Q1 2022 Triplepoint Venture Growth BDC Corp Earnings Call
[music].
Good afternoon, ladies and gentlemen, welcome to the Triple point venture growth BDC Corp, first quarter 2022 earnings conference call.
At this time all lines have been placed in a listen only mode.
After the Speakers' 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 an audio webcast on the triple point venture Growth's website.
Company management is pleased to share with you the company's results for the first quarter of 2022 today.
Today, representing the company is Jim <unk>, Chief Executive Officer, and Chairman of the board.
Suzhou Srivastava, President and Chief investment Officer, and Chris Mathieu Chief Financial Officer.
Before I turn the call over to Mr. <unk> 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 the 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.
Visitors are cautioned not to place undue reliance on any forward looking statements made during the call, which reflect management's opinions only as of today.
Bill Clinton copies of our latest SEC filings. Please visit the company's website at Www Dot TEP Vg Dot CLO.
Now I'd like to turn the conference over to Mr. Leblanc. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining <unk> first quarter 2022 earnings call.
We're pleased with our strong first quarter result.
We over earned our dividend hit our funding target increased our portfolio yield and maintained our credit quality.
We are on track to carry out our 2022 plans drawing on Tpg's differentiated platform, our strong earnings generation capabilities and our balance sheet strength.
This includes our $125 million private debt offering during the quarter and the Brs recently reaffirming our investment grade rating.
The venture capital environment has remained active throughout the recent market choppiness in the demand for venture lending has remained very strong.
This has resulted in our largest pipeline globally at our sponsor Triple point capital of more than $2 75 billion as at quarter's end.
In the first quarter here at TPB G are signed term sheets at venture growth stage companies with more than $650 million. The second highest since our IPO topped only by the previous quarter.
In fact, the level of signed term sheets in each of the last two quarters has been running at a rate more than triple that of our quarterly average and all of the previous quarters.
This level of signed term sheets bodes well for our future debt commitments and increased fundings in 2022.
During a time when demand returns remained strong we continue to maintain our proven and disciplined approach we work with a select group of leading venture capital investors and with what we believe to be the highest quality venture growth stage deals. This.
The strategy Hasnt changed since our IPO more than eight years ago.
We believe our time tested approach has been proven throughout numerous cycles.
It positions us well to further deliver strong returns to shareholders as we capitalize on the exciting opportunities ahead in 2022 and beyond.
Regardless of macroeconomic shifts in venture lending experience makes a difference.
Our senior team is the most cycle tested in the venture lending industry.
If there's one point that said, Joe and I have learned over what is now more than 23 years of experience working together alone covering more than $14 billion in venture lending transactions during that period.
It's the venture lending business through markets and cycles.
Okay.
Diving into some of our first quarter highlights we generated NII per share of <unk> 44, and.
And exceeded our regular 36 dividend.
We achieved a weighted average portfolio yield of 15, 5%.
First quarter fundings, so right into the middle of our target range and based on our current pipeline, we expect fundings to continue increasing throughout the year in line with the previous.
Ranges, we laid out.
As of today in fact, we've already funded more than $49 million subsequent to quarter's end.
As we previously reported we had several loan prepayments during the first quarter, reflecting the ability of our high quality portfolio companies to complete additional funding round and achieve attractive exit.
<unk>, both completed public listings during the quarter.
We also received prepayments from virtual instruments in Casper.
In this environment, we believe that this level of prepayment activity actually speaks to the strength and stability of our portfolio companies.
Theyre growing raising capital and completing successful exits.
Prepayments, while theyre not always predictable in terms of their timing remain ongoing contributors to our income and yields and further testimonial to the strength of our companies.
Underpinning our ongoing success and our future prospects as our high credit quality portfolio that I mentioned.
This includes a number of companies experiencing tailwind in this current environment.
While in person activities and return to the office are underway pandemic, Eric consumption patterns are here to stay many portfolio companies continue to benefit from both the reopening of the economy and the consumer behavioral shifts to online procurement.
There is increased demand for next generation brands that connect and engage with consumers directly online and an expanding range of e-commerce offerings.
Service and delivery at convenient rapid delivery times are becoming an even stronger differentiation factor for companies providing vital products.
Health and wellness related companies continue to prove their strong value proposition.
Other portfolio companies of our stand to benefit from the current inflationary environment in the low labor availability.
