Q1 2024 Hercules Capital Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to the Hercules Capital first quarter 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your co-speaker today, Michael Hara, Director of Investor Relations. Please go ahead.
Good day.
Michael W. Hara: Thank you for standing by welcome to the Hercules Capital first quarter 2024 earnings call. At this time, all participants are in listen only mode.
Michael W. Hara: After the speaker's presentation, there will be a question and answer session.
Michael W. Hara: To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising you have just raised to draw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to Michael.
Operator: Michael Hara director of Investor Relations. Please go ahead.
Michael W. Hara: Thank you, Gerald. Good afternoon, everyone, and welcome to Hercules' conference call for the first quarter of 2024. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules' financial results were released just after today's market close and can be accessed from the Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call.
Michael W. Hara: Thank you Darryl good afternoon, everyone and welcome to Hercules Conference call for the first quarter of 2024.
Michael W. Hara: On the call today from Hercules are Scott Luce, King CEO, and Chief investment Officer, and Seth Meyer CFO.
Michael W. Hara: Hercules financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at Investor Dot <unk> Dot com.
Michael W. Hara: An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call. During this call. We may make forward looking statements based on our own assumptions and current expectations.
Michael W. Hara: During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guaranteed future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including but not limited to the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website.
Michael W. Hara: Forward looking statements are not guarantees of future performance.
Michael W. Hara: Not be relied upon in making any investment decision.
Michael W. Hara: Financial results may differ from the forward looking statements made during this call for a number of reasons, including but not limited to the risks identified in our annual report on Form 10-K.
Michael W. Hara: Any forward-looking statements made during this call are made only as of today's date, and Hercules assumes no obligation to update any such statements in the future.
Michael W. Hara: Other filings that are publicly available on the Sec's website any forward looking statements made during this call are made only as of today's date.
Michael W. Hara: And Hercules assumes no obligation to update any such statements in the future.
Michael W. Hara: With that I will turn the call over to Scott.
Scott Bluestein: Thank you, Michael, and thank you all for joining the Hercules Capital Q1 2024 earnings call. Following our record operating performance in 2023, Hercules Capital is off to a tremendous start in 2024.
Michael W. Hara: Okay.
Speaker Change: Thank you Michael and thank you all for joining the Hercules capital Q1, 2024 earnings call.
Scott Bluestein: Following our record operating performance in 2023 Hercules capital is off to a tremendous start to 2024.
Scott Bluestein: Our record origination and funding performance in Q1 continues to reflect the benefits of being able to operate an institutional venture and growth stage lending platform at scale, our ability to consistently deliver strong results for our shareholders, and provide custom-tailored solutions for our growth stage borrowers in a variety of market environments. It speaks to the quality of our employees, the strength of the platform, and the team-first culture that we have built, and our 20-plus year history of operating with an emphasis on prudent underwriting, asset and liability diversification, and an unwavering commitment to the venture and growth stage ecosystem that we serve.
Scott Bluestein: Our record origination and funding performance in Q1 continues to reflect the benefits of being able to operate in institutional venture and growth stage lending platform at scale.
Scott Bluestein: Our ability to consistently deliver strong results for our shareholders and provide custom tailored solutions for our growth stage borrowers and a variety of market environments.
Scott Bluestein: Speak to the quality of our employees the strength of the platform and team first culture that we have built and our 20 plus year history of operating with an emphasis on prudent underwriting asset and liability diversification and an unwavering commitment to the venture growth stage ecosystem that we serve.
Scott Bluestein: As of the end of Q1, Hercules Capital is managing more than $4.5 billion of assets, an increase of 14.7% from where we were a year ago. We continue to expect 2024 to be another year with higher-than-normal market and macro volatility and a higher-for-longer rate environment.
Scott Bluestein: As of the end of Q1 Hercules capital was managing more than $4 5 billion of assets an increase of 14, 7% from where we were a year ago.
Scott Bluestein: We continue to expect 2024 to be another year with higher than normal market and macro volatility and the higher for longer rate environment, but as we discussed on our last call. We expected the market environment for new originations to improve throughout 2024, we.
Scott Bluestein: But, as we discussed on our last call, we expected the market environment for new originations to improve throughout 2024. We have already witnessed this in Q1, and we are now benefiting from the balance sheet decisions that we made throughout 2023, where we went long on liquidity and low leverage. We continue to manage our business and balance sheet defensively while maintaining maximum flexibility to shift to offense quickly and aggressively if deal quality warrants it, as we did in Q1.
Scott Bluestein: We have already witnessed this in Q1 and we are now benefiting from the balance sheet decisions that we made throughout 2023, where we went long liquidity and low leverage.
Scott Bluestein: We continue to manage our business and balance sheet defensively, while maintaining maximum flexibility to shift to offense quickly and aggressively if deal quality warranted as we did in Q1.
Scott Bluestein: This includes continuing to enhance our liquidity position, maintaining low leverage, tightening our credit screens for new underwritings, and maintaining our higher than normal first lien exposure, which remained relatively flat at 88.4% in Q1. Let me now recap some of the key highlights of our performance for Q1.
Scott Bluestein: This includes continuing to enhance our liquidity position, maintaining low leverage tightening our credit screens for new underwritings and maintaining our higher than normal first lien exposure, which remained relatively flat at 88, 4% in Q1.
Scott Bluestein: Let me now recap some of the key highlights of our performance for Q1.
Scott Bluestein: Many of the quality later stage companies that put off debt decisions in 2023 were back at the table, and that drove our very strong start to the year on origination. In Q1, we originated an historic record for any quarter for both gross debt and equity commitments and gross fundings of $956 million and $605.2 million, respectively. The $605.2 million of gross funding in Q1 is the strongest funding quarter that we have ever delivered.
Scott Bluestein: Many of the quality later stage companies that put off that decisions in 2023.
Scott Bluestein: Back at the table and that drove our very strong start to the year on originations.
Scott Bluestein: In Q1, we originated and historic record for any Q1 for both gross debt and equity commitments and gross fundings of $956 million and $605 2 million respectively.
Scott Bluestein: The $605 2 million of gross fundings in Q1.
Scott Bluestein: Is the strongest funding a quarter that we have ever delivered.
