Hercules Capital Inc. Q1 2023 Earnings Call
Okay.
Good day, and thank you for standing by.
Welcome to the Hercules Q1, 2023 earnings conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
When you're an automated message confirming that your hand has been raised.
Pretty much all your question. Please press star one one.
Please be advised that today's conference is being recorded.
I would now like to hand over the conference to todays Speaker, Michael Hara managing director of Investor Relations. Please go ahead Michael.
Mark Good afternoon, everyone and welcome to Hercules Conference call for the first quarter of 2023.
With us on the call today from Hercules are Scott.
Chief investment Officer, and Seth Meyer CFO .
Financial results were released just after today's market close.
You can access the Hercules Investor Relations section at Investor Dot H T. G C dot com.
An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference.
During this call we may make forward looking statements based on our own assumptions and current expectations.
These forward looking statements are not guarantees of future performance and should not be relied upon in making any investment decision.
Financial results may differ from the forward looking statements made during this call for a number of reasons, including but not limited to the risks identified in our annual report on Form 10-K, and other filings that are publicly available on the SEC's web.
Right.
Any forward looking statements made during this call are made only as of today's date and Hercules assumes no obligation to update any such statements in the future.
I'll turn the call over to Scott.
Thank you Michael and thank you all for joining the Hercules capital Q1, 2023 earnings call.
Following our record operating performance in 2022, and despite a volatile market backdrop, partially driven by the failure of our largest competitor in the asset class Hercules capital delivered another quarter of record operating performance in Q1.
Our ability to consistently deliver strong results speaks to the quality of our employees the strength of the platform that we have built and our 18 plus year history of operating with an emphasis on prudent underwriting asset and liability diversification and an unwavering commitment to the venture and growth stage ecosystem.
That we service.
Building, a venture and growth stage lending business that operates at scale and consistently delivers strong credit and financial performance does not come easily or by accident.
Since inception in 2003 and throughout our history, we have focused on sticking with our steadfast core principles steady patient and disciplined underwriting.
Diversifying and strengthening both sides of our balance sheet, maintaining strong liquidity and continuously investing in our team.
And systems.
From the beginning of 2021, our platform has raised more than two 5 billion in new capital and significantly increased our credit facilities with better flexibility and terms.
We further enhanced and expanded our reach and capabilities with the creation of our wholly owned <unk>, which manages our three private funds.
And now with the unexpected changes in our competitive environment. In Q1, we are presented with a tremendous opportunity that we believe will grow our presence and further strengthen our leadership position in the venture growth stage lending landscape.
The current market requires a combination of playing skillful and selective offense in terms of new business and disciplined and tight defense on credit.
We intend to do both and we believe that we are uniquely positioned to be able to do so successfully.
Q1 was another quarter of investment in the company, where we took additional steps to strengthen our platform origination capabilities and back office functionality and sophistication.
We added talent across the organization and now have an excess of 105 full time employees.
During the quarter. We also established a new private credit fund vehicle and raised additional capital to enhance liquidity in the BDC.
As of the end of Q1, we manage more than $3 9 billion of assets across our platform an increase of 33, 2% year over year.
The investments that we have made provide us with continuing optimism and confidence in the trajectory of our business for the remainder of 2023.
Let me recap some of the key highlights of our performance for Q1.
We started out 2023 with record gross fundings for our first quarter with over $476 million, which led to strong net debt investment portfolio growth of over $153 million.
This is the fifth consecutive quarter that we have been able to deliver in excess of $100 million of quarterly net debt investment portfolio growth, which positions us favorably to be able to continue to drive earnings momentum in 2023.
Our Q1 originations activity was driven by both our technology and life Sciences teams delivering strong funding performance during the quarter.
Our funding activity demonstrated balance between our two core verticals, while our new commitments were weighted more slightly more slightly more towards technology companies.
We funded debt capital to 31 different companies in Q1 of which nine were new borrower relationships.
Consistent with what we saw throughout 2022, we were again able to expand our funding relationship with numerous portfolio companies that continue to show strength and achieved performance milestones during the quarter.
In Q1, we were also able to provide new commitments to six current borrowers, which strengthens our incumbency position in several strong companies. We expect this trend of increased follow on fundings to existing portfolio companies to continue in 2023.
The momentum that we saw throughout 2022 in terms of originations accelerated in Q1, following the failure of SBB and general turmoil across the regional bank landscape we.
We intend to use our experience and best in class underwriting acumen to selectively target the best opportunities that present themselves and avoid the many marginal deals that we're currently seeing.
