Q2 2021 Hercules Capital Inc Earnings Call
Good day and thank you for attending by welcome to the Hercules Capital Q2, 2021 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. So on.
A question during the session you will need to press star 1 on your telephone and he advised that today's conference is being recorded.
If you require any further.
[noise] assistance. Please press Star Zero 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 Lori and good afternoon, everyone and welcome to Hercules Conference call from the second quarter of 2021.
With us on the call today.
Day from Hercules are Scott Bluestein, CEO, and Chief investment Officer, and Seth Meyer CFO.
Hercules second quarter 2021 financial results from released just after today's market close and can be accessed from Hercules Investor Relations section on H T. G C Dot com.
A range from a replay of the call at Hercules webpage or by.
Using the telephone number and pass code provided in todays earnings release. During this call. We may make forward looking statements based on current expectations.
Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing day delays between the day of this release and on the confirmation and final audit results. In addition.
The statements contained in this release that are not purely historical are forward looking statements.
These forward looking statements are not guarantees of future performance is on.
Subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward looking statements, including without limitation, the risks and uncertainties, including the uncertainties.
Surrounding the current market uncertainty has caused by the COVID-19 pandemic and.
And other factors, we identified from time to time in our filings with the SEC.
Although we believe that the assumptions on which these forward looking statements are reasonable any of those assumptions can be approved to be prove inaccurate and as a result, the forward looking statements based on those assumptions also can be incorrect.
You should not place undue reliance on these forward looking statements.
Forward looking statements contained in this release are made as of the date hereof and Hercules assumes no obligation to update the forward looking statements or subsequent events.
To obtain copies of related SEC filings. Please visit our website and with that I'll turn this call on call over to Scott.
Thank you Michael.
Thank you all for joining US today, we hope that everyone is well.
Q2, 2021 was a strong follow up to a record setting Q1.
We delivered solid operating results further strengthened and expanded our investment platform and continue to emphasize credit discipline. Despite the market frothiness.
And the momentum we saw in Q1 across our investment portfolio accelerated in Q2 with a record number of year to date portfolio company completed or announced exit events.
Our investment team continued their momentum in Q2 and delivered record first half 2021 performance for both gross.
This new debt and equity commitments and fundings.
We continue to conservatively manage the business by maximizing liquidity staying disciplined on new underwritings, ensuring a strong balance sheet and maintaining substantial operational flexibility.
Public and private equity markets continue to perform.
Gross generally well and there continues to be an abundance of liquidity across our core markets.
Let me recap on the key highlights of our strong performance for Q2.
We originated over $440 million of gross new debt and equity commitments and delivered gross fundings of over 270.
The exception.
Combined with our record setting debt and equity commitments and fundings in Q1, we established a new record for the first half of the year with over $970 million in gross new debt and equity commitments and total fundings of $634 million.
We again.
<unk> saw strong performance from both our technology and life Sciences teams.
Being able to have balance between our 2 core verticals has continues to be a significant competitive advantage for us in the market and a key differentiator of our business.
Although an abundance of equity capital and loosely structured debt has continued.
<unk> challenges in terms of prudent new business origination our investment team has continued to deliver while staying true to our historical credit discipline.
We continue to believe that a disciplined approach to underwriting will serve us and our stakeholders well over the long term.
Our expanding platforms.
<unk> scale and brand reputation continue to give us exposure to an active pipeline that currently exceeds $1 billion of potential investments the.
The quality of the companies in our pipeline remains strong.
Since the close of Q2 and as of July 26, 2021, Hercules has closed 2000 <unk>.
$7 million of new commitments and has $402 million of pending commitments.
Based on our current closed commitments and the strength of our active pipeline. We expect that 2021 will be a record year for Hercules capital in terms of annual new debt and equity commitments.
During Q2, we continued to see strength in terms of portfolio company exits and portfolio company liquidity events.
Year to date, we've had 8 M&A events.
10 companies that completed their public offerings through either traditional ipos or spec mergers and 8 additional companies that have.
Needed to spec transactions.
This combined with continued very strong performance across our broader investment portfolio again drove high levels of early payoffs.
Early loan repayments were at the mid range of our guidance of $150 million to $200 million at nearly 170.
Agreed, but decreased slightly from $192 million in Q1.
For Q3, we expect prepayments to be between $200 million and $250 million based on the momentum that we're seeing across our investment portfolio. Although this number could change materially as we progress in the quarter.
Even with the continued elevated levels of early pay offs are strong fundings during the quarter produced net debt investment portfolio growth of $57 million after allocating over 30 million of new fundings to the initial private fund that is managed through our wholly own registered investment advisor.