Scott Bluestein: For Q1, we generated total investment income of $121.6 million, up nearly 16% year-over-year, and net investment income of $79.2 million, up nearly 21% year-over-year, or $0.50 per share, and provided 125% coverage of our base distribution of $0.40 per share. We were able to achieve 125% coverage of our base distribution despite ending the quarter with very conservative gap leverage of 93.6%.
Scott Bluestein: For Q1, we generated total investment income of $121 6 million.
Scott Bluestein: Up nearly 16% year over year.
Scott Bluestein: And net investment income of $79 2 million.
Scott Bluestein: Nearly 21% year over year or 50 cents per share.
Scott Bluestein: In providing 125% coverage of our base distribution of 40 cents per share.
Scott Bluestein: We were able to achieve 125% coverage of our base distribution, despite ending the quarter with very conservative GAAP leverage of 93, 6%.
Scott Bluestein: This is our fourth consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayment. We also generated a return on equity in Q1 of 18.8%. Our portfolio generated a gap effective yield of 14.9% in Q1 and a core yield of 14%. Our balance sheet remains very well positioned to support our continued growth objectives and serves as a key differentiator of our business.
Scott Bluestein: This is our fourth consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee acceleration is from early repayments.
Scott Bluestein: We also generated return on equity in Q1 of 18, 8%.
Scott Bluestein: Our portfolio generated a GAAP effective yield of 14, 9% in Q1, and a core yield of 14%.
Scott Bluestein: Our balance sheet remains very well positioned to support our continued growth objectives and serves as a key differentiator of our business.
Scott Bluestein: The focus of our origination efforts in Q1 was once again on quality and diversification. Our Q1 Originations activity was driven by both our technology and life sciences teams, delivering record funding performance during the quarter, although new business activity was again intentionally weighted slightly more towards the life sciences side.
Scott Bluestein: The focus of our origination efforts in Q1 was once again on quality and diversification.
Scott Bluestein: Our Q1 originations activity was driven by both our technology and life Sciences teams delivering record funding performance during the quarter.
Scott Bluestein: Although new business activity was again intentionally weighted slightly more towards the life Sciences side.
Scott Bluestein: In Q1, approximately 65% of our funding was to life sciences companies, while approximately 57% of our commitments during the quarter were to life sciences companies. Our new commitments in Q1 reflect our slightly more optimistic view of the technology sector as we start the year. We funded debt capital to 24 different companies in Q1, of which 9 were new borrower relationships. Consistent with what we saw throughout 2023, we expanded our funding relationship with numerous portfolio companies that continued to show strength and achieve performance milestones during the first quarter.
Scott Bluestein: In Q1, approximately 65% of our fundings were to life Sciences companies, while approximately 57% of our commitments during the quarter were to life Sciences companies.
Scott Bluestein: Our new commitments in Q1 reflect our slightly more optimistic view on the technology sector as we start the year.
Scott Bluestein: We funded debt capital to 24 different companies in Q1 of which nine were new borrower relationships.
Scott Bluestein: Consistent with what we saw throughout 2023, we expanded our funding relationship with numerous portfolio companies that continue to show strength and achieved performance milestones during the first quarter.
Scott Bluestein: In addition, the record level of new commitment activity and continued strong performance of the current portfolio led to an increase in our available unfunded commitments to approximately $483.4 million, which increased from $335 million in Q4. Since the close of Q1 and as of April 30, 2024, our deal team has closed $117.3 million of new commitments and funded $52.3 million. We have pending commitments of an additional $308.5 million in signed, non-binding term sheets, and we expect this number to continue to grow as we progress in Q2. Consistent with our historical approach to underwriting credit, we will remain disciplined on new originations, and we will prioritize asset quality over chasing higher-risk transactions with a yield premium.
Scott Bluestein: In addition, the record level of new commitment activity and continued strong performance of the current portfolio led to an increase of our available unfunded commitments to approximately $483 4 million, which increased from $335 million in Q4.
Scott Bluestein: Since the close of Q1 and as of April 30th 2024, our deal team has close to $117 $3 million of new commitments and funded $52 3 million.
Scott Bluestein: We have pending commitments of an additional $308 5 million in signed non binding term sheets and we expect this number to continue to grow as we progressed in Q2.
Scott Bluestein: Consistent with our historical approach to underwriting credit we will remain disciplined on new originations and we will prioritize asset quality over chasing higher risk transactions with a yield premium.
Scott Bluestein: Given the market backdrop throughout 2023, which carried into 2024, we remain pleased with the exit activity that we saw in our portfolio during the first quarter. In Q1, we had four portfolio companies announce acquisitions, of which one was recently completed in March. We also have two portfolio companies that have filed registration statements for an IPO. As we anticipated, early loan repayments decreased in Q1 to approximately $161 million, which was in line with our guidance of $125 million to $225 million.
Scott Bluestein: Given the market backdrop throughout 2023, which carried into 2024.
Scott Bluestein: We remain pleased with the exit activity that we saw in our portfolio during the first quarter.
Scott Bluestein: In Q1, we had four portfolio companies announced acquisitions of which one was recently completed in March.
Scott Bluestein: We also have two portfolio companies that have filed registration statements for an IPO.
Scott Bluestein: As we anticipated early loan repayments decreased in Q1 to approximately $161 million, which was in line with our guidance of 125 million to $225 million.
Scott Bluestein: For Q2 2024, we expect prepayments to accelerate from Q1 levels and be in the range of $200 million to $300 million, although this could change as we progress in the quarter. Credit Quality of the Debt Investment Portfolio Improved Quarter Over Quarter. Our weighted average internal credit rating of 2.16 improved from the 2.24 rating in Q4 and remains at the low end of our normal historical range. Our grade 1 and 2 credits improved to 68%, compared to 62.6% in Q4. Grade 3 credits decreased 29.2% in Q1 versus 34% in Q4.
Scott Bluestein: For Q2, 2024, we expect prepayments to accelerate from Q1 levels and be in the range of 200 million to $300 million. Although this could change as we progress in the quarter.
Scott Bluestein: Credit quality of the debt investment portfolio improved quarter over quarter.
Scott Bluestein: Our weighted average internal credit rating of 2.16 improved from the two point to four rating in Q4 and remains at the low end of our normal historical range.
Scott Bluestein: Our grade one and two credits improved to 68% compared to 62, 6% in Q4.
Scott Bluestein: Three credits decreased 29, 2% in Q1.
