Q3 2023 TriplePoint Venture Growth BDC Corp Earnings Call
Afternoon, ladies and gentlemen, welcome to the Triple point friendship Phyllis BTC cough third quarter of 2023 earnings Conference call.
At this time all lines have been placed another friend anymore should.
So do you need a <unk> conference breakfast that Christians are Indiana.
After the speaker's remarks.
Be an opportunity to ask questions and instructions for follow up.
This conference is being recorded.
Lay off the car will be available and an audio webcast of the Triplepoint friendship.
Right.
Company management of cheese to share with you the companies yourself for the third quarter of 2023.
Today's representing the company is Jim <unk>, Chief Executive Officer, and Chairman of the board sexual Srivastava precedent and cheese that investment officer.
Chris Matthews Chief Financial Officer.
Before I cut the call over to Mister.
I'd like to direct your attention to the customers Safe Harbor disclosure and the company's press release regarding.
Looking statements and your mind you that during this call management will make certain statements speculate a future event or the company's future performing our financial condition, which are considered forward looking statements under federal Securities law.
<unk> stood up for her to the company. Most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from your statement.
The company does not undertake any obligation to update any forward looking statements all projections unless required by law.
Investors are cautioned not to place undue reliance on any forward looking statements made during the call.
Like management's opinions only as of today.
Copies off our latest S. C. C filing please visit the company's website at Www Dot T. P V G Dot com.
Now I'd like to turn the conference over to Mister Let me. Please go ahead Sir.
Good afternoon, everyone and welcome to T. P V G third quarter earnings call.
Turning to the results for the quarter, our focus continued to be on the priorities. We believe will enable us to navigate through the current challenging markets.
Specifically, our focus is maintaining our earnings power and our strong liquidity.
Managing the portfolio.
And positioning P. P V G for the future.
Regarding your earnings power T. P V. G generated net investment income or N I I of 19.1 million during the quarter or 54 cents per share.
We once again over her in the regular quarterly distribution of 40 cents per share.
Since their I P. O. We have provided shareholders cumulative distributions of $14.65 per share.
And our focus remains in producing and I I that covers the distribution over the long term.
The supporters in we have an estimated dollar three per share a spillover income.
T. P. P. T also achieved a weighted average portfolio yield for the third quarter of 15.1%.
Benefiting from both prepayment income as well as the Pharaoh low interest rate increase during May and July.
We ended the quarter will increase liquidity as we experienced both higher repayment activity and successfully reduce unfunded commitment.
T. P V G liquidity now exceeds unfunded commitments and provides us with the capacity to capitalize on new investment opportunities heading into 2024.
Cause we'd share for the last several quarters venture capital markets remain challenging given the backdrop of macroeconomic uncertainties restrictive monetary policies inflationary supply chain geopolitical and other issues.
According to the N B C. A national venture Capital Association Pitchbook third quarter data overall venture capital investment activity decreased relative to the prior quarter.
Amounting to the lowest quarterly total in the past six years.
These numbers are well below the highs we experience in the 21 and 22 period.
They're more comfortable the activity levels and the 2018 through 2020 periods.
Having said that and relevant to T. P V G aggregate investment into late stage and venture growth stage companies was actually up quarter over quarter. Some 25 billion versus 21.6 billion. According to Pittsburgh.
Activity included very prominent transaction Amazon's 4 billion investment into anthropic.
Pitch pull it also points out to pick up an exit activity 35.8 billion in the third quarter versus only $6 6 billion in the second quarter.
This includes a number of I P o's, featuring venture and P E back companies arm <unk> and into the car.
These transactions were sizeable and created significant exit opportunities.
While we expect conditions to remain the same as we close out 2023, we do see glimmers and are witnessing a pickup in the venture capital investment momentum.
There are some early signs, which point to the potential for a more active investment outlook for 2024 in venture capital.
And and venture lending.
This includes recent conversations we've had with V C. As in the last few weeks, citing investment activity within their fund on a gradual rise and the general sentiment among many investors annona printers.
Which seems to be the expectation that next year will be a more active year for investing.
This is further supported by the significant amount of capital raised by venture fund and the last two years that has been sitting on the sidelines waiting to be deployed.
We believe that a more robust return to growth in the V. C market, However will not materialize until public market multiple stabilize.
The overall investor sentiment continues on its path to improve and investors begin to actively deployed there dry powder.
There is a new market reality and ventures that is emerging one with a more conservative investment approach.
For the deals getting done in today's market the operational investment principles of change. The emphasis is now on managing cash burn and demonstrating a projected path to profitability.
As opposed to the guiding principle, just two or three years ago, where venture investors saw growth at all costs.
Well, we don't expect any overnight changes as I will get into we continue to find pockets of opportunity for new growth stage investments, reflecting this new market reality.
And we expect to be able to increase our allocation of investment to T. P V. G. In the quarters ahead.
Turning to the portfolio and credit quality that surgery will cover in more detail during the quarter. Our teams brought some existing credit situations to conclusion.
Continue to proactively work through others and.
And managed smaller dollar size ones, which developed during the quarter. Our teams remain closely engaged with our stress portfolio companies in this environment.
There were some notable developments in the quarter and a significant transactions are portfolio company Metropolis announced an agreement to acquire publicly traded Espy plus.
For 1.5 billion.
Tempus ex machina, whose proprietary video and data sync technology serves as an operating system for sports rebrand. It is infinite athlete and acquired injury analytics firm bio core.
Portfolio companies, such as core like Vernon Flash co Darris overtime.
Mom's on others continue to make notable progress in achieving their plans and their well positioned in this challenging environment.
Another priority is remaining focused on <unk> longterm positioning and leadership in the venture lending market.
In the wake of the Silicon Valley Bank crisis earlier this year.
Heading into next year, we are both setting the groundwork to be ready when market conditions improve and there was a broader and sustained recovery and overall venture capital activity.
This includes continued diversification in sector rotation investments for T. P V G in fields, such as artificial intelligence enterprise says transformative technologies robotics healthtech in other sectors.
This includes preferences for companies, who that tribute such as recently raised fresh capital, having low on cash runways having.
Having backing from our select venture investors prudent management teams and whose business models have proven unit economics and high retention rates.
Or even those companies would strong customer base is generally with large enterprise customers.
We'll also continue to evaluate hold sizes step to equity coverage and other key metrics and these investment opportunities.
In summary, while we expect conditions to remain the same as we close out 2023 and.
And while said site are set on our portfolio and maintaining credit quality, we are preparing for the future.
Given our existing scale and strong portfolio yield we expect to continue to deliver strong investment income while positioning the company to further benefit when these markets improve.
This includes building on our strong liquidity position and maintaining the financial strength of <unk>.
Returning to our targeted balance sheet leverage range.
Capitalizing on the change in the competitive landscape and building our pipeline of lending opportunities from our slick sponsors.
Adding new power borrowers to our portfolio with the goal of further diversifying the portfolio.
Maintaining a strong yield profile.
Continuing to overrun our dividend and stabilizing net asset value and growing it over time.
Ah wrap up these remarks with the same message that has sustained triple point throughout many years and many market cycles.
Venture lending is about investing for the long term.
And we will continue to focus on the priorities, we've discussed here as well as the core tenets of Triplepoint philosophy.
Relationships reputation references and returns.
In order to continue to capitalize on market opportunities over the long term.
With that let me call the turn it over to Carl over to subtle.
Operator: At this time, all lines have been placed in the Sononi mode. Should they need assistance, please signal a conference specialist by pressing star in zero. 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 of the TriplePoint venture growth website.
Jim and good afternoon during the third quarter Triplepoint capital R Global investment platform and the advisor to TBB G signed 58 million of term sheets with venture growth stage companies compared to $114 million, a term sheets and Q2, which continues to reflect our approach to originations across our <unk>.
That form in light of current market conditions.
With regards to new investment allocation to TPG during the quarter given both current market conditions and <unk> elevated leverage ratio, we allocated a prudent five $6 million in new commitments with three companies to T V V G.
Operator: Company management is pleased to share with you the company's results for the third quarter of 2023. Today representing the company is Jim Labe, Chief Executive Officer and Chairman of the Board, Sajal Srivastava, President and Chief Investment Officer, and Chris Matthew, Chief Financial Officer. Before I turn the call over to Mr. Labe, I'd like to direct your attention to the customary safe Harvard disclosure in the company's press release regarding forward-looking statements and your mind view 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 security law.
This included one new portfolio company K health accompany backed by primary venture partners lower ventures, Cedar Sinai Hospital, and other investors, which provides patients remote access to health care services through their smartphones using AI technology.
Operator: You're 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 opinions only as of today.
During the third quarter, TB Vg funded $12.7 million in debt investments to five portfolio companies.
This funding level came in below our guide arrange for the quarter, reflecting a lower utilization of expiring unfunded commitments and continued disciplined use of that capital by our portfolio companies.
These funded investments carried a weighted average annualized portfolio yield of 14.2% at origination of the 12.7 million funded during the quarter $7.1 million was related to existing unfunded commitments and the remaining $5 $6 million was from new commitments made during the quarter.
As we look to the fourth quarter, we continue expect fundings and the 25% to $50 million range and are off to a good start with $10 million funded so far.
During Q3, we made significant progress boosting our liquidity, reducing our net leverage ratio and reducing our unfunded commitments. In fact as of today are total liquidity is almost double are unfunded commitments enhancing our investment capacity as market conditions improve.
