Q2 2022 Triplepoint Venture Growth BDC Corp Earnings Call
At this time all lines have been placed in a listen only mode. After the speakers' remarks, there'll 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 and an audio webcast on the Triple point venture growth website company management is pleased to share with you. The company's results for the second quarter of 2022 today, representing the company is Jim Labe, Chief Executive Officer, and Chairman of the board. So it's agile.
<unk>, President and Chief investment Officer, and Chris Mathieu Chief Financial Officer.
Before I turn the call over to Mr. Liberte, 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.
Well you.
You were asked to refer to the company's most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. The company does not undertake any obligation to update any forward looking statements or projections unless required by law.
Investors are cautioned not to place undue reliance on any forward looking statements made during the call, which reflect management's opinion opinions only as of today to obtain copies of our latest SEC filings. Please visit the company's website at Www Dot T. P V. G Dot com now I would like to turn the conference over to <unk>.
Mr Libbey.
Thank you operator, good afternoon, everyone and welcome to Triple point ventures second quarter 2022 earnings call.
Against the backdrop of macroeconomic uncertainty, we continued to make strong progress executing against the plan that we laid out at the beginning of the year.
Demand for our debt financing in the quarter was strong and we maintained our focus working with our select leading venture capital investors and continuing with our disciplined approach of investing in what we believe are the highest quality venture growth deals.
During the second quarter, we achieved several key objectives, including growing our portfolio to record levels.
Over earning the dividend and generating strong portfolio yield during.
During the past few quarters, we have gradually been bringing up our portfolio leverage and in the second quarter. We're pleased to have hit our target leverage range.
We exceeded our funding goals last quarter funding more than $157 million of debt investment and they've maintained strong momentum heading here into the second half of 2022.
Specifically, we signed more than $803 million of new term sheets at venture growth stage companies at T. P C. Our sponsor.
This is the highest for any quarter since our IPO.
We also entered into new debt commitments of 260 million during the quarter and Additionally, our pipeline has now grown to more than 2 billion prevent or growth stage companies at quarter's end.
Turning to the portfolio our earnings power remains strong we generated NII of <unk> 41 cents per share in the quarter and exceeded our 36 cent dividend.
A third of our portfolio companies have raised an aggregate of more than $1 7 billion of capital in the first half of this year.
In terms of the overall venture capital market. It continues to hold its own.
Here's a few stats to the fundamentals.
Private venture markets have remained highly active even amid this public equity volatility and venture capital investment levels remain well above pre COVID-19 averages for any quarter.
U S venture capital firms invested more than 62 billion last quarter across nearly 4500 transactions.
Despite this challenging market environment year to date venture capital funds have raised 122 billion. According to the N V C. A in Pittsburgh and venture capital funds have now increased their dry powder to a record 290 billion since 2019.
All this dry powder, that's looking to be deployed in the near term bodes well for our portfolio companies and the equity available to them.
For quality companies, they really couldnt be a stronger pool of capital that access.
Having stayed at all of this we can't ignore the recent shifts and the impact in the venture markets due to this tech sell off.
This has created disconnect between public and private company valuations.
We continue to expect private market valuations of late stage growth companies to plateau or even reset as valuations have been leveling off in.
And the venture capital Ipos last quarter, they were almost nonexistent.
Investors are prioritizing their existing portfolio companies with the goal of supporting them through profitability, particularly at this venture growth stage, which is a market in which we operate.
Given the market Choppiness many companies have revised their plans for this year, but it's important to note, they're all still growing.
For example companies, which previously had ambitious yearly growth plans of maybe 100% or so they've now revise their growth expectations, let's say to somewhere more like maybe 40, 50 or 60% or so all of this resulting in more moderate cash burn rates and extended cash runway.
Yeah.
Many venture investors have guided their portfolio companies towards revamp plans to maintain two or more years of cash on hand, and a goal of achieving profitability sooner.
