Hercules Capital, Inc.

Thank you, David. Good afternoon, everyone, and welcome to Hercules' conference call for the third 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 were 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 Q3 2025 earnings call. Hercules wrapped up the first three quarters 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 and disciplined underwriting. Our platform momentum continued in Q3 with originations of over 846 million, which led to record originations of 2.87 billion for the first three quarters of 2025. putting us on pace to exceed our previous full-year record of $3.12 billion. Our record fundings for Q3 of $504.6 million led to $95.9 million of net debt portfolio growth and a new record with over $557.8 million of net debt portfolio growth in the first three quarters of 2025. The strong new business that we generated during the third quarter led to continued solid net debt portfolio growth, and that helped drive, sorry, and that helped Hercules generate record total investment income of 138.1 million and net investment income of 88.6 million, or 49 cents per share during Q3. Despite operating in a declining rate environment, we were able to achieve 122 percent coverage of our quarterly base distribution of 40 cents per share in the third quarter and maintain 80 cents per share of spillover income. Our strong Q3 performance was highlighted by new records, including record total gross fundings for a third quarter of 504.6 million, an increase of 85.5 percent year over year, Record total investment income of $138.1 million, an increase of 10.3% year over year. Record period ending assets under management of approximately $5.5 billion, an increase of 20.7% year over year. Our first three quarters performance was highlighted by several new records, including record total investment income of 395.1 million, record net investment income of 254.7 million, record total gross new debt and equity commitments of 2.87 billion, record total gross fundings of 1.75 billion, and record net debt investment portfolio growth of over 557.8 million. Our performance results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency, and scale of the Hercules platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders. Our approach to the current market is centered around disciplined credit underwriting, managed and controlled portfolio growth, and maintaining balance sheet strength and flexibility. We believe that this will best position the company to continue to deliver strong relative operating results irrespective of the market environment. We noted in our Q2 2025 earnings call that we continue to see a more favorable new business landscape broadly and that we were expecting the business to be able to take advantage of that. Our expectation was that we would deliver strong new business over the second half of the year, but that Q3 would be slower, as it typically is for our ecosystem. After a slow start to Q3, our investment teams were able to take advantage of several opportunities, which helped us deliver record Q3 funding performance. We are maintaining our expectation that origination activity will remain strong through year-end, and we have already delivered record new commitments and record new fundings for the year. As we noted earlier this week, Hercules recently achieved another meaningful milestone by reaching the $25 billion mark in total cumulative debt commitments since our first origination in October 2004. This is a tremendous achievement that reflects the enduring strength and impact of the Hercules platform and validates our approach of building a company focused on what is best for our shareholders and stakeholders, treating our employees the right way, and providing certainty and consistency in the market to our borrowers, prospects, and their investors. While the new business environment remains constructive, we are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets, as we noted on our last earnings call. Having operated in this asset class for over 21 consecutive years and through several different credit cycles, we know the importance of being disciplined and true to the underwriting rigor that has made Hercules the market leader, and that is exactly what we intend to continue to do. We maintained a conservative and defensive balance sheet while still delivering strong originations and record funding performance for Q3. In Q3, we maintained our high first lien exposure, which remained above 90%, and continues to be towards the high end of our BDC peers. As we guided, gap leverage increased modestly to 99.5% in Q3. up from 97.4 percent in Q2, and we did not utilize our ATM during the quarter. Our Q3 gap leverage remained at the low end of our typical historical range of 100 percent to 115 percent and below the average of our BDC peers. 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 Q3. In Q3, we originated total gross debt and equity commitments of over $846 million and record gross fundings of over $504 million. We generated record total investment income of $138.1 million and net investment income of $88.6 million, or 49 cents per share. We achieved 122 percent coverage of our quarterly base distribution of 40 cents per share. We continue to be very well positioned with regards to dividend coverage in a declining rate environment. With the record growth in our debt investment portfolio through the first three quarters of 2025, And given that nearly 75% of our prime-based loans, which comprise approximately 82% of the portfolio, are now at their floors, we believe that we are generating a level of core income that amply covers our base distribution of $0.40 per share. We generated a return on equity in Q3 of 17.4%. and our portfolio generated a gap-effective yield of 13.5% in Q3 and a core yield of 12.5%, which was consistent with Q2. 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 originations versus chasing higher-yielding assets with more risk or loosening deal structure to drive short-term portfolio growth. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a specific competitive advantage. Our Q3 originations activity was well-balanced between life sciences companies and technology companies. In Q3, approximately 54% of our commitments and 50% of our fundings were to life sciences companies, while approximately 46% of our commitments and 50% of our fundings were to tech companies. We funded that capital to 24 different companies in Q3, of which seven were new borrower relationships. Year to date, through the end of Q3, we have added 27 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 $437.5 million, down from $471.5 million in Q2. Over 50 percent of our gross fundings for Q3 occurred in the last month of the quarter, and that momentum continued into early Q4. Since the close of Q3 and as of October 28, 2025, our investment team has closed 554.4 million of new commitments and funded 237.4 million. We have pending commitments of an additional $425.5 million in signed non-binding term sheets, and we expect this number to continue to grow as we progress in Q4. Our active pipeline remains robust. With our closed quarter-to-date activity as of October 28, 2025, we have already exceeded our previous annual records for gross new commitments and new fundings. demonstrating the continued growth and scaling of our platform. While Q4 is typically a very strong originations quarter for the venture and growth stage markets, we remain focused on maintaining our high bar for new originations, given some of our recent market observations. we are continuing to see a lot of companies in our ecosystem looking to access the credit markets that lack scale and what we believe to be solid equity support. The volume of deals that we are screening and passing on continues to be near record levels, and we are continuing to see deals get done without strong structure and well outside of what we believe are prudent underwriting metrics for our asset class. We do not expect many of these deals to age well. 