Which is driving business is out there to invest more into the efficiency enhancing products and the services that many of our portfolio companies offer.
Yes.
Turning back to the venture capital and venture lending environment. These days as I mentioned, the private venture markets have remained highly active even amid this public equity volatility.
Last quarter's VC investment levels, we are still well above pre COVID-19 averages for any quarter measured on both the dollar volume as well as a deal count basis.
The pace of VC fund raising activity continued uninterrupted.
At $70 billion of funds raised last quarter VC fundraising hit a record in non traditional investors and venture deals also reached a new high.
With the addition of all of this new fundraising there is now a record amount of dry powder looking to be deployed in the near future.
This is estimated to be more than 300 billion by the pitch book NVCA monitor.
This should provide ample support for investment activity and the potential impacts of any corrections in the market.
For quality companies. There is no doubt there couldnt be a stronger pool of capital to access.
Having stated this.
We can't ignore the recent shifts and the impact in the venture market, most notably private market valuations at these later in growth stage companies, where valuations have been leveling off and venture capital Ipos lease last quarter were almost non existent.
As we look forward. However, all of these factors service positive trends and drivers behind the increased demand for venture lending and we see that continuing to play out during the remainder of this year.
Companies are increasingly evaluating debt financing solutions as a result of these longer timelines Republic listings.
Following a record year for venture capital activity. Many of the companies that raised equity last year at attractive valuations are now looking to add debt.
Other companies are seeking additional runway in the form of debt as they plan out their timetable and future equity rounds.
And then still other cases companies are commencing with drawdowns under their existing lines with us as part of augmenting their financing strategy and capitalization plans in this environment.
Companies are no longer raising equity rounds every six months to 12 months necessarily or as quickly as last year and there is a little more moderation.
These are all great trends as many are turning towards debt and layering it in as part of their go forward plans.
We believe all of this has a positive effect for future business and for our yields.
Given the increased demand and increased attention towards debt. We're taking advantage of this opportunistically to increase our rates and expect to increase our yields through the year.
To recap all of this we're very pleased with the strong first quarter performance as we said on our last earnings call 2022 will be a year of continued execution growth and performance.
We anticipate the second quarter will be a real busy fundings quarter, we expect to build on that momentum throughout the balance of the year, given our backlog and our liquidity.
Given our strong pipeline, we're excited about the opportunities ahead.
In executing against these opportunities we have a cycle tested team and we will remain disciplined and continue to apply our tried and true underwriting standards to select the best deals and deliver strong returns to our shareholders.
With that let me turn the call over to you Sanjay. Thank you Jim and good afternoon, as we articulated during our last earnings call in anticipation of the busy year, our playbook for the first quarter was intended to position our business and our team to prepare for and to execute on driving portfolio growth.
<unk> credit quality and capital efficiency over the course of the year, while generating strong returns for shareholders key objectives for the quarter included increasing funding capacity, while diversifying both the type and cost of capital maintaining our disciplined approach of originating high quality and high yielding.
Investments not just for the quarter, but for the entire year and of course, demonstrating the earnings power and return potential for our core business. We are pleased to have accomplished each of these objectives regarding first quarter investment portfolio activity Triple point capital signed $657 million of term sheets with venture growths.
Stage companies and we closed $126 million of debt commitments to 11 companies with TPG signed term sheets and closed commitments were both up from Q1 2020 levels 2021 levels of $192 million and $90 million respectively.
We also received warrants valued at 800010 portfolio companies and made $2 4 million of direct equity investments and for companies.
During the first quarter, we funded $63 million in debt investments to 10 portfolio companies, which was the midpoint of our $50 million to $75 million guidance range for Q1, and an increase from $57 million of debt investments to seven companies in Q1 2021.
The debt investments, we funded during the quarter carried a weighted average annualized portfolio yield of 13, 3% at origination which is also up from 12, 6% in Q1 2021 our.
Our core portfolio yield during the quarter was 12, 7% up from 11, 9% in Q1 2021 and has increased every quarter since then.
In addition, as a result of prepayment activity during the first quarter, our weighted average annualized portfolio yield on total debt investments was 15, 5%.
The continued growth of our portfolio and increasing portfolio yield enabled us to generate earnings in excess of our dividend and demonstrate again the return potential of our business both on an NII and ROE basis at scale.