Given our strong funding performance in Q1, we expect funding activity to be weighted towards the second half of Q2.
Since the close of Q1 and as of May <unk> 2023, our deal team has closed $1 million of new commitments and funded $3 9 million.
We have pending commitments of an additional $510 million in signed non binding term sheets, we expect deal quality in terms to continue to get better as the year plays out and our balance sheet and liquidity is positioned favorably to be able to benefit from this.
Volatility across the equity and credit markets increased in Q1 and in particular in the financial markets due to the SBB situations.
Valuations for both public and private companies remain under pressure in the capital markets have stayed more selective on the equity side.
Given the dislocation created we recently established a new credit lending program to provide capital to help the disrupted companies navigate the challenges from the recent market events.
Consistent with our historical approach to underwriting credit, we will remain patient and disciplined on these new opportunities and we will always prioritize credit quality over chasing higher risk transactions with a yield premium.
Hercules has always maintained a credit first culture and we expect this to continue to serve us well, particularly in periods of volatility.
During Q1 portfolio company exits and liquidity events for the industry continued to reflect the ongoing pressure in the equity and broader financial markets.
Having said that during Q1, our investment portfolio continued to exhibit strong M&A activity with eight M&A transactions closing in the first quarter.
We had one additional new M&A transaction in Q1, which was Sanofi has announced acquisition of prevention bio which was announced in March and subsequently closed on April 27th.
The previously announced acquisition of Oak Street also closed on May one.
In addition, this week I various bio announced that they have entered into a definitive agreement to be acquired by Astellas pharma and we added one new confidential IPO submission, giving us too in the current pipeline.
We continue to expect to see strong M&A activity across our portfolio in the quarters to come which validates the great work and selective underwriting, but our investment teams do.
As we anticipated early loan repayments increased further in Q1 to approximately 202 million slightly above our guidance of $150 million to $200 million and an increase from $131 million in Q4 2022.
For Q2 2023, driven in large part by M&A, we expect prepayments to increase further to between $225 million and $325 million. Although this could change as we progress in the quarter.
The increasing levels of prepayments over the last several quarters. Despite the market volatility reflects the quality of our loan portfolio as well as our team's ability to continue to identify and target. The most promising growth stage companies in the market.
In Q1, we generated record total investment income of $105 1 million and record net investment income of $65 5 million or <unk> 48 per share providing 123% coverage of our base distribution of 39 per share.
This is our second consecutive quarter of delivering record net investment income and we expect that trend to continue in Q2.
Our portfolio generated a GAAP effective yield of 15, 1% in Q1, and a core yield of 14%, which is indicative of the recent rate increases and higher onboarding yields for certain new loans.
With net regulatory leverage at a very conservative 99, 2% and continued robust liquidity across our platform our balance sheet remains very well positioned.
Credit quality of the debt investment portfolio remains strong and stable.
Our weighted average internal credit rating of 226 was slightly higher than the 223 rating in Q4, but still at the low end of our normal historical range.
Our grade one and grade two credits slightly decreased to 59, 8% compared to 61, 5% in Q4 great.
<unk> three credits were slightly higher at $37. One in Q1 versus 36, 3% in Q4 are.
Our rated four credits made up three 1% of the portfolio and rated five credits were zero percent in Q1.
As of the end of Q1, we had the same two debt investments on nonaccrual with an investment cost and fair value of approximately $17 9 million and $1 $2 million, respectively, or 0.6% and 0.0% as a percentage of the company's total investment portfolio at cost and <unk>.
Value respectively.
Our consistent and strong credit performance as a result of our emphasis on diversification and credit discipline as key cornerstones of our investment strategy.
We have increased and enhanced our portfolio level monitoring as a result of the banking turmoil witnessed in Q1, and we continue to be pleased by what we're seeing on the credit side of our business.
As of the end of Q1, approximately 82% of our debt investment portfolio is in senior secured first lien positions up from approximately 73% a year ago.
Despite the decline in valuations for many growth stage companies over the last 12 plus months.
As of the end of Q1, the median loan to value across our debt investment portfolio was approximately 8% and a weighted average loan to value across our debt investment portfolio was approximately 18%.
This defensive portfolio positioning gives us confidence in our ability to continue to deliver strong credit performance.
For our portfolio companies, having ample liquidity and the ability to raise additional capital when needed are two important factors that we closely monitor.
Despite more selectivity and valuation sensitivity from venture capital investors capital raising across our portfolio remained strong in Q1.