Year to date.
We have managed to deliver net debt investment portfolio growth of $139.3 million, which is a credit to our investment team and diversified investment platform.
In Q2, we generated total investment income of $69.6 million and net investment income of 37.
Right.
Or 32 per share.
The increase in both total investment income and net investment income was primarily attributable to the higher level of fee income during the quarter as compared to the year before.
Our portfolio generated a GAAP effective yield of 12, 7%.
Percentage in Q2, and a core yield of 11, 5%, which was at the midpoint of our previous guidance for 2021.
With net regulatory leverage at a very conservative 82, 4% and continued robust liquidity across our platform, we remain very well positioned.
Credit quality on the debt investment portfolio again improved in Q2 with a weighted average internal credit rating of 193% as compared to 2.01 in Q1.
This was our strongest internal credit rating in our history since our first publicly reported quarter in.
It was an advice.
Overall, our grade 1 and 2 credits increased to 81, 5% in Q2 versus 79, 6% in Q1.
Grade 3 credits decreased to 18% in Q2 versus 19, 5% in Q1.
$2 rated 4 and rated 5 credits made up 1.4% of the entire debt portfolio fair value.
In Q2, we had 3 debt investments on non accrual with a cumulative investment cost and fair value of approximately 23 million and $7.7 million respectively.
Or 1% and 3% as a percentage of the company's total investment portfolio at cost and value respectively.
During Q2 Hercules had net realized losses of $14.3 million, primarily due to the write off of 1 legacy.
Putting investment that had a fair value of zero.
Excluding the write off of that fully impaired position. We had we had record gross realized gains of $47.9 million from the sale of equity and warrant investments during Q2.
As a result of continued strong.
<unk> across our portfolio, the exceptionally strong equity capital markets and robust exit and IPO activity, our Q2 net asset value per share increased by over 3% to $11.71.
This is the highest net asset value per share.
Performing <unk> reported since Q3.2008.
We ended Q2 with strong liquidity of $610 million, which provides us with substantial coverage of our available unfunded commitments of $327 million.
And the ability to fund our ongoing anticipated.
That lease activity.
Overall, we believe that our balance sheet is exceptionally strong and well positioned.
As Seth will discuss we will continue to look for ways to optimize our balance sheet and further drive down our overall cost of debt capital.
The venture capital ecosystem continues.
Continued to exhibit exceptional strength in Q2 after a record Q1.
For the first half of 2021 venture capital funds raised a total of $74.1 billion and invested over $150 billion in the U S. According to data gathered by pitch book and.
And the National venture Capital Association.
That compares to $81 billion and $164.3 billion, respectively for all of 2020.
We declared our 10th consecutive quarterly cash distribution of <unk> 32 per share as well as our supplemental.
Pollution of 7 cents per share as previously discussed on our Q1.2021 on earnings call.
Inclusive of Q1, we have declared 78 of distributions to our shareholders year to date, which is a 22% increase over the same period last year.
As of Q2.2021, we have generated record undistributed earnings spillover of approximately $162 million or $1.38 per share subject to final tax filings.
This provides us with additional flexibility with respect to our variable base distribute.
Distribution going forward.
And the ability to continue to invest in our team and platform.
Year to date, we have continued to add talent to our team with several new hires. We have also continued to enhance our infrastructure and platform.
We will continue to make these investments to best position us for sustained.
Long term success.
In closing.
I am grateful and thankful to each of our talented and dedicated employees, who continue to demonstrate tremendous strength commitment and perseverance during what continues to be a challenging time for many.
Being able to deliver.
Liver record new commitments year to date is a credit to each of them and the great work that they do.
I would also like to once again, thank each of our portfolio companies and their institutional investors that have chosen to make Hercules capital their preferred financing partner.
I will now turn the call over to Seth.
Thank you Scott and good afternoon, ladies and gentlemen, the investment team delivered another strong funding and commitment quarter, resulting in first half records for both dimensions, we were able to grow the loan book by $57 million at cost during the quarter. We delivered total investment income of $69.6.
<unk> million dollars and once again had NAV appreciation per share triggered by the strength of our portfolio and the broader market.
Our early payoff levels reduced to $168 million, which was within the guidance range.
Net of the private credit fund allocations the healthy loan growth.
Growth helped our total investments grow to $2.5 billion at cost.
As usual I would like to focus on the following areas the income statement performance and highlights NAV.
The unrealized and realized activity leverage and liquidity and the outlook.
