distribution program as part of our Q4 earnings report now that the full 60 cents from our most recent supplemental distribution program has been paid out. In closing, our momentum has continued through the first three quarters of 2022 and we remain well positioned from all aspects to take advantage of market conditions and grow our core income generating assets and as a result the earnings power of the business. We will remain steadfast with our core themes of maintaining a strong balance sheet and staying disciplined on new underwritings while continuing to invest in our teams and our platform. We remain thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth.

Thank you, Scott, and good afternoon, ladies and gentlemen. Hercules continues to be positioned extremely well to navigate the current market and operating environment. Our operating platform in Q3 benefited from over $475 million of investment portfolio growth year-to-date, a rising interest rate environment, and a strong balance sheet that is funded primarily with fixed-rate, long-dated, unsecured term loans. This combination of events increased net investment income to $50 million, a 25% quarter-over-quarter increase or 39 cents per share in Q3. This was achieved by delivering another record core income combined with a more normal volume of prepayments. Credit remains strong and non-accruals continue to be less than 1% of the portfolio, positioning us well to continue to generate strong operating results. With that in mind, let's review the following areas, income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity, and then finally the financial outlook. First, income statement performance and highlights. As previously mentioned, net investment income was $50 million, or 25% more quarter over quarter, or $0.39 per share in Q3. Total investment income was $84.2 million, as guided in the second quarter earnings call, driven by 21% growth in the debt portfolio year-to-date on strong new business, lower prepayments, and an increase in benchmark rates. Our effective and core yields in the third quarter were 12.9% and 12.4%, respectively, compared to 11.5% and 11.3% in the second quarter. The increase in the core yield was due to an increase in coupon interest as a result of base rate interest increases. We expect this trend to continue with the full quarter impact of the third quarter Fed policy interest rate changes, as well as the decision today. Turning to expenses, our gross operating expenses for the quarter increased to $36.1 million compared to $35.1 million in the prior quarter. Net of costs recharged to the RIA Our operating expenses were $34.2 million. Interest and expense and fees increased to $16.7 million from $14.2 million in the prior quarter due to the growth of the investment portfolio and slightly higher weighted average cost of debt. SG&A expenses decreased to $19.4 million from $20.9 million in the prior quarter, the midpoint of my guidance. Net of costs recharged to the RIA, the SG&A expenses were fairly stable at $17.5 million. Our weighted average cost of debt was 4.4%, a slight increase compared to the prior quarter, reflecting a full quarter of the two institutional debt financings completed in June, as well as greater utilization of the credit facilities due to growth of the investment portfolio. Our ROAE or NII over average equity increased 270 basis points to 14.7% for the third quarter and our ROAA or NII over average total assets was 6.9%. Let's now switch our focus to NAV, unrealized and realized activity. During the quarter, our NAV increased 4 cents per share to $10.47 per share. This represents an NAV per share increase of 0.4 percent quarter over quarter. Net investment income accretion due to the modest use of the ATM and realized gains were offset by dividends paid in the quarter including the $0.15 per share spillover distribution of 2021 earnings. Regarding our recent dividend declaration, the early announcement was related to our spillover distributions from 2021. To ensure compliance with the registered investment company tax rules, we needed to declare the dividend before October 15. The net realized gains of $5.3 million comprised of $8.4 million of gains from the disposal of equity and warrant positions and gain on foreign exchange offset by $3.1 million of realized losses related to losses and write-off of legacy equity and warrant positions. Moving next to leverage and liquidity, our GAAP and regulatory leverage were 113.2% and 100.3% respectively, which decreased compared to the prior quarter despite the net growth in the investments due to the modest use of the ATM. Netting out leverage with cash on the balance sheet, our net gap in regulatory leverage was 109% and 96.1% respectively. We ended the quarter with liquidity of $700 million, As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. We believe our strong liquidity positions us very well in the current rate environment. We continued to access the ATM during the third quarter and raised $43 million, resulting in a $0.10 per share accretion to NAV. Finally, regarding the outlook points, For the fourth quarter, we are increasing our core yield guidance range to 12.5 to 13.5%, excluding any future benchmark rate changes. As a reminder, approximately 95% of our debt portfolio is floating with a floor, so the recent interest rate hike and any additional in 2022 will benefit our core yield going forward. Although very difficult to predict, as communicated by Scott, we expect $100 to $150 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter due to the balance sheet growth experienced in the third quarter. For the fourth quarter, we expect SG&A expenses of $20 to $21 million and a similar level of RIA allocation of expense compared to the third quarter. In closing, we are positioned extremely well to benefit from this market, and we're looking forward to continued growth of our core income. I will now turn the call over to Susan to begin the Q&A portion of the call. Susan, over to you.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please stand by while we compile the QA roster. Our first question comes from Crispin Love of Piper Sandler. Your line is open.

