Hercules Capital, Inc.

Good afternoon. My name is Jess, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital Second Quarter 2025 Financial Results Conference Call. All participant lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. Please be advised that today's conference may be recorded. Lastly, if you should require operator assistance, please press star zero. I will now turn the call over to Michael Herrera, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Jess. Good afternoon, everyone, and welcome to Hercules Conference Call for the second quarter of 2025. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer, and Seth Meyer, CFO, Hercules financial results released just after today's market close 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 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 Q2 2025 earnings call. Hercules wrapped up the first half of 2025 by delivering another strong quarter of record fundings and record operating performance, while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations. After originating over a billion dollars of new commitments in Q1, our momentum continued in Q2 with our second consecutive quarter of originations of over $1 billion. Our record fundings led to 192.1 million of net debt portfolio growth in Q2 and a new record with over 461.9 million in the first half of 2025. During the second quarter, we took additional steps to further strengthen our balance sheet and liquidity position with the closing of our institutional investment-grade bond offering of $350 million of 6% unsecured notes due 2030. We also extended and upsized our credit facility led by MUFG to $440 million. Our staggered liability maturity stack low cost of capital relative to our peers, and ample liquidity across our platform continues to put us in an advantageous competitive position. Post Q2, we announced the first close of our advisor subsidiaries fourth private credit fund. Hercules Advisor LLC now manages four funds with approximately 1.6 billion in committed equity and debt capital. As a reminder, Hercules Advisor LLC is a wholly owned subsidiary of Hercules Capital, an internally managed BDC. And as a result, 100% of the earnings and value of that business benefit our public shareholders and stakeholders. Our strong Q2 performance was highlighted by several new records, including Record total gross fundings of $709.1 million, an increase of 53.7% year-over-year. Record total investment income of $137.5 million, an increase of 10% year-over-year. And record net investment income of $88.7 million, or 50 cents per share, an increase of 7.7% year-over-year. Our first half performance was highlighted by several new records, including record first half 2025 total investment income of $257 million. Record first half 2025 net investment income of $166.2 million. Record first half 2025 total gross new debt and equity commitments of $2.02 billion. and record first half 2025 total gross fundings of 1.25 billion our performance results are driven by our leadership position within the growth stage lending market the longevity consistency and scale of the hercules capital platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders In our public comments during the first quarter of 2025, we noted that we anticipated a more favorable new business landscape broadly, and that we were positioning the business to be able to take advantage of that. It has played out largely consistent with our expectations. While the equity and credit markets have remained volatile, we have noted a general improvement in overall market sentiment subsequent to our last earnings call. Management teams appear less hesitant, investors are active, and companies seem to be navigating the market choppiness and changing messaging from the current administration more effectively. We believe that certain sectors, geographies, and end markets are positioned better right now, and our recent and near-term originations will reflect that. Despite strong originations and record fundings, we have maintained a conservative and defensive balance sheet. In Q2, we maintained our high first lien exposure, which remained at approximately 91%, and continues to be toward the high end of our BDC peers. Gap leverage decreased modestly to just over 97% in Q2. down from 99.9% in Q1. Our Q2 gap leverage remained at the low end of our typical historical range of 100% to 115% and below the average of our BDC peers. We ended Q2 with over a billion dollars of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well. Let me now recap some of the key highlights of our performance for Q2. In Q2, we originated total gross debt and equity commitments of over $1 billion and record gross fundings of over $709 million. We generated record total investment income of $137.5 million and record net investment income of $88.7 million, or 50 cents per share. We were able to achieve 125% coverage of our quarterly base distribution of 40 cents per share. We generated a return on equity in Q2 of 17.1%. And our portfolio generated a gap effective yield of 13.9% in Q2 and a core yield of 12.5%, which was relatively flat compared to Q1. Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high quality transactions versus chasing higher yielding assets, which we believe have more risk. The focus of our origination efforts in Q2 was on maintaining a disciplined approach to capital deployment. while being selectively aggressive on certain opportunities where we felt that we had a competitive advantage. Our Q2 originations activity were well balanced between life sciences and tech companies. In Q2, approximately 53% of our commitments and fundings were to life sciences companies, while approximately 47% of our commitments and fundings were to tech companies. We funded debt capital to 26 different companies in Q2, of which 11 were new borrower relationships. Year to date, through the end of Q2, we have added 20 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $471.5 million. up slightly from 455.7 million in Q1. Since the close of Q2 and as of July 28, 2025, our deal teams have closed 44.2 million of new commitments and funded 33.5 million. We have pending commitments of an additional 480 million in signed non-binding term sheets. and we expect this number to continue to grow as we progress in Q3. Q3 is historically our slowest quarter for new originations, and we expect that to be the case again this year. While that is typical for the venture and growth stage markets generally, we have chosen to be even more selective and patient recently, given some of our recent market observations. In certain sectors, we have seen an abundance of liquidity and a desire for asset growth, leading to transactions that we do not believe reflect appropriate risk-adjusted returns. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters. We are generally pleased with the exit activity that we saw in our portfolio during the second quarter. In Q2, we had three M&A events in our portfolio, which included one life sciences portfolio company and two technology portfolio companies announcing acquisitions. That brings us to six M&A events in our portfolio year-to-date through the end of Q2. In addition, we had one technology company complete their IPO in the quarter. Based on current market conditions and improving corporate sentiment, we expect exit activity to accelerate towards year end. Early loan repayments increased as expected in Q2 to approximately 267 million. Even with the higher level of early loan repayments, we still achieved strong net debt portfolio growth given the record funding levels in the quarter, which continues to position us well for strong core earnings growth in the second half of 2025. For Q3 2025, we expect prepayments to be similar to Q2 and in the range of $200 million to $250 million, although this could change as we progress in the quarter. Credit quality of the debt investment portfolio improved quarter over quarter. Our weighted average internal credit rating of 2.26 decreased slightly from the 2.31 rating in Q1. and remains within our normal historical range. Our grade one and grade two credits increased to 62.9% compared to 61.1% in Q1. Grade three credits increased slightly to 34.7% in Q2 versus 33.9% in Q1. Our rated four credits decreased to 2.4% from 4.1% in Q1 and we did not have any rated five credits as of Q2 quarter end. In Q2, the number of loans and companies on non-accrual decreased by one. We had one debt investment on non-accrual with an investment cost and fair value of approximately $9.8 million and $7.9 million respectively, or 0.2% as a percentage of our total investment portfolio at cost and value. During the second quarter, we concluded our workout efforts with our three rated five loans from Q1, including Coros, a legacy loan that had been impaired and on non-accrual status since Q2 of 2024. The resulting realized loss on those three positions was $6.5 million less than our previous quarter's impairment, and there was a positive impact to net asset value during Q2 as a result. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring remains enhanced. Given the ongoing uncertainty of the current tariff and trade-related environment, we continue to proactively assess any material impact across our credit portfolio. Based on what we know as of today and continued conversations with our borrowers, we continue to believe that none of our portfolio companies will be negatively impacted by the current tariff situation to a material degree. Our net asset value per share in Q2 was $11.84, an increase of 2.5% from Q1 2025. We ended Q2 with strong liquidity of $785.6 million in the BDC and over $1 billion of liquidity across the Hercules platform. With healthy liquidity, a low cost of debt relative to our peers, and four investment-grade corporate credit ratings, we remain well positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Venture capital investment activity continues to demonstrate a healthy pace, with $69.9 billion invested in Q2 and $162.8 billion invested for the first half of 2025, according to data gathered by PitchBook NVCA. M&A exit activity in Q2 for U.S. venture capital-backed companies was $32.2 billion. IPO activity improved, but remained muted during the second quarter. Consistent with the aggregate data for the ecosystem, during Q2, capital raising across our portfolio remained strong, with 19 companies raising over $1.1 billion in new capital during the second quarter. For the first half of 2025, we've had 45 companies raise over $3.8 billion in new capital. Given our strong, sustained operating performance, we exited Q2 with undistributed earnings spillover of $134.1 million, or $0.74 per ending share outstanding. For Q2, we are maintaining our quarterly base distribution of $0.40 and our supplemental distribution of $0.07 per share for a total of $0.47 of shareholder distributions. Our Q2 net investment income covered our base distribution by 125% and our full distribution, including our 7 cent supplemental distribution, by over 106%. This is our 20th consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. In closing, our scale institutionalized lending platform, and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. In Q2, Hercules delivered its ninth consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Our success is attributable to the tremendous dedication, efforts, and capabilities of our 100-plus employees and the trust that our venture capital and private equity partners place with us every day. 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.