Turning to the income statement performance and highlights.
Net investment income was $37 million or <unk> 32 per share in Q2, an increase compared to the prior quarter attributable to 2 consecutive solid quarters of growth. Following the portfolio decline in Q4.2020, as a result of the record loan payoffs.
Total investment income was $69.6 million, an increase compared to the prior quarter. The main driver for the increase was fee income despite lower payoffs largely due to the vintage and size of the onetime and unamortized fees associated with the loans that paid off.
Our effective and core yields in the second quarter were 12, 7% and 11, 5%, respectively compared to 13, 2% and 11, 6% in the first quarter. The effective yield was down due to the lower early repayments.
The slight decline.
In the core yield was due to a modest decrease in coupon interest.
Turning to expenses, our gross operating expenses for the quarter decreased to $33.8 million compared to $35.1 million in the prior quarter.
Net cost recharge net of.
Line recharge to the RIAA, our operating expenses were $32.6 million.
Interest expense and fees decreased to $16.7 million from $17.5 million in the prior quarter.
The second quarter figures were again elevated due to the acceleration of fee recognition.
<unk> for the pay off of the former SBA license debit yours at par value and pay down of the securitization due to the reinvestment period ending.
SG&A SG&A expenses decreased to $17.1 million from $17.6 million in the prior.
Cost order the decrease was driven by lower compensation expenses related to the decrease in fundings relative to our record Q1, and quarterly payroll taxes, which normally run higher in the first quarter.
Net of cost recharge to the IAA the SG&A expenses were 15.
Higher claim.
Our weighted average cost of debt was 5.4%, which represents a small decrease compared to the prior quarter.
Both quarterly figures were elevated driven by the additional fees associated with early debt retirements from both our securitization and.
Pointing SBA debenture loan repayments.
Second quarter adjusted cost of debt, excluding fee acceleration was consistent with the prior quarter at 5.1%.
Let's now switch the focus to the NAV unrealized and realized activity.
During the quarter.
And the other NAV.
Increased <unk>.
35 per share to $11.71 per share. This represents an NAV per share increase of 3% quarter over quarter.
The main driver for the increase was the net change in unrealized depreciation of $60 million after.
A reversal of prior net unrealized depreciation of $29.3 million, mainly due to <unk>.
Investments disposed or written off.
Our $60 million of net change in unrealized depreciation was driven entirely by the mark to market of our equity and warrant poor.
<unk> on our debt portfolio was relatively stable with a $1.5 million appreciation was mainly from the reversal of prior unrealized depreciation.
In addition, we had recognized a $1.5 million depreciation on an escrow receivable from 1 portfolio.
Fully that paid off this quarter.
The net realized loss in the quarter of $2014.3 million comprised of 40.786 million of net gains from the disposal of equity positions offset by $62.1 million of realized loss pertaining to 1 legacy.
Company position that had previously been fully impaired at a carrying value of zero dollars.
Moving to leverage our GAAP and regulatory leverage was 87, 7% and 83, 8% respectively.
Which decreased compared to the prior quarter due.
At the partial repayment of the 2 securitizations, which are now in natural runoff.
Netting out leverage with cash on the balance sheet.
Our GAAP and regulatory leverage was 86, 4% and 82, 4%, respectively, putting us in a very strong position.
Due to that on heading into the next quarter.
We continued to utilize our our third SBA license drawing down on an additional $16.2 million of <unk> and on attractive annual interest cost of <unk> 7.
7.1%.
We had have access to an additional $121.3.
Position of SBA funding for qualified investments.
As a result, we ended the quarter with strong liquidity of 610 million. This excludes capital raised by the funds managed by our wholly owned.
A subsidiary.
As a reminder, our liquidity continues to be enhanced by.
No of course monthly principal and interest collections as well as early pay offs.
Finally, the outlook points.
Our core yield guidance of 11% to 12% continues to apply for Q3.2021.
For the third quarter, we expect SG&A expenses of 16.5.
<unk> $17.5 million consistent with the prior quarter.
Although we expect our underlying third quarter cost of borrowing to decrease modestly interest and fees will increase with the accelerated fee recognition of $1.5 million due to the previously disclosed early redemption of 70.
$5 million of 525%.
2025 notes completed on July 1 at par value.
The $1.5 million increase in fee recognition is a onetime event and will impact our Q3 NII.
In addition, we expect our 2 securitization, which.
<unk> now and natural runoff to continue to trigger and increased capitalized fee recognition.
With respect to the February 2022 convertible bond maturity.
