TriplePoint Venture Growth BDC Corp.

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. Second Quarter 2023 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speaker's remarks, there will be an opportunity to ask questions and instructions will follow at that time. This conference is being recorded and a replay of the call will be available in the audio webcast on the TriplePoint Venture Growth website. Company management is pleased to share with you that the company's results for the second quarter of 2023. Today, representing the company is Jim LaBey, Chief Executive Officer and Chairman of the Board, Sajal Srivastava, President and Chief Investment Officer, and Chris Matthew, Chief Financial Officer. Before I turn the call over to Mr. LaBey, I'd like to direct your attention to the customary safe harbor disclosure in the company's press release regarding forward-looking statements and remind you that during this call, Management will make certain statements that relate to future events or the company's future performance or financial condition, which are considered forward-looking statements under federal securities law. You are asked to refer to the company's most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. The company does not undertake any obligation to update any forward-looking statements or projections unless required by law. Investors are cautioned not to place undue reliance on any forelooking statements made during the call which reflect management's opinions only as of today. To obtain copies of the latest SEC filings, please visit the company's website at www.tpvg.com. Now, I'd like to turn the call over to Mr. LeBay.

Good afternoon, everyone, and welcome to TPVG's second quarter earnings call. I'll start by talking about the venture market. The data speaks for itself. As the National Venture Capital Association PitchBook data shows, in the first half of 2023, the venture capital ecosystem has struggled to adapt to market dynamics that we haven't seen in years. PitchBook further states that this shift in the landscape has impacted all the sectors and all the stages of the venture ecosystem. They're all well below the high-water mark set in the past few years. Deal value, it's down 46%. Exit values, 77 percent, and fundraising is down 73 percent. That's all over the first half of 2023 compared to last year. Investment activity by the venture funds into private companies continues to be really volatile. During this period of valuation resets that we've been talking about in these calls, investors have pulled back on the amount of capital they're deploying. primarily driven by the uncertainty in the broader economy and financial markets. We believe the continued disconnects out there between public market multiples and valuations and private market valuations, combined with the lack of IPO and M&A exits these days and the withdrawal of the non-traditional growth investors, has made it very difficult for many later and growth stage companies to raise capital. As we've been discussing during these past several quarters and we'll get into further, venture lending has been impacted by these conditions as well, most notably by this reduced level of equity investing. Leveraging the power of the TriplePoint Capital platform and in our experience gained over the past 18 years, our focus in the second quarter and year-to-date continues to be three priorities that we believe will enable us to navigate through the current markets. and position TPVG to benefit as conditions improve through time. Having been through many of these venture capital market cycles, we believe it's a period of demonstrating patience and taking timely advantage of lending opportunities with this market backdrop. Specifically, our priorities are focused on maintaining our earnings power and our strong liquidity, managing the portfolio, and positioning TPVG for the future. Regarding our earnings power, with a portfolio of almost 940 million, we generated net investment income, or NII, of 18.8 million, or 53 cents per share, as we once again over-earned our regular quarterly dividend of 40 cents per share. TPVG also achieved a weighted average portfolio yield for the second quarter of 14.7 percent. We're also focused on maintaining strong liquidity in a diversified capital structure, adding to TPVG's stable foundation. Based on current liquidity exceeding our unfunded commitments and cash flows from our existing portfolio, we believe we have ample liquidity well into 2024. Another priority continues to be to manage and monitor the portfolio. It starts with frequent contact we're having with our portfolio companies and their investors on an active basis. In addition, our teams are out there. They're monitoring portfolio company plans and business progress. We're regularly assessing their financial condition and capital structure matters, and there's always an active review of capital needs and financing strategies. We're very proactive these days given today's volatile market. As Sajal's