As Jim mentioned, we continue to see equity fund raising activity in the venture capital industry as a whole and within our portfolio in particular, which is a testament to its quality during the quarter eight portfolio companies raised over $800 million of equity capital as compared to 10 portfolio companies raising over $700 million of <unk>.
Capital in total in Q1 2021, we.
We continue to make strong progress on our goal of diversifying the TPG portfolio, while scaling at the end of Q1, we had 48 funded <unk> as compared to 33 funded <unk> as of Q1, 2021 up 45% and our debt investments were up 21% on a fair value base.
<unk> from 574 million to $696 million or top 10, obligor represented approximately 40% of our total debt investments as compared to 53% as of one year ago.
Our equity and warrant portfolio continue to grow as well with a 128 warrant and equity investments as of Q1, 2022 up 36% from 94 warrant and equity investments one year ago and represents a $110 million on a fair value basis, almost double from $60 million.
As of Q1 2021.
Moving onto credit quality during the quarter five companies were moved from category, one and category two as a result of Prepays.
Would like to highlight the prepayment from virtual instruments also known as <unk>, which back in 2015 December 2015 was rated four on our watch list and now six years later has paid us off in full quite impressive job by our team in the company as well.
In addition, one company with $2 5 million of principal balance was downgraded from category two to category III.
We see continued progress on the other two of our category <unk> and <unk>.
Both to be upgraded over the next one to two quarters.
Our one category four portfolio company Luminary Rowley is our only loan on non accrual during the quarter. They launched the second generation of their innovative seaboard rise keyboard, which has been positively received.
During the quarter two portfolio companies completed their spec mergers <unk> and Sandra Casper completed its take private transaction fuse was acquired by eight by eight and non Nam Nam was acquired by Mars Petcare.
Transfixing growth continue to make progress on their previously announced bank mergers as well.
As noted in today's earnings release, we funded almost $50 million of new loans, just one month into the second quarter. We previously guided to a $50 million to $100 million range for fundings for Q2 and have line of sight to beat the range for the quarter.
For Q3, and Q4, we continue to expect fundings in the range of $100 million to $200 million each quarter on a gross basis.
We are excited for what's in store over the course of the year and we continue to be heads down focused on growing the portfolio in a disciplined manner, maintaining a strong credit profile growing NII and NAV and.
And working with some of the most exciting venture growth stage companies backed by some of the industry's best venture capital funds it.
It is during periods of volatility where our platform our team and our investment approach flex their muscles in a very thoughtful and disciplined manner to show our leadership position in the market with innovation consistency transparency and scale with that I'll now turn the call over to Chris.
Yeah.
Great, Thanks, Joe and Hello, everybody.
During the first quarter, we continued to generate substantial core interest income from our high quality loan portfolio. We continued to see favorable utilization rates on new debt commitments to our companies, we deployed capital using our attractive sources of leverage while maintaining excellent credit quality and diversity.
I'll take you through an update on the financial results for the first quarter of 2022.
Total investment income was $27 $3 million as compared to $20 million for the first quarter of 2021, our portfolio yield was 15, 5% on total debt investments as compared to 13, 3% for the prior year period.
The onboarding yields continued to be strong and stable given.
Given the loan prepayments in the quarter totaled $115 5 million, we reported in elevated weighted average portfolio yield for the period.
Operating expenses were $13 8 million as compared to $11 1 million for the first quarter of 2021 operating expenses for the current quarter consisted of $5 million of interest expense $3 7 million of management fees, $3 4 million of incentive fees and $1 6 million.
G&A expenses the increase in overall operating expenses is primarily driven by an increase in the portfolio of assets an increase in the use of attractive leverage in.
In the aggregate growth in pre incentive fee income.
We earned net investment income of $13 5 million or <unk> 44 per share compared to just 29 per share in the same period last year and <unk> 42 per share in the prior quarter.
While we experienced limited realized and unrealized valuation events in the first quarter, we did realize.
A record $3 1 million of net realized losses on investments, resulting from Casper sleep completing its take private transaction.
And foreign currency adjustments on prepayments.
And net unrealized losses on investments of $4 7 million, resulting primarily from $3 5 million of net unrealized losses from fair value and mark to market adjustments as well as the reversal in recognition of a $1 $2 million of previously recorded unrealized gains associated with investments.
Realized during the period.