We view this as a positive and favorable trends when it comes to debt repayment as.
As well as for our portfolio of credit quality.
As we look forward several of these market conditions serve as positive drivers behind both the increased demand for venture lending and opportunities for T. P. V. G that we believe will continue to play out during the remainder of the year.
Companies are turning towards debt and layering in as part of their go forward plans following a record year for venture capital activity. Many of the companies have raised equity recently at attractive valuations are now looking to add that in this valuation sensitive market.
Companies are increasingly evaluating debt financing solutions as a result of the longer timelines for public listings.
Other companies out there are seeking additional runway in the form of debt because they playing out their timetable and future equity rounds, and augment their financing strategy and capitalization plans.
We've seen each of these scenarios in the second quarter and we expect the trend to continue in 2022 and beyond.
These trends have helped create a sustained demand for venture lending and provides continuing advantages for us with our deal structures and opportunistic pricing.
We also continue to be more selective in our underwriting with a focus on lower total leverage and slightly higher pricing, which reflects the brand reputation and track record to the triple point platform and are 100% direct origination business.
Prospective portfolio companies today, the high quality ones are also being more selective and they're seeking a dependable and proven debt financing partner.
When it comes to debt, they're not solving for right or the largest deal but more of the best long term partner and that is where triple point outperforms.
While seeking to capitalize on the strong deal flow, we will continue to be mindful of the times and maintained our strict credit discipline and as we say in almost every earnings call stick to our knitting.
Maintaining discipline in the current market is especially important.
So Joe and I have worked together for 23 years, and we are poised to further drawing our track record of operating through diverse market environments.
Along with triple points experienced cycle tested team and best position the company.
Based on our success managing through multiple cycles, we've learned that if you have the experience and the knowhow dynamic markets can be some of the most productive and advantageous times for capitalizing on venture lending opportunities.
We believe the market could have a positive effect on the venture lending business and yield over the long term.
We're also poised to benefit from T. P. C. As differentiated platform that is invested now in more than $14 billion in venture lending transactions.
T P. CS investment team is the largest in our history.
Pipeline is at record levels, and we are servicing more geographies as a global platform with multiple vehicles, we're able to serve high quality portfolio companies, regardless of the transaction size or location.
To recap, we're very pleased with our strong second quarter performance and our progress executing against our plan.
We expect the second half will be driven by continued patient execution and performance.
With our credit discipline remaining stringent we continue to be excited by the opportunities ahead and anticipate some active quarters throughout the balance of the year, given the strong pipeline and backlog.
In seeking to capitalize on compelling opportunities, we have a cycle tested team and we will remain disciplined and apply our tried and true underwriting standards to select the best deals and deliver strong returns to our shareholders.
With that I'll turn this over to Sergio Thank you Jim and good afternoon, we remain disciplined during the second quarter generating strong results. Despite volatile markets and continue to execute against our 2022 plan to grow and diversify the portfolio, while increasing our use of leverage.
Regarding second quarter investment portfolio activity Triple point capital signed a record $803 6 million of term sheets with venture growth stage companies and we closed a record $259 9 million of debt commitments to 17 companies at TPG signed term sheets and closed commitments were up from Q2 'twenty.
One levels of approximately $251 million and $103 million, respectively. We also received warrants valued at $2 1 million and 16 portfolio companies and made 700000 of direct equity investments in four companies of the 17 companies, we've committed debt capital to during the quarter.
<unk> were new portfolio companies and four were existing portfolio companies.
During the second quarter, we funded $157 6 million in debt investments to 20 portfolio companies, which was well above our 50 to 100 million guidance range for Q2.
Q2, fundings represented an increase from $76 million debt investments to seven companies in Q2 'twenty one.
The increase in fundings was related to the strong origination activity during the quarter were approximately two thirds of our fundings came from new debt.
New debt commitments that closed in Q2, which reflects our efforts to drive the utilization of our new commitments more efficiently.