We expect to settle any converting holders with cash for the principal component of the note and.
Our net shares for the option value. This will allow us to pay the principal in cash irrespective of the number of conversions, while managing leverage and dilution appropriately.
Although very difficult to predict as Scott communicated, we expect $2 million to $250 million in prepayment activity in the third.
<unk>.
For the third quarter, we expect a similar level of expense allocation to what we saw in Q2 and.
In closing, we're pleased with the first half of 2021 and looking forward to building on another successful quarter.
I will now turn the call over to Laurie to begin the Q&A.
Third quarter of our call Lorie over to you.
And as a reminder to ask a question you will need to cross the star 1 on your telephone.
Our first question is from Chris Manuel Piper Sandler. Please ask your question.
Thanks, Good afternoon.
So 1 on the spillovers.
So you have a record $160 million 38 per share. So can you talk a little bit about what your plans are with that and can you remind me. If you have any restrictions there with how much spillover you can have is that 90% of NII or net assets and then when would you need to do.
Porsche thing if there are restrictions.
Sure. Thanks, Kristen I'll take the first part and then <unk> can speak to the second part in terms of restrictions. So I think we've kind of consistently said obviously, we're very pleased by the fact that we have such a large spillover and it continues to provide us with significant flexibility both in terms of being able to continue to invest in the platform.
Do something our team, but also with respect to evaluating and reevaluating our distribution policy on a quarterly basis, our quarterly base distribution is variable on the board evaluates on a quarterly basis, what we think makes sense based on the facts and circumstances as of the time and then at the beginning of this year in Q1, we announced.
In 2008 supplemental distribution for 2021, which will be distributed 7 percentage per quarter in each of the 4 quarters of 2021, our plan would be to evaluate at the end of this year a further potential supplemental distribution program for 2022, and we will of course on a quarterly basis reevaluate what.
Ounce the day distribution level, we think that we think is most appropriate.
And Christian on your second part of your question you had asked on what the limitations are as a registered investment company, we're required to distribute 90% of our earnings on a basically over a year. So if we accumulate on the ordinary.
Aerie income earnings that are greater than 90% of an annual earnings then we're reaching that ceiling that youre talking about.
So we would have to distribute it and then on the capital gains side, we have to distribute about 98% of it but that measurement period is really from November.
October and so we need to see what that position would be after October.
Okay. Thanks.
Helpful. And then I heard your comments on the prepayments that theyre expected to be higher in the third quarter.
$200.250 million in that range. So what are the key changes that you're on.
On that you've been seeing recently versus the last few quarters to cause it to.
Increased a little bit there and would you expect the overall portfolio or at least the debt portfolio to decrease given these elevated prepayment levels.
Sure. So it's too early Christian in the quarter for us to really opine as to whether we think the portfolio.
It will be up or down we're just starting Q3 now per our disclosure we have $403 million of pending signed commitments already so that's a very very healthy start to Q3.
And the pipeline continues to be very strong in terms of what's driving the elevated prepayments for Q.
Folio you I think a couple of things. So 1 we've sort of consistently spoken about the quality of the health of our portfolio over the course of the last several quarters. Our portfolio right now is performing at a level that we frankly haven't seen in some time and a lot of these companies are incredibly well capitalized right now we have per our disclosure 8.
Q3 companies in the pending Ipos back share.
On a position and so we expect.
At least a good portion of those to be completed in the Q3 timeframe and then we're also aware of several M&A potential events and capital raising events in Q3, which we expect to lead to elevated prepayments.
It's all being driven by positive things and I think the credit as I said in my comments really goes to our team who is doing an incredible job picking and selecting and winning mandates and financing opportunities with some great companies that are incredibly healthy and have a lot of optionality.
Great. Thank you for taking my questions.
Our next question is from Devin Ryan of JMP Securities. Please ask your question.
Hi, Good afternoon. This is Kevin full pump for Devon.
My first question can you talk about your overall satisfaction, so far on utilizing the private credit fund to extend the investment platform a percentage of option.
Sure. So Kevin I think we're very pleased with what we've seen so far the effort continues to be fairly early in terms of its evolution.
Raise the first fund in Q1, we started our investment activities in Q1. So we are now essentially 2 quarters into it if you look at the amount of capital that we've been able to.
Okay to the private vehicles inclusive of Q1 and Q2, we're at roughly $80 million, which is frankly ahead of our initial expectations and I think in terms of overall, how it is benefiting Hercules capital is essentially doing what we expected it to do.
I think first it is increasing the overall pie that we are able to.