going to discuss, we're working our way through some exciting credit, excuse me, existing credit issues created by these macroeconomic and venture market changes. Last quarter, almost 90% of the portfolio on a fair value basis was performing at our two best credit scores, and we believe are adapting well to these current market conditions. This includes 14 companies that raise capital year to date. Ten of them last quarter raised more than $326 million alone. Several of our portfolio companies are growing, they're expanding, and they're executing according to their individual financial plans and also operating ahead of plan, as well as a few are achieving positive EBITDA. We upgraded credit ratings on three of the portfolio companies which had strong performance, and they had projected cash runways extending beyond our loan maturity dates. We upgraded Pill Club as its loan was assumed in conjunction with the sale of the company. This quarter, for a few portfolio companies, primarily those which we have been previously talking about and identified, we lowered their credit ratings due to some ongoing challenges and developments they had in the quarter. Given the broader market and current challenging times, we will continue to proactively work through the issues which can arise in this environment and we remain engaged with the rest of the portfolio. We've been through many of these cycles in the past, and we believe an upturn in the market is dependent on the return of stability in the public markets, and technology company multiples specifically, as well as technology companies digesting and adapting to today's new environment. As venture investors regain confidence in valuations and valuation metrics, we believe it will enable companies to obtain values based on expectations for future year revenues and exceed their current private valuations. In the interim, many companies will remain on their paths of bringing down operating burn to conserve cash and to extend their runways. As we've mentioned before in these calls, the environment for many venture growth stage companies has changed. From business plans of growth at all costs transitioning into plans of conserved cash at all costs. The third priority I mentioned is our focus on TPVG's long-term positioning and leadership in the venture lending market. We're looking to capitalize on changes in the competitive landscape that have occurred in the venture lending market since the Silicon Valley bank crisis earlier this year. We're continuing to set the groundwork for when market conditions improve as well. And we're taking advantage of those opportunities we are seeing in the current market environment. We see resilience, for example, in the fintech, software, enterprise, cybersecurity, health tech, and travel segments, among other sectors. These companies are all looking to capitalize and utilizing our debt to help accelerate their plans, or in some cases, we're helping finance opportunistic acquisitions. These are the type of sectors and use cases we'll continue to focus on in the near term, and our pipeline today reflects this strategy. While it's a pretty challenging market, for TPVG, it's about working through this period of volatility and building our pipeline for the future. I continue to see and witness glimmers of progress on the horizon and growing signs of increased investment activity. This includes pockets of technology investments being funded and operating in today's recalibrated and very valuation-sensitive environment. The entrepreneurs that we meet with now are sharply focused on the path to profitability as opposed to top-line growth. Many of the venture capitalists we have spoken with have shared an optimistic outlook that they have for increased investment activity in 2024. They tell us about a growing pickup in investment activity at their funds, and while it's still early, they continue to expect to see improvement into next year. We believe this is a reasonable assessment, given the more than $290 billion out there of estimated dry powder that venture capital funds raised in 21 and 22, which is yet to be invested, according to PitchBook and VCA. While our results will continue to depend upon our ability to deploy capital and effectively manage credit, based on our track record and our success investing more than $13 billion of venture loans across the TriplePoint Capital platform and our experienced, multi-cycle tested team, we believe we're in a position to capitalize on opportunities over the long term. We believe venture lending is about investing for the long term. which includes obtaining warrant and equity investments in the portfolio, which now span across 119 companies at TPVG. As we progress through the remainder of the year, we expect to continue to focus on the priorities we've outlined here, as well as draw upon Triple Point Capital's differentiated strategy in order to continue to capitalize on market opportunities over the long term. With that, Let me turn the call over to you, Sajal.