Scott Bluestein: Versus 34% in Q4.
Scott Bluestein: Our rated 4 credits decreased moderately to 2.6% from 3.4% in Q4, and rated 5 credits were 0.2%. In Q1, the number of loans on nonaccrual increased by one. We had two debt investments on nonaccrual with an investment cost and fair value of approximately $42.2 million and $5.2 million, respectively, or 1.2 percent and 0.1 percent as a percentage of the company's total investment portfolio at cost and value, respectively. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our monitoring remains enhanced given continued market volatility.
Scott Bluestein: Our rated four credits decreased moderately to two 6% from three 4% in Q4 and rated five credits were 0.2%.
Scott Bluestein: In Q1, the number of loans on nonaccrual increased by one we had two debt investments on non accrual with an investment cost and fair value of approximately $42 2 million and $5 $2 million, respectively, or one, 2% and 0.1% as a percentage.
Scott Bluestein: The company's total investment portfolio at cost and value respectively.
Scott Bluestein: With respect to our broader credit book and outlook. We generally remain pleased by what we are seeing on a portfolio level and are monitoring remains enhanced given continued market volatility.
Scott Bluestein: Our focus on credit underwriting and a diversified asset base is continuing to serve us well. We are continuing to see general outperformance and positive momentum in terms of capital raising, M&A activity, and milestone achievement throughout our life sciences book, while things continue to remain slightly more muted on the technology side with respect to the same. During Q1, capital raising across our portfolio was very strong, with 31 companies raising approximately $2.6 billion in new capital, which was, again, weighted towards our life sciences portfolio.
Scott Bluestein: Our focus on credit underwriting and a diversified asset base is continuing to serve us well.
Scott Bluestein: We are continuing to see general outperformance and positive momentum in terms of capital raising and M&A activity and milestone achievements throughout our life Sciences book, while things continue to remain slightly more muted on the technology side with respect to the same.
Scott Bluestein: During Q1 capital raising across our portfolio was very strong.
Scott Bluestein: With 31 companies raising approximately $2 6 billion in new capital, which was again weighted towards our life Sciences portfolio.
Scott Bluestein: During Q1 2024, Hercules had net realized gains of $8.2 million, comprised of net realized gains of $9.2 million, primarily due to the gain on warrant and equity investments, offset by $1 million due to the loss on warrant and equity investments. Our net asset value per share in Q1 was $11.63, an increase of 1.7% from Q4 2023. We ended Q1 with strong liquidity of $498.1 million. Our balance sheet is both strong and stable, and it puts us in a very strong position to be able to benefit from a new business environment that we believe is as strong as we have seen in several years now.
Scott Bluestein: During Q1 2020 for Hercules had net realized gains of $8 2 million.
Scott Bluestein: Comprised of net realized gains of $9 2 million.
Scott Bluestein: Primarily due to the gain on warrant and equity investments offset by $1 million due to the loss on warrant and equity investments.
Scott Bluestein: Our net asset value per share in Q1 was $11 63.
Scott Bluestein: An increase of one 7% from Q4 2023.
Scott Bluestein: We ended Q1 with strong liquidity of $498 1 million.
Scott Bluestein: Our balance sheet is both strong and stable and it puts us in a very strong position to be able to benefit from a new business environment that we believe is as strong as we have seen in several years now.
Scott Bluestein: Venture capital ecosystem fundraising and investment activity started in 2024 with fundraising activity at approximately $9.3 billion and investment activity at approximately $36.6 billion, according to data gathered by PitchBook NVCA. We expect investment activity to remain at these levels, driven by more selectivity in terms of the profile of the companies that are receiving equity funding. Given our strong operating performance in Q1, we exited the quarter with undistributed earnings spillover increasing to approximately $143 million, or $0.88 per ending share outstanding.
Scott Bluestein: The venture capital ecosystem fundraising and investment activity started 2024 with fund raising activity at approximately $9 3 billion and investment activity at approximately $36 6 billion. According to data gathered by pitch book NVCA.
Scott Bluestein: We expect investment activity to remain at these levels driven by more selectivity in terms of the profile of the companies that are receiving equity funding.
Scott Bluestein: Given our strong operating performance in Q1, we exited the quarter with undistributed earnings spillover, increasing to approximately $143 million or 88 cents per ending share outstanding.
Scott Bluestein: For Q1, we are maintaining our base distribution of $0.40 and a supplemental distribution of $0.08 per share. This represents our 15th consecutive quarter of being able to provide our shareholders with a supplemental distribution on top of our regular quarterly base distribution.
Scott Bluestein: For Q1, we are maintaining our base distribution of <unk> 40.
Scott Bluestein: And a supplemental distribution of <unk> <unk> per share.
Scott Bluestein: This represents our 15th consecutive quarter of being able to provide our shareholders with a supplemental distribution on top of our regular quarterly base distribution.
Scott Bluestein: Subsequent to Q1, we marked our 20th year investing in the Venture and Growth Stage Asset class, reaching the $20 billion milestone in cumulative debt commitments for our company. By focusing on our team, culture, and always trying to do things that are in the best interest of our shareholders and stakeholders, our platform has been able to reach incredible highs. Our scale, institutionalized lending platform, and our ability to capitalize on a rapidly changing competitive and macro environment continue to drive our business forward and our operating performance to record levels.
Speaker Change: In closing.
Scott Bluestein: Subsequent to Q1, we marked our 20th year investing in the venture and growth stage asset class, reaching the $20 billion milestone in cumulative debt commitments for our company.
Scott Bluestein: By focusing on our team.
Scott Bluestein: Culture, and always trying to do things that are in the best interest of our shareholders and stakeholders. Our platform has been able to reach an incredible highs.
Scott Bluestein: Our scale institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels.
Scott Bluestein: Our success since inception over 20 years ago is attributable to the tremendous dedication, effort, and capability of our employees and the trust that our venture capital and private equity partners place with us every day. Having a team and platform that is able to consistently deliver for our borrowers in a variety of markets is something that we are all incredibly proud of. We are thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth.
Scott Bluestein: Our success since inception over 20 years ago is attributable to the tremendous dedication.
Seth: We are thankful to the many companies management teams and investors that continue to make Hercules their partner of choice.