Pursue from a debt perspective.
Number 2 it is allowing us to pursue some larger later stage transactions and spread the funding over a couple of different vehicles and then number 3 it is helping us be more aggressive in a couple of very specific parts of the market, where frankly, we were constrained in the internally.
Alex BDC model and so I think when we look at it sort of 2 quarters in.
We're incredibly pleased by the performance to date.
Okay. Thank you that's helpful. And then obviously, we've talked about how prepayments are going to be elevated in the next quarter I'm just curious how.
How you view your target leverage range I know in the past you've communicated.
Manage 1 on a quarter is that kind of stuff what are you looking to get the portfolio longer term.
Yes, that's our sealing our targeted ceiling that we've self imposed on ourselves of 1 to 5.
Leverage 2 to equity and we would see as prepayments start to stabilize again.
We would try to target to get back.
All above 1 to 1 for sure.
Okay. Thank you for that and thanks for taking my questions and congratulations on the strong quarter.
Thanks, Kevin.
Our next question is from Finian O'shea from Wells Fargo Securities. Please ask your question.
Hi, good afternoon.
And Scott.
Can you talk about with all the new.
Venture capital fund raising and investing.
On.
What sort of areas all of that money is going into is it mostly the late stage growth stage or is it finding its way into.
Other more.
Our traditional private equity areas.
Anything any color you'd give on that front share.
It's been pretty widespread Finn.
If you just look at the numbers.
It's pretty incredible in terms of what we're seeing you know following a record 2020, where you had 81 billion raised on a $164 billion.
Year to day, just through the first half of this year. We're already at 74 billion raised in that 150 billion invested we tend to look at it from sort of <unk>.
3 different buckets early stage expansion stage and then established later stage and we've seen outperformance in terms of VC equity capital being invested in each of those 3 buckets.
Although the greatest area of increase has been in that later stage established bucket part of the market.
Okay. That's helpful and just a follow up on.
G&A I think self guided.
Flat or consistent G&A again.
Great.
How would we.
More comfortable.
Comfortable with that given what's going on in in your part of the labor markets and your plans to grow the business with record fundings.
How does it stay where it is.
Again at the moment, we have a very stable.
Base of employment, which has been very good through the COVID-19 environment. Our costs are not dramatically different as a result, because we were very.
Hi Tech organization, well prepared to work remote and so we didn't really have to.
Investments in that dimension the investments that Scott mentioned in his.
<unk> that we continue to make.
Are really projects that are underway that seek to.
Replace systems and other processes at a lower cost and at the same time, we continue to add people and resources.
Behind that so it is really a <unk>.
Invest smartly and reinvest the savings into the growth of the main element of our business the human capital and getting your debt.
The only thing I would add as Jeff just said if you look at a lot of the investments that we're making right now in terms of the platform and the infrastructure a lot of it.
To make it.
Driven towards increasing efficiency and additional use of technology and a lot of those things that we're doing we think long term will actually have a savings for the company and so that is offsetting some of the increase in employment related costs that were just seeing given given a result of the labor market.
It is really so much.
Thanks, Tim.
Our next question is from Kenneth Lee of RBC capital markets. Please ask your question.
Alright, Thanks for taking my question.
Just 1 around your funding mix I Wonder if you can just share some thoughts around that and perhaps.
Further expand upon comments on bump potential to further optimize the balance sheet there. Thanks.
Sure so.
As we saw in Q1, the fundings were near evenly split again between technology and life Sciences in Q1, I think the mix was almost exactly 50.50 it.
It was pretty close to 50.50 once again in this quarter, we look at it both from a commitment perspective and from a funding perspective. So if you look at the $4.41 of commitments or the $2.79 in fundings. It was pretty evenly split once again between our technology and life Sciences focus.
Got you and.
And then in terms of the the originations over the near term just wonder if you could just talk a little bit more about what factors could either drive origination volumes, either higher or lower over the course of the rest of the year.
Sure.
On the pipeline right now is it.
Incredibly robust as I mentioned on the call on and our subsequent released in the press release, we've closed $27 million on commitments quarter to date through the first 2006 days of the quarter, we have $403 million of pending signed term sheets, which again, assuming diligence and the closing process holds true we.
We would expect to close in the Q3 timeframe overall, we continue to be very pleased by the quality of the companies that we are looking at I think the variables that could change that pipeline up or down really just get back to sort of more of the macro discussion in terms of the vibrancy of the ecosystem over the last 12 to 18 months, we've obviously seen.