Thanks. Good afternoon, everyone. Scott, so you said early in your comments that you're avoiding certain industries and markets. I was just curious if you could give a little bit more color there, maybe the types of deals that you're passing on and what industries you are less interested in currently.

Thanks, Crispin. We get asked that question a lot, and consistent with prior quarters, we're not going to publicly speak to the industries that we're avoiding. I think if you look at some of our SOI disclosure, it should become fairly evident, but we have a pretty... a pretty cautious look at certain industries right now given the macro environment and given some of the equity market volatility that we have seen and we expect to continue to see. So we're being very cautious. I will say that we've shifted the portfolio over the last several quarters to be much more centered around established stage and expansion stage companies. And so when you look at sort of the three buckets that we consider part of the venture ecosystem, early stage, expansion stage, and established stage companies, We're largely out of early stage investing at this point, and the vast majority of our portfolio right now is in the latter two buckets, which we think is just a safer credit profile in this environment. There are some obvious things that we have avoided historically and that we will continue to avoid. So we're not touching any deals that we believe have cannabis exposure. We're not touching any deals that we believe have crypto exposure. And then for any more clarity, we're just not going to make any public comment.

All right. Thanks, guys. That's helpful. And then, Seth, I'm looking at your core yield, guys. I think you said 12.5% to 13.5%. I'm just looking back at the last couple of quarters. So you did 12.4% in the third quarter, 11.3% in the second quarter. Just based on the recent rate hikes that we saw in the third quarter, do you think the core yield towards the higher end of your guidance range makes sense? Or is there a reason to not think that? And then relatedly, is there a point where you'll hit a ceiling on what yields can do regardless of future rate increases?

Yeah, great questions, Chris. And yeah, we give a wide range because of course we are going later stage in a lot of the companies that we're approaching and introducing to the portfolio. And at times that may introduce a lower core yield. to the portfolio compared to the existing portfolio. I do think it's fair that we'll probably be at the midpoint of that range or maybe to the upper end, but we're also trying to make sure that we're very cautious acknowledging the fact that there could be a turnover in the portfolio and that could change. But Scott, maybe on the historic perspective of the industry where you see and where there might be a cap.

Yeah, I think it's fair to assume, Crispin, at some point, you know, there will be a cap in terms of how much more appreciation you'll see from a core yield perspective, but we certainly don't think we're at that point yet.

All right. I appreciate you taking my questions. That makes sense on the later stage of confirmation. Thanks, guys.

Thanks, Crispin.

Thank you. Our next question, as we compile. Our next question comes from Kevin Fultz of JMP Securities. Your line is open.

Hi, good afternoon, and thank you for taking my question. My first question is on portfolio company liquidity. Scott, on the last earnings call, you shared some insightful statistics around portfolio company liquidity. Just curious if you have updated stats that you could share with us as of September quarter end.

Thanks, Kevin. Similar and consistent with what we did during COVID, we did not update that and we don't plan to update that on a quarterly basis. I will say though, that we do track liquidity on a pretty consistent basis and we really did not see a material change quarter over quarter. So to the extent that we did provide that guidance publicly, you wouldn't see a material difference. I would also note that this is the third consecutive quarter where fundraising at the portfolio company level has remained strong. In each of Q1 and Q2, we saw our debt portfolio companies raise over a billion dollars of new capital. That actually accelerated a bit in Q3, where our portfolio companies raised nearly 1.5 billion, and we've had several events already take place in Q4. So we're watching liquidity very closely, obviously given some of the stress that we're seeing in the market. But as of the most recent data that we have, we continue to be comfortable with how the portfolio is positioned as it relates to liquidity.

Okay, that's helpful. And, you know, I believe you said in the past that you tend to lean into funding activity and life sciences, and the life sciences vertical when there's elevated volatility in the market. And I'm just curious if your funding activity is starting to reflect that given a transitioning market backdrop.