Seth Hardy Meyer: Thank you, Scott, and good afternoon, ladies and gentlemen. Hercules' record first quarter originations performance was a testament to the amazing team and the relationships we have in the venture and sponsor back space in which we operate. The portfolio growth was supported by our low leverage and cost of debt, as well as strong liquidity entering the quarter, a position we will maintain strategically throughout 2023. To further support our current and anticipated growth, in the first quarter, we took advantage of the ATM by raising $66 million of very accretive capital, helping us to maintain a strong leverage position below one-to-one on both a gap and regulatory basis. We continue to maintain strong available liquidity of approximately half a billion as of quarter end, and more than $850 million across the platform, including advisor funds managed by our wholly owned subsidiary, Hercules Advisor, LLC.
Seth Hardy Meyer: And the relationships, we have in the venture and sponsor back space in which we operate.
Seth Hardy Meyer: Portfolio growth was supported by our low leverage and cost of debt as well as strong liquidity entering the quarter our position we maintain strategically throughout 2023.
Seth Hardy Meyer: Speaking of Hercules Advisor, the performance for the quarter enabled us to increase our second quarterly dividend to 1.6 million, which when combined with the expense reimbursement of approximately 2.9 million, resulted in 4.5 million of cash delivered to the BDC in Q1. With that in mind, let's review the areas of the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and financial output. Turning our attention to the income statement performance and highlights.
Seth Hardy Meyer: Total investment income was on par with the record prior quarter at $121.6 million, driven by the prior year and year-to-date growth in the debt portfolio. Core investment income, a non-GAAP measure, remains stable at $114.2 million. Core investment income excludes the benefit of income recognized as a result of loan prepayment.
Seth Hardy Meyer: Net investment income decreased $79.2 million, or $0.50 per share, in Q1, an 8% quarter-over-quarter decrease driven by an increase in variable compensation due to the record funding volume and peaking of benefit expenses and payroll taxes in Q1. Our effective and core yields changed modestly in the first quarter to 14.9% and 14%, respectively, compared to 15.3% and 14.3% in the prior quarter. The decrease in the core yield was due to a lower yield on new originations and lower expired commitment revenue.
Seth Hardy Meyer: First quarter gross operating expenses were $45.3 million compared to $38.2 million in the prior quarter, net of costs recharged to the RIA. Our net operating expenses were $42.4 million. Interest expense and fees remain stable at $20 million.
Seth Hardy Meyer: SG&A increased to $25.2 million at the low end of my guidance. However, net of costs recharged to the RREA, SG&A expenses were $22.4 million. Our weighted average cost of debt remains stable at 4.9 percent. Our ROAE or NII over average equity was 18.8 percent for the first quarter, and our ROAA or NII over average total assets was 9.2 percent. Switching the focus to the NAV unrealized and realized activity.
Seth Hardy Meyer: During the quarter, our NAV per share increased 20 cents to $11.63 per share. This represents an NAV per share increase of 1.7% quarter over quarter. The main drivers were the net investment income of $79.2 million, accretion due to the use of the ATM, net realized gains mainly on the realization events on equity and warrant positions of $8.2 million, and unrealized appreciation of $3.6 million, all of which exceeded the dividends paid in the quarter.
Seth Hardy Meyer: Our $3.6 million of unrealized appreciation was the result of $0.7 million of net unrealized appreciation on the loan portfolio and $5.7 million of appreciation on the public equity and warrant portfolio. 2.4 million of unrealized depreciation was attributable to the valuation movements in the privately held equity warrants and investment funds, and 0.2 million of the net unrealized depreciation was attributable to net foreign exchange movements, in addition to 7.3 million of net unrealized depreciation attributable to the escrow and other investment-related receivables. These were partially offset by the reversal of prior unrealized depreciation of 7.5 million.
Seth Hardy Meyer: For leverage and liquidity, our gap in regulatory leverage increased to $93.6 million and 84.4%, respectively, compared to the prior quarter due to the greater utilization of our leveraged facilities on the higher volume of business. Netting out leverage with cash on the balance sheet, our net gap and regulatory leverage were 91% and 81.7%, respectively. We ended the quarter with nearly $500 million of available liquidity. As a reminder, this excludes the capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $850 million of available liquidity.
Seth Hardy Meyer: The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities. As a final point, we continued to access the ATM market during the quarter and, as I mentioned, raised approximately $66 million, resulting in a $0.13 per share accretion to NAV. Finally, on the outlook points for the second quarter, we are updating our core yield guidance range at 13.7 to 13.9 percent, excluding any future benchmark interest rate change.
Seth Hardy Meyer: Finally on the outlook points for the second quarter, we are updating our core yield guidance range at 13, 7% to 13, 9%, excluding any future benchmark interest changes as a reminder, more than 97% of our portfolio is floating.
Seth Hardy Meyer: As a reminder, more than 97 percent of our portfolio is floating with the floor, so Fed decreases in interest rates may not have an equal reduction on our core yield. Although very difficult to predict, as communicated by Scott, we expect $200 million to $300 million in prepayment activity in the second quarter. We expect our second quarter interest expense to increase slightly on the growth of the balance sheet compared to the prior quarter.
Seth Hardy Meyer: With a floor so fed decreases in interest rate may not have an equal reduction to our core yield.
Seth Hardy Meyer: So very difficult to predict as communicated by Scott, we expect $2 million to $300 million in prepayment activity in the second quarter.
Seth Hardy Meyer: We expect our second quarter interest expense to increase slightly on the growth of the balance sheet compared to the prior quarter for.
Seth Hardy Meyer: For the second quarter, we expect SG&A expenses of $23 to $24 million and an RIA expense allocation of approximately $2.5 million. As previously guided, the advisor business began paying dividends in the fourth quarter to Hercules Capital. Going forward, we expect a quarterly dividend from the RIA of approximately $1 to $1.5 million per quarter. In closing, the business is positioned well for 2024 after delivering record first quarter commitments and funding. We're excited to see how the rest of 2024 develops. I will now turn the call over to the operator to begin the Q&A part of our call. [inaudible]
Seth Hardy Meyer: For the second quarter, we expect SG&A expenses of $23 million to $24 million.
Seth Hardy Meyer: <unk> and R&D expense allocation of approximately $2 5 million.
Seth Hardy Meyer: In closing the business is positioned well for 2024 after delivering record first quarter commitments and fundings were excited to see how the rest of 2024 develops I will now turn the call over to the operator to begin the Q&A part of our cargo.