With 23 companies raising nearly $1 billion in new capital in the first quarter.
As a result of the recent market volatility we wanted to provide a brief update on what we are seeing across our portfolio in terms of liquidity.
When looking at our entire outstanding debt investment portfolio inclusive of contractually committed funding facilities from existing equity investors, we estimate that approximately 71% of our portfolio. Currently has 12 plus months of liquidity with another 18% with six to 12 months of <unk>.
Liquidity on balance sheet.
Loans, which have three months or less of liquidity make up approximately 0.3% of our outstanding debt portfolio.
While approximately 41% of our outstanding debt portfolio currently has 18 plus months of liquidity.
During Q1 Hercules had net realized gains of $8 million.
This was comprised of net realized gains of $8 4 million due to the sale of equity investments and gains on foreign exchange offset by $400000.
Excuse me $400000 due to the write off of warrant positions.
We ended Q1 with strong liquidity of over $553 million.
Inclusive of available liquidity and our private funds, we have approximately $1 billion of liquidity as of the end of Q1.
During the first quarter, we increased our letter of credit facility with SMB C from $100 million to $175 million.
This was done to best position us to take advantage of the better quality later stage transactions with potentially higher unfunded commitments that we are currently seeing as a result of the banking market turmoil.
The turmoil in the venture capital ecosystem during the quarter affected both fundraising and investment activity at more muted levels at 11, 7 billion and investment activity at 37 billion respectively. According to data gathered by pitch book NVCA.
With the amount of capital available to invest at higher at historic highs exceeding a half a trillion dollars entering 2023, we expect fundraising to stay at much lower levels than prior years and investment activity to pick up as the year goes on.
We exited Q1 with undistributed earnings spillover of over $133 million or <unk> 96 per share.
The undistributed earnings spillover continues to provide us with the added flexibility with respect to our shareholder distributions going forward and the ability to continue to invest in our team and platform.
For Q1, we maintained our base distribution at 39.
And declared a supplemental distribution of <unk> for a total.
<unk> of <unk> 47 of shareholder distributions.
This was our 11th consecutive quarter of being able to pay out a supplemental distribution to our shareholders.
In closing.
Our strong growth and performance continued in Q1 and has elevated our earnings power to historic highs.
We remain optimistic about our business opportunities given how well we are competitive competitively positioned to take advantage of market conditions and grow our core income generating assets and as a result, the earnings power of the business.
Our core themes for 2023 will largely remain consistent with 2022 and they reflect maintaining a strong balance sheet and liquidity position and staying selective and disciplined on new underwritings, while continuing to invest in our teams and our platform.
We are thankful to the many companies management teams and investors that continue to make Hercules their partner of choice.
I will now turn the call over to Seth.
Thank you Scott and good afternoon, ladies and gentlemen.
Hercules first quarter performance was a great way to kick off 2023.
The portfolio growth was complemented by strengthening our balance sheet to support our current and anticipated growth in the first quarter, we renewed the $400 million <unk> credit facility executed and subsequently increase the SM BC letter of credit facility from $100 million to a total of 100.
$75 million and took advantage of the ATM by raising $65 million of accretive capital.
We continue to maintain strong available liquidity of $553 million as of the quarter and.
More than 120 million higher.
Then what we maintain just a year ago.
Despite the increase in our ready to access credit facilities more than 80% of our leverage its fixed rate and 73% is unsecured helping us keep financing costs low and Optionality hi.
We continue to explore more cost effective ways to manage our liquidity needs as the opportunities to invest increase.
While maintaining our consistent credit and return standards.
We have positioned ourselves well to continue scaling our platform most recently by adding additional capital managed by our wholly owned.
Okay.
As previously communicated we expect the IRI a to move beyond expense relief for the BDC and start delivering dividends to the BDC later this year and further enhance our returns to our shareholders with these points in mind, Let's review the following areas income statement performance and highlights NAV.
The unrealized and realized activity.
Leverage and liquidity and the financial outlook.
Starting with the income statement performance and highlights. This was the second quarter in a row that total investment income exceeded $100 million at $105 1 million driven by the prior year and current quarter growth in the debt portfolio and solid new business underwriting and an increase in benchmark.
Rates.
Net investment income was another record at $65 5 million or five 4% quarter over quarter increase or a record 48.
Sure.
NII in Q1.
Our effective and core yields in the first quarter were 15, 1% and 14% respectively compared to 14, 7% and 13, 8% in the prior quarter. The increase in the core yield was due to an increase in coupon interest as a result of benchmark rate increase.