As of quarter end, the company's total net assets were $429 5 million or $13 84 per share compared to $434 million or.
For $2014 and one penny per share as of December 31, 2021, and further $401 8 million.
Or $13 per share as of a year ago March 31 2021.
This quarter was primarily impacted by volatility in our public equity and warrant portfolio and foreign currency exposures, but nap was up on a year over year basis.
I am pleased to announce that on April 28, our board of directors declared a distribution of <unk> 36 per share from ordinary income to stockholders of record as of June 16th to be paid on June 30.
In addition to over earning the dividend again this quarter. We were again, we again increased spillover income, which remains significant and totaled approximately $12 8 million or <unk> 41 per share at the end of the quarter supporting additional regular and special supplemental distributions in the future.
As we continue to experience strong portfolio activity over time and further record loan prepayments, we expect to maintain net investment income at levels that cover current regular quarterly distributions consistent with our long term track record.
I'd also note that NII to dividend coverage was 122% for the first quarter.
As such well discussed and for modeling purposes, we now expect to come in around $100 million to $125 million of gross fundings for Q2, we continue to expect gross fundings for Q3, and Q4 to be in the range of $100 million to $200 million each quarter and that results in an overall forecast for the full year in the range of 400.
Dollars to $600 million.
On a gross basis.
Now, let's move to our unfunded investment commitments, we continued to experience high utilization on new commitments during the first quarter given the robust pipeline that we mentioned earlier, we ended the quarter with $232 million of unfunded investment commitments to 25 companies of the $232 million.
$140 million of this total will expire during 2022 and 92 million will expire during 'twenty three and beyond.
77% of these unfunded investment commitments have contractual floating interest rates all of which have a prime rate floors set to three in a quarter or higher.
This compares to the outstanding loan portfolio at quarter end, which had 52% contractual floating interest rates.
Now just a quick update on our term notes our credit facility and overall liquidity.
In February we completed a $125 million private institutional notes offering.
These notes are unsecured and bear interest at a fixed rate of 5% per year and mature in 2027, Drs issued an investment grade credit rating in connection with this transaction and recently reaffirmed our investment grade issuer rating of Triple D.
We're pleased to have completed this our 30.
Investment grade notes offering to date further enhancing the flexibility and diversification of our balance sheet.
The proceeds from this offering position us well to support our continued portfolio growth and we appreciate the strong interest and support from our growing group of investors.
With the proceeds of this offering we fully paid down our revolving credit facility, which we expect to draw again upon when needed to further grow the portfolio with accretive leverage which will benefit our shareholders.
With the completion of the financing and against the backdrop of a rising rate environment, our fixed rate borrowings account for 94% of our outstanding leverage as of quarter end, while 52% of our debt investments are at floating rates and stand to benefit from increasing interest rates.
With our latest debt offering now complete we have three layers of term debt maturities with the earliest occurring in 2025.
As of March 31st there was an aggregate of $20 million of debt outstanding of which $395 million represented these fixed rate investment grade notes and we ended the quarter with an additional $25 million outstanding on the floating rate credit facility after paying down the balance mid quarter.
We ended the quarter with a nine eight times leverage ratio compared to 1.8 times leverage ratio as of year end. We continue to have an overall long term target leverage range of 1.0 to one two times leverage ratio.
As of quarter end, the company had total liquidity of $376 million consisting of $51 million in cash.
And $325 million available under our credit facilities subject to existing advance rates terms and covenants. In addition to this strong liquidity the existing seasoned and diversified portfolio provides stable cash flows, which bodes well for the sustained liquidity throughout 2022.
So this completes our prepared remarks, and we'd be happy to take questions from you at this time so operator.
Would you. Please open the line for questions at this time.
We will now begin the question and answer session.
Asked a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
Okay withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Finian O'shea of Wells Fargo Securities. Please go ahead.
Hi, everyone. Thanks, good afternoon.
Jim I appreciate your.
Comments from the beginning on being able to.
Raise your core lending rates can you add a little.
Color there on.
How the pipeline is developing.
For and what the newer issue yields could look like.
So.
The pipeline as we mentioned.
This is at the platform level is moving more and more.
Record levels and its continuing to increase.
On an opportunistic basis, only theres opportunities here risk reward too.
Move our yields up a little bit during the course of the year. This is independent of anything that may be going on with interest rate increases such as today.