Operator: At this time, we will conduct the question and answer portion of the call. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Crispin Love with Piper Sandler, The Floor is Yours.
Speaker Change: Thank you.
Seth Hardy Meyer: At this time, we will conduct the question and answer portion of the call. As a reminder to ask the question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Crispin Elliot Love: Our first question.
Operator: Comes from the line of Crispin Love with Piper Sandler the floor is yours.
Crispin Elliot Love: Thanks. Good afternoon.
Crispin Elliot Love: Thanks, Good afternoon.
Scott Bluestein: First on first quarter funding, very strong here with net Hercules funding at nearly $500 million. And Scott, you mentioned the pent-up demand of companies that put off debt decisions in 2023 coming back to the table early in the year. Do you view the first quarter here as somewhat of an anomaly, or could this pent-up demand just remain a tailwind through the next few quarters to continue to drive elevated levels or even levels similar to the first quarter?
Crispin Elliot Love: First on first quarter funded very strong here with Matt Hercules fundings at nearly $500 million and Scott you mentioned, the pent up demand.
Scott Bluestein: Elevated levels or even levels similar to the first quarter.
Scott Bluestein: Thanks, Crispin. The funding activity in Q1 was exceptionally strong. As you pointed out, $605 million of gross funding, nearly $500 million net in the BDC, that led to net debt investment portfolio growth of over $325 million. If you look at our pending and closed pipeline, you can see continued momentum. So I would say that we are very optimistic about the continuation of a strong funding environment over the next couple of quarters. Do we expect it to reach the level that we saw in Q1? Most likely not, but we certainly don't expect to see a reversion back to the level that we saw a year or so ago?
Crispin Elliot Love: Great. Thanks, Scott.
Scott Bluestein: That all makes sense. And then there is a little bit of a bigger picture question just on the competitive environment. Can you just talk a little bit about how the competitive environment has shifted just over the last year or so and a few months since the bank turmoil of March last year? Are you seeing any recent activity from banks coming back or increasing exposure? And then separately, are you seeing more of a pickup from private lenders or others in the space, or any retrenchment? Just curious about the competitive environment as a whole. Sure, yeah.
Scott Bluestein: Sure, I think for us, it's still status quo on the competitive side. As I pointed out in the last few calls, there are still venture banks that are active in the market. We continue to see First Citizens, and SVB, from time to time on transactions. We've seen HSBC on a handful of transactions, and we've seen a couple of other venture banks that have been in and out of the market. The reality is, we are not primarily competing with venture banks on transactions.
Scott Bluestein: When you think about sort of the non-bank side of the market, there are a handful of competitors that we compete with on a deal-by-deal basis, but there really is no consistent source of competition that we see on a deal-by-deal basis. The changes that we've made to our business in terms of being able to strengthen our balance sheet, do deals that on the low end are $10 million, on the high end are $300 million, do deals that are both expansion and established stage, go after companies that are looking for that last round of financing, have really put us in a unique position where we can play on both ends of the market, and we can really dominate everywhere in between.
Scott Bluestein: And so not much has changed on the competitive side for us, and we continue to focus on the things that we can control, and obviously, that's leading to tremendous results, both on the operating side and on the funding side as well.
Crispin Elliot Love: Thanks, Scott. Very good. Appreciate you taking my question. Sure. Thanks, Crispin.
Speaker Change: Again I appreciate you taking my questions.
Operator: Thank you for your question. One moment, please. Our next question comes from the line of Brian McKenna with Citizens. The floor is yours.
Speaker Change: Sure. Thanks Kristen.
Speaker Change: Thank you for your question one moment please.
Brian J. McKenna: Our next question.
Operator: Comes from the line of Brian Mckenna with citizens the floor is yours.
Brian J. McKenna: Thanks. Good evening, guys.
Brian J. McKenna: Thanks, Good evening guys I.
Brian J. McKenna: I appreciate all the commentary on new funding activity and the outlook, there, but I guess, what I'm trying to figure out is.
Brian J. McKenna: The trajectory of the portfolio from here just in terms of growth. So if you are at 10% in the quarter sequentially I appreciate it likely doesn't increase that much moving forward every quarter, but.
Brian J. McKenna: I appreciate all the commentary on new funding activity and the outlook there, but I guess what I'm trying to figure out is the trajectory of the portfolio from here, just in terms of growth. So, if you're 10% in the quarter sequentially, I appreciate it likely doesn't increase that much moving forward every quarter, but if there's a way, how should we think about the cadence of portfolio growth in the coming quarters? And then what might that mean for the trajectory of NII, assuming there is kind of no material shift in the rate back?
Brian J. McKenna: If theres a way how should we think about the cadence of portfolio growth in the coming quarters, and then what might that mean for the trajectory of NII, assuming kind of no material shift in any rate backdrop.
Scott Bluestein: Thanks, Brian. We don't provide funding guidance on a quarterly basis. And we certainly don't provide our expectations in terms of net debt portfolio growth. But we did provide, as we always do, updated prepayment guidance for Q2, and we expect prepayments to increase pretty substantially in the second quarter. The guidance that we gave was $200 million to $300 million. Based on what we're seeing right now, I would expect it to be on the high end of that number.
Speaker Change: Yes, Thanks, Brian we don't on a quarterly basis provides.
Scott Bluestein: Funding guidance.
Scott Bluestein: And we certainly don't provide our expectations in terms of net debt portfolio growth. We did provide as we always do updated prepayment guidance for Q2, and we expect prepayments to increase pretty substantially in the second quarter. The guidance that we gave was 200 million to $300 million based on what we.
Scott Bluestein: We're seeing right now I would expect it to be on the high end of that number. So that's almost double what we saw in Q1, where we had $160 million of prepayments. So in Q2, we're certainly not expecting to deliver another 300 plus million dollars of net debt portfolio growth.
Scott Bluestein: So that's almost double what we saw in Q1, where we had $160 million of prepayments. So in Q2, we're certainly not expecting to deliver another $300-plus million of net debt portfolio growth. I think if you think about sort of the basic cadence of the business, you know, we are generally going to do somewhere between $300 million and $400 million, or $450 million of gross funding on a quarterly basis. You can obviously pull out the normal course amortization, and then you can pull out the prepayment guidance that we give, knowing that the prepayment guidance is just our best guess based on what we know as of the date of this call.