<unk>, we're forecasting a leveling of our core yield hereafter due to expected little to no movement from the fed in the coming quarters.
Turning to expenses, our gross operating expenses for the quarter increased to $42 3 million compared to $40 million in the prior quarter.
Net of cost recharge to the RIAA, our operating expenses were $39 6 million.
Interest expense and fees increased to $19 million from $18 million in the prior quarter due to the growth of the investment portfolio and slightly higher weighted average cost of debt.
SG&A expenses increased to $23 3 million from $22 million in the prior quarter slightly above my guidance on higher funding for the quarter versus our forecast.
Net of cost recharge the RIAA the SG&A expenses were at $26 million.
Our weighted average cost of debt was four 7% a slight increase compared to the prior quarter reflect reflecting a greater utilization of the credit facilities.
Due to growth of the investment portfolio.
Our Aro AE or NII over average equity increased to 18, 8% for the first quarter and our R. O a a or NII over average total assets was eight 9%.
Switching to NAV.
Unrealized and realized activity during the quarter or <unk> <unk>.
Increased 29 per share to $10 82 per share. This represented an NAV per share increase of two 8% quarter over quarter.
The main drivers for the increase were the net change in unrealized depreciation of $21 1 million net of reversals of prior unrealized depreciation of $8 1 million, mainly due to investments disposed of written off net.
Net investment income and accretion due to the ATM sales offset by dividends paid in the quarter, including the supplemental distributions.
Our $21 1 million of unrealized depreciation was primarily driven by $22 million of appreciation to the loan portfolio.
Approximately half of which relates to valuing certain investments at expected proceeds due to the portfolio's company's intention to prepay the loans before maturity.
This correlates with our increased prepayment guidance for Q2.
The reversal of prior unrealized depreciation resulted in a net realized gain of $8 million comprised of net realized gains of $8 $4 million due to the sale of equity.
Investments and gains on foreign exchange offset by <unk> 4 million due to the write off and other realizations of warrants.
Moving to leverage and liquidity, our GAAP and regulatory leverage.
Were 115, 6% and 103, 9% respectively.
Which slightly increased compared to the prior quarter due to maintaining a higher cash balance over the quarter end.
Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage positions decreased to 110, 9% and 99, 2% respectively.
As mentioned, we ended the quarter with $553 million of available liquidity as a reminder, this excludes capital raised by the funds managed by our wholly owned.
Subsidiary inclusive of these amounts the Hercules platform has nearly 1 billion of available.
Liquidity, we believe our strong and flexible liquidity positions.
US well in the current operating environment.
With the Q1 renewal of the <unk> facility and the increase in the <unk> letter of credit facility, we have no near term debt maturities, giving us the ability to be opportunistic should we decide to raise additional capital to support the business. We continue to opportunistically access the ATM.
Market during the quarter and raised approximately $65 million, resulting in an 11% accretion to NAV.
Following the quarter end, we have raised another $48 million further strengthening our liquidity position to support very strong new business demand and ensuring our leverage remains within the target range.
Finally, the outlook points for the remainder of 2023, we expect our core yield range to be at $13 eight to 14, 2%.
As a reminder, 95% of our debt portfolio is floating with a floor. So the recent interest rate hike and additional any additional in 2023 will benefit our core yield going forward.
Very difficult to predict as communicated by Scott, We expect 225 to 325 million in prepayment activity in the second quarter we.
We expect our second quarter interest expense to increase compared to the prior quarter due to the balance sheet growth.
Experienced in the first quarter.
For the second quarter, we expect our SG&A expenses to be $22 million to $23 million and our IAA expense allocation of approximately two to $2 5 million.
In closing the steps, we've taken to strengthen our balance sheet and continue continuing to scale our platform ensure that we're well positioned for the remainder of 2023.
I will now turn the call over to the operator to begin the Q&A part of our call Mark over to you. Thank you at this time, we will conduct the question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one one also.
These standby, while we build the question and answer roster.
Our question will come from John Hecht Jefferies. John Please go ahead.
Hey, guys. Thanks for taking my questions.
Congratulations on putting together a good stable strong quarter, an unstable world.
It's Scott.
You did you referred to kind of the STB sale. The first citizens in Canada, you referred to the opportunities in and then sort of disruptions that that presented to the market.
I am wondering maybe if stepping back and thinking about the next few quarters.
You could describe to us.
What is what is first citizens is going to.