Operator: To obtain copies of our latest SEC filings, please visit the company's website at www.tpvg.com.
James Labe: Now I'd like to turn the conference over to Mr. Labe, please go ahead.
During Q3 or $37.3 million loan prepayments helped increase are weighted average annualized portfolio yield in total debt investments to 15.1% for the quarter.
James Labe: Good afternoon everyone and welcome to TPVG's third quarter earnings call. Turning to the results for the quarter, our focus continued to be on the priorities we believe will enable us to navigate through the current challenging markets. Specifically, our focus is maintaining our earnings power and our strong liquidity, managing the portfolio and positioning TPVG for the future. Regarding our earnings power, TPVG generated net investment income or NII of 19.1 million during the quarter or 54 cents per share.
Excluding prepayment related income poor <unk> core portfolio yield was 14.1%.
We expect the increase in the prime rate in Q3 to benefit our core investment yields hearing Q4 and into 2024.
We are expecting lower levels of loan prepayments in the fourth quarter and expect our 28 million loan with Metropolis to prepay upon completion of it's announced transaction likely in the second half of 2024.
At the end of Q3 are that investment portfolio company Cat was 54, representing 19 different subsectors in our top 10 portfolio companies represented 37% of our total debt investments at cost. We also held 183 Warren and equity investments in 115 companies with a total cost and fair.
James Labe: We once again over-earned the regular quarterly distribution of 40 cents per share. Since our IPO, we have provided shareholders cumulative distributions of $14.65 per share and our focus remains on producing NII that covers the distribution over the long term. As of quarter's end, we have an estimated $3 per share of spillover income. TPVG also achieved a weighted average portfolio yield for the third quarter of 15.1 percent, benefiting from both prepayment income as well as the favorable interest rate increase during May and July.
Value of $72.6 million and $87.3 million respectively.
In Q3, three of our portfolio companies with outstanding debt raised $47 million of capital, bringing our total to 16 portfolio companies with outstanding debt raising $437 million of capital and year to date.
This level of activity reflects both the challenging fundraising environment as well as the seasonally lower activity associated with the third quarter.
James Labe: We ended the quarter with increased liquidity as we experienced both higher repayment activity and successfully reduce unfunded commitments. TPVG liquidity now exceeds unfunded commitments and provides us with the capacity to capitalize on new investment opportunities heading into 2024. As we share for the last several quarters, venture capital markets remain challenging given the backdrop of macroeconomic uncertainties, restricted monetary policies, inflationary supply chain geopolitical and other issues. According to the NVCA, National Venture Capital Association pitch book third quarter data, overall venture capital investment activity decreased relative to the prior quarter, amounting to the lowest quarterly total in the past six years.
As we look to the fourth quarter, we are pleased to see fund raising activity within our portfolio picking up with several portfolio companies, making progress towards raising round here in Q4 and in Q1 2024 with one portfolio company already raising 26 million of capital.
Another portfolio expecting to close $30 million of capital imminently.
We believe this activity early in the quarter, especially considering market conditions is a positive reflection on the outlook for our portfolio companies and bodes well for credit quality going into 2024.
With regards to credit quality during the quarter, we upgraded metropolis with the principal balance of 2007 $7 million from category to category one.
Removed <unk> from category, one as a result of its $30 million loan prepayments.
We received $1.9 million of proceeds from the liquidation of Reno run, reducing our exposure to 400000, we.
James Labe: These numbers are well below the highs we experience in the 21 and 22 period. They're more comparable to activity levels in the 2018 through 2020 periods. Having said that and relevant to TPVG, aggregate investment into late stage and venture growth stage companies was actually up quarter over quarter, some 25 billion versus 21.6 billion according to pitch book. This activity included a very prominent transaction, Amazon's 4 billion investment into anthropics. Pitchpoint also points out a pickup and exit activity, 35.8 billion in the third quarter versus only 6.6 billion in the second quarter.
We expect runner run to remain a category three asset until we are paid off in full which is expected to occur in 2024 and will represent a 100% recovery.
During the third quarter certain a R e-commerce and consumer portfolio companies experienced continued challenges as they manage through ongoing market and sector specific issues, including negative consumer sentiment, increasing customer acquisition costs lower than expected revenue during the summer higher than normal levels of <unk>.
<unk> and continued impact of inflation on their cost of goods sold in addition to developments in their runway extension efforts path to profitability and strategic efforts.
James Labe: This includes a number of IPOs featuring venture and PE back companies, ARM, Klavio and Instacart. These transactions were sizable and created significant exit opportunities. While we expect conditions to remain the same as we close out 2023, we do see glimmers and are witnessing a pickup in the venture capital investment momentum. There are some early signs which point to the potential for a more active investment outlook for 2024, venture capital and venture lending.
During the quarter, we downgraded credit ratings of three e-commerce and consumer companies from category to to category three due to these developments in the quarter.
Dia styling outdoor voices and naked one world with a combined total principal balance of $19.4 million and a combined total failure value of $19.7 million for the three companies as of Q3.
We also downgraded the credit rating of two e-commerce and consumer companies from category three to category. Four also due to these developments in the quarter project 1920, which operates as <unk> and mystery tackle box, which also operates as catch cope with a combined total principal balance of $9 million and a combined total fair value of <unk>.
James Labe: This includes recent conversations we've had with VCs in the last few weeks citing investment activity within their funds on a gradual rise. And the general sentiment among many investors and entrepreneurs, which seems to be the expectation that next year will be a more active year for investing. This is further supported by the significant amount of capital raised by venture funds in the last two years that has been sitting on the sidelines waiting to be deployed.
Seven $6 million for the two companies as of Q3.
Given the upcoming holiday season, Q4 is generally an important quarter for retail e-commerce and consumer companies and we believe some of our category three and four companies could see a boost as they closed out the year with a strong corner, which could potentially put them in better positions for 2024.
James Labe: We believe that a more robust return to growth in the VC market, however, will not materialize until public market multiple stabilize. The overall investor sentiment continues on its path to improve and investors begin to actively deploy their dry powder. There is a new market reality in venture that is emerging. One with a more conservative investment approach. For the deals getting done in today's market, the operational investment principles have changed. The emphasis is now on managing cashburn and demonstrating a projected path to profitability.
Untitled labs, which operated under the name made renovations with a loan fair value of $2.7 million as in Q3 was downgraded from category forward to category five.
After pivot in the business and unsuccessful financing and strategic efforts the company announced in October that it was closing its business and selling officer of its assets are.
Q3, Mark represents our expected recovery mountain from that process.
<unk> with a loan fair value of $7.2 million is a Q2 was removed from category five in Q3 as a result of its bankruptcy filing.
As mentioned in prior quarters, we have downgraded the company due to ongoing challenges with the company's execution and prior failed capital raising and strategic efforts.
James Labe: As opposed to the guiding principle just two or three years ago, where venture investors thought growth had all cost. While we don't expect any overnight changes, as I will get into, we continue to find pockets of opportunity for new growth-stage investments reflecting this new market reality. And we expect to be able to increase our allocation of investments to TPVG in the quarters ahead. Turning to the portfolio on credit quality, as Sajal will cover in more detail, during the quarter, our teams brought some existing credit situations to conclusion.
As we mentioned during last quarter's call, we would expect it to enter into an extended restructuring and recovery process with the company and its key stakeholders.
And we were disappointed to see in Q3 that the parties could not come to agreement on that plan and ultimately a bankruptcy in full liquidation process was pursued instead and as a result, we have written off our entire position to put the situation by this.
During the quarter. We also adjusted the fair values for two category five loans in the process of sailor liquidation demand and underground enterprises based on updated recovery estimates.
James Labe: Continue to proactively work through others and manage smaller dollar size ones, which developed during the quarter. Our teams remain closely engaged with our stress portfolio companies in this environment. There were some notable developments in the quarter. In a significant transaction, our portfolio company Metropolis announced an agreement to acquire publicly traded SP plus for 1.5 billion. Tempestex Machina, whose proprietary video and data sync technology serves as an operating system for sports, rebranded as infinite athlete and acquired injury analytics for a biocore.
On a more positive note during the quarter E bike portfolio company Van move a category five loan was acquired by Lavoy. The electric Scooter unit of Formula One engineering and technology firm Mclaren applied we're looking forward to working with their chairman Nick Fry, the former CEO of the Mercedes Formula one team and their UK.
Based private equity sponsor Grable capital for the next phase of endless journey and a recovered. We're currently in the process of closing the transaction and our schedule investments will reflect a revised securities as well as any revised recovery estimates for the combined companies at year end.
James Labe: Portfolio companies such as CoreLite, Ernen, Flash, Calderas, over time, Monson and others continue to make notable progress in achieving their plans and their well-positioned in this challenging environment. Another priority is remaining focused on TPVG's long-term positioning and leadership in the venture lending market in the wake of the Silicon Valley bank crisis earlier this year. Heading into next year, we are both setting the groundwork to be ready when market conditions improve, and there is a broader and sustained recovery in overall venture capital activity.
TVD Jeeze recovery will include a combination of debt and equity in lavoy as well as continued security positions and the assets of van move not otherwise acquired by Lavoy that we intend to liquidate over the coming quarters.