To be clear, we funded companies with strong existing equity and cash reserves in many cases topping off recent financings and extending the runway well into 2023 in 2024, we expect to see 50% to 75% of our existing unfunded commitments to be drawn.
Given the strong existing cash balances and continued fundraising activities of our portfolio companies.
Typically at the end of the draw periods if utilized.
The debt investments, we funded during the quarter carried a weighted average annualized portfolio yield of 13, 6% at origination which is up from 13, 2% in Q2 'twenty one our core portfolio yield during the quarter was 12, 8% and increased for the fifth quarter in a row and up from 12.
<unk> percent in Q2, Q2, 'twenty one as a result of both increases in the base prime rate and the increased spread of new investments. In addition, as a result of prepayment activity during the quarter. Our overall weighted average annualized portfolio yield on total debt investments was $14 five per se.
Yeah.
Our success growing our portfolio and increasing portfolio yield enabled us to generate earnings in excess of our dividend and once again demonstrates the strong return potential of our business both on an NII in Oro basis as we scale.
As Chris will cover approximately a third of the fundings for Q2 occurred during the last two weeks of the quarter and will contribute to income more materially in Q3.
In addition, our performance during the second quarter doesn't include the full impact of the prime rate change on June 16th which will contribute more significantly in Q3, along with the additional prime rate increase in July .
With regards to leverage one of our major objectives for the year is to run at a higher leverage ratio on a more consistent basis. We're pleased to have increased our leverage ratio during the quarter, which we expect will result in continued strong net investment income in excess of our dividend in the third quarter and over the course of the rest.
For the year as well as provide a buffer from the impact of prepay activity.
For Q3, and Q4, we continue to expect quarterly fundings in the range of $100 million to $200 million on a gross basis and since our portfolio of companies continue to raise equity capital our expectations remain that we will have on average one prepay a quarter through year end. In addition to the scheduled principal amortization.
Of the portfolio.
As I mentioned earlier, we demonstrated strong progress on diversifying the TPG portfolio, while scaling in addition to achieving a record portfolio size at the end of Q2, we had 56 funded obligor ours as compared to 34 as of Q2 'twenty. One in addition, our top 10.
Obligor represented approximately 35% of our total debt investments as compared to 51% as of one year ago.
Our equity and warrant portfolio continues to grow well with 140 warrant and equity investments as of Q2, 'twenty two as compared to 110 investments one year ago and represents a $107 9 million on a fair value basis, an increase of 71% from Q2 'twenty one.
Yeah.
During the quarter, our public warrant and equity holdings experienced $4 6 million of unrealized losses, ending the quarter with a fair value of approximately 11 million investments in three of the nine companies are still subject to lock up.
Our plan is to liquidate all of our public holdings over the course of 2022 as they recover in value in fact as of yesterday's close we're up another $1 billion.
Moving on to credit quality, the overall health of our portfolio companies remains solid.
Jim mentioned, our portfolio companies not only raised $1 7 billion since the start of the year, but have also reduced operating burn to extend runway. We're pleased to report that 90% of our portfolio is ranked at our two best credit scores, which means that they are performing at or above expectations and fat.
During the quarter, one company with $2 5 million of principal balance was upgraded from category three to category two due to improved performance.
We downgraded two portfolio companies with a total principal balance of $28 4 million from category two to category three due to performance below expectations. We expect both companies to raise additional capital during the third quarter and to have sufficient runway to enable them to improve performance over time.
With regards to our other two existing category three companies both demonstrated stable performance during the quarter with one raising additional capital.
In total our category three loans represent eight 4% of our total investment portfolio on a cost basis, and seven 9% on a fair value basis, and we accept expect to upgrade these companies as they perform over the course of the rest of the year and to raise significant additional.
Capital.
Our only category four portfolio company Luminary really raised additional capital in Q2 and is heads down planning for another new product launch roadie represents 1% of our total investment portfolio on a fair value basis.