Operate SVP from your perspective, largely as it was if there are changes how does it affect the ecosystem in which you work and then what does that mean in terms of either opportunities or challenges for your portfolio companies and then boil that back to how does that create an opportunity for Hercules overtime.
Sure. Thanks, John .
Couple of things, we can't speak to what first citizens will or won't do but certainly want to take a minute to maybe make a couple of comments on the SBB situation.
The first thing that I want to say what happened to SBB in Q1, certainly from our perspective had absolutely nothing to do with the health or vibrancy of the venture ecosystem and it certainly had nothing to do with the credit quality of their venture lending book.
What happened to Silicon Valley Bank in the first quarter was a result of a mismatch in terms of their asset and liability management, which created obviously significant pressure from a deposit perspective.
We as an organization have tremendous respect for that team and for the SBB business.
<unk> was an instrumental part of the ecosystem for the last 40 years.
As a firm we are saddened by the failure of the bank and we obviously feel terribly for the approximately 10000 employees of the bank.
Having said that we view what happened to SBB in the first quarter as a tremendous opportunity for <unk>.
You saw some of the early impact of that positivity in terms of our Q1 numbers.
Youre seeing more of that impact now in our pipeline numbers that were publicly reported in our press release, where we have over $500 million of signed term sheets.
Quality of our pipeline since the SBB failure has continued to grow both in terms of size and in terms of quality.
We look at the opportunity realistically and we also look at it as an opportunity for us to honor, our 18 plus year commitment to helping fund the companies that make up debenture and growth stage ecosystem.
We are very well positioned we believe we are the only lender in the venture lending space positioned to be able to aggressively take advantage of the opportunity that has been that has been created by sbb's exit from the market.
Okay, that's very helpful.
You may have.
We are aware of some others smaller venture lenders too but.
Without being terribly close to them.
I'm not totally familiar with their liquidity positions, but I do think that they were they had strained liquidity certainly in relation to you guys. So the question is.
Outside of the STB is they cut the competitive market also getting favorable meaning that our other our other market participants.
We kept by the current situation relative to you guys, which are strengthened.
Sure without mentioning names John because I don't think that that would be appropriate I will say that we are absolutely seeing some signs of stress across the venture lending landscape not just with respect to SBB, but with respect to others I can only speak to how we are positioned and I can tell you that from our perspective, we are incredibly well.
Well positioned we have always managed this business with a conservative balance sheet.
We ended the year with net regulatory sorry, we ended Q1 with net regulatory leverage of under 100%. We ended Q1 with over $550 million of liquidity in the BDC over a $1 billion of available liquidity across the <unk> platform.
<unk>.
We have made tremendous investments over the last couple of years in our team and our systems and in our infrastructure. We currently have over 105 full time employees, we added significant new talent to the organization in Q1, and we intend to continue to do whatever we need to do to ensure that we are position.
To fill the void left by SBB and potentially others.
Alright, well. Thank you very much for the color there I'll get back in the queue. Thanks.
Thanks, John .
Thank you and please standby for our next question.
And our next question will come from Crispin Love with Piper Sandler.
Thanks, Good afternoon all.
You said early in the prepared remarks that year, avoiding marginal deals that youre currently seeing can you just expand a little bit on that on what Youre seeing currently and then just also speak to your confidence on closed fundings accelerating in the back half of the second quarter.
Sure I am not going to say too much Kristen with respect to.
What exactly we're seeing on the marginal deal front, because obviously, we're avoiding those deals I'll make a general comment which is that our pipeline right now continues to be at record levels.
Our investment team, which is now comprised of about 56% to 57 full time employees.
Screening seeing evaluating and looking at a record number of transactions.
The vast majority of the transactions that we are seeing are simply not transactions that meet our credit underwriting screens and we're passing on those and I will tell you. We continue to see many of those deals get done in the market and we'll have to see over the next couple of quarters of how that plays out we're being very selective.
In terms of new business, we have the balance sheet to be able to be aggressive on new business win and where we want it to be but the single most important part of our new business effort right now is on making sure that the credit quality is strong and that it meets our very tight underwriting parameters.
Alright, Thanks, Scott that's all helpful. And then just on credit and specifically one of your portfolio companies Kodiak Biosciences. So.
Filed for bankruptcy in late March which is out there publicly so I'm just curious on what type of recovery you might expect there just looking at their balance sheet. They had a little over $50 million of cash in the third quarter.