<unk>, just a tremendous trajectory both in terms of public equity and the private equity markets from a DC perspective, if that continues to be healthy and robust we would expect that trajectory to sort of remain based on sort of where it is right now if those markets shift to the downside, we actually think it could be a.
Official to us in terms of increasing the pipeline because as I've mentioned a couple of times now over the last few calls from a competitive perspective right now our biggest competitive threat continues to be the equity markets either on the public side or on the private side.
Right very helpful. Thanks.
Ken.
Our next question is from Christopher Nolan of Ladenburg Thalmann. Your line is open. Please ask your question.
The increase in diluted share count.
Related to the 2022 convertible notes being in the <unk>, yes.
Is that assuming a full conversion because I guess, it's tough.
Great price of that is roughly $16 or so.
Yes, the strength price now is at $16.21, when we originally issued it was at 16.41, it's been adjusted.
Per the mechanics of.
On distributions over a set amount.
And it is correct your assumption on.
On what is causing us to provide the dilution impact of the shares. Okay. So just taking the full dilution no shouldn't be anything further in the next quarter.
Correct.
And then I guess, a fuller spectrum I mean thats. The write down is there any takeaway was that for.
1 off is there something related to supply chain or China.
You might be able to share with us in terms of.
The demise of that investment yes.
Yes, sure so theres nothing new there, Chris that's the legacy Sun Jeopardy solar spectrum position.
That company has been on our books.
Going back now 5 or 6 years, it was fully impaired down to a carrying value of zero several years ago when that company went through bankruptcy.
We obviously continue to work on the investment.
What caused us to take the realization this quarter and move it from unrealized to realize is the fact that the company has officially.
Officially now been dissolved so from a GAAP perspective, we're able to take that realization. It has no impact at all on net asset value.
And then I would just add that as we from a fiduciary perspective continue to look to create value from all of our positions as part of the sort of final dissolution of that company we did.
Structure of new deal, where we were.
Transfer of the legacy assets, which we do believe continue to have some value into a newco and that newco per our public disclosure is now right in the middle of a publicly disclosed reverse merger. So we are hopeful that on a go forward basis. We will continue to have some possibility of realization of downstream.
Great.
We're able to charge just a quick follow up on the industry are you seeing companies being taken out in earlier stage than before just because the whole D. C tech sector. So hard for so long.
We haven't really seen any any.
The disproportionate allocation to early stage versus late stage.
From an M&A perspective.
We're continuing to see vibrancy in each of the areas that we focus on 90% of our business is really on that expansion and established stage part of the market. We do very little in the early stage, but we've continued to see very healthy robust M&A and IPO exit activity in.
And for those 2 core areas and we've seen it across the industry. So when you look at our portfolio from a sector perspective.
We're not seeing a disproportionate amount in any any particular technology or life sciences industry, we're seeing it pretty broad based which I think just speaks to the overall amount of liquidity that's in the ecosystem.
Alright.
Thank you for taking my questions sure.
Our next question is from Casey Alexander of Compass point, Please ask a question.
Yeah, Hi, good afternoon, a couple of questions in.
It looks like based upon the capital gains statement that there were some meaningful sales of some of the pub.
We traded equity positions in the quarter can you go over any of the more significant sales that were made in the quarter.
Sure. So we did have a record approximately $47 million of gross realized gains from distributions of our public equity and.
Positions in the quarter.
The most meaningful.
Excuse me the most meaningful dissolution was door dash, we did sell.
A portion of that position not the entirety of the position as of the end of Q2, we continue to hold approximately 200000 share.
Theres of door dash, which depending on which day, we're using for the closing has a value of approximately $35 million to $40 million and then we had some smaller.
Some smaller exits and sales during the quarter, but that was the most meaningful sales.
Okay, great. Thank you that's very helpful. Thank.
Warren late there was.
Quite a lift in.
The <unk>.
Unfunded commitments during the quarter.
And oftentimes, that's just a measure of timing between the commitment and the actual funding.
Is there some likelihood of some of those <unk>.
<unk> unfunded commitments coming into funded status and therefore offsetting some of the prepayments that you see coming during the next during this quarter.
Great question, Casey and it's really a difficult 1 to answer when we look at that unfunded number what we really focus on is the percentage of sort of fundings to.
Increases and as you know from following us for a long time historically, we tend to be in that sort of 60% to 75% range from a funding to commitment perspective. If you look at the business in Q2, our ratio was approximately 65%. So on the lower end of that range, but certainly within the range the increase in.
Our commitment to is really being driven by 3 particular things number 1 we.
