Hercules Capital, Inc.

Good day and thank you for standing by. Welcome to the Hercules Capital fourth quarter 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 the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.

Thank you, Josh. Good afternoon, everyone, and welcome to Hercules Conference Call for the fourth quarter in full year 2022. With us on the call today from Hercules is Scott Blustein, CEO and Chief Investment Officer, and Seth Meyers, CFO. Hercules financial results released just after today's market closed and can be accessed from Hercules' 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 filings 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 Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q4 2022 earnings call. Following our record operating performance in 2021, Hercules Capital raised the bar higher and once again delivered record performance in 2022. 2022 was a historic year for Hercules Capital, and I am incredibly proud of what our talented and growing team accomplished. Our record setting performance in 2022 culminated with the strongest total and net investment income quarter in the company's history. and the recent declaration of an increased quarterly base distribution and a new supplemental distribution program for our shareholders. Hercules Capital delivered another strong year of record originations performance, record financial results, and continued strong credit performance. Our performance in 2022 reflects the benefits of being able to achieve and operate at scale, maintain robust liquidity and a strong balance sheet, and working with the best in class team that is highly experienced in this asset class. Thanks to the growth of both the BDC and our private credit funds business, Hercules Capital is now managing in excess of 3.6 billion of assets, an increase of over 38% from where we were at the end of 2021. Despite continued market and macro volatility, The continued strength and expansion of our Originations platform, robust liquidity position, and strong balance sheet put us in position to deliver achievements on multiple fronts in 2022, including record total gross debt and equity commitments of $3.12 billion, up 18% year over year, and the first time in our 18-year history where we have been able to deliver over $3 billion of new commitments in a year. Record debt investment portfolio growth of nearly $600 million. Record total investment income of $322 million, up 14% year over year. Record net investment income of $188 million, up 25% year over year. Increased our base distribution three times in 2022, with our most recent increase to $0.39 per share in Q4. Record cash distributions of $1.96 declared for 2022. An 18% increase year over year. Three consecutive years of delivering supplemental distributions to our shareholders. And finally, over $330 million of investments assigned to and or funded directly out of the advisor funds that we manage through our wholly owned RIA. 2022 was also another year of investment in the company, where we took additional steps to strengthen our platform, originations capabilities, and back office functionality and sophistication. These investments provide us with continuing optimism and confidence in the trajectory of our business heading into 2023. Our results in Q4 can be summarized by record earnings, strong portfolio growth and momentum, improving yields, and stable credit. Let me recap some of the key highlights of our performance for Q4. Our record originations performance in the first three quarters of 2022 continued with strong Q4 gross debt and equity commitments of $645 million. Our gross fundings continued to be strong during the quarter with over $367 million. which led to strong net debt investment portfolio growth of over $133 million during the fourth quarter and a record $598.5 million for 2022. The net debt investment portfolio growth that we achieved in 2022 combined with the current yield environment puts us in a strong position to be able to deliver strong net investment income growth in fiscal year 2023. Our Q4 originations activity was driven by both our technology and life sciences teams delivering strong performance during the fourth quarter. Our commitments and funding activity demonstrated balance between our two core verticals, and this continues to provide us with the unique ability to actively target both verticals depending on where we are seeing better opportunities and risk-adjusted returns. We funded capital to 25 different companies in Q4, of which nine were new borrower relationships. For 2022, we added 52 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 that has been active in the market through several cycles. Consistent with what we saw throughout the first three quarters of 2022, we were again able to expand our funding relationship with numerous portfolio companies that continued to show strength and achieve performance milestones during the fourth quarter. With over 3 billion of new commitments in 2022 and a lower than typical funding to commitment ratio driven by conservative credit underwriting, we expect this trend of increased follow-on fundings to existing portfolio companies to continue in 2023. The momentum that we saw throughout 2022 has carried into 2023, and we are pleased by our performance on Originations quarter to date. Since the close of Q4 and as of February 13th, 2023, our deal team has already closed 189 million of new commitments, and funded over 192 million. We have pending commitments of an additional 263 million in signed non-binding term sheets. Volatility across the equity markets, particularly for growth stage companies, continue to stabilize in Q4. Valuations for both public and private companies remain under pressure, and the capital markets have stayed more selective on the equity side. This is continuing to drive strong demand for our capital and why we expect our pipeline to continue to be healthy near to medium term. 