We believe the continued stress in certain assets during the quarter and the year are directly related to the ongoing challenging conditions in the venture capital equity fundraising market and then the M&A market for both public and private companies as well as certain sector specific circumstances related to the overall macroeconomic environment.
While we expect market conditions to remain the same here in Q4 and has 2024 starts we have seen many of our portfolio companies over the past couple of quarters respond and adapt favorably to this new market reality as I will describe shortly and from what we currently can see we believe our <unk>.
James Labe: This includes continued diversification and sector rotation investments for TPVG in fields such as artificial intelligence, enterprise SaaS, transformative technologies, robotics, health tech, and other sectors. This includes preferences for companies with attributes such as recently raised fresh capital, having long cash runways, having backing from our select venture investors, prudent management teams, and whose business models have proven unit economics and high retention rates. Or even those companies with strong customer bases generally with large enterprise customers. We will also continue to evaluate hold sizes, depth, equity coverage, and other key metrics in these investment opportunities.
Building momentum to succeed in 2024 and beyond.
Our portfolio companies have now had almost a year to adjust to managing growth and driving in economics with reasonable path to profitability lowering burn rates and having realistic expectations for raising additional capital.
A number of companies are also seeing strong revenue and margin tailwinds in their businesses, having achieved profitability or having significant cash runway to achieve profitability.
As we look to 2024, we currently believe we will see new credit stress events decline and that we will begin to see potential positive developments in outcomes from our portfolio companies do to their adaptation execution and performance despite market conditions.
James Labe: In summary, while we expect conditions to remain the same as we close out 2023, and while sites are set on our portfolio and maintaining credit quality, we are preparing for the future. Chair. Given our existing scale and strong portfolio yield, we expect to continue to deliver strong investment income while positioning the company to further benefit when these markets improve. This includes building on our strong liquidity position and maintaining the financial strength of TPVG, returning to our targeted balance sheet leverage range, capitalizing on the change in the competitive landscape and building our pipeline of lending opportunities from our select sponsors.
Nevertheless, we will continue to remain proactive and diligent as we navigate these conditions and manage our portfolio.
In summary, as Jim said, we're focused on maintaining the financial strength and liquidity position of TPG remaining in frequent contact with our portfolio companies stabilizing credit quality and preparing for returning to portfolio growth in 2024, given our existing scale and strong portfolio yield we expect to continue to deliver strong.
<unk> investment income while position the company the further benefit when markets improve with that I will now turn the call over to Chris.
James Labe: Adding new borrowers to our portfolio with a goal of further diversifying the portfolio, maintaining a strong yield profile, continuing to overrun our dividend and stabilizing net asset value and growing it over time. I'll wrap up these remarks with the same message that has sustained TriplePoint throughout many years and many market cycles. Venture lending is about investing for the long term and we'll continue to focus on the priorities we've discussed here, as well as the core tenets of TriplePoint philosophy. Relationships, reputation, references and returns. In order to continue to capitalize on market opportunities over the long term.
Thank you saw Joe and Hello, everyone. During the third quarter, we generated substantial core interest income from our high yielding diversified loan portfolio, while successfully reducing our balance sheet leverage on a net basis, we increased our liquidity position in the quarter through the modest use of the ATM program loan prepayments.
And reduction in unfunded loan commitments the.
The reduction in unfunded loan commitments was accomplished through commitment exploration and fundings in excess of new commitments.
Total investment income was 35 $7 million as compared to $29.7 million for the third quarter of 2022.
This increase of 20% was due to growth in the average portfolio size as well as higher investment yields.
Operator: With that, let me call the turnover to settle.
Our portfolio yield was 15.1% on total debt investments this quarter as compared to 13.8% for the prior year period.
Sajal Srivastava: Thank you Jim and good afternoon. During the third quarter, TriplePoint Capital, our global investment platform and the advisor to TPVG, signed 58 million of term sheets with venture growth stage companies compared to 114 million of term sheets in Q2 which continues to reflect our approach to originations across our platform in light of current market conditions. With regards to new investment allocation to TPVG during the quarter, given both current market conditions and TPVG's elevated leverage ratio, we allocated a prudent 5.6 million in new commitments with three companies to TPVG.
Onboarding yields continue to be strong and stable.
Operating expenses were $16.6 million as compared to $12.8 million for the third quarter of 2022.
These expenses consisted of $9.3 million of interest expense $4 $6 million, a management fees and $2.7 million of G&A expenses.
We recorded elevated legal expenses of 550000, and higher excise tax expense of $325000 compared to the prior quarter due to the sizeable increase in spillover income estimated for the full year.
Sajal Srivastava: This included one new portfolio company, KHealth, a company backed by primary venture partners, Lera Ventures, Cedars Fine Eye Hospital and other investors which provide patients remote access to healthcare services through their smartphones using AI technology. During the third quarter, TPVG funded 12.7 million in debt investment to five portfolio companies. This funding level came in below our guided range for the quarter, reflecting a lower utilization of expiring unfunded commitments and continued discipline use of debt capital by our portfolio companies.
With the shareholder friendly total return requirement under our incentive fee structure. The incentive the expense was reduced by $3.8 million during the third quarter and $11.3 million for the nine months ended September 30th.
Sajal Srivastava: These funded investments carried a weighted average annualized portfolio yield of 14.2 percent at origination. Of the 12.7 million funded during the quarter, 7.1 million was related to existing unfunded commitments and the remaining 5.6 million was from new commitments made during the quarter. As we look to the fourth quarter, we continue to expect the fundings in the 25-50 million range and are off to a good start with 10 million funded so far. During Q3, we made significant progress boosting our liquidity, reducing our net leverage ratio and reducing our unfunded commitments.
We ended we earned net investment income of $19.1 million or 54 cents per share compared to $16.9 million or 51 cents per share in the same period in 2022.
The company recognized net realized losses on investments of $25 $6 million, resulting primarily from the right off of high Q, which was right here at five on our watch list and it's removal from our investment portfolio.
Net changing unrealized gains on investments for the third quarter of 2023 was $8.6 million consisting of the reversal of 17.6 million. A previously recorded unrealized losses that were realized during the period.
Unrealized losses of $6 $2 million on the existing debt investment portfolio.
And $2.8 million on the warrant and equity portfolio, resulting from fair value adjustments.
Sajal Srivastava: Amendment. In fact, as of today, our total liquidity is almost double our unfunded commitments, enhancing our investment capacity as market conditions improve. During Q3, our 37.3 million of loan prepayments helped increase our weighted average annualized portfolio yield on total debt investments to 15.1% for the quarter. Excluding prepayment-related income, poor core portfolio yield was 14.1%. We expect the increase in the primary and Q3 to benefit our core investment yield here in Q4 and into 2024.
As a quarter and the company's total net assets were 374 million.
Or $10.37 per share compared to $379 $4 million or $10.70 per share as of June 32023.
Our board of directors declared a regular quarterly dividend of 40 cents per share.
The dividend is from ordinary income to stockholders of record as of December 15th.
To be paid on December 29th.
Sajal Srivastava: We are expecting lower levels of loan prepayments in the fourth quarter and expect our 28 million loan with metropolis to prepay upon completion of its announced transaction, likely in the second half of 2024. At the end of Q3, our debt investment portfolio company count was 54 representing 19 different subsectors and our top 10 portfolio companies represented 37% of our total debt investments at cost. We also held 183 worn inequity investments in 115 companies with a total cost and fair value of 72.6 million and 87.3 million respectively.
In addition to over earning the third quarter dividend, we continue to retain undistributed net investment income which totaled $37.3 million.
$4.03 per share at the end of the period to support additional regular and supplemental dividends in the future.
Given the strong yields and size of the loan portfolio of the dividend coverage was strong again this quarter at 133% coverage for the full year to date was 132%.
Now just an update on unfunded investment commitments overall liquidity and status of balance sheet leverage.
We ended the third quarter with $142 million, an unfunded investment commitments down from $205 million in the last quarter with $38 million dependent upon the portfolio company, reaching certain milestones.
Sajal Srivastava: In Q3, three of our portfolio companies without standing debt raised 47 million of capital bringing our total to 16 portfolio companies without standing debt raising 437 million of capital year to date. This level of activity reflects both the challenging fundraising environment as well as the seasonally lower activity associated with the third quarter. As we look to the fourth quarter, we are pleased to see fundraising activity within our portfolio picking up with several portfolio companies making progress towards raising rounds here in Q4 and in Q1, 2024 with one portfolio company already raising 26 million of capital and another portfolio expecting to close 30 million of capital imminently.
All of these unfunded invest investment commitments have contractual floating interest rates.
Of the total amount 46 million are set to expire here in Q4.
We had $37 million, a prepayments $15 million early repayments onto revolving structures and $20 million us scheduled principal amortization gender.
Generating $72 million liquidity during the quarter.
As a quarter and the company had total liquidity of $262.5 million, consisting of $122 million in cash and $140 million available under the revolving credit facility.
Sajal Srivastava: We believe this activity early in the quarter, especially considering market conditions, is a positive reflection on the outlook for our portfolio companies and bodes well for credit quality going into 2024. With regards to credit quality, during the quarter, we upgraded Metropolis with a principal balance of 27.7 million from Category 2 to Category 1 and removed Ford Rock from Category 1 as a result of its 30 million loan prepayment. We received 1.9 million of proceeds from the liquidation of renner run reducing our exposure to 400,000.