We have continued to go after some larger later stage deals where just by definition the amount of unfunded is going to be a little bit larger number 2 our team has done a really really great job on identifying some companies in the market right now that are very well capital.
Capitalized so to get those deals on board, we're funding a little bit less than we typically would and then just making that unfunded piece available for a little bit longer and then the last piece is we have a lot of portfolio companies right now that are achieving preset performance milestones, which tends to unlock and make available some of those legacy.
In cubic commitments. So that's what's driving the increase we continue to have liquidity that is more than sufficient to cover those unfunded commitments based on the overall strength of our portfolio right now I think it's difficult to tell you what percentage of those we think will actually become funded but I can assure you that we're in conversations with all of these companies.
And doing what we can to try to get them and incentivize them to draw that capital.
That's a great answer. Thank you I just wonder in that last portion of it where a number of companies who've hit milestones historically that that does.
Give them a need to draw is that draw.
You know being is that need to draw on those unfunded commitments running into competition from equity markets and this abundant sources of capital. Yes. There is no doubt debt our portfolio right now just from an overall liquidity perspective. These companies are better capitalized and more liquid than we've seen in some time.
Is causing some companies to either defer or delay the drawing of fundings that are available to them.
How long that last part Inc. TBD.
But that is certainly something that we've seen over the last quarter or 2 as the health of our portfolio has increased.
Alright, great got it okay.
And thanks, so much for taking my questions I appreciate it.
Good day.
Our next question is from Brian <unk> of Jefferies.
Good question.
Hi, good afternoon, guys congrats on the good quarter.
Quick question on the timing of the originations.
Originations on repurchase.
Repayments in the quarter can.
Can you give us a sense for.
What month in the quarter, you saw that activity on both sides and whether it picked up or declined at any point.
Yes, so we typically we typically model sort of 'twenty.
<unk> and then <unk> in terms of the.
Okay. Thanks cadence over the course of a quarter and that obviously that can change quarter to quarter, but the majority of our fundings and commitment activity typically close in the last month of the quarter and that's been the case for the last 15 plus years, we're really not seeing that change. The team has typically busy in each of the months during the quarter, but we see things.
Funder of escalate from an activity perspective.
Last month of the quarter and the prepayments are variable right Theres no theres no way to sort of tell you when those things will happen.
A lot of these prepayments are tied to M&A a lot of these prepayments are tied to specs that had been announced and are just sort of in the SEC queue waiting.
Ultimate sign off on closing.
Those things could happen. This month those things could happen next month or 200 to 250 is our best guests from an overall quarterly prepayment perspective based on what we know as of today.
Got it thank you very much sure.
Our next.
Question is from Ryan Lynch from <unk>. Please ask your question.
Hey, good afternoon.
You talked about the market debenture market really kind of having an abundance of liquidity.
Liquidity and capital in that space and I think that's what's driving the heightened level of.
Prepayments that you all are experiencing and theyre going to experience in the third quarter I'm.
I'm just wondering it doesn't seem like anything in the near term is probably going to change that liquidity debt.
On a floating around that marketplace and so what I'm wondering is it feels like prepayments could be heavy for the foreseeable future.
<unk> in your portfolio and so is there anything that you all can do or are trying to pursue on the origination side to boost originations to help offset those those potentially strong prepayments for the foreseeable future, except obviously I know you guys don't want to.
Loosen up anything on your credit standards, but.
Different sort of strategies or areas or sectors that you guys are looking at to kind of boost that.
Sure Brian So a couple of things. So so first first part of your question I think the answer is yes, we do expect to see elevated levels of prepayments.
Certainly short to medium term and I think we've been pretty key.
Are there any on our guidance as it relates to that.
Look back over the last 3 or 4 quarters now we've been in that $150 million to $250 million of range and it's been pretty consistent in Q4 of last year, we did see a pretty large spike in prepayments, we expect to see another spike now in Q.
<unk> again based on the overall strength of the portfolio in terms of what we're doing a couple of things on number 1 the private credit fund of debt. We have now raised is giving us the ability to do some different things and we're not going to talk publicly about the types of things that we're able to do there outside of what we've already disclosed, but we do anticipate.
Clearer hate that that private credit fund business is going to allow us to continue to increase the pie that's available for our team to go after and look at and then we are obviously continuing to be able to do things within our portfolio for the companies that are performing at an elevated or high level to try and restructure and amend those deals in a way that makes it more palatable for those companies to end.