Brian J. McKenna: Alright, great. Very helpful, Scott.
Brian J. McKenna: I think if you think about sort of the basic cadence of the business. We are generally going to do somewhere between 304 hundred $450 million of gross fundings on a quarterly basis, you can obviously pull out the normal course amortization and then you can pull out the prepayment guidance that we give knowing that the prepayment.
Brian J. McKenna: Guidance is just our best guess based on what we know as of the date of this call.
Scott Bluestein: And then maybe a question on credit. So you added one company to non-accrual status. Can you just talk about that one investment a little bit? And then, just more broadly, non-accruals are still low in the absolute, but are there any areas across the portfolio you're watching closely today or any situations you're maybe looking to get out in front of?
Speaker Change: Alright, great helpful. Scott and then just maybe.
Scott Bluestein: A question on credit. So you had a one company to non accrual status can you just talk about that one.
Scott Bluestein: <unk> investment a little bit and then just more broadly non accruals are still low in the absolute but are there any areas across the portfolio.
Scott Bluestein: Watching closely today or any situations you may be looking to get out in front of us.
Scott Bluestein: Sure. So we're always watching the totality of the portfolio very closely. That's our DNA. That's what we do. We run this firm as if it's a credit shop, which is the way a venture lending firm really should be run. The overall credit book continues to perform very well. If you look at the numbers that we just reported, less than 3% of the entirety of our book is in grade 4 and grade 5 credits, million dollars in grade four, and about eight million dollars in grade five.
Scott Bluestein: Sure. So we're always watching the totality of the portfolio very very closely.
Scott Bluestein: That's our DNA, that's what we do.
Scott Bluestein: We run this firm as it fits in.
Scott Bluestein: If it's a credit shop, which is the way our venture lending firm really should be run.
Scott Bluestein: The overall credit book continues to perform very well if you look at the numbers that we just reported.
Scott Bluestein: Million.
Scott Bluestein: And grade four and about $8 million in grade five so it's very small on a relative basis we.
Scott Bluestein: So it's very small on a relative basis. We did add one small loan to our nonaccrual list in Q1. That loan has about a 12 million dollar cost basis and a fair value of approximately five million. And our expectation is that we'll have that situation resolved before our next earnings call. All right, I'll leave it there. Thank you.
Scott Bluestein: We did add one small loan to our nonaccrual list in Q1 that loan is about a $12 million cost basis has a fair value of approximately $5 million and our expectation is that we'll have that situation resolved before our next earnings call.
Scott Bluestein: Alright ill leave it there thank you.
Speaker Change: Thank you for your question.
Operator: This question comes from Lionel Finian O'Shea from WAFS.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Finian O'shea WNS the line is yours.
Finnian O'Shea: Hey, everyone. Good afternoon. Scott, going back to some of your introductory remarks on positioning the company with liquidity to take advantage of this market, that looks like it worked out pretty well. Are you able to update us on what you're thinking today and how much growth at Hercules, the overall BDC, you sort of hope for or plan for this year and next year? Sure.
Speaker Change: Hey, everyone. Good afternoon.
Finnian O'Shea: Scott going back to.
Finnian O'Shea: Some of your introductory remarks on <unk>.
Finnian O'Shea: Positioning the company.
Finnian O'Shea: With liquidity to take advantage of this market.
Finnian O'Shea: It looks like it worked out pretty well are you able to update us on what youre thinking today and how much.
Finnian O'Shea: ROE said Hercules the overall BDC <unk>.
Finnian O'Shea: Sort of hope for planned for.
Scott Bluestein: Sure. Thanks, Ben.
Finnian O'Shea: This year next year.
Scott Bluestein: Sure. Thanks, Dan.
Speaker Change: We're planning for a strong robust year in terms of originations and growth.
Scott Bluestein: We're planning for a strong, robust year in terms of originations and growth. We were pretty clear in terms of our positioning last year that we were preparing for an improved origination environment in 2024. That's what we saw in Q1, and that's what we expect to see over the next several quarters. Having said that, if there is a quarter where we don't see deal equality, we'll pull back just as we would do in the ordinary course.
Scott Bluestein: We were pretty clear in terms of our positioning last year that we were preparing for an improved origination environment in 2024.
Scott Bluestein: That's what we saw in Q1 and that's what we expect to see over the next several quarters, having said that if there is a quarter, where we don't see deal quality will pull back just as we would do in the ordinary course.
Scott Bluestein: Terms of how we're positioning the business and how we're managing the business now it's going to be very consistent with what we did last year, which is to generally be defensive in terms of how we manage the balance sheet. We don't want to be caught in a position, where we end up low liquidity or over levered, because we think that just takes away optionality and flexibility.
Scott Bluestein: In terms of how we're positioning the business and how we're managing the business now, it's going to be very consistent with what we did last year, which is to generally be defensive in terms of how we manage the balance sheet. We don't want to be caught in a position where we end up with low liquidity or over-levered because we think that just takes away optionality and flexibility. So, Seth and I and the team are going to continue to focus on making sure we have a strong balance sheet, a healthy liquidity position, and that we're managing the business relatively conservatively with respect to leverage so that if we do have an opportunity like we saw in Q1, we're able to very quickly take advantage of it.
Scott Bluestein: So Seth and I and the team are going to continue to focus on making sure. We have a strong balance sheet, a healthy liquidity position and that we're managing the business relatively conservatively with respect to leverage so that if we do have an opportunity like we saw in Q1, we're able to very quickly take advantage of it.
Finnian O'Shea: Great, it's helpful. And a follow-up for Seth is, I think I caught the guidance for the advisor dividend to be at least at the midpoint, a little bit below what it started out at. Does that imply a cessation in growth there or less origination, or how do we think about that?
Speaker Change: Great that's helpful and.
Speaker Change: Follow up for surface I think I caught the.
Finnian O'Shea: Guidance.
Finnian O'Shea: For the advisor dividends to be at least at the midpoint a little bit below what it started out at does that imply.
Finnian O'Shea: A cessation in growth, there or less origination or how do we.