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 are remaining patient and disciplined on new originations. and we will prioritize credit quality over chasing higher risk transactions with a yield premium. We believe that we are incredibly well positioned in the current market and that our scale and portfolio and VC diversification afford us the ability to say no on new credits that do not meet our underwriting parameters. This is particularly important in today's market where the number of growth stage companies looking for structured debt has increased dramatically. Hercules has always maintained a credit-first culture, and we expect this to continue to serve us well, particularly in periods of volatility. During Q4, portfolio company exits and liquidity events for the industry continue to reflect the ongoing pressure in the equity markets. as well as the trends in M&A that we anticipated on our Q3 earnings call. For 2022, we had 19 total exits comprised of five IPOs and 14 companies announce or complete M&A transactions. Although the exit environment in 2022 was suppressed relative to 2021, our 19 exits were consistent with our historical average. As the IPO market remains uncertain, we continue to expect to see an acceleration of M&A transactions over the next several quarters. Since our last earnings call on November 2nd, we have had nine portfolio companies announce or complete M&A transactions. This includes Ouster announcing a merger with Belladine in Q4 and completing it in Q1, and Evernote announcing its acquisition by bending spoons. also in Q4. During Q1 quarter to date, we have had seven additional portfolio companies announce or complete M&A transactions. This includes Fungible being acquired by Microsoft, Alvareo Pharma being acquired by Ipsen, Agravita being acquired by Novus, Concert Pharmaceuticals being acquired by Sun Pharma, Logicworks being acquired by Cox Communications, Aveo being acquired by LG Chem, and Oak Street's recent announcement that it is being acquired by CVS. This reflects the quality of our loan portfolio as well as our team's ability to continue to identify and target the most promising growth stage companies in the market. Early loan repayments were approximately $131 million in Q4. close to the midpoint of our guidance of 100 million to 150 million, and a modest increase from 125 million in Q3 2022. For Q1 2023, driven in large part by M&A, we expect prepayments to be between 150 million and 200 million, although this could change as we progress in the quarter. In Q4, we generated a record total investment income of $100.2 million and record net investment income of $62.1 million, or $0.47 per share, providing 121% coverage of our recently increased base distribution of $0.39 per share. Our portfolio generated a GAAP effective yield of 14.7% in Q4. and a core yield of 13.8%, 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 100.1% and continued robust liquidity across our platform, our balance sheet remains very well positioned. Additionally, we have no long-term debt maturing in 2023, which affords us the ability to be opportunistic and selective on raising new capital. Credit quality on the debt investment portfolio remained strong and stable. Our weighted average internal credit rating of 2.23 was slightly higher than the 2.20 rating in Q3. but it remains at the low end of our normal historical range. Our Grade 1 and 2 credits decreased to 61.5% compared to 67.4% in Q3. Grade 3 credits were higher at 36.3% in Q4 versus 31.1% in Q3. Our Rated 4 credits made up 2.1% of the portfolio and Rated 5 credits were 0.1% in Q4. As of our most recent reporting, 100% of our debt portfolio companies are current with respect to contractual payments of principal and interest. As of the end of Q4, we had only two debt investments on non-accrual, with an investment cost and fair value of approximately $18 million and $1.7 million respectively, or 0.6% and 0.1% as a percentage of the company's total investment portfolio at cost and value, respectively. We ended Q4 with strong liquidity of over $606 million. Subsequent to year end, we signed a new letter of credit agreement with SMBC, which provides for a letter of credit facility of up to $100 million. In addition, we amended and extended our MUFG-led facility. The venture capital ecosystem finished 2022 with fundraising activity at a record 163 billion and investment activity at 238 billion, according to data gathered by PitchBook and the National Venture Capital Association. With the amount of available capital to invest at historic highs, We remain optimistic that venture capital activity will accelerate in 2023. Despite more selectivity and valuation sensitivity from venture capital investors, capital raising across our portfolio remained strong throughout 2022 with 58 companies or more than half of our portfolio companies raising over 5.6 billion of new capital. In Q4 alone, we had 20 different companies raise over $1.6 billion of new capital. We exited Q4 with undistributed earnings spillover of nearly $125 million or $0.94 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. For Q4, we increased our base distribution to 39 cents from 36 cents and declared a new annual supplemental distribution of 32 cents, which will be paid equally over the next four quarters beginning in March 2023. This was our third increase to our quarterly base distribution in 2022, and our third consecutive year of being able to pay out supplemental distributions to our shareholders. We will continue to evaluate the quarterly variable-based distribution with a particular focus on the debt portfolio growth and NII growth that we are expecting to materialize. In closing, our momentum remains strong throughout 2022, and we remain well positioned in 2023 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. Our core themes for 2023 will largely remain consistent with 2022 and they reflect maintaining a strong balance sheet and liquidity position and staying disciplined on new underwritings while continuing to invest in our investment teams and platform. We are 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.