It does, and I made that reference in my prepared comments. We had a very strong quarter with respect to debt commitments. It was a record quarter for us with $817 million. We continue to see strength from both our technology and life sciences teams during the quarter, but if you look at the breakdown of our actual commitments in the quarter, There was more of a weighting this quarter towards the life sciences side, and that was intentional given some of the macro environment that we're seeing.

Okay. That makes sense. And I appreciate you taking my questions, and congratulations on a really nice quarter. Great. Thanks, Kevin.

Thank you. One moment, please. The next call. comes from Ken Lee of RBC Capital Markets. Your line is open.

Hi, thanks for taking my question. One question on the internal credit grading. I wonder if you could just talk about some of the key factors that you're seeing that's driving some of the movement of companies within those buckets there. Thanks.

Sure. Thanks, Ken. So really not a lot of movement quarter over quarter Last quarter, we were at 2.13 in terms of weighted average credit rating across the debt portfolio, slight uptick to 2.20 in Q3. And that's really, if you look at our historical moves, that's not a material move in any way. 2.20 is still at the very low end of our historical range, which in normal periods has been in the 2.2 to 2.45 range. There was a little bit of movement in terms of the individual ratings. The rated five loans improved, so we have no rated five loans. The rated one loans moved down slightly. The primary driver there was actually the fact that we did some new deals with existing rated one credits. Every time we do a new deal, we tend to move those deals back to a rated two because we're resetting our underwriting expectation. And then there was a little bit of movement within the twos, threes, and fours, but really nothing of note.

Gotcha. Very helpful there. And just one follow-up. I wonder if you could just update us on some of the potential outlook for the revenue stream from the private credit fund, the Hercules Advisor. I think you've talked in the past about the potential for seeing some dividends from that side of the business at some point. Thanks.

Yeah, sure, Ken. This is Seth. So at the moment, we're clearly doing the cost sharing and the BDC is benefiting a little bit from loans to help finance the RIA. As it comes into a cash flow positive position, we expect that dividend flows potentially in the back half of next year could occur or early parts of 2024. And so we would expect the BDC to really start to see the true benefit of the management fees that it's collecting, overcoming the costs that it's being allocated. But it's really, don't forget, dependent on tax earnings and profits. Determine the timing of it. Scott?

Yeah, Ken, I would just maybe add a few things to what Seth said. If you look at our quarterly disclosure, we are disclosing the amount of deal that we are funding out of our private fund business. In 2021, that was over $225 million of fundings. year-to-date through Q3, so including the most recent information in our press release, which was just released. We have already funded nearly $325 million out of the private fund business. So as you can see, if you combine the 2021 numbers and the year-to-date numbers, that business is ramping up considerably, which gives us continuing comfort that not only are we going to continue to see the expense reimbursement, but that the dividend income stream, as that performance fee and as the management fee start to pick up, it will continue to provide some substantial value for the shareholders of HTGC.

Gotcha. Very helpful there. Thanks again.

Thanks, Ken.

Thank you. One moment, please. Our next caller is Christopher Nolan of Leidenberg Salmon. Go ahead, please. Oh, I'm sorry, my mistake. Our next question is from Ryan Lynch of KBW.

Hey, good afternoon. I had a question on just broader market dynamics. I mean, you guys put up some good slides on the overall venture capital activity going on. And from your slides, you can see that fundraising has been really strong, continues to be really strong in 2022. But mergers and acquisitions, so exit activity has really just fallen off a cliff so far in 2022. And investment activity has dropped over 2021, but still remains healthy. But I'm just wondering, how should we read kind of that drop off in mergers and acquisitions and exit activity? You know, how does that? What should we read into that as far as how you guys are looking at the environment and how is the health of the VC market today?