Seth Hardy Meyer: Yeah, sure, Finn. It really, in the first instance, the first dividend that we paid in Q4, there was a little bit of pent-up cash and a little excess earnings and profits that we could distribute, and that kind of spilled over into the first quarter as well. So, I would stick with the guidance of 1 to 1.5 million, but we certainly hope that that's going to continue to grow.
Seth Hardy Meyer: Yeah, sure, Finn.
Speaker Change: Think about that thanks.
Speaker Change: Yes sure thing.
Seth Hardy Meyer: It really in the first instance, the first dividend that we paid in Q4, there is a little bit of pent up cash and a little excess.
Seth Hardy Meyer: Earnings and profits that we could distribute.
Seth Hardy Meyer: And that kind of spilled over into the first quarter as well so I would stick with the guidance of one to one 5 million, but we certainly hope that that's going to continue to grow.
Finn: Thank you.
Operator: Thank you for your questions. One moment, please, as I prepare the queue. Our next question comes from the line of Casey Alexander with Compass Point Research and Trading. The floor is yours.
Seth Hardy Meyer: Yes.
Casey Jay Alexander: One moment, please about the person in the queue.
Operator: Our next question comes from the line of Casey Alexander with Compass point research and trading the floor is yours.
Casey Jay Alexander: Hi, good afternoon. First of all, congratulations on the 20th anniversary. It's quite an accomplishment, this business. My first question is, you know, I totally understand the strategy of being long liquidity in 2023, especially following the upheaval at the beginning of the year, but at what point in time do you start to take the leverage ratio up some in order to more optimize the earnings of the BDC while still being, you know, well within the leverage limits?
Casey Jay Alexander: Sure.
Casey Jay Alexander: My first question is.
Casey Jay Alexander: Totally understand the strategy of being long liquidity in 2023, especially following the upheaval at the beginning of the year.
Casey Jay Alexander: At what point in time do you start to take the leverage ratio up.
Casey Jay Alexander: I mean, you know, you could certainly deliver a lot more NII to shareholders if you were running it, you know, at 1.1 times. And it seems to me that you're in a much more stable environment than you were three, four quarters ago.
Casey Jay Alexander: Deliver a lot more NII to shareholders.
Casey Jay Alexander: You were running at $1, one time and it seems to me that you're in a much more stable environment than you were three four quarters ago.
Scott Bluestein: Yeah, thanks, Casey. And first, thanks for the congratulations. It is a tremendous accomplishment for the company and for the team, and the credit really does go to the team. So thanks for that acknowledgement.
Speaker Change: Yes, Thanks, Casey and first thanks for the congratulations.
Scott Bluestein: A tremendous accomplishment for the company and for the team.
Scott Bluestein: And the credit really does go to the team. So thanks for that acknowledgement in terms of leverage and liquidity I think if you look at what we just did in Q1, we did begin to take leverage up.
Scott Bluestein: In terms of leverage and liquidity, you know, I think if you look at what we just did in Q1, we did begin to take leverage up. We ended the year with gap leverage of about 87%. We ended Q1 with gap leverage of about 94%. So for us, that's a pretty meaningful quarterly increase given that we had over $300 million of net debt portfolio growth. On the Q4 earnings call, Seth and I were clear that we do expect to take leverage up slowly throughout the course of 2024, and that continues to be our intent.
Scott Bluestein: We ended the year with GAAP leverage of about 87%. We ended Q1 with GAAP leverage of about 94%. So that's for US that's a pretty meaningful quarterly increase given that we had over $300 million of net debt portfolio growth.
Scott Bluestein: On the Q4 earnings call Seth and I were clear that we do expect to take leverage up slowly throughout the course of 2024.
Scott Bluestein: Are we going to get to 1.1? Are we going to get to 1.15? It's really difficult to say because that will largely depend on what happens on the prepayment side of the business, but we do expect to continue to take leverage up slowly and cautiously throughout the next several quarters, which will help further drive the profitability of the business.
Scott Bluestein: That continues to be our intent or are we going to get to $1. One are we going to get to 115, it's really difficult to say because that will largely depend on what happens on the prepayment side of the business, but we do expect to continue to take leverage up slowly and cautiously throughout the next several quarters, which will help further drive.
Scott Bluestein: The profitability of the business.
Casey Jay Alexander: Okay, great. Thank you.
Speaker Change: Okay, great. Thank you.
Scott Bluestein: Secondly... You know, the first quarter is normally, you know, kind of a quieter quarter after usually following the year-end rush, and you've had... basically, basically two years of very lackluster activity and pent-up activity that looks like it's starting to come to the marketplace. And your deal size is so much larger than it was a couple years ago. So I'm curious why you wouldn't expect your deal activity to be similar to levels of Q1 as the year goes along when deal activity actually traditionally increases.
Casey Jay Alexander: Secondly.
Casey Jay Alexander: You know first quarter is normally kind of a quieter quarter. After usually following a year end rush.
Scott Bluestein: Two years of Av.
Scott Bluestein: Very lackluster activity and pent up activity that looks like it's starting to come to the marketplace and your deal size is so much larger than it was a couple of years ago. So I'm curious why you wouldn't expect your deal activity to be similar to levels of Q1 as the year goes along with deal activity actually true.
Scott Bluestein: Yeah, you know, it's a great question, and I would point out a couple of things. Despite the fact that we have the capability now to do significantly larger deals than we did, you know, one, two, three, four, five years ago, the average dollars funded for us actually has remained fairly constant. In Q1 of 23, for example, which is the year-ago period that you just referenced, our average dollars funded per portfolio company was about $21 million.
Scott Bluestein: Additionally increases.
Speaker Change: Yes, it's a great question and I would point out a couple of things.
Scott Bluestein: The average dollar is funded for US actually has remained fairly constant.
Scott Bluestein: In Q1 of 'twenty three for example, which is the year ago period that you just referenced our average dollars funded per portfolio company was about $21 million. If you look at that data today as of Q1 'twenty four it's about $23 million average dollars funded per poco.
Scott Bluestein: If you look at that data today as of Q1 24, it's about $23 million in average dollars funded per POCO. So there really hasn't been that much of an increase in terms of the average dollars, and a lot of that is sort of self-imposed.
Scott Bluestein: So there really hasnt been that much of an increase in terms of the average dollars and a lot of that is sort of self imposed we're very focused on diversification and granularity within the portfolio I think a mistake that a lot of our competitors make us when they chase the big Chase the big deals and forget about granularity within the portfolio. So we've.