During the quarter, we downgraded pencil in pixel also known as Monte to category five as a result of its formal M&A process falling apart at the last minute and the company selling its assets here in Q3 our.
Our principal balance was $15 million and we marked our loan down to 225 million as the end of Q2, which is our expected recovery amount.
This was a sudden an isolated event related to specific facts and circumstances around margin and it's M&A process. When it was evident that the expected transaction would not happen. We explore the alternatives and concluded. This was the best outcome to minimize the loss and put the matter behind us.
Our credit quality and performance has been exceptional since <unk> IPO cumulative net credit losses after factoring realized gains from our warrant and equity investments translate to accumulative net loss rate of 0.9% based on commitments and one 4% based on fundings since our.
Our IPO eight years ago, or 18 basis points, a year and we expect our existing public stock portfolio to more than offset the maudsley loss as and when we sell our holdings.
Our outlook for credit over the rest of the year continues to be quite positive given the strong cash positions of our portfolio companies and their extended runway. There continued fundraising efforts. The continued support of our select VC investors and of course, the efforts of our lead credit team to manage situations to good outcomes.
Thought it would be helpful to next year some of our thoughts with regards to originations and credit in this environment.
At our core we continue to focus on what I would describe as triple point worthy companies are high quality companies with the best venture capital investors, not just deals or volume for growth sake, we have been and always will be patient as we look to deploy our capital and grow our portfolio.
Our investment criteria have not changed and in most cases are more stringent.
We are a financing source for growth, we encourage the prudent use of leverage and we expect prospective portfolio companies to have recently raised equity capital has strong support and conviction from our select vcs and have meaningful existing cash runway.
We continue to believe that it is during volatile times when some of the best companies get funded which is consistent with our 17 year track record of Triple point and the more than 23 years that Jim and I have worked together.
In summary, we've made substantial progress against our game plan for the year. Despite the market volatility and are excited for what's in store of over the remainder of the year, but make no mistake. We continue to be heads down focused on growing our portfolio in a patient and disciplined manner, maintaining a solid credit profile.
Maintaining leverage growing in NII and NAV.
All while working with some of the most exciting venture growth stage companies backed by some of the industry's best venture capital funds with that I'll now turn the call over to Chris.
Great. Thank you Sergio and Hello, everyone.
During the second quarter, we continued to generate substantial core interest income from our high quality loan portfolio and continued to see strong and stable utilization rates on new debt commitments, we deployed capital using our attractive sources of leverage which consisted of $390 million of fixed rate long term investment.
Great notes and a $350 million revolving credit facility that we renewed in July .
Maintaining overall solid credit quality and increasing diversification in the portfolio.
I'll now take you through the financial results for the second quarter of 2022.
Total investment income was $27 million as compared to $20 million for the second quarter of 2021. This increase of 35% was largely due to the growth in the average portfolio size as well as higher portfolio yields.
Our portfolio yield was 14, 5% on total debt investments this quarter as compared to 13, 9% for the second quarter of last year.
Onboarding yields continue to be strong and stable.
Loan prepayments contributed one 7% to the portfolio yield this quarter with a total of $50 million in principal prepayments and $3 $1 million of accelerated income.
While we were very successful in funding new investments totaling $157 million approximately 30% was funded in the closing weeks of the quarter.
Which bodes well for the strong topline investment income growth in Q3 and beyond.
Operating expenses were $14 $8 million as compared to $10 9 million for the second quarter of last year.
Operating expenses for the quarter consisted of $6 1 million of interest expense $3 9 million of management fees, $3 2 million of incentive fees and $1 $6 million general and administrative expenses. The increase in overall operating expenses, primarily driven by an increase in the portfolio.
Assets, an increase in the use of attractive leverage and the growth in pre incentive fee income.
We earned net investment income of $12 $7 million or <unk> 41 per share compared to $9 four.
$4 million or <unk> 30 per share in the same period of 2021.