Thanks, Ryan. Great question. Let me speak first to sort of the VC market just broadly in terms of fundraising and investment activity. We have historically tracked those two statistics on a quarterly basis because we think that they are most reflective of the health or vibrancy of the ecosystem. And they're both equally important VC fundraising and VC investment activity. If we look at fundraising first, the year to date data has been incredibly robust, 151 billion raised through the first three quarters. That is already representative of a record year for the industry. When you look at the investment data, there has absolutely been a pretty significant slowdown or pullback. from what we experienced in 2021. When we look at the year-to-date data and we compare it to any previous year outside of 2021, it's actually very strong, very healthy, and still fairly robust. So in comparison to last year, which was a record year, there's been a significant slowdown in pullback, but we continue to look at the data that we're seeing with an optimistic lens because it does reflect very strong investment activity Just not on a year over year basis, because you're comparing it to record levels of investment activity of 344 billion in 2021. In periods of volatility, it's not a surprise to see. And if you look historically at other periods of volatility, you've seen the same sort of same thing happen in the industry. That exit activity slows down considerably. On the IPO side, that market has essentially been non-existent year to date. We have had a couple of IPO events. We've had five year-to-date, including one in Q3, but we expect IPOs to continue to be fairly slow for the next several quarters. On the M&A side, it's been more active than what we've seen on the IPO side, but it's still down. And what we would attribute the downtick to is the uncertainty of the market, a lot of companies trying to figure out what to do next, A lot of companies and boards right now are in that sort of exploration stage where they're having discussions. Should they raise dilutive equity? Should they approach secured lenders for non-dilutive debt financing? Or should they explore M&A? In Q3 in our portfolio, we saw an uptick in M&A activity, some of which were disclosed, some of which have not yet been disclosed because those conversations are ongoing. And I will just tell you anecdotally from the conversations we're having with our 100 portfolio companies, we continue to expect to see a healthy level of M&A, certainly over the course of Q4 and into the first half of next year.

Okay, that's a helpful backdrop on the market. The other kind of market question that I had, I mean, there's been a pretty significant drawdown of deposits flowing out of tech-focused banks. I would just love to hear what, if any, sort of impacts that would have on your investment outlook and potential competition in the marketplace.

It doesn't change much for us in terms of the outlook. We really don't compete with banks on the vast majority of deals that we do. There are a handful of banks that we'll see from time to time. There are a handful of credible and reputable long-standing banks that we will partner with on an occasional basis. We expect that to continue. And with respect to how the banks are doing in terms of deposits or funding, it could cause the banks to be a little bit more conservative and certainly a little bit less aggressive. But I would tell you that in the majority of deals that we go after, we're not competing head-to-head with commercial banks.

Okay. That's helpful commentary. I appreciate the time this afternoon. Thanks, Ryan.

Thank you. One moment, please. And our last question at this time comes from Christopher Nolan of Leidenberg Salmon. Your line is open.

Hey, guys. Most of my questions have been asked. I guess a little follow on life science rotation. Is there a favorite area like drug development or devices or services within life sciences?

Yeah, I mean, if you look at our historical data and if you look at the makeup of our current portfolio in terms of our disclosure, there is certainly a bias towards diversified drug discovery, drug development. But we have exposure to virtually all sectors of the life sciences ecosystem, and our emphasis is continuing to be on having a diversified portfolio, whether it's with respect to our tech book or our life sciences book.

And I guess on the capital structure, and excuse me if this might have been asked earlier, but given that you guys are growing so big and size is becoming an issue where you're focusing on later stage companies, any consideration of basically – securitizing deals and just getting them off the balance sheet?

So it's not really consideration right now. We've been very successful utilizing unsecured debt in the capital markets, as well as in the rare instances we've done some of the securitizations. We did pay off those two that we had historically last year. and not removing them from the balance sheet in the way that you're talking about. But we would look to secured funding when we saw that it was the right opportunity for our balance sheet. But at the moment, we've been pretty successful utilizing a combination of the credit facilities, where we have great support from the institutions that back us in that capacity, as well as making trips to the capital markets at the right cadence and timing because of the credit facility capacity and going the unsecured route.

Got it. Okay, great. Nice quarter. Thank you.

Thanks, Chris.

Thank you. At this time, I would like to turn it back to Scott Bluestein for closing remarks.

Thank you, Susan, and thanks to everyone for joining our call today. As a final note, we will be participating in both the Jefferies BDC Summit and Fitch Ratings BDC Conference on November 16th, the JMP Securities, Financial Services, and Real Estate Conference on November 17th, and the KBW Midtown March on December 14th, all of which are taking place in New York. If you would like to arrange a meeting with the Hercules Management Team, please contact each of the financial institutions mentioned directly or Michael Hara. We look forward to reporting our progress on our next year-end earnings call. Thank you all, and have a great rest of the day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.