Because when demand is strong.
At the right opportunities, we want to continue to work to increase yield.
Sure that's helpful and can you describe.
What what opportunistic looks like.
In the in the triple points realm.
No not something I'm sure.
We've seen in the past, it's usually a very clean.
Clean recently capitalized tied growth.
Late stage company just curious what.
Perhaps are struggling or sideways company might look like.
Let me jump in I think opportunistic did not mean with regards to our strategy or opportunistic meant as with regards to on our transactions when it's not an across the board rate hike. So to speak from our perspective, I think Jim missing Opportunistically as we look to the risk return of transactions or the.
The deal sizes or other characteristics of traditional I'd call them. The same the usual venture growth stage investments.
Just because there's so much demand.
We fundamentally believe we should be charging more given the volatility in the environment. So I would say, we're not suggesting we have started an opportunistic lending strategy or anything like that it's the same old strong demand high quality venture backed company venture growth stage companies that raised significant amounts of equity capital, but we believe again there is.
We're able at the Triple point capital level to charge, a premium and we've <unk>.
Continued to do that yes, I would.
Just reinforce it based on the reputation the reference relationships, we have in the industry and are able to continue to command a premium in these situations, it's not a separate sector or certain.
Area are reserved for companies that we would never touch.
Okay. Thanks.
And just one more on a high level. It sounds like this is another pretty good by the dip type environment for you where the.
The IPO market slows, but but venture capital keeps getting raised and portfolio companies keep performing well in your capital is more on demand. So you do very well under this environment.
But stepping back this is supposed to be a higher risk asset class.
So what level of headwinds, whether they come from interest rates or recession or over capitalization.
Do you think it would take here too to thwart.
The momentum of venture capital to you.
Do you think there is a certain.
The level of headwind.
We could see or do you think we're just really still in the early innings of a.
Long long run of growth.
I'll start and then Jim jump in I mean again, it would be disingenuous to say that there is nothing that could cause headwinds in the venture capital equity or the VC or the tech ecosystem again, we're talking more specifically about the tech and the venture ecosystem with regards to technology companies, but but I would say.
Again, we continue to believe that we're in early innings, and we look at factors like investment activity the dry powder of our funds and again remember the sponsors that we're working with these vcs are not playing for a quick exit on their portfolio companies right. They're in they expect.
<unk> long holding periods for their portfolio companies to exit and so I think we.
We appreciate where we're glad that they have significant amounts of dry powder and they're deploying it and then the outlook on top of that that our portfolio companies themselves have significant amount of dry powder and.
So they are using our debt in a thoughtful way we're not bridge financing we're not here for companies that are unable to raise equity or that had transactions fall apart that those are not triple point portfolio companies. We're here to help those companies accelerate growth in the data shows right those are the comps.
Is that are most attractive both in good times and in volatile times for M&A for follow on equity raise and with the cream rises to the top and so that's why again, we think our investment strategy will outperform during volatility because we focus on such high quality companies that they will continue to attract.
<unk> get more than their lions share of the capital that flows into the asset class and so what will I think we're mindful of valuation right. That's an important metric and if public comp multiples get clobbered. Even further then it's hard to argue that a private company.
Spike their higher growth rates should get the same or higher multiple and so we're just cognizant of that but again data is showing and the reality is that our companies are again quite durable and performing well from a fund raising and overall financial performance perspective.
Got it thanks, so much.
Our next question comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Hey, guys.
Just to start out with.
Jim did you mentioned prepayments to date I missed it if you did.
I don't think we hear in the sector I talked about fundings to date since the quarter its been $49 million as of today and in today's earnings release, we mentioned that we've had $26 million in prepayments so far in Q2.
Great.
Given geographically how has your investment portfolio changed.
Given this strong.
Strong growth in Texas, and Florida, and so forth like that.
Has the geographic mix of your portfolio changed much it was that sort of speak towards your operating expenses going forward.
But from a geographic standpoint, there really hasn't been.
Some some small shifts quarter to quarter, but overall.
The majority of our U S businesses and the hotbeds of.
Silicon Valley, where were headquartered as well as out in New York.
New York has been on the increase.
And the second market now for venture capital, we don't have any targeted geographic.
<unk> approach in terms of cities or dispersion, so like that but the overwhelming amount of our business I think is going to continue to be.