Near quarter, and we drew down on our credit facility to enhance our investment flexibility pursuant to certain 1940 Act requirements.
After the quarter and we paid down the credit facility decreased leverage and increased availability under the credit facility for future draws is appropriate.
In addition to this current liquidity the existing portfolio provides contractual cash flows, which bodes well for sustained liquidity.
We continue to maintain a bird a diversified capital structure and as of September 30th and.
Sajal Srivastava: We expect runner run to remain a Category 3 asset until we are paid off in full, which is expected to occur in 2024 and will represent 100 percent recovery. During the third quarter, certain of our e-commerce and consumer portfolio companies experience continued challenges as they manage through ongoing market and sector-specific issues, including negative consumer sentiment, increasing customer acquisition costs, lower than expected revenue during the summer, higher than normal levels of inventory, and continued impact of inflation on their cost of goods sold. In addition to developments in their run-way extension efforts, path to profitability and strategic efforts.
An aggregate of $395 million was outstanding and fixed rate investment grade term notes and $210 million was outstanding on the floating rate revolving credit facility, which has a total commitment available up $350 million.
Sajal Srivastava: Roberts. During the quarter, we downgraded the credit ratings of three e-commerce and consumer companies from category two to category three due to these developments in the quarter, deistiling, outdoor voices and naked one world with a combined total principal balance of 19.4 million and a combined total failure value of 19.7 million for the three companies as of Q3. We also downgraded the credit rating of two e-commerce and consumer companies from category three to category four also due to these developments in the quarter.
Our fixed rate borrowings account for 65% of our outstanding balance sheet leverage at quarter end, while 62% of our debt investments, where it floating rate and have benefited from increasing interest rates over time.
We have three steps to the ladder of term debt maturities in the maturities are set to occur in 2025, 26 and 27.
We ended the quarter with a leverage ratio of 1.62 times compared to a net leverage ratio of 1.29 times.
This compares favorably to the prior quarter with a leverage ratio is 1.67 times compared to a net leverage ratio of 144 times.
We expect to maintain this level of leverage through the end of the year and we expect to Delever the balance sheet in the first half of 2024.
Last year, we announced the launch of our ATM program and during the third quarter, we issued common stock with aggregate net proceeds of $6.2 million.
Sajal Srivastava: Project 1920, which operates as Senrav and Mystery Tacklebox, which also operates as Cacheco, with a combined total principal balance of 9 million and a combined total failure value of 7.6 million for the two companies as of Q3. Given the upcoming holiday season, Q4 is generally an important quarter for retail e-commerce and consumer companies, and we believe some of our category three and four companies could see a boost if they close out the year with a strong quarter, which could potentially put them in better positions for 2024.
Given the cost effective issuance above net asset value all shares issued were accretive dynast.
And as of the end of the quarter, we still had $43.7 million available under that program.
This completes our prepared remarks today and we'd be happy to answer your questions and so operator could you. Please open the line at this time.
We will now begin the question and answer questions to ask a question.
Sean.
Okay, using a speaker phone please pick up there.
Sajal Srivastava: Untitled labs, which operated under the name May renovations, with a loan fair value of 2.7 million as of Q3, was downgraded from category four to category five. After pivot in the business and unsuccessful financing and strategic efforts, the company announced in October that it was closing its business and selling off certain of its assets. Our Q3 mark represents our expected recovery mount from that process. Health IQ, with a loan fair value of 7.2 million as of Q2, was removed from category five and Q3 as a result of its bankruptcy filing.
Daniel.
And you would like to withdraw your question.
Okay.
At this time.
Gotcha.
And our first question comes from Kenyan.
Oh. Please go ahead.
Hi, everyone. Good afternoon.
First question on the e-commerce sector downgrades.
<unk> gave some color on that was part of it.
<unk>.
Sajal Srivastava: As mentioned in prior quarters, we had downgraded the company due to ongoing challenges with the company's execution and prior failed capital raising and strategic efforts. As we mentioned during last quarters call, we had expected to enter into an extended restructuring and recovery process with the company and its key stakeholders, and we were disappointed to see in Q3 that the parties could not come to agreement on that plan, and ultimately a bankruptcy and full liquidation process was pursued instead.
Related to.
A a.
Pullback in venture capital.
Commitments to the sector.
And if so how does that translate to your portfolio that you're downgraded is very visible fundraising issue you see for these companies.
Yeah. Thanks for the question. So so again I think the the downgrade was not to all of our E Commerce and consumer portfolio companies. This is a sector, where we've had some some great success as a platform and for <unk> historically this.
Sajal Srivastava: And as a result, we have written off our entire position to put the situation behind us. During the quarter, we also adjusted the fair values for two category five loans in the process of sale or liquidation, demand and underground enterprises based on updated recovery estimates.
This is really specific to certain set of portfolio companies, we're going to be mentioned were particularly during the summer.
Some negative sentiment interestingly enough the strong weather or the favorable weather impacted a number of these portfolio companies as well and so that plus again <unk>.
Sajal Srivastava: On a more positive note, during the quarter, e-bike portfolio company VanMove, the category five loan was acquired by LaVoy, the electric scooter unit of Formula One Engineering and Technology firm McLaren applied. We're looking forward to working with their chairman Nick Fry, the former CEO of the Mercedes Formula One team, and their UK-based private equity sponsor, Grable Capital, for the next phase of VanMove's journey and our recovery. We are currently in the process of closing the transaction, and our schedule investments will reflect our revised securities as well as any revised recovery estimates for the combined companies at year end. TBVG's recovery will include a combination of debt and equity in LaVoy, as well as continued security positions in the assets of VanMove, not otherwise acquired by LaVoy that we intend to liquidate over the coming months.
Eight of consumer sentiment.
Changes that we saw over the course of the year from folks like Apple Google and.
And Facebook on their search algorithms and the level of information that they share increasing customer acquisition costs. So again, I'd say specific to certain elements of the sector anti specific companies.
I'd say with regards to venture financing. It's mixed we are seeing and we have seen of the portfolio companies that have raised capital. This year a number of them are an e-commerce and consumer companies.
I would say again, we're it's a balanced approach to the sector and you know it doesn't change our overall outlook e-commerce and consumer.
It's helpful. Thank you in just a follow on the dividend.
Sajal Srivastava: Quarters. We believe the continued stress and certain assets during the quarter and the year are directly related to the ongoing challenging conditions in the venture capital equity fundraising market and in the M&A market for both public and private companies as well as certain sector specific circumstances related to the overall macroeconomic environment. While we expect market conditions to remain the same here in Q4 and as 2024 starts, we have seen many of our portfolio companies over the past couple of quarters respond and adapt favorably to this new market reality as I will describe shortly and from what we currently can see we believe our building momentum to succeed in 2024 and beyond.
Jim mentioned, you would like to continue to over or in the dividend.
But of course, there's a bit of deleveraging and you'll have the incentive fee.
Uhm turned back on where do you see this sort of run rate of your earnings power as the.
B D C portfolio, etc, Uhm subtle.
Following this deleveraging exercise and what does that mean for the the 40 per cent, sorry, 40 cent pay.
Pay out you have currently.
Yeah, it's been a good.
Good question I think we have done some analysis on that and thinking about the impact on the overall coverage given the strength right now update consistent coverage, we've had even if we bring back the incentive fee once the nap stabilizes, we still see 40 cents is a solid number going forward given.
Sajal Srivastava: Our portfolio companies have now had almost a year to adjust to managing growth and driving into economics with reasonable paths to profitability, lowering burn rates and having realistic expectations for raising additional capital. A number of companies are also seeing strong revenue and margin tailwinds in their businesses having achieved profitability or having significant cash runway to achieve profitability. As we look to 2024, we currently believe we will see new credit stress events decline and that we will begin to see potential positive developments and outcomes from our portfolio companies due to their adaptation, execution and performance despite market conditions.
The fully scaled up portfolio and the yields that are being generated and the level of fixed rate leverage we have we think it bodes well for a longterm coverage right.
Right now as far as maintaining that dividend that's the strategy given the the higher leverage ratio. It doesn't make sense right now to start looking at increasing dividend, but rather maintain the the nerve.
Yeah, that's all for me thanks, so much.
Sajal Srivastava: Nevertheless, we will continue to remain proactive and diligent as we navigate these conditions and manage our portfolio. In summary, as Jim said, we are focused on maintaining the financial strength and liquidity position of TPVG, remaining in frequent contact with our portfolio companies, stabilizing credit quality and preparing for returning to portfolio growth in 2024. Given our existing scale and strong portfolio yield, we expect to continue to deliver strong investment income while positioning the company to further benefit when markets improve.
Our next question comes from Christie Hi.
Please go ahead.
Thanks I appreciate you taking my questions I'm, just first off on the high Q right off from a quarter are there any expectations there for any potential of our coverage on that one and then just on that line as well what was the total right off and the <unk> incremental amount in <unk> in the third quarter that wasn't already.
Unrealized previously.
Sure I'll start with the business update and then Chris if you can give the number so I would say Christian yeah, no. We're not expecting any additional recovery again, we wanted to get this one past us and move on so we rode off the full amount of of our loan.