Thank you, Jim, and good afternoon, everyone. During the second quarter, TriplePoint Capital, our global investment platform, and the advisor to TPVG signed 114 million of term sheets with venture growth stage companies compared to 199 million of term sheets in Q1, which reflects our approach to originations across our platform in light of current market conditions. Given our continued focus on TPVG's overall leveraged positions, During the quarter, we allocated 18 million of new commitments with four companies to TPVG, including one new portfolio company, Tempus X Machina, a company backed by Andreessen Horowitz, Silver Lake, and others, which provides analytics and data sets from sporting events using AI and machine learning. During the second quarter, TPVG funded 30.6 million in debt investments to eight portfolio companies, which was at the lower end of our guided range for the quarter. These investments carried a weighted average annualized portfolio yield of 16.4% at origination. Of the $30.6 million funded during the quarter, $17.1 million was related to existing unfunded commitments, and the remaining $13.5 million was from new commitments made during the quarter. As Chris will cover in more detail, our unfunded commitments are at $180 million as of today, with $63 million set to expire this quarter and another $32 million by year-end. Similar to our experience during the pandemic, we continue to see lower than expected utilization of existing unfunded commitments prior to their expiration and are projecting fundings for both Q3 and Q4 to be in the 25 to 50 million range per quarter. We also expect loan prepay and contractual amortization activity from the existing portfolio to potentially match or exceed fundings in Q3, similar to our experience in Q2. During Q2, our $34 million of loan prepayments helped increase our weighted average annualized portfolio yield on total debt investments to 14.7% for the quarter. Excluding prepayment-related income, core portfolio yield was 14.1%. We expect the increase in prime rate in Q2 and again last week to benefit yield during the second half of 2023 as well. Our debt investment portfolio company count at the end of Q2 was 56, represented 21 different subsectors, and our top 10 portfolio companies represent 34 percent of our total debt investments. In Q2, seven portfolio companies raised $304 million of capital, and three portfolio companies, which closed rounds in Q1, raised an additional $22 million during the second quarter. bringing our total to 14 portfolio companies, raising 390 million of capital a year to date. Our portfolio companies saw an increase in aggregate amounts raised in Q2 over Q1. We believe this bodes well for not only the operating runway these portfolio companies will have, but also for their future credit outlook. Despite the challenging environment, during the quarter, we sold our warrants and equity investments in Toast, which had completed its IPO in 2021, and we recorded a realized gain of $3 million, bringing our cumulative gross realized gains from warrant and equity investments since TPVG's IPO to $48 million. The interesting story on Toast is that they never drew on the venture loan commitment we made to them in 2018, and our $3 million of realized gains represents 100 times multiple on our original fair value of the warrant we received. We continue to hold 184 warrant and equity investments in 115 companies with a total cost and fair value of $71 million and $89 million respectively as of Q2. We believe Revolut, World Remit, Monzo, Upgrade, Signify, Cohesity, and Passport Labs are some of the higher profile portfolio companies that could potentially drive future upside value over time as market conditions improve. Although we saw a slight improvement in our weighted average credit score from Q2, We did see ongoing stress with existing companies on our credit watch list as situations developed either during the quarter or shortly thereafter that warranted further credit downgrades and fair value reduction. We also downgraded two new names and upgraded four names during the quarter. Eighty-eight percent of our portfolio on a fair value basis is performing at our two best credit scores, and we believe are adapting well to current market conditions. During the second quarter, we upgraded three obligors with a total of $33 million in principal balance, including Monza Bank, Flash Parking, and Mockingbird from Category 2 to Category 1 due to strong performance above expectations and cash runway. In addition, during the quarter, we removed Pill Club with a principal balance of $20 million from Category 3 in conjunction with its acquisition by our portfolio company, 30 Madison. The outstanding principal balance was assumed in full under a new loan structure secured by 30 Madison. These loans are current, accruing income, and rated Category 2. This was a positive outcome and a testament to our team's skills in managing a challenging credit situation. In Q2, we added one company to Category 3, Mystery Tackle Box, with a principal balance of $5 million, and one company to Category 4, Made Renovations, with a principal balance of $10 million. due to developments in its strategic financing process. With regards to our other Category 4-rated asset, Roli, we continue to see improved operating performance. The company increased sales in Q4-22 and has performed to plan in 2023, with new product initiatives targeted for the second half that should be catalysts for growth. With regards to Category 5 assets, underground enterprises, with a $6 million principal balance, was downgraded to Category 5 due to our revised expectations for an extended recovery process