New York Silicon Valley, Boston, and Socal those kinds of areas.
And then finally, just a follow up on Phil's question.
Are you seeing any improvements or strengthening in the terms of conditions for your loan investments.
Yes subtle here I'd say the good news is we've generally been very consistent I think thats one of the reasons why our portfolio companies choose us and so.
We're thoughtful in terms of how we structured I would say the good news is we're we're definitely focusing on companies that have larger equity capital bases and more recent rounds of financing.
To validate the investor support to <unk> to validate.
The current kind of enterprise value. So I would say for us it's more on the credit side than on the structuring slide in terms of how we operate during volatile times alright.
Great. Thank you that's it for me.
The next question comes from Kevin faults of JMP Securities. Please go ahead.
Hi, good afternoon, and thank you for taking my questions. Yes, as you mentioned in your prepared remarks quarter to date investment fundings totaled $49 million, which is tracking above the prior forecast of $50 million to $100 million and as you discussed are expected to exceed $100 million for the quarter. Just curious if you could talk about the investment environment more broadly.
The investment landscape has improved since last update March.
Yes, I would say kind of consistent with what we said last quarter again.
A certain element of it Kevin is the Q1 is always a lighter quarter for us given how busy Q Q4 is generally and then we build up pipeline momentum over the course of the year, So I would say that.
The targets that we've given of increasing funding quarter over quarter is consistent with our past practices I would say from the.
The increase here in Q2 is a little bit of spillover and timing from investments that could have closed or funded in Q1. It's been from just the overall pipeline growth and then I think the third bucket is a little bit of utilization by existing portfolio companies as they are unfunded commitments.
<unk>.
Two exploration or closer to exploration I would like to point out that we are.
Just like we saw in Q1 2020, right during periods of volatility our portfolio companies given their stability and resiliency you don't see a run on the bank you don't see this draw on cash and maintaining excess liquidity just to have that liquidity right because they're all well capitalized to begin with.
In fact, what we saw right is the significant amount of prepayment activity in Q1, which again is a good testament to quality. So so I'd say kind of it's just a consistent story, we've been telling for the past several quarters of this again portfolio growth the demand in the market just our discipline in terms of how we.
We're underwriting we're not doing anything different if anything we're again being a little tougher given the the overall volatility, but we're pleased with what we're seeing from a market demand and market quality.
Okay. That's really helpful. And then just digging a little more on the prepayments just curious what your expectations are for the cadence of prepayments, including visibility in the current quarter.
Chris do you want take that one.
Well I can speak to that.
Okay.
Quarter to date information. So we had one one obligor prepay already this quarter.
Generation and generating additional accelerated income of a little over $1 million. So.
As I think central and others have come.
Communicated its really tough to anticipate prepayments given that we have a mature portfolio with different year of vintages, we know that prepayments occur. It's a natural part of the venture lending model. So it will happen. It's likely we will have another prepay before the end of this quarter. It's just hard to estimate kind of the quantum.
At the size of those prepayments.
$26 million and $26 5 million so far this quarter in principle.
Prepayments.
Okay that makes sense and I'll leave it there congratulations on a nice quarter.
Thank you thanks.
The next question comes from Chris <unk> of Piper Sandler. Please go ahead.
Thanks. Good afternoon. So just one on the broader environment and the related volatility that you've been talking about a little bit. So do you think you've been benefiting from the volatility that we've seen in the private and public market valuations, where you have companies that raised equity in the past year or so don't want to raise a down round.
Add that through you.
And do you and would this be a tailwind for you over the near term and how long do you think that tailwind could last.
Yes, let me start and then Jim javelin jumped in place so definitely seeing some benefits I think Jim mentioned this in his prepared remarks.
During the more robust periods.
We saw companies raising follow on equity rounds every six months to 12 months because in particular that those private market later stage investors were significantly valuing and rewarding kind of growth and willing to pay significant premiums sooner.
The normal model is to raise an equity round every 12 to 24 months and so during more robust times aggressive times, let's say from the equity markets raising more frequently so what we're seeing now is again going back to the more thoughtful approach of raising an equity round every 12 to 18 months and so the portfolio companies.
Are layering in some of these are companies that have either raised or are raising are layering in <unk>.