Total unrealized losses included $16 $8 million of Mark to market adjustments on the loan portfolio of which $13 2 million directly related to the pencil and pixel loans that was just covered by subtle as well as mark to market adjustments applied to our portfolio of fixed rate loans given there.
Rise in the prime rate this quarter.
$4 6 million also was from fluctuations in FX rates and $2 7 million from fluctuations in the public equity investments in our portfolio.
As of the second quarter as of the second quarter and the company's total net assets were $404 million or $13 and one penny per share compared to $403 million or $13 three pennies per share as of June 32021.
On July 27th our board of Directors declared a distribution of 36 per share from ordinary income to stockholders of record as of September 15th to be paid on September 30th.
With over earning the dividend again this quarter, we increased spillover income, which remains significant and totaled approximately $14 $3 million or <unk> 46 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, 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 strong at 113% for the second quarter.
Now, let's move to our unfunded investment commitments, we continued to experience strong and stable utilization of our new commitments during the quarter given the robust pipeline that we mentioned earlier, we ended the quarter with 234 million of unfunded investment commitments with an additional $96 million dependent upon the portfolio company.
Reaching certain milestones.
Of these amounts are $100 million of this total will expire during 2022 <unk>.
77% of these unfunded commitments have contractual floating rate interest rates, all of which have a prime rate floors set to 3.25% or higher.
This compares favorably to the outstanding loan portfolio at quarter end, which had 59% contractual floating interest rates, which is up from 52% in the prior quarter.
Now just a quick update on our term notes our credit facility and overall liquidity.
With the completion of three separate five year fixed rate investment grade loans over the last two and a half years and against the backdrop of a continued rising interest rate environment, our fixed rate borrowings account for 79% of our outstanding leverage at the end of the quarter was 59% of our debt investments are at floating rates.
And stand to benefit from increasing interest rates over time.
With our latest fixed rate term debt offering completed in Q1, we have three steps to the ladder of term debt maturities with the maturities to occur in 2025, 26 and 27.
As of June 30th there was an aggregate of $500 million of debt outstanding 395 million outstanding on our fixed rate investment grade notes and $105 million outstanding on our revolving credit facility.
Earlier in the second quarter, given the strength and diversity of our portfolio and the reasonable level of leverage we maintain.
D B R. S reaffirmed the company's investment grade Triple the long term issuer rating in April .
In July we amended our revolving credit facility. The amendment extends the revolving period from November of 22 to May of 'twenty four and the scheduled maturity date from May of 24 to November of 'twenty five.
The total commitment remains the same at $350 million and all of a syndicate lenders continued with this long term partnership.
Appreciate the continued support of our leading and diversified banking group with its attractive revolving facility and our favorable investment grade notes outstanding we remain well positioned to capitalize on the demand for our debt financing solutions.
We ended the quarter with a 1.24 times gross leverage ratio at a 1.13 times leverage ratio net of cash on hand.
With the attractive cost effective credit facility, we will continue to use the line to grow the portfolio.
As of quarter end, the company had current liquidity of $288 million, consisting of $43 million in cash and $245 million available under our revolving credit facility.
In addition to this current liquidity the existing seasoned and diversified portfolio provides stable cash flows, which bodes well for sustained liquidity through 2022.
For example, during the next two quarters alone we have more than $25 million in expected cash flows from contractual principal payments in the portfolio, excluding any loan prepayments and proceeds from the sale of public equity securities in our portfolio that may also occur.
So this completes our prepared remarks, and we'd be happy to take questions from you on the phone. So operator could you. Please open the lines at this time.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Finian O'shea from Wells Fargo. Please go ahead.
Hi, everyone. Good afternoon.
First question on portfolio Company fund raising your numbers on.
Very good I think.
$1 7 billion in the first half.
I'm seeing if you could.
Unpack that a bit.
It reflects the sort of.
Median.
Venture debt borrower.
What was this number the <unk> number.
Concentrated or or fairly well spread out over line.