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. Lending to cash flow negative growth stage companies requires patience, prudence, and experience. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q3 and quarter to date Q4, we've had four M&A events in our portfolio, which included two life sciences portfolio companies and two technology portfolio companies announcing acquisitions. That brings us to 10 M&A events plus one IPO in our portfolio year-to-date through October 30, 2025. Based on current market conditions and improving corporate sentiment, we continue to expect exit activity to accelerate towards year-end. Early loan repayments came in slightly higher than expected in Q3 at approximately $262 million. Even with the higher level of early loan prepayments, we still achieved strong net debt portfolio growth given the strong funding levels in the quarter, which continues to position us well for strong core earnings growth in the remainder of 2025 and into 2026. For Q4 2025, we expect prepayments to be lower and in the range of $150 million to $200 million. although this could change as we progress in the quarter. Credit quality of the debt investment portfolio remained strong and relatively the same quarter over quarter. Our weighted average internal credit rating of 2.27 increased just slightly from the 2.26 rating in Q2 and remains well within our normal historical range. Our grade one and two credits increased to 64.5% compared to 62.9% in Q2. Grade three credits decreased slightly to 32.7% in Q3 versus 34.7% in Q2. Our rated four credits increased to 2.8% from 2.4% in Q2. And we, again, did not have any rated five credits. In Q3, the number of companies with loans on non-accrual increased by one. We had debt investments in two portfolio companies on non-accrual with an investment cost and fair value of approximately $52.2 million and $47.2 million, respectively, or 1.2% and 1.1% as a percentage of our total investment portfolio at cost and value, respectively. Subsequent to quarter end, we successfully worked through and resolved the one new loan that was added to non-accrual during the third quarter. The result of that effort was that we received net proceeds on that debt 56% higher or nearly $14 million higher than our Q2 fair value mark. Despite a small realized loss on that particular loan, our realized IRR on that debt position was approximately 13.2%. 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 still remains enhanced, given the volatility in the markets broadly and the ongoing government shutdown, which has now extended into the fifth week. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we will do will continue to serve us well. As of the end of Q3, the weighted average loan-to-value across our entire debt portfolio was approximately 16%, and we have not noted any meaningful deterioration in credit since our last earnings call. Our net asset value per share in Q3 was $12.05, an increase of 1.8 percent from Q2 2025. This is the highest net asset value per share that we have reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC. and over a billion of liquidity across our platform. With healthy liquidity, a low cost of debt relative to our peers, and four investment-grade corporate credit ratings, including an investment rating upgrade to BAA2 from Moody's, we remain well-positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Given the enhanced focus on PIC across the private credit markets, we wanted to provide some additional disclosure on PIC income for Hercules. For Q3, PIC was approximately 10.5 percent of total revenue, which was flat from where it was during the first half of 2025. Approximately 85 percent of our PIC income in Q3 was attributable to PIC that was part of the original underwriting and not a result of any credit or performance-related amendment. Nearly 90 percent of our PIC income in Q3 came from loans that we have rated as 1, 2, or 3, while there was only a single loan that was rated 4 that was generating PIC income during the third quarter. Excluding 100 percent of our PIC income during Q3, the business still generated cash net investment income that provided 111 percent coverage of our base dividend. Philosophically, we will selectively use PIC at underwriting to enhance income for certain credits that we believe are stronger and more stable, and we expect this to continue to be the case going forward. Venture capital investment activity in Q3 mirrored the strength that we experienced in our deal flow and originations. 2025 continues to demonstrate a healthy pace with $80.9 billion in Q3 and $250.2 billion invested for the first three quarters of 2025, according to data gathered by PitchBook and VCA. The $250.2 billion of investment activity already represents the second highest year in history, exceeding the $236.1 billion invested in 2022. While the aggregate data remains strong, it is highly concentrated, with over 67 percent of all year-to-date VC equity investment going into AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies was $20 billion. Both the number of IPOs and dollars raised increased in Q3 and continues to improve. Consistent with the aggregate data for the ecosystem, during Q3, capital raising across our portfolio remains strong, with 18 companies raising over $1.3 billion in new capital. In 2025, we've now had 64 companies raise over $5 billion in new capital. Year to date, our portfolio companies have raised over $6 billion of new capital. Given our strong, sustained operating performance, we exited Q3 with undistributed earnings spillover of $146.2 million. or $0.80 per ending share outstanding. For Q3, we are maintaining our quarterly base distribution of $0.40 per share for a total of $0.47 of shareholder distributions. Our Q3 net investment income covered our base distribution by 122%. and our full distribution, including our $0.07 supplemental distribution, by over 104%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions next year. This is now our 21st consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly-based 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 Q3, Hercules delivered its 10th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Despite the declining rate environment that we are now operating in, we were able to achieve 122% coverage of our quarterly base distribution in Q3. Our continued success as a company is attributable to the tremendous dedication, efforts, and capabilities of our 115-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.