Christopher Mathieu: With that, I will now turn the call over to Chris. Thank you, Sajal and hello everyone. During the third quarter, we generated substantial core interest income from our high yielding diversified loan portfolio while successfully reducing our balance sheet leverage on a net basis. We increased our liquidity position in the quarter through the modest use of the ATM program, loan prepayments and reduction in unfunded loan commitments. The reduction in unfunded loan commitments was accomplished through commitment expirations and fundings in excessive new commitments.
And the the the total realized loss was 25 and change million and there was about $7 million in the current quarter that that hit that impacted naff.
Okay within the 20th I'm, sorry, it's not 25, plus seven so so seven alright twenty-five was in the current quarter and the rest had already been previously been an unrealized loss or unrealized depreciation prior periods.
Christopher Mathieu: Total investment income was $35.7 million as compared to $29.7 million for the third quarter of 2022. This increase of 20% was due to growth in the average portfolio size as well as higher investment yields. Our portfolio yield was 15.1% on total debt investments this quarter as compared to 13.8% for the prior year period. Onboarding yields continue to be strong and stable. Operating expenses were $16.6 million as compared to $12.8 million for the third quarter of 2022. These expenses consisted of $9.3 million of interest expense, $4.6 million of management fees, and $2.7 million of G&A expenses.
Okay. Okay that makes sense and then just a just.
Just a broader question on the industry in that competitive environment. I'm curious if you can just talk about have the competitive environment has shifted recently uhm are I guess over the last few quarters since the bank turmoil earlier. This year are you seeing any recent activity from banks getting involved or I pick up from private lenders or just or any <unk>.
Others in the space where <unk>.
<unk> the competitive landscape Sir.
Yeah, I I would say if anything we continue to see pullback of the non typical non traditional nine longterm participants in the market.
And then I would add overall as you've seen just from most of US reporting that I'd say deal volume has slowed down so I wouldn't say anyone is taking necessarily more market share the.
Christopher Mathieu: Kansas. We recorded elevated legal expenses of $550,000 in higher excise tax expense of $325,000 compared to the prior quarter, due to the sizeable increase in spillover income estimated for the full year. With the shareholder-friendly total return requirement under our incentive fee structure, the incentive fee expense was reduced by $3.8 million during the third quarter and $11.3 million for the nine months ended September 30th. We earned net investment income of $19.1 million or $54 per share compared to $16.9 million or $51 per share in the same period in 2022.
Competitive die.
Dynamic, particularly on the tech side has materially changed.
That's that's it for me I appreciate you taking my question.
The next question comes from Christopher Alexander.
Please go ahead.
Hey, guys.
Given your comments on a leveraged should we assume that the cash levels remain elevated levels in the fourth quarter.
Yes.
Yeah, Okay, well that gives you five elevated.
And then the comments in terms of maintained rather than increase in the dividend should we read into that higher excise taxes going forward.
Christopher Mathieu: The company recognized net realized losses on investments of $25.6 million dollars, resulting primarily from the right off of high queue, which was rated five on our watch list and it's removal from our investment portfolio. Net change in unrealized gains on investments for the third quarter of 2023 was $8.6 million, consisting of the reversal of $17.6 million of previously recorded unrealized losses that were realized during the period, net unrealized losses of $6.2 million on the existing debt investment portfolio and $2.8 million dollars on the warrant and equity portfolio, resulting from fair value adjustments.
Yes, yes. So we we had an additional accrual of about 325000 this quarter to do I'll call a catch up given that we were over earning consistently cost. So far this year. So we should expect a higher level of excise tax through the end of the year.
And final question, a while ago I believe the journal had an article talking about how the S. C. C was looking possibly at.
Applying a fiduciary standard to venture capital investments.
Where it would effectively raise the bar in terms of the responsibility of the venture capital Investor and new companies and.
Christopher Mathieu: As of quarter end, the company's total net assets were $374 million or $10.37 per share compared to $379.4 million or $10.70 per share as of June 30, 2023. A board of directors declared a regular quarterly dividend of $0.40 per share. The dividend is from ordinary income to stockholders of record as of December 15th to be paid on December 29th. In addition to over earning the third quarter dividend, we continued to retain undistributed net investment income which told us $37.3 million or $1.3 per share at the end of the period to support additional regular and supplemental dividends in the future. Given the strong yields and size of the loan portfolio, the dividend coverage was strong again this quarter at 133%. Coverage for the full year to date was 132%.
I don't know whether or not you heard of anything like that and if you have if you have any comments on it.
You know I have not just looking around the table not heard about or looked into too deeply I would only comment Chris that given the fact that we work with a very <unk>.
Select group of venture capital investors, whom we've had long standing relationships. They are generally very active investors in their portfolio companies as well and so uhm with their board seats with their involvement in with their strong opinions. So I would say well I guess generally could be viewed as a good thing.
[noise] I would say our investors are already.
Pretty active with our portfolio or their portfolio companies.
Okay Ah social success.
The next question comes from the last Abraham.
Christopher Mathieu: Now just an update on unfunded investment commitments overall liquidity and status of balance sheet leverage. We ended the third quarter with $142 million in unfunded investment commitments down from $205 million in the last quarter, with $38 million dependent upon the portfolio company reaching certain milestones. All of these unfunded investment commitments have contractual floating interest rates. Of we had $37 million of prepayments, $15 million of early repayments under revolving structures and $20 million of scheduled principal amortization.
<unk>.
Hi, guys. Thanks for the question just add add the nature of the repayments that you received and you know in the corner of the prepayments there has.
Been in a in a couple of quarters is any of that pull forward from what you may have expected and thank you for.
No not really so <unk> was the the largest that we had indicated we expected a prepayment and that that's the the lion's share of the the premium the prepayment that occurred this quarter.
And that was that was not pulled from say a Q4 event.
Okay, and then as we think about deleveraging starting the beginning of next year that just really going to be a function here of.
Christopher Mathieu: Generating $72 million of liquidity during As of quarter end, the company had total liquidity of $262.5 million, consisting of 122 million in cash and 140 million available under the revolving credit facility. Near quarter end, we drew down on our credit facility to enhance our investment flexibility pursuant to certain 1940 act requirements. After the quarter end, we paid down the credit facility, decreased leverage, and increased availability under the credit facility for future draws as appropriate.
Prepayments look like in the first half.
Yeah, I think it's a combination of contractual repayments just the normal aging of the portfolio in the schedule of the principle that comes through we have a couple of loans that are also maturing in that first half half of the year and usually we see one or two loans prepay each quarter. So even if it's a <unk>.
More muted prepayment environment will we still expect to see some of that so it's a combination of all of that.
Christopher Mathieu: In addition to this current liquidity, the existing portfolio provides contractual cash flows which votes well for sustained liquidity. We continue to maintain a diversified capital structure and as of September 30th, an aggregate of $395 million was outstanding in fixed rate investment grade term notes and $210 million was outstanding on the floating rate revolving credit facility which has a total commitment available of $350 million. Our fixed rate borrowings account for 65% of our outstanding balance sheet leverage at quarter end, while 62% of our debt investments were at floating rate and have benefited from increasing interest rates over time.
Alright, Uhm and one on expenses.
And it looks like G&A was up a little bit here and do three I think you said something about 500 K and.
Legal expenses I think is a part of that.
Is that the main item that is gonna potentially come out here and Q4.
Correct Yep to the the elevated level of legal.
Will not likely be that high an excise tax could be similar.
S. I think Chris had mentioned earlier.
Okay got it Uhm and then just maybe a bigger picture question and you guys mentioned.
Christopher Mathieu: We have three steps to the latter of term debt maturities and the maturities are set to occur in 2025, 26 and 27. We enter the quarter with a leverage ratio of 1.62 times compared to a net leverage ratio of 1.29 times. This compares favorably to the prior quarter with a leverage ratio was 1.67 times compared to a net leverage ratio of 1.44 times. We expect to maintain this level of leverage through the end of the year and we expect to deliver the balance sheet in the first half of 2024.
Investment activity picking up here a bit and just curious do you think that's a function of you know the.
V C investors being very comfortable with where evaluations are in the kind of opportunity is there any other.
Seeing now or is it more a function of you know they have to do something with the dry powder that they've had for you know for a little while now and you know if it is the ladder. What do you think that means for for the quality of the deal that we may see over the next 12 to 18 months. Thank you.
Christopher Mathieu: Last year, we announced the launch of our ATM program and during the third quarter, we issued common stock with aggregate net proceeds of $6.2 million. Given the cost-effective issuance above net asset value, all shares issued were creative to nav and as at the end of the quarter, we still have $43.7 million available under that program.
Yeah, I can handle that I can speak only in terms of the selected investors the smaller universe of what we consider to be the top venture investors that we deal with them.
It is absolutely not the ladder.
There is not they are investments are not driven by the pressure to deploy that's certainly in the background, but it's the opportunities that are emerging in what we're calling the the.
Operator: This completes our prepared remarks today and we'd be happy to answer your questions and so operator, could you please open the line at this time? We will now begin the question and answer session. To ask a question, may we press star then one on your touch on phone? If you're using a speaker phone, please pick up your hands if you're proposing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then do.
The new market realities here today, particularly up to very early stages, which is a little less focus of T. P V G, but in many sectors.
And there's just many opportunities, particularly now that there's been a shift and as I mentioned, it's more the path to profitability for these new companies managing cash burn as opposed to several years ago, where it was growth.
Operator: At this time, we will pass momentarily to assemble our roster.