in conjunction with its bankruptcy filing on May 1st. LUCO, with a principal balance of $17.4 million, was downgraded to Category 5 as a result of its announced agreement in June to be acquired by Admiral Group, a UK-based insurance company, as well as its intent to sell certain business units and assets to other parties. The fair value mark for Q2 represents our expected recovery from the sale to Admiral and expectations of value from the disposal of its remaining assets. Health IQ, with a principal balance of $25.1 million, was downgraded to Category 5 during the second quarter due to ongoing challenges with the company's execution and strategic efforts. The fair value mark for Q2 represents our revised expectations for an extended restructuring and recovery process. and our team is actively engaged with the company and other stakeholders. VanMoof, with a principal balance of 22.5 million, was downgraded to Category 5 during the second quarter. Subsequent to the end of the second quarter, as a result of an unsuccessful M&A process, the company was declared bankrupt in the Netherlands. This was a particularly surprising and disappointing outcome, as VanMoof was a 14-year-old company that had raised over $180 million of equity capital and was widely regarded as one of the leaders of the e-bike market. Despite meaningful historical revenues and launching a new line of e-bikes this year, the company was unable to attract additional capital strategic partners. We are early in the process and actively working to maximize our recovery. Although these credit developments impacted NAV this quarter, with VanMoof and HealthIQ representing approximately 70% of the NAV reduction, we expect some of these situations, such as VanMoof, Fluco, and Underground, to be resolved over the next three to six months, while the others have time for recovery as our teams manage through these situations. As Jim discussed, we believe the increase in stressed assets is directly related to challenging conditions in the venture capital equity fundraising markets and in the market for M&A transactions by both public and private companies. Venture capital-backed companies that have had success raising capital in the past are having a difficult time in the current environment and will continue to experience such challenges unless market conditions improve or they delay their capital raising efforts until market conditions improve. We believe that once public market multiples stabilize, overall sentiment and outlook improve, and equity investors begin to deploy the significant dry powder they have under management, we will start to see the market recover. While we are pleased to see an increasing number of portfolio companies raise rounds in Q2, and we are making progress on our recoveries, the market is still currently challenging, and we continue to remain proactive and diligent as we manage through this environment. Although we believe that we are in a challenging part of the cycle for venture capital investing, We've effectively managed through cycles before, which is reflected in our long-term performance at the TriplePoint Capital platform and at TBVG. Since TBVG's inception 10 years ago, our cumulative net loss rate has remained under 2% of cumulative commitments, or 20 basis points per annum, and 3% of fundings, or 30 basis points per annum. Our underwriting processes have been refined not only over the past 10 years since TBVG's IPO, but also the 18 years since we started the TriplePoint Capital Platform and the 24 years that Jim and I have been working together. We utilize a rigorous approach to both fundamental credit analysis and qualitative and quantitative assessment of high-growth venture capital-backed companies, and we regularly review and adjust our decision-making based on market conditions and dynamics. Considering current market dynamics and conditions, we're applying our underwriting metrics, credit standards, and credit decisions to reflect the new market realities. Although credit losses are an expected part of the venture lending model, as we reexamine our historical losses, they tend to be unique situations as opposed to having common themes for the outcomes that occurred. While they all fundamentally ran out of cash and were either unable to raise a follow-on round of financing or successfully complete a sale of their business or assets in excess of our loan balances, They occurred for unique reasons, which we do not believe were foreseeable or expected at the time of underwriting. Keep in mind that an important element of the venture lending model is the impact of the equity kicker in the form of warrants and direct equity investments. These valve investments have the potential to drive meaningful realized gains, offset credit losses, and help grow NAV over time. Since TVVG's IPO, we have generated $48 million of gross realized gains, with one name in particular, generating $27 million in gross realized gains, which demonstrates the potential of what one successful exit can have. As mentioned earlier, we currently hold 184 warrant and equity investments in 115 companies as a quarter's end, and believe many have the potential for success in the future. In summary, as Jim said, we are focused on maintaining the financial strength of TVBG, remaining in frequent contact with our select VCs and portfolio companies, are focused on our portfolio and stabilizing credit, and are preparing for the future. Given our existing scale and strong portfolio yield, we expect to continue to deliver strong investment income while positioning the company to further benefit when market conditions improve. With that, I'll now turn the call over to Chris.