$25 million loan $25 million loan, which looks to be about $17 $5 million and slow now so unclear what their cash burn has been since the third quarter, just given disclosures, but I'm curious if you're comping on a full recovery there based on the cash position or anything else worth pointing out sure.
Thanks, Chris as you pointed out we do have one company out of about 120 debt positions.
That did file for bankruptcy at the end of Q1.
Bankruptcy for us as a senior secured first lien creditor does not mean that we are going to have a loss on that position. When the company filed we had $25 million of principal outstanding.
Subsequent to the filing we have worked cooperatively and constructively with the company with the advisors and with the investors. We have already received $10 million of cash paydowns, So that $25 million principal loan has been reduced to $15 million.
The company remains 100% current through the May 1st date on all payments of principal and interest to Hercules.
The company has a vast pool of assets that they are currently looking to monetize obviously in consultation with Hercules and their advisors and while there are no guarantees in any of these situations. We feel very good about the ultimate recovery of that position.
I would also say that for us what we just said is not just words, we have a very long track record of being able to signet to be able to navigate through challenging workouts and bankruptcy situations. If you look at the last several workouts and bankruptcies that we as an organization have had we've had.
Very strong recoveries and we're not seeing anything with respect to Kodiak, specifically that we believe will lead to a different outcome.
Yes.
Thank you. Thanks, Scott really appreciate all the color there really helpful and congrats on a good quarter. Thanks.
Thanks Kristen.
Yeah.
Thank you please standby, while we bring our next.
Yes.
And our next question will come from Kevin.
<unk> Securities go ahead, Kevin.
Hi, Good afternoon. Thanks for taking my question. My first question might sound familiar from another BDC earnings call, but I wanted to get your point of view as well.
I know you closely review the Pittsburgh NVCA venture monitor and there is a figure in the <unk> 23 report that highlights the funding gap that has recently accelerated within late stage VC and Thats actually the figure shows that the late stage late stage capital demand to supply ratio has reached a decade high in the first quarter of 2023 at just about three two times.
Which compares to <unk> nine times in the first quarter of 2022.
Just curious what your view is on the shift in capital availability for late stage companies.
Both what youre seeing in the market within your own portfolio and also what that could mean in terms of venture stage company's ability to raise additional capital.
Sure. Thanks for the thanks for the comment and the question Kevin.
All of a couple of comments there.
They are absolutely remains significant amount of a significant amount of capital on the sidelines, which is available for late stage companies what.
What we are seeing and what I think equity investors are seeing is that there continues to be a disconnect from evaluation perspective, with respect to where the venture capital firms want to be on valuation and where our management teams and entrepreneurs want to be on valuation.
The capital that is sitting on the sidelines for the most part is not going away that capital will be there in Q2, it'll be there in Q3, it'll be there in Q4 and what typically happens during these periods that there is a period of a sort of a slow delicate dance and at some point the valuations.
We will meet and these deals will start to get done the.
The other comment that I would make with respect to sort of the broader data that we're seeing from NVCA and pitch book is although the Q1 data with respect to VC equity investments was down materially.
I think sort of the folks that are out there thinking that this is a sort of a dark winter and the worst period that we've seen at least it doesn't add up with our view of the market.
In Q1 of 2023.
There were approximately 2856 companies that received venture funding and the venture funding in Q1 totaled approximately 37 billion.
When you compare that to what the market was able to achieve between 2020 and 2022, so during the Covid period.
The numbers are down materially.
But if you compare that to the numbers between 2012, and 2019, which we view as sort of the steady state of the market.
Those numbers were approximately 3900 deals per year and approximately $70 billion invested so on a comparative basis to what we view as the normal market. The numbers in Q1, although down materially we are still fairly healthy and thats. The way that we are currently viewing the market.
Okay. That's really helpful. And then just one more if I can I'm curious if current market conditions are presenting the opportunity to scale the private funds and <unk>.
Yes.
At a more accelerated rate than you initially anticipated.
Absolutely.
I would reiterate what we said on the last call, which is we continue to expect to be able to begin to dividend distributions from the <unk> up to the BDC in the second half of this year. So not only will the shareholders of HTC be benefiting from the expense reimbursement, we expect in the second half of this year for our share.
Holders to begin to benefit from distributions from the RA business up to the BDC.
There is tremendous momentum for us not just in the BDC, but also in the private fund business.
If you look at what we announced most recently we did launch a new private vehicle, which is specifically designed to take advantage of the market dislocation that we're currently seeing we deployed a significant amount of capital in the private funds in Q1.