Sonia O'Shea: Our first question comes from Sonia and O'Shae with Brown Fargo. Please go ahead. Hi everyone. Good afternoon. First question on the e-commerce sector, downgrades. Satellite gave some color on that. Was part of it related to a pullback in venture capital committed to this sector and if so, how does that translate to your portfolio that you downgraded? Is there a visible fundraising issue you see for these companies? Yeah, thanks for the question.
We're pretty excited or at least they are in terms of.
The opportunities here in the future.
That's it for me thank you.
The next question comes from Brian Lynch.
Okay go ahead.
Hey, Good afternoon first question I had was you've mentioned on this call and in the past year guys focus is working with.
Group of what you would call it kind of top tier D C sponsors.
<unk>.
You know given given the credit issues that you guys have experience in his most recent recent venture sort of down cycle have.
Sajal Srivastava: So again, I think the downgrade was not to all of our e-commerce and consumer portfolio companies. You know, this is a sector where we've had some great success as a platform and for TVVG historically. This is really specific to certain set of portfolio companies where again we mentioned we're particularly during the summer saw some negative sentiment and interesting enough, the strong weather or the favorable weather impacted a number of these portfolio companies as well.
Have you guys put any consideration.
Modify that strategy and maybe branch out a wider group of a V C sponsors versus focusing on what you guys would call.
Selected top top tier our top kind of top group that much more.
Group.
Yeah, right. So a very interesting question listen I think again from our perspective, we look to our long term track record. So obviously, we're looking to our relationships and her interactions with these funds and our portfolio companies over multiple years multiple cycles, and so again I'd say our track.
Sajal Srivastava: And so that plus, again, negative consumer sentiment changes that we saw over the course of the year from folks like Apple, Google and Facebook on their search algorithms and the level of information that they share, increasing customer acquisition costs. So again, I'd say specific to certain elements of the sector and to specific companies. You know, I'd say with regards to venture financing, it's mixed. We are seeing and we have seen of the portfolio companies that have raised capital this year, a number of them are any commerce and consumer companies. I would say again, it's a balanced approach to the sector and you know, doesn't change our overall outlook to e-commerce and consumer.
Continues to be.
Strong over the 10 year time period since TPB Jeeze inception, having said that.
We always review and evaluate the the selected enter capital funds that we work with based on.
Our interactions with them or performance within three <unk>.
Position in the market their track record. So it's not a fix list forever right. It's a living breathing list that benefits from experience track record until I would say it's fundamentally.
Sajal Srivastava: It's a helpful thank you and just to follow on the dividend, Jim mentioned you would like to continue to over earn the dividend, but of course there's a bit of deleverging and you'll have the incentive to turn back on. Where do you see the sort of run rate of your earnings power as the BDC portfolio, et cetera, settle following this deleverging exercise and what does that mean for the 40 percent, sorry, 40 cents pay out you have currently?
A combination of both so yes it has.
The folks that we have deep relationships with but it also adjust incorrects based on performance and experience and it also deals with the realities of changes in the venture capital landscape.
Okay understood.
And then I believe and correct me if I'm wrong I believe you said that as we move into 2024, you expect credit distress of that to decline in your portfolio I'm.
I'm just curious I guess, what what <unk> what are the assumptions that you guys are using to keep your confidence in that statement is is is there any sort of macro changes that you would need to occur.
Sajal Srivastava: Yeah, Finn, a good question. I think we have done some analysis on that and thinking about the impact on the overall coverage. Given the strength right now of the consistent coverage we've had, even if we bring back the incentive, he wants to nav stabilize as we still see 40 cents as a solid number going forward, given the fully scaled up portfolio and the yields that are being generated and the level of fixed rate leverage we have, we think it bodes well for long-term coverage. Right now as far as maintaining that dividend, that's the strategy given the higher leverage ratio, it doesn't make sense right now to start looking at increasing dividend but rather maintain the nav.
Sonia O'Shea: That's all for me, thanks so much.
In order for you to continue to to have that sentiment or.
What sort of gives you confidence.
Because it seems like right now you know based on the current V C trends.
Unless it is going to be a big shift in sort of a recovery in the V C marketplaces, whether it's.
Investment opportunities feels like it could last well into 2024, so I just love to have you on packed that statement a little bit more yeah, yeah, absolutely. So so again and I think I covered it a fair amount of it.
Prepared remarks, but I would say.
We're not expecting overall market conditions to change materially here in queue for an early into 2024 it right.
The V C market is not gonna.
Flip the other direction overnight, but what we're seeing right is that our portfolio companies now have had almost a year to deal with the realities of this economic environment and the change in the venture capital environment to understand with the new standards and the new metrics for success are in the <unk>.
Kristen Love: Our next question comes from Kristen Love with Piper Sandler, please go ahead. Thanks and I appreciate you taking my questions. I'm just first off on the high Q right off in the quarter. Are there any expectations there for any potential or coverage on that loan and then just on that loan as well? What was the total right off and the incremental amount in the third quarter that wasn't already and unrealized previously?
Venture capital ecosystem, not only from an operational perspective, but also from fundraising perspective, we talked about.
Managing that balance between hyper growth and burn at all cost, we talked about driving you'd solid unit economics, either having a path to profitability being profitable or convincing investors. How you can with an incremental financing. So so I would say, it's not the market recovery of that were banking on her that were.
Sajal Srivastava: Sure, I'll start with the business update, and then Chris if you can give the number. So I would say Chris, you know, no, we're not expecting any additional recovery. Again, we wanted to get this one past us and move on. So we wrote off the full amount of our loan. And the total realized loss was 25 and changed million, and there was about 7 million in the current quarter that impacted NAF.
Sajal Srivastava: OK, within the 25, it's not 25 plus seven. So so seven of 25 was in the current quarter and the rest had already been previously been an unrealized loss or unrealized appreciation in prior periods. OK, OK, that makes sense.
Optimistic as we looked at 2024 candidly, it's the hard work of our entrepreneurs in our portfolio companies of adapting and changing and surviving and making it through and so clearly we have had some portfolio companies that weren't successful in pivoting and adjusting to the environment changes and and that explains that the <unk>.
Guess that we've seen but we also have roughly 90% right. That's sitting in our top two categories, where they have responded in there now and what not all of them are good I'd have success in 2024, but I'd say, we feel again, we're coming to the end given the adapt and the and the adjustment, but again conditions can change execution. These are startup.
Sajal Srivastava: And then just a broader question on the industry and the competitive environment. I'm curious if you can just talk about how the competitive environment has shifted recently, or I guess over the last few quarters since the bank turmoil earlier this year. Are you seeing any recent activity from banks getting involved or pick up from private lenders or just or any others in the space where that's impacting the competitive landscape here. Yeah, I would say if anything, we continue to see pullback of the non typical non traditional non long term participants in the market.
Companies, they can make mistakes and so things could change, but at least as we look today. We look at the response, we look at the game plan, we look at the cash runway of the portfolio companies and then the last pieces.
Fund raising activity even in this environment that our portfolio companies here in Q4, and Q1 that are on track for it again I think it's it's small amount of light at the end of the tunnel, we're not saying it's over but you know some positive data points for us as we go into 24.
Sajal Srivastava: And then I would add overall, as you've seen just from from most of us reporting that, you know, I'd say deal volume has slowed down. So I wouldn't say anyone is taking necessarily more market share or the competitive dynamic, particularly on the tech side has materially changed.
Okay.
Understood. That's all for me this afternoon. Thank you.
Kristen Love: Nice, that's it for me. I appreciate you taking my question.
The next question comes from.
Combo.
Uh-huh.
Alright, just a couple of questions. Chris you said, you've pulled cash down from the credit facility at the end of the quarter to meet some regulatory hurdles could you tell.
Christopher Nolan: The next question comes from Christopher Nolan with ladenburg. Please go ahead. Hey guys, given your comments on a leverage, should we assume that the cash levels remain at elevated levels in the fourth quarter? Yes.
Tell me how much that was cause I, just <unk> I'm trying to get to a more normalised leverage ratio at the end of the quarter as opposed to the reported 1.62 times.
Yeah. So so I would say the that is a quarterly event that you would expect to see for at least the next two or three quarters, but that's not the average cash outstanding. So if you're trying to calculate weighted average that outstanding for interest expense.
Christopher Mathieu: Yeah, OK, then give your comment on elevating. And then the comments in terms of maintaining the nav rather than increasing the dividend, should we read into that higher exercise taxes going forward? Yes, yes, so we had an additional accrual of about 325,000 this quarter to do. I'll call it catch up given that we were over earning consistently so far this year. So we should expect a higher level of exercise tax through the end of the year.
So there there are a number of quarterly tests that all bdc's have and I'd say, there's at least a handful that do the same approach that we're doing where they.
Have a larger gross asset and some people use it through swaps or treasury bills. We found that its most efficient to use the existing credit facility. We have two two gross up the balance sheet, but to answer I guess, most direct you should expect for at least another two or three quarters that.
Sajal Srivastava: And final question, a while ago, I believe the journal had an article talking about how the SEC was looking possibly at applying a fiduciary standard to venture capital investments, where it would effectively raise the bar in terms of the responsibility of the venture capital investor in new companies. And I don't know whether or not you heard of anything like that and if you have, if you have any comment on it. You know, I have not just looking around the table, not heard about or looked into deeply.