Key borrowers.
And then sort of second part.
What did you see in terms of.
The magnitude of valuation change.
And these new fundraising rounds.
And then at sub Sahara Al I'll take the first cut so just.
Packing through so in Q2, we had 13 companies raise about $900 million, so a pretty diverse pool.
In terms of so it's not one or two companies raising the lion's share so I think again.
Great data point in terms of the spreading of the cap plays across the.
The portfolio and then the other really interesting statistic is the majority of the rounds have been at or above upticks in valuations. So again I think it's a testament to the quality of our companies that theyre able to raise and that they are able to raise ad.
Are there existing valuations are at premium to prior round valuations.
Okay. That's helpful.
One is there any category.
In venture that.
These fees are backing away from I know, that's usually how how problems start when they do as a certain line of.
The business goes.
Out of bold.
In this sort of is this sort of a broad drawdown cost cutting and extend the runway type thing or are you seeing Bcs.
Sort of pivot away from any any sub industry or anything like that.
Yes, it's an interesting dynamic I would say, we're not seeing any specific sub sector of Tac as as kind of toxic or not attracted capital I mean I'll pick on crypto again, we're not we don't have portfolio companies in crypto, but.
Well the crypto market is quite challenged there number of investors that see this as an opportunity and are looking at that as a sector to invest in so I would say from our perspective, our goal is to lend to companies in those sectors that are attracting follow on financing from.
Our select group and I think Thats, our primary focus, but I would say overall the theme is those companies in sectors that are capital intensive or with burn rates that are.
Higher than necessary are growth rates that are unnecessarily high.
Because of the burn rate are less attractive. So I don't think its sector specific I think its more of a financial discipline specific.
Okay very well thank you.
The next question comes from Crispin Love from Piper Sandler. Please go ahead.
Thanks, and good afternoon, everyone.
Are your new debt investments they came in a little bit better than I think your initial expectations were for the second quarter.
I appreciate the reaffirmed guide that you gave for the second half, but just as we're looking at the third and fourth quarter would you expect that third quarter to be closer to the lower end of that $100 million to $200 million guide that you gave just given that strong activity that we saw at the end of the second quarter. If there was any pull forward there in originations that closed in the second quarter.
The third or or do you think you can still get to that midpoint for the third quarter, just any color there would be great.
Christian so so I'd say the third quarter is generally a seasonal quarter right given the summer.
Vacation schedule, although I think from our perspective, given the backlog.
We would expect to come in.
System with that range consistent with prior quarters, probably towards the lower end and then Q4 tends to be the busier quarter and so mid to high end of that range.
Perspective, as we look to Q2, I would say theres a little bit of pulling from Q3 into Q2, I also think given the expectation of rates and rate increases in the frequency of it I definitely think there was motivation on both sides lender and the GOR to get deals done faster I think we were using that as an opportunity to.
To close given the but again, given where floating rate was less relevant but I think again companies were looking to lock in capital. So I'd say that was.
Look at the Q2 activity.
Yeah.
Great. Thank you.
I appreciate that color.
And then just can you give a little bit more detail on our liquidity among our portfolio companies than if you have any metrics.
On hand about how much liquidity some of those companies have to last six months, a year or longer or just any other qualitative insight you can share I think Jim might have said something about two years that cash on hand, but I didn't really catch what that was if you could clarify that as well that'd be awesome.
Yes, no problem. It's a good question and a salient one to ask these days so I don't think I.
Mentioned in the prepared remarks, but.
As of last quarter.
Over two thirds of our company's had 12 months more cash in terms of cash runway yeah. It is.
Is something that we are continuing to monitor and it's a very widespread these days.
Great. Thank you I appreciate the color.
The next question comes from Kevin Folds from JMP Securities. Please go ahead.