<unk> was about $121 million of fundings and Thats on top of about 400 million that we funded in the private fund business last year alone.
Okay, that's great to hear I'll leave it there congratulations on the nice quarter.
Thanks, Kevin.
Thank you for your question. Please standby, while we bring up our next question.
Our next question will come from for Noland Landberg Thalmann.
Scott.
Typically two things.
Paul.
On the earlier question would.
Would you consider participating in a new.
Targeting the venture capital space.
The answer to that is no.
Not in the banking business, we think that our business works better without being tied into relying on deposits and so the answer would be no.
Second question is how do you think is going to affect that.
VC lending lending business.
So AI is something that we're obviously watching very.
<unk> closely.
We think that there are positive scenarios and then of course negative scenarios as well we're looking at it pretty up domestically, we think that AI has the ability to further accelerate innovation across the technology and life Sciences landscape.
Every few years there is new innovation that is disruptive AI is the sort of the current phenomenon and while we do have some concerns about the impact that AI could have on certain businesses. Overall, we are actually pretty optimistic about what AI will mean for the overall health of the innovative economy.
Thank you.
Thanks, Chris.
Thank you for your question.
Please standby.
Yes.
Our next question will come from Casey Alexander Compass Point Research and trading go ahead Casey.
Hi, good afternoon, and thank you for taking my questions.
Scott.
Described SIV be Silicon Valley bank as a competitor but.
In many ways. They were also a partner.
To you.
And you guys had joint positions with companies.
I'm curious from your seat.
You know what opportunities does that create for you too.
Take a more senior position in the lending stack with those companies.
And and also hammer bound your incumbency position with those companies and then secondly, with Silicon Valley Bank. There's been a lot of migration of talent that has gone around has Hercules has been able to make any key hires that have been able to take advantage of some of the dispersion of some of that talent.
Sure couple of great questions Casey and thanks, Thanks for your for your questions there.
First thing with respect to the partnership I mentioned collaborative and competitive relationship.
I would tell you that over the years Silicon Valley Bank was a great partner of ours in terms of helping US finance many great companies across the venture capital ecosystem.
We have a pretty high bar in terms of who we will partner with an SPD was one of the few firms that we were comfortable partnering with in terms of the market both on the life Sciences and technology side.
Having said that as you just pointed out that creates a tremendous opportunity for us given that we do have a handful of partner deals with the bank to be able to do some things strategically to help lock down our incumbency position.
I'll also say that with respect to those partner deals to date first citizens has honored a 100% of the commitments across our portfolio first citizens continues to fund those companies that we are partnered on and we don't expect there to be any negative disruption in that regard, but there is certainly an opportunity for us to continue.
To take some added market share with respect to not just those deals that were partnered on currently but that we were contemplating partner on partnering with them prior to the situation that developed in Q1.
With respect to talent in my opening remarks, I made the comment that we have tremendous respect for the SBB business and for that team. There were a handful of employees that we identified that we thought would fit in very well with the Hercules culture and team and we have made a handful of hires from SBB over the course of the last 30 to 60 day.
And we're very pleased with what we've seen to date from that group of employees.
Alright, thank you.
My other follow on question is there.
Gross fundings of $476 million and you called out nine new borrowers added 31 companies at 22 borrowers.
Were existing borrowers how does that $476 million can you tell us how much was drawn down off of the unfunded commitments as opposed to being direct originations.
Sure I can give you the breakdown roughly $476 million of fundings in the quarter.
About $185 million of the fundings.
Our new fundings two new companies.
Approximately $150 million of the fundings were new fundings as part of new commitments to existing portfolio companies.
And approximately $140 million were fundings from unfunded commitments.
Terrific. Thank you very much and I appreciate you taking my questions sure. Thanks Casey.
Thank you for the question. Please standby while we bring our next question to this age.
Our next question will come from Finian O'shea of Wells Fargo.
Hi, everyone. Good afternoon.
Can you provide us any detail on what.
What the new private fund means.
For Hercules economics.
If it's part of the RIAA or a separate vehicle.
Sure and good to hear from you.
So the the.
New fund will in the same way as the first two funds provided a management fee and performance fee to the IAA. So yes to answer to your second part of your question. It is part of the existing <unk> Fund.
<unk>.
And so very similar and consistent with what Scott mentioned in the back half of 2023, it will provide expense relief.
In the immediate term as it builds up the portfolio. It will start to generate those revenues from the management and performance fees, which will then eventually turn into additional dividends that come up to the BDC.