The cash balance would be elevated.
So it kind of grows at leverage would be kind of consistent which what you're seeing for this quarter.
Okay. Secondly, you mentioned in response to a previous question that there's a couple of companies there where your loans are maturing in the first part of next year.
And by your own admission you don't expect the environment to change how confident are you you know there's there's nothing more binary then the maturity date of a of a term loan how confident are you that those companies have a financing or some type of an event.
Sajal Srivastava: I would only comment, Chris, that given the fact that we work with a very select group of venture capital investors who we've had long standing relationships, you know, they're generally very active investors in their portfolio companies as well. And so with their board seats with their involvement and with their strong opinions. So I would say, well, you know, I guess generally could be viewed as a good thing. I would say our investors are already pretty active with our portfolio, are their portfolio companies.
That creates the conditions that will allow them to make timely repayment on those loans.
Yeah, <unk> I'll take it so I would say to the extent that there was concern those companies would be on our credit watch list today, we would wait for the future event.
Vilas Abraham: Okay, Sajal, the question comes from Vilas Abraham, the UBS, please go ahead. Thanks for the question. Just on the nature of the repayments that you received in the quarter, the prepayments, your highs have been in a couple quarters. Is any of that to pull forward from what you may have expected in Q4? No, not really. So, Ford's Rock was the largest that we had indicated we expected a prepayment, and that's the lion's share of the prepayment that occurred this quarter, and that was not pulled from, say, the Q4 event.
But I would say again and encourage you can correct me wrong I mean, I think a fair amount that is natural amortization thats coming so these aren't necessarily bullet payments of the few companies that may or may not have a bullet payments in Q1 or Q2, I think it's on a case by case basis, but I would just say that we look to Q1, it's Oh, sorry, Q4 and Q1.
It's mostly natural amortization, meaning monthly principal payments as opposed to a lump sum.
Final maturity and then I would say just generally speaking when it comes to extensions, it's an effect and circumstance basis of extending maturity dates depending on the credit situation and credit rating in cash runway to company.
Okay, great Yeah, well when I look at this quarter's activity with 20 million of schedule a principal amortization.
Vilas Abraham: Okay, and then as we think about, you know, de-leveraging starting at the beginning of next year, is that just really going to be a function here of what prepayments look like in the first half? Yeah, you think it's a combination of contractual repayments, just the normal aging of the portfolio and the schedule of the principle that comes through. We have a couple of loans that are also, you know, maturing in that first half of the year, and usually we see one or two loans prepay each quarter, so even if it's a more muted prepayment environment, we still expect to see some of that. So, it's a combination of all of that.
That seems like a high amount, where there's some bullet payments in there.
To take a look I think during the <unk> I mean, it was $70 million [laughter] cash. We had we had 30 million of of $30 million to $40 million of Prepays right. Chris We had repaid on revolvers again is another component of of the cash that we saw and then portfolio amortization.
No. If you had the details right well no I'm I'm I'm I'm looking at the 20 million, specifically stated as scheduled principal amortization and that seems like a large large amount. So I'm trying to understand if there was any bullet maturities in that and it was supposed to be.
Sajal Srivastava: All right. And one of the expenses, it looked like GNA was up a little bit here in Q3. I think you said something about 500K, and I'm in legal expenses, I think, as a part of that. Or you know, is that the main item that is potentially come out here in Q4? Correct. Yeah, so the elevated level of legal will not likely be that high, and the excise tax could be similar. As I think Chris had mentioned earlier.
There was one okay. There was one there was one representing $12 million.
Right, Okay that makes that that number makes a lot more sense now okay. Thank you.
Yeah, that's all for me.
Alright next question comes from Brian.
And for the security. Please go ahead.
Great. Thanks, So I appreciate the outlook commentary heading into next year, but it's 2024 doesn't play out as expected and the recovery across the industry has pushed out even further you what's the expectation for portfolio performance, specifically as it relates to Nonaccruals and just underlying chronic quality and then what might that mean for.
Sajal Srivastava: Okay, got it. And then just maybe a bigger picture question. You guys mentioned investment activity picking up here a bit, and I'm just curious. Do you think that function of the VC investors being very comfortable with where evaluations are and the kind of opportunities they're seeing now, or is it more a function of, you know, they have to do something with the dry powder that they've had for a little while now? And if it is the latter, what do you think that means for the quality of the deal that we may see over the next 12 to 18 months?
The trajectory of luggage.
Yeah well.
You know unfortunate again with a crystal ball I don't Wanna be jokes in Europe, obviously, we take a quarter to quarter, we take it facts and circumstances and I would say the.
The good news is we look to our higher rated credit score companies. They have significant amount of cash one way to make it through 2024 and beyond so I would say that's one element I'd say the second so existing cash runway continues to be strong for our top two rated credit watchlist companies.
Let's say the second element is despite.
Sajal Srivastava: Thank you. Yeah, I can handle that. I can speak only in terms of the select investors, the smaller universe of what we consider to be the top venture investors that we deal with. And by it is absolutely not the latter. There is not, they are investments are not driven by the pressure to deploy that that's certainly in the background. But it's the opportunities that are emerging in what we're calling the new market realities here today.
Despite the depressed market again, as we talked about where our portfolio companies are raising new rounds of financing with one already here in queue for $3 million, a second one happening imminently and more under way. So I think again, we feel are remaining our top two rated portfolio companies are.
Attracting follow on capital they have earlier this year, we believe that they're doing so here in <unk> and then I I do think again, it's we're seeing sectors that continue to attract strategic interest equity interest I don't want to say Hey, I for example, on everything and anything with a on it can get funding today.
Sajal Srivastava: Particularly at the very early stages, which is a little less focus of TPVG. But in many sectors, and there's just many opportunities, particularly now that there's been a shift. And as I mentioned, it's more the path to profitability for these new companies managing cash burn as opposed to several years ago where it was growth. We're pretty excited, or at least they are in terms of the opportunities here in the future.
So so I'd say, that's a more balanced outlook can't really comment on 2024 other than yes, if <unk>.
Our goal is to Delever by virtue of the scheduled amortization I think we see upside from portfolio company prepayments again, we talked about how challenging two three was for the entire venture capital ecosystem and we had one of our highest levels.
Ryan Lynch: Thank you for me, thank you.
Portfolio company prepay and liquidity is $70 million of cash generated in the third quarter. So again I don't Wanna say during really tough quarters, we should expect that kind of cash generation, but I would say again, it's not all doom and gloom to the extent that this challenging environment continues to be.
Ryan Lynch: The next question comes from Ryan Lynch with TBW, please go ahead. Hey, good afternoon. First question I had was, you've mentioned on this call in the past, your guys' focus is working with, will be a select group of what you would call a kind of top tier BC sponsors to source your investments.
Same conditions for a prolonged period of time.
Helpful. Thanks, and then just to follow up you know does a higher for longer interest rate environment impact, how you're thinking about just managing the portfolio broadly for the long term and then does this should all impact you know the sectors, you ultimately will invest into overtime.
Sajal Srivastava: Given the credit issues that you guys have experienced in this most recent venture sort of down cycle, have you guys put any consideration to modify that strategy and maybe branch out to a wider group of BC sponsors versus focusing on what you guys would call a more selected top tier or top kind of top group, but much more curated group? Yeah, right, so a very interesting question. Listen, I think again, from our perspective, we look to our long-term track records, so obviously we're looking to our relationships and our interactions with these funds and our portfolio companies over multiple years, multiple cycles, and so again, our track record continues to be strong over the 10-year time period since TPBG's inception.
An interesting question I, you know I would say you know as we look to hire heals right I I do think from from our perspective right.
You know there is a cap on the total return that we can make on an individual loan right. If we're charging you know certain high level or the a 20% return on alone from from the dead component I think equity investors will take a second look and say my gosh, that's approaching equity like returns, particularly when you.
Sajal Srivastava: Having said that, we always review and evaluate the selected venture capital funds that we work with based on our interactions with them, our performance with them, their position in the market, their track record, so it's not a fixed list forever, it's a living breathing list that benefits from experienced track record, and so I would say it's fundamentally a combination of both, so yes, it has the folks that we have deep relationships with, but it also adjusts and corrects based on performance and experience, and it also deals with the realities of changes in the venture capital landscape.
Factor in the warrant and so I, maybe I'll just provide that financing instead of this company taking venture dead and then it makes you think about the companies don't raise equity or who sponsors don't say forget it will do it instead and then it means are you getting adversely selected because the new companies that you're talking to with these really.
[noise] hi rates are ones that it who's investors don't want to give them more capital. That's why our approach has been to hold yields generally in the same level, but take on what we think our company.
Companies with stronger credit profiles as Jim mentioned lending to companies that have recently raised rounds of equity financing will have seen the reset in their evaluations. Some from an LTV perspective, we feel stronger in terms of using that as a calculation and then have lower cash burn rates longer cash.
Sajal Srivastava: Okay, understood, and then I believe in incorrect from wrong, I believe you said that as we move into 2024, you expect credit stress effect to decline in your portfolio. I'm just curious, I guess, what are the assumptions that you guys are using to give you confidence in that statement? Is there any sort of macro changes that we need to occur in order for you to continue to have that sentiment, or what sort of gives you that confidence in that, because it seems like right now based on the current VC trends, unless there's going to be a big shift in sort of a recovery in the VC marketplace, whether it's fund-raising or investment or exit opportunities, feels like it could last well into 2024, so I just love to have you unpack that statement a little bit more.