Hi, good afternoon, and thank you for taking my questions. Just a question around the loan to value trends in the portfolio. Clearly there has been a significant pullback in private company valuations are just curious if you have a sense how LTV ratios have changed in the portfolio where that currently stands and also if you could remind us where you underwrite new deals on the <unk>.
<unk> basis.
Sure. So we target ltvs under 25% at time of origination as of Q2 is in the 10-Q I believe were between 7%, 8% LTV for the portfolio, which is relatively flat to where we were as of Q1. So no material change in terms of portfolio.
LTV and as mentioned the majority of the fund raising of our portfolio companies year to date have been at or flat or upticks in valuation. So so I would say.
Jim said listen I think the reality of where the public multiples are in fundraising activity of the rest of the year.
We expect our portfolio companies to continue to be able to raise but I think again raising flat is flat is the new up and up is amazing, but I'd say, we continue to expect to hold in that range of that.
7% to 9% over the next couple of quarters.
Got it that's good to hear and I'll leave it there congratulations on a nice quarter.
The next question comes from Casey Alexander from Compass point. Please go ahead.
Yeah good afternoon.
We've seen the volatility of the equity markets.
And a lot of things get pushed down in values in the equity markets.
And you're Onboarding yields are going up which suggests that maybe you have a little bit more leverage in your negotiations with companies coming in.
Does that include are you getting a better basis on the equity slices that you are taking alongside of the debt investments that youre, making and would it be your expectation that the vintage nature that you're lending to right now would generate higher roe's than than maybe we had been used to.
Over the past few years.
Yes, Casey Great question, Yeah, absolutely, so I would say absolutely as we look to the.
The companies that are getting funded in this environment right there, they're getting benchmarked off of current multiples.
The insight we are hearing from the V. CS is hey, let's use current multiples as the basis for our entry point, but as we look to exit Hey, we're expecting five year average from the 13% to 19 times, our six year averages as our exit multiples. So so I would say absolutely we are.
Spectating on a balance basis this class to generate higher return given where valuations are in new round valuations are being said as we look to how we structure our deals obviously, it's yeah.
Yield in there.
The yield from the coupon side and the debt side and the balance of the equity kicker side. So we're never going to subsidize one or that's not a reason to charge less to get more equity kickers, but I would say as Jim mentioned, we're looking to push both up so we're definitely looking to.
There is a premium for capital in this environment and you want to pick great companies and there is a cap to what our total returns can be but we are definitely companies are willing to pay a premium to be with a high quality trusted dependable partner and we're seeing it on both the debt side of pushing the yields up and on the equity kicker percent.
Age of total ownership of these companies.
Can we add that's historically, what we've seen as well in it.
Opportunistic times.
Okay. Thank you for that.
Lee just because I have a bad attention span can you guys review what your guidance is for the third quarter fourth quarter originations and sort of how you expect prepayments to offset that.
Sure Casey So we got it to a $100 million to $200 million of gross fundings per quarter for Q3, and Q4 consistent with prior guidance again, given seasonality a little bit of pulling of Av.
Originations in Q3 to Q2.
Q1, sorry Q3 to be.
At the lower end of the range Q4 to be at the higher end of that $100 million to $200 million range from from a funding gross fundings perspective, we continue to expect to have one prepay a quarter.
And I think that's our those are your questions.
But did you say also do you expect in the second half of the year.
Sort of regular amortization totaling around $50 million.
Oh, well, we currently we always have regular amortization not the second half of the year isn't.
More unique but I believe correct the portfolio cash flows and Chris jump in for the second half of the year are in excess of $60 million.
Great.
Alright, Thank you for taking my questions I appreciate it.
The next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.
Hey, guys pencil in pixel.
Given your comments is that a third quarter realized loss.
Christopher I'll take that yeah, yeah. So yeah. So we fully hit the NAV in Q2, but it'll flipped from an unrealized loss to a realized loss in Q3, Okay. No impact no impact on Q3, just got a geography and given the cautious comments you guys just sort of painted on the market.