Thank you, Scott, and good afternoon, ladies and gentlemen. Our strong momentum reported in the first half of the year continued throughout the third quarter. As Scott shared, the business activity during the quarter and year to date has been exceptional and the record breaking for our platform. Fundraising and investment deployment in our RIA managed funds also has been very strong expanding the platform and scaling the business to be even more efficient. We continue to maintain strong available liquidity of $655 million as of the end of the quarter in the BDC and more than $1 billion across the platform, including the advisor managed funds by our wholly owned subsidiary, Hercules Advisor LLC. Based on the performance of the quarter, Hercules Advisor delivered a third-quarter dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.1 million, resulted in approximately $6.2 million in NII contribution to the BDC in Q3. With those points in mind, let's review statement performance and highlights. NAV, unrealized and realized activity, leverage and liquidity, and then finally the financial outlook. Total investment income in Q3 was another record at $138.1 million, supported by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, increased as well to another record at $127.9 million, Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was 88.6 million or 49 cents per share in Q3. Our effective and core yields were 13.5 and 12.5 respectively percent compared to 13.9 percent and 12.5 percent in the prior quarter. As of quarter end, almost 60% of our prime base loans were at the contractual floor and thus the impact of any future rate reductions will be muted. Third quarter gross operating expenses were $53.6 million compared to $52.2 million in the prior quarter. Net of costs recharged to the RAA, our operating expenses were $49.5 million. Interest expense and fees increased to $27.2 million due to the growth of the business and corresponding increase of leverage. SG&A decreased slightly to $26.4 million above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses decreased to $22.3 million. Our weighted average cost of debt increased slightly to 5.1%. Our ROAE or NII over average equity increased to 17.4 percent for the third quarter, and our ROAA or NII over average total assets increased to 8.7 percent. Switching to NAV unrealized and realized activity, during the quarter, our NAV per share increased by 21 cents to $12.05 per share. This represents an NAV per share increase of 1.8% quarter over quarter. The main driver was appreciation of the debt portfolio, as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized appreciation was overwhelming. primarily attributable to $28.6 million of net unrealized appreciation on debt investments, $11.3 million of net unrealized appreciation attributable to valuation movements on publicly traded equity, and warrant investments, and $0.8 million net unrealized depreciation attributable to escrow and other investment-related receivables. This was partially offset by 5.1 million reversal of previous quarter appreciation upon a realization event, and 2.6 million of net unrealized depreciation attributable to valuation movements in the privately held equity, warrant, and investment funds. Hercules also experienced a small net realized loss of $1.8 million, primarily due to losses on equity investments. On leverage and liquidity, our gap in regulatory leverage increased to 99.5 percent and 83.6 percent, respectively, compared to the prior quarter due to the growth in the balance sheet being financed by leverage. Netting out leverage with our cash on the balance sheet, our net gap and regulatory leverage was 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly-owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of availability uh available liquidity the strong liquidity positions as well to support our existing portfolios companies as well as source new opportunities finally on the outlook points for the fourth quarter we expect our core yield to remain in the range of 12 to 12.5 percent as a reminder 98 percent of our portfolio our debt portfolio is floating with a floor and as of today Almost 75% of our prime base portfolio is at the contractual floor. Although very difficult to predict, as stated by Scott, we expect $150 to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter based on the year-to-date debt portfolio growth. For the fourth quarter, we expect SG&A expenses of $25 to $26 million. and an RIA expense allocation of approximately $4 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 to $2.5 million per quarter. In closing, the steps that we took in the first half of the year to strengthen our balance sheet continue to help us grow and scale our platform. I will now turn the call over to the operator to begin the Q&A part of our call. Brian, over to you.