And I'll just add quickly to that when we launched the private fund business about two and a half years ago, we made a commitment publicly and privately that 100% of the benefit from that private fund business would accrete to the benefit of Hte Gcs public shareholders and.
And we remain committed to that commitment so anything that we do in the private fund business will be under the RIAA, which is a wholly owned subsidiary of the public BDC.
Okay, Great. That's all for me. Thanks, so much thanks.
Thanks Man.
Sure.
Thank you for your question.
Standby for our next question.
Our next question comes from Ryan Lynch with K B W.
Hey, good afternoon.
First one I had is you mentioned a lot of the details around the SBB class and kind of the aftermath.
On that as far as the opportunity set that goes on.
Was just curious if.
If you could talk about.
Post the collapse of FCB has there been any sort of shift in investor sentiment or action from the DC.
Equity investors and their willingness support.
The existing companies just just broadly in the DC marketplace, obviously, the trends have been getting worse as far as the level of investment activity.
<unk> has had been kind of going lower for the last several quarters, but I just wasn't sure if you've seen any sort of acceleration of those trends post at CEB or not.
Sure. Thanks, Ryan I don't think we've seen any any acceleration necessarily obviously what happened with Silicon Valley Bank was a surprise to the vast majority of the ecosystem and I think for the first couple of weeks sort of post failure a lot of people on the equity side and on the credit side were sort of just sort of taking a step back to catch their breath and figure.
Out which has happened obviously.
Obviously subsequent to SBB theres been some additional turmoil first Republic, obviously, some additional regional banks that are currently exploring strategic options. So I don't think theres anything specific in terms of an acceleration that we saw post SBB.
The equity markets right now and the credit markets continue to be volatile Theres, obviously, a lot of uncertainty.
We continue to focus on what we can control and that's ensuring that our credit portfolio continues to outperform that our BDC continues to be incredibly well positioned and conservatively managed and that we think puts us in a great position to be able to benefit and take advantage of whatever the opportunity set is over the next couple of quarters.
Yes.
Okay understood.
And then the other question I had you mentioned repair accounts about $22 million appreciation. Your ballpark I think you said half of it was due to the company's expected to prepay.
Can you talk about what what drove the other half of the appreciation and Matt just given the market environment.
I just would love to hear why why that growth increase and then also in your press release you talked about.
$4 7 billion.
Of unrealized depreciation related.
Privately held equity warrants.
Bonds.
Can you talk about what what was the driver behind there where some of your portfolio companies actually do an up round in this marketplace that we value from those equity warrant positions or what drove that that $5 million.
Sure. Thanks.
So as you know every quarter, we go through and revalue of the entire portfolio. So we'll go through and we will do individual adjustments on the portfolio companies based on their performance against our original underwriting plan for those companies that are performing a little bit better maybe there having faster round of capital raised may be there.
Progressing faster through an FDA approval process.
They will.
Will will slightly tweak the valuation on those portfolio companies on both the debt and the equity positions. Obviously, if they are private.
And.
We'll go through and do a market yield analysis compared to a benchmark portfolio that we use the SMA index.
See where we should be adjusting the overall portfolio based on benchmark interest rates as well.
So.
The appreciation beyond that that we did for about half of the Mark to market. As you mentioned for the early repayments is really based on that performance.
The impairments stayed very consistent you'll notice that we had only two nonaccrual loans mainly.
<unk> maintained very consistent valuation small adjustments on those.
So net net the portfolio is performing better than its underwriting thesis on a market basis.
Adjusted basis, keeping in mind that our 95% of our portfolio is floating with a floor.
So that we're not having.
Reductions in values as the benchmark interest rate goes up.
So that was on the debt portfolio and then Scott do you want to comment on the private equities sure Brian with respect to the $4 7 million of unrealized depreciation on the private equity and warrant positions. The substantial majority of that appreciation came from an up valuation with respect to Hercules and <unk>.
<unk>, which is the wholly owned registered investment advisor that was a result of two things one we raised and we launched the new fund and continued growth with respect to the AUM in the first two private funds.
Okay.
Understood I appreciate that and appreciate the afternoon sure. Thanks Ryan.
Thank you. Thank you everybody for your questions at this time I would like to turn it back over to Scott for closing remarks.
Thank you Mark and thanks to everyone for joining our call today, we look forward to reporting our progress on our Q2 2023 earnings call.
Thank you all and have a great day.
Thank you everybody.
In today's conference. This concludes the program may now disconnect.
Okay.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
[music].