Venture debt to complement that capital now I'd say I definitely don't think it's to avoid down around I think again the data points within the companies that we had raised equity here in Q1 were primarily up rounds, and so I think it's again, they're not at the peak multiples than peak valuations that they may have been in the past.
So rather than raise more than they used to they say great Hey.
Hey, we didn't Max out on the multiple let's raise an appropriate amount and then instead of raising too much or more than we normally will complement it with venture debt and so I think thats. The the really healthy the really exciting the thing that we're particularly pleased about when we see the current demand from the quality of companies. We're looking for I think the <unk>.
Thing two is we're also seeing companies and sectors that again were very attractive to equity investors.
Software in particular, where they are coming to the debt markets versus last year.
We're running into the equity markets and getting 10 term sheets and so again, it's just we're seeing great companies looking for that for the right reasons I can't really add much I think that covers it nicely, but we've done this for decades.
Valuation uncertainties, and some softening evaluations, which are going on out there all continued opportunities here for that.
We are not out to replace a scenario of a down round or anything like that these are scenarios, where the company's central mentioned well capitalized they are augmenting and enhancing their financing and strategies by layering in and putting in place theyre not.
So replacement because there's a down round round the corner at least for our companies.
Okay, great. Thank you that's helpful color there.
Then you put up two consecutive very strong quarters for net investment income. So I'm just curious if you could speak to how the board might be thinking about the regular distribution level or potential for a special distribution going forward just any color there would be great.
Yes, I'd say listen again.
We've got a playbook, we've got a strategy we've been talking for several quarters and so for us it's getting to a target size and scale getting the portfolio to consistently stay at a certain level getting leverage to maintain certain consistent leverage level and then you'll see you see the ROE and the <unk>.
NII, we can generate so I'd say.
Again, we're very much focused on the full fiscal year not on a quarter to quarter basis, and so I would say listen let us continue to deliver and have this conversation with our board in particular after a couple more quarters, but again, if we keep doing what we're doing it's hard to argue that this business is not going to demonstrate even.
We continue to demonstrate such strong return and.
NII performance.
Great. Thank you for taking my questions.
The next question comes from Casey Alexander of Compass point. Please go ahead.
Yes, hi, good afternoon, a lot of my questions have already been asked but.
Earlier in the presentation, you rattled off a bunch of portfolio of companies that have been acquired and I didn't quite catch that if you could run through that again and in what period, where they acquired.
Sure Casey. So so again, we had two portfolio companies in Q1 that completed their spec mergers, so inspiron auto and sandor.
<unk> in Q1 closed its take private transaction.
Fuse closed its acquisition in Q1 as well and then finally, so did our Nam Nam Nam, which was acquired by Mars Petcare.
And then the two other companies we mentioned Transfixing Grove had previously announced their spec mergers last year that have not closed yet, but they continue to make progress.
Great.
Okay.
Alright, that's the only question I have thank you.
The next question comes from Ryan Lynch of K VW. Please go ahead.
Hey, good afternoon.
One housekeeping question can you provide total level.
Prepayment income recorded in Q1 of 2022, I know you have $5 million in the fourth quarter.
When you reported Q.
For already I know you said you had already.
$3 million in Q1, I, just wanted to know where that settles out.
Yes.
Yes.
In the aggregate.
Prepayment income and Thats a combination of accelerated.
Prepayment fees and whatnot as aggregate $4 5 million.
A little over $4 5 million okay.
Okay.
<unk>.
That's helpful and then the only other question I had was.
You mentioned.
Some volatility.
Kind of the high growth.
That's your markets, maybe some resetting valuations, creating and longer potential timeline for liquidity events our IPO.
Or.
Venture lenders.
Comparable.
Two to extend the runway I'm just wondering though on the flip side of that from a credit standpoint.
<unk> seen certain.
Public equity.
STREAMWAY hydro.
But our cash flow negative or non profitable businesses today that are still <unk>.
Fundamentals are still performing well for holiday and they've.
<unk> been over the last several quarters are down.
80% in the last six months.
Has that sort of valuation change.
Flowed through.
These high growth non profitable businesses in the venture space and what happened.
If that sort of correction, 50% plus correction happens.
In some of your portfolio companies just broadly in the market what does that mean for credit quality.
Yes.
Software question that Ryan So I'd say first is again as we look to there's always some element of discrepancy between the multiples paid for private companies versus public companies and so it's never.