Typically with us versus versus paying us off I think overall, though I would tell you. Despite the fact that the prepayments are difficult to replace I think it speaks to the quality of our team I think it speaks to the great work that our team does bolt on the technology side and on the life Sciences side and frankly if.
If we right now in this market had a portfolio, where we werent seeing prepayments I think that would speak to actually a lack of credit quality, which is just not something that we would want to see.
Mhm Yep that mention Karen and the prepayments on our sign of very good underwriting on those specific credits.
With the specific.
Standard repayments you guys were looking at in the third quarter, then as potential by hit would you say.
How would you characterize those are those kind of normal course from a vintage standpoint are they earlier or later vintages, because depending on how long does a better on your portfolio those could potentially newer loans, though it's going.
Half.
Much higher fees relative to the dollar amount level. So I'm just wondering should we expect anything different from a fee level relative to the vintage of those prepayments you guys are expecting in the third quarter no based on what we know right now we would expect it to be pretty consistent in terms of vintage and what you would expect to see from.
On acceleration perspective on a percentage basis.
Okay.
Understood I appreciate the time this afternoon.
Yes, Ryan.
And our next question is from Sarkis.
Your best Sheehan of B Riley Securities. Please ask your question.
Hey, good afternoon and.
Thanks for taking my question here.
I just wanted to get some incremental color on on the comment you made regarding the abundance of capital creating challenges. So just wanted to see if you can expand on this thought some more and specifically if you can kind of relate it back to the prior comments on the question of regarding with private credit funds. So do you see the privates.
Credit fund as an opportunity to kind of work around some of the abundance of capital challenges you're seeing right now.
So on <unk>, 1 with respect to the abundance of liquidity in the market and some loosely structured deals Inc.
The comment really speaks for itself over the last several quarters, we've seen some people.
You get very aggressive from a structure perspective from an underwriting perspective to get fundings on the board and fundamentally that's just not something that we've ever done we've got a 15 year track record of being a disciplined underwriter of credit and I think our team has done a very good job of sticking to that.
We tend to look at pretty closely that the deals that.
Bolt on in the market that we see that we lose or that we pass on and right now the amount of deals that are getting done but our team passes on it is really at an all time high and I just think that speaks to.
I don't want to say desperation, but I think it speaks to the fact that there are a lot of lenders out there right. Now that are just really trying to sort of get points on the board irrespective of the quality.
Get some credits.
So that's something that we may not be perfect, but I think we're going to continue to try to be very focused on maintaining that disciplined approach because we're in this for the long term and whether we have a strong quarter or 2 really doesn't change the calculus in terms of how we think about the trajectory of the business and then in terms of the private credit fund I think the answer is again, yes that private.
<unk> of credit fund was put in place. It was raised to really do 2 things number 1 to be accretive to <unk> shareholders over the long term and as a wholly owned subsidiary of the public BDC and we expect that to continue to be the case and then number 2 we expect that it.
We'll be able to allow us to increase the pie and the size of the opportunity that we can go after in the market. So there are without getting into specific industries or sectors or types of businesses, but there are companies now there are industries now there are opportunities now that our team both on the tech side and the life Sciences side can go after aggressively.
Private debt, we would not have gone after 12 months ago, and so I think long term, we continue to be very optimistic that having the private credit fund business, which continues to grow and expand we will just continue to increase the overall pie for us.
Yes, thanks for that and just another question on kind of the advisers so Brian.
I guess at what size or scale, you think Hercules get the dividend stream from the advisor I think on the last call you mentioned that.
Timeline might be at the midpoint of next year, you might start accruing dividends just wanted to get a sense for whether it's 12 months from now 24 months from now any color you can give there.
Yes, absolutely.
So on the circuit, we're thinking in the 12 to 18 months period, we should have enough scale.
That does expenses net were allocating to the RNA, which immediately benefit the BDC and ultimately the shareholders.
Are there going to be overcome by the amount of management.
Kerry that theory is earning.
As far as the scale of that we're not disclosing a lot of the details of the <unk> right now so I can't give you a number.
We think that that would match up with as far as the total investment, but you can see the allocations that we've done so far to the fund.
The disclosures.
TBD Youll see as we continue to make further allocations and investments in that fund.
In the next 12 to 18 months is when we think we can generate dividends.
Thanks, I'll take the rest offline.
Alright, Thanks, Charlie Thanks.
And there are no further questions at this time I will turn the call over to Scott Gleason T O and she is investment officer for his closing remarks.
Thank you operator, and thanks to everyone for joining our call today, we look forward to reporting our progress on our next Q3.2021 earnings call.
Right.
Okay.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Oh.
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