And given also your comments do you expect earnings to exceed the dividend. What's your thoughts in terms of leverage you want to take some risk off and decrease the leverage are going to increase it but what are the thoughts around that.
Yes.
Chris our perspective, as we've we've been jumping up and down over the years from a leverage ratio perspective, and so one of our after getting the investment grade rating from DVR S. We said to our investors that we wanted to take advantage of that rating and the low cost fixed rate debt and run at a higher <unk>.
Just just to as we said demonstrate the earnings profile of this business. When you have a 13% yielding portfolio at scale really should drive greater NII in a row.
But then as we said given prepayment activity, that's always what's kind of dropped our leverage down and so I think our goal is we'd like to run at higher leverage, but the reality is with prepayment activity with portfolio amortization.
It is generally hard hard to do that but again, we wanted to demonstrate to our investors our ability to do what we said and to attempt to run at a slightly higher leverage ratio great and I guess my final question is how many of your companies have.
Bank loans or some sort of bank financing, which was ahead of your.
And our debt investments and cause of growth capital loans I'm not sure. If that's first lien senior secured on top of banks or add a little.
Clarification, Chris.
Disclose in our 10-Q that we qualified as those companies that have term loans from banks or term loans, plus revolvers and it's approximately 25% as at the end of Q2, which is the same as where it was as of Q1.
Great. Okay. Thanks, guys.
The next question is from Ryan Lynch from K B W. Please go ahead.
Hey, good afternoon.
I'm trying to get a little more clarity on it.
The total nature of roughly 27 million, our total realized and unrealized losses in the quarter what of that is contributed kind of markdowns.
Valuation research equity investment spreads versus write downs related to credit I know you had a $13 million write down from pencil in pixel I'm. Just curious are there any other credit write down that specifically impacted or contribute to that that totaled $27 million.
Yes. So there were there was one other kind of I'll call. It category that I mentioned, where we we hit the fixed rate loans that we have in the portfolio with what we call a market rate adjustments. So for those it was about kind of in the aggregate for those loans about two and a half million dollars unrealized adjustment for those given.
The double increase in prime rate during Q3.
Sorry, without too or is it spread related versus quite right.
That's correct yeah. They were there there are white credits that are performing at or better than expectation. Its just the fact that they were fixed rate deals.
Rather than any kind of credit impairment or issue.
But I.
Just wanted to talk about.
I want to make sure I'm understanding this correctly I believe and correct me if I'm wrong.
You said, 50% to 75% of your unfunded commitments do you expect to be drawn.
I'll just kind of curious what you get.
Hindsight was around.
And I do the math on that that's like 100.
Dollars $70 million to $250 million.
Of additional funding that you would expect.
Look at your balance sheet today, let's say you guys are kind of at your leverage target or right around 9 million self imposed.
Actually fluctuate in that.
$60 million of total.
Amortization in the back half of the year and then you'll have some prepayments as well, but it's just that the large number so it depends on when when the timeframe you expect those funded.
Is that number correct and then also.
What was the.
The timeframe you expect those to fund.
Bob.
So I can start so far.
First I guess the first point is that we do have a kind of a scheduled maturity for the various portfolio companies. We have generally we give them six to 12 months to draw down on the the availability of the commitment I think I had mentioned.
$100 million of our unfunded commitments would expire if not drawn by the end of the year and then the rest of that kind of is spread out ratably over 2023. So.
It's not a it's not a near term expectation that there would be heavy draws even for those that do draw but that'll be over the next next nine to 12 months as well.
And then on top of that.
About a third of the unfunded commitments or milestone based so.
The portfolio companies have to achieve those milestones in order to access that capital and not all of them have actually done that.
Okay.
Alright, I appreciate the time this afternoon.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jim <unk> for any closing remarks. Please go ahead.
Great. Thank you as always we'd like to thank everyone here for listening and participating in our call today, we absolutely look forward to talking with you. All again next quarter. Thanks, again and have a nice day.
Goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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