Nevertheless, same per say generally that private companies have always gotten premiums to the public companies because they've been growing at a higher growth rates and so in an environment, where youre public comps are getting clobbered or.
The exit environment may be challenging right I think the key thing is to look at the playbook of our portfolio companies right. It's about growth is important but uncontrolled growth or unprofitable growth right don't make sense and so growing at a slower rate still means growing but it means that you can extend your.
Our runway and you can weather the time for raising your next round to potentially an environment, where multiples come back or the environment is different right and I think thats inherent element of what all of our companies are doing theyre not at full growth potential because they know again, there's volatility there.
Though there is multiples are off in the public markets and so.
I think theyre, all being mindful and wise in terms of cash burn and that's also again another reason why theyre looking to our debt and using our debt, but I think again you have to go back to the fundamental value of technology companies and the value they create in our everyday lives and the economy as a whole and the importance that they play.
And that makes them attractive it makes them attractive to follow on private capital for new investments. It makes them attractive from that to raise capital from their existing investors, where let's say new investors may not find may for some reason not be deploying capital will then their existing investors will look to.
To protect our investments preserve the runway give these companies tie.
Time to weather the storm and then the third element is the M&A environment, Brian of having those scenarios and these companies pursue exits where we as a lender or quite pleased because again, we get paid back in full we have prepayment penalties and we get some form of gains so I'd say listen it's.
It's volatile Thats why we use the word volatile.
It's not up into the right and it's not down to her left that's it's.
Up and down and Thats why again certain sectors continue to outperform certain sectors may be more volatile uncertain maybe out of it.
Okay.
And then just on <unk>.
It's important in Europe .
Maybe not your portfolio, specifically, but but but.
But maybe just a broader venture space has valuations do you think fully reset.
In the venture space to the same extent that happened to public markets because it feels like it's only a matter of time before that would need to happen and that hasnt happened.
Again, I'm talking about very strong companies in public markets. They are just not profitable have had a complete sort of reset in valuation, which.
Half the trickle down to the private market, but that is eventually going to be their comp do you think that that reset has happened in the private market, it's happening now or still needs to happen further in the future.
I'll start and feel free to add total, but I think reset is a very strong word I haven't heard that in the venture ecosystem here I think it's a little bit more again, we're focused on just technology, but there are continuing generational moves in technology.
It's.
It's just completely changing.
The whole trends here and I think.
Because there's some public market changes for a quarter or two when we're dealing with private markets.
Gets a little bit extreme but it comes down to when talking to venture capitalists. The future is likely to have as long as good companies good growth some reasonable valuations.
Things are just going to be.
Going to as well, so I think resets a strong word discipline and particularly early stage companies again, we're a platform here not just venture growth stage last quarter. They were actually increases in valuations and I think thats going to continue and the series a the early stage in the seat as I mentioned et cetera.
Venture growth stage later stage has been some softening evaluations. So yes. It was a huge doubling of public market. There was a spike last year over the previous 18 months in private market valuations things do need to moderate a little bit, but resetting or dropping 80%.
Like that at least for companies in the venture folks we're running with.
There is a softening at those later stage growth ones, we're benefiting from it but I don't think.
What's happening last quarter and the stock market is now a predictor for the future of the venture private market valuation I would only add I mean, that's why we're a lender. So lets also keep the context right. So central to our perspective valuation is nice and is important but it's not a.
The critical metric for us when we're underwriting our oil company and the good news is were right.
We're in the debt side of the balance sheet. So from our perspective, when we care about valuation I think to your point Ryan is we're somewhat indifferent when it comes to valuation right. We just want to make sure that this company can raise incremental capital or.
<unk> make sure that there is an exit event potential in a downside scenario. So I would say listen I'm not here to protect valuations I'm not here to justify valuation I think we're more focused on making sure that companies continue to raise capital because as a lender that's what matters to us most and so if it's overvalued or undervalued.
We're somewhat indifferent because our core return is generated from the debt side of the equation not from the equity kicker.
Mhm.
That's helpful context.
I appreciate the dialogue dialogue. This afternoon. Thanks guys.
Thank you.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Jim Labe for any closing remarks.
Thank you operator, we're very happy to share our first quarter results with everyone and as always I'd like to thank everyone for participating in the call and we look forward to talking to you. All again next quarter Hope you share our excitement. Thanks again.
Goodbye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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