Runway. So so I think that's our our our perspective on that but I think on the other hand, we do think of the impact of interest expense on their cash flow and so that obviously impacts burn rates and so.
It's something to be mindful of but again.
The majority of our portfolio companies are focused to get to profitability, but they aren't necessarily there yet today.
Great. Thank you.
This concludes that question and answer session I would like to turn the conference back over to you. Mr. Can try any kind of thing remarks. Please go ahead.
Mmk. Thank you and is always like to thank everyone for listening and participating in today's call I Hope you found it helpful. We look forward to talking with you all again next quarter. Thanks, again have a nice day.
Bye bye.
The contract call has been authenticated.
Sajal Srivastava: Yeah, absolutely, so again, I think I covered a fair amount of it in our prepared remarks, but I would say, again, we're not expecting overall market conditions to change materially here in Q4 and early into 2024, right? The VC market is not going to flip the other direction overnight, but what we're seeing right is that our portfolio companies now have had almost a year to deal with the realities of this economic environment and the change in the venture capital environment to understand what the new standards and the new metrics for success are in the venture capital ecosystem, not only from an operational perspective, but also from a fund-raising perspective.
Okay. Thank you for answering today's presentation.
Alright.
Sajal Srivastava: We talked about managing that balance between hyper growth and burn it all cost. We talked about driving solid-unit economics, either having a path to profitability, being profitable, or convincing investors how you can with an incremental financing. So I would say it's not the market recovery of that we're banking on or that we're optimistic as we looked at 2024. Candidates, the hard work of our entrepreneurs and our portfolio companies of adapting and changing and surviving and making it through.
Sajal Srivastava: Clearly, we've had some portfolio companies that weren't successful in pivoting and adjusting to the environment changes, and that explains the stress that we've seen, but we also have roughly 90 percent that's sitting in our top two categories where they've responded and they've backed. Now, not all that we're going to have success in 2024, but I'd say we feel, again, we're coming to the end given the adapting and the adjustment. But, again, conditions can change, execution, these are startup companies, they can make mistakes, and so things could change, but at least as we look today, we look at the response, we look at the game plan, we look at the cash runway of the portfolio companies, and then the last piece is the fundraising activity.
Sajal Srivastava: Even in this environment that our portfolio companies here in Q4 and Q1 that are on track for, again, I think it's small amount of light at the end of the tunnel. We're not saying it's over, but some positive data points for us is and we go into 24. Understood.
Ryan Lynch: That's all for me this afternoon. Thank you.
K.C. Alexander: The next question comes from K.C. Alexander with Compass Point, please. Go ahead.
Christopher Mathieu: Just a couple of questions. Chris, you said you pulled cash down from the credit facility at the end of the quarter to meet some regulatory hurdles. Can you tell me how much that was because I'm trying to get to a more normalized leverage ratio at the end of the quarter as opposed to the reported 1.62 times? Yeah, so I would say that is a quarterly event that you would expect to see for at least the next two or three quarters.
Christopher Mathieu: But that's not the average cash outstanding. So if you're trying to calculate weighted average debt outstanding for interest expense. So there are a number of quarterly tests that all BDCs have and I would say there's at least a handful that do the same approach that we're doing where they have a larger gross asset and some people use it through swaps or treasury bills. We found that it's most efficient to use the existing credit facility we have to to gross up the balance sheet.
Christopher Mathieu: But to answer, I guess, most direct. You should expect for at least another two or three quarters that the cash balance would be elevated. So kind of gross at leverage would be kind of consistent, what you're seeing for this quarter.
Sajal Srivastava: Okay.
Sajal Srivastava: Secondly, you mentioned in response to a previous question that there's a couple of companies where your loans are maturing in the first part of next year. And by your admission, you don't expect the environment to change. How confident are you, there's nothing more binary than the maturity date of a term load. How confident are you that those companies have a financing or some type of an event that creates the conditions that will allow them to make timely repayment on those loans?
Sajal Srivastava: Yeah, I'm curious as I'll take it. So I would say to the extent that there was concern, those companies would be on our credit watch list today, we would wait for the future event. But I would say again, and Chris, you can correct correctly or wrong. I mean, I think a fair amount that is natural amortization that's coming, so these aren't necessarily bullet payments of the few companies that may or may not have a bullet payment in Q1 or Q2.
Sajal Srivastava: I think it's on a case-by-case basis, but I would just say as we looked at Q1, oh sorry, Q4 and Q1, it's mostly natural amortization, meaning monthly principal payments as opposed to a lump sum of final maturity. And then I would say just generally speaking, when it comes to extensions, it's on a fact and circumstance basis of extending maturity dates depending on the credit situation and credit rating and cash runway the company.
Sajal Srivastava: Okay, great.
Sajal Srivastava: Now when I look at this quarter's activity with 20 million of schedule principal amortization, that seems like a high amount where there's some bullet payments in there. I want to take a look. I think during the court, I mean, it was 70 million of cash we had. We had 30 million of 30 to 40 million of pre-pays. Right, Chris? We had repays on revolvers. Again is another component of the cash that we saw and then portfolio amortization.
Sajal Srivastava: I don't know if you had the detail. Right. Well, no, I'm looking at the 20 million specifically stated as scheduled principal amortization. And that seems like a large amount. So I'm trying to understand if there was any full of maturities in that. There was one there was one representing 12 million. Right. Okay. That makes that that number makes a lot more sense now.
Sajal Srivastava: Okay.
Brian McKenna: Thank you.
Brian McKenna: That's all for me.
Brian McKenna: Next question comes from Brian McKenna with JNB Securities. Please go ahead. Great. Thanks. So I appreciate the outlook commentary heading into next year.
Sajal Srivastava: But if 2024 doesn't play out as expected and the recovery across the industries pushed out even further, what's the expectation for portfolio performance specifically as it relates to non accruals and just underlying credit quality. And then what might that mean for the trajectory of leverage? Yeah. You know, I'm for say again, but the crystal ball. I don't want to be joking. You're obviously we take a quarter to quarter. We take it facts and circumstances.
Sajal Srivastava: And I would say you know, the good news is as we look to our higher rated credit scored companies to have significant amounts of cash runway to make it through 2024 and beyond. So I would say that's one element. I'd say the second so existing cash runway continues to be strong for our top two rated credit watchless companies to say the second element is despite the depressed market. Again, as we talked about, we're seeing our portfolio companies are raising new rounds of financing with one already here in Q4 of 30 million.
Sajal Srivastava: A second one, you know, happening imminently and more underway. So I think again, we feel our remaining our top two rated portfolio companies are attracting follow on capital. They have earlier this year. We believe that they're doing so here in Q4 and Q1. And then I do think again it's we're seeing sectors that continue to attract strategic interest equity interest. I don't want to say AI, for example, everything in anything with a on can get funded or today.
Sajal Srivastava: So so I'd say that's, you know, a more balanced outlook can't really comment on 2024 other than yes, if, you know, our goal is to deliver by virtue of the scheduled amputation. I think we see upside from portfolio company prepayments. Again, we talked about how challenging Q3 was for the entire venture capital ecosystem. And we had one of our highest levels of portfolio company prepay and liquidity of 70 million of cash generated in the third quarter.
Sajal Srivastava: So again, I don't want to say during really tough quarters, we should expect that kind of cash generation, but I would say again, it's not all doom and gloom to the extent that this challenging environment continues to be the same conditions for a prolonged. Harter.
Sajal Srivastava: Helpful thanks. And then just to follow up, you know, does it hire for longer interest rate environment impact, how you're thinking about just managing the portfolio broadly for the long term. And then does this at all impact, you know, the sectors you ultimately will invest into over time. You know, I think equity investors will take a second look and say, my gosh, that's approaching equity like returns, particularly when you factor in the warrant.
Sajal Srivastava: And so I maybe I'll just provide that financing instead of this company taking venture debt. And then it makes you think about the companies who don't raise equity or who sponsor you. And there's don't say, forget it will do it instead. And then it means, are you getting adversely selected because the new companies that you're talking to with these really high rates are ones that whose investors don't want to give them more capital.
Sajal Srivastava: That's why our approach has been to hold yields generally in the same level, but take on what we think are, you know, companies with stronger credit profiles as Jim mentioned lending to companies that have recently raised rounds of equity financing. They have seen the reset and their evaluations. So from an LTV perspective, we feel stronger in terms of using that as a calculation and then have lower cash burn rates longer cash runway.
Sajal Srivastava: So I think that's our perspective on that. But I think on the other hand, we do think of the impact of interest expense on their cash flow. And so that obviously impacts burn rates. And so, you know, it's something to be mindful of. But again, the majority of our portfolio companies are focused to get to profitability, but they aren't necessarily there yet today.
Sajal Srivastava: Great. Thank you.
Operator: This concludes our question and answer session.
James Labe: I would like to down the conference back over to Mr. Jim for any closing remarks. Please go ahead. Okay. Thank you. And as always like to thank everyone for listening and participating in today's call. I hope you sound it helpful. We look forward to talking with you all again next quarter. Thanks again. Have a nice day. Bye bye.
Operator: The conference call has now concluded.
Operator: Thank you for joining today's presentation. You may all.