Scott Bluestein: We're very focused on diversification and granularity within the portfolio. I think a mistake that a lot of our competitors make is when they chase the big deals and forget about granularity within the portfolio. So we focus very intently on our top five, our top ten as a percentage of our total bulk, and what that average dollars outstanding per POCO number is. We do see some opportunity to continue to move upstream, and we expect to be able to
Scott Bluestein: Focus very intently on our top five or top 10, as a percentage of our total book and what that average dollars outstanding per Poco number is we.
Scott Bluestein: We do see some opportunity to continue to move upstream and we expect to be able to continue to do that there were a handful of deals that we booked in Q1 that were larger in nature. There's a handful of deals that are in our pipeline right. Now that are also larger in nature, but we're also still focusing the majority of our time on the bread and butter deals where we.
Scott Bluestein: We can continue to add significant value to the ecosystem.
Casey Jay Alexander: All right, thank you for taking my question. Thanks, Casey.
Speaker Change: Alright, Thank you for taking my questions. Thanks.
Operator: Thank you for your question. One moment, please. Our next question comes from the line of John Hecht of Jeffries.
Speaker Change: Thanks Casey.
Speaker Change: Thank you for your question.
Operator: Comes from the line of John Hecht of Jefferies.
John Hecht: Afternoon, guys. Thanks for taking my question. The first one is, were the fundings, I guess the timing of the fundings, were they kind of skewed toward the back end of the quarter? And I don't think that's untypical, but just because you have such substantial growth, but you're... Your interest income was somewhat flat with last quarter.
Moderator: Floor is yours.
John Hecht: Afternoon, guys. Thanks for taking my question.
John Hecht: First one is where the fun things I guess the timing of the fundings were they kind of skewed toward the back end of the quarter.
John Hecht: And I don't think that's untypical.
John Hecht: But just because you have such substantial growth, but youre.
John Hecht: In your interest income was somewhat flat with last quarter.
Scott Bluestein: Yep, a pretty typical quarter for us where we have funding activity in each of the three months of the quarter, but the vast majority did come once again in the last month of the quarter.
Scott Bluestein: Yep.
Scott Bluestein: Pretty typical quarter for us where we have funding activity in each of the three months of the quarter, but the vast majority did come once again in the last month of the quarter.
John Hecht: Okay, and then the core yield guidance, is that a function of, you know, bigger, later-stage companies, or is it just market rates? Or how do we think about that?
Scott Bluestein: Okay and then.
John Hecht: The core yield guidance is that a function of bigger later stage companies or is it just market rates or how do we think about that.
Seth Hardy Meyer: Yeah, you're thinking about it the right way as far as larger, later stage deals that we're concluding, John. And as I had mentioned in my commentary, the decrease in the core yield was largely related to those new originations, and that's what causes us to guide down a little bit, looking forward.
Speaker Change: Yes, you're thinking about it the right way as far as larger later stage deals that were concluding Jon and as I had mentioned.
Seth Hardy Meyer: In my commentary.
Seth Hardy Meyer: The decrease in the core yields was largely related to those new originations and that's what causes us to guide down a little bit.
John Hecht: Okay, and then... How do we like the fee of fees as a percentage of, call it activity, which would be both originations and then prepayments. I guess it's more prepayment or repayment fees. Is there anything changing there? Anything we should be cognizant about in terms of what's going on in the new deal market? No, no, pretty, pretty consistent.
Seth Hardy Meyer: Looking forward.
John Hecht: The fee.
John Hecht: Kind of fees as a percentage of call it activity, which should be.
John Hecht: And then prepayments.
John Hecht: I guess, it's more prepayment or repayment fees what.
John Hecht: Is there anything changing there or anything we should be cognizant about in terms of what's going on in the new deal market.
John Hecht: No no I'm pretty.
Speaker Change: Pretty consistent John So we're not seeing a change.
John Hecht: On whether they do have backend fees, what the size of the backend C is what how old the deal is and so.
Seth Hardy Meyer: And so while we typically give guidance of either 3% to 4% on the acceleration, it could be much less or it can actually be higher in some instances. So it really depends on the specific deals, what the arrangements were, and the age of that deal, whether it's fully or nearly fully amortized. So that changes, but as far as the agreements that we're putting in place and the fees that we're arranging for new business, there's no trend difference there. Okay, that's helpful. Thanks.
Seth Hardy Meyer: While we typically give the guidance of you this 3% to 4% on the acceleration and can be much less or it can actually be higher in some instances. So it really depends on the specific deals what the arrangements where in the age of that deal, whether it's fully or nearly fully amortized.
Seth Hardy Meyer: So that changes, but as far as the agreements that we're putting in place and the fees that we're arranging a new business. There is no trend difference there.
Speaker Change: Okay. That's helpful. Thanks.
Seth Hardy Meyer: Okay.
Speaker Change: Our next question.
Operator: comes from the line of V.S. Abraham of UBS. The floor is yours. Hey, everybody.
V.S. Abraham: Sure. Thanks fellas.
Vilas T. Abraham: Hey, everybody. Thanks for the question just one for me.
Vilas T. Abraham: Given the strong origination outlook discussed on the call can you just talk a little bit about Hercules capacity right now ability to support that just from a from a people and a technology perspective, and any areas you might be thinking about doing further investment in thank you.
Scott Bluestein: You know, if you look at what we did in 21 and in 2022, but we made significant investments in the business. Our full-time employee count is now up over 110 over the course of the last 24 months. We've added to all groups and at all levels of the company; we made some very strategic, intentional additions to the investment team over the course of the last 12 months. We have boosted our back office and credit team. We have improved our operations team and our finance team. We've added to our legal team.
Vilas T. Abraham: Sure. Thanks, Phil is if you look at what we what we did in 'twenty, one and in 2022, but we made significant investments in the business.
Scott Bluestein: Our full time employee account now is up over 110 throughout the course of the last 24 months, we've added to all groups and at all levels of the company. We made some very strategic intentional additions to the investment team over the course of the last 12 months.
Scott Bluestein: So we feel very good about where we are right now from a headcount perspective and the fact that we have the ability to support some pretty extensive growth over the next year or so. In terms of the balance sheet, the balance sheet, as we've mentioned several times, is very well positioned. We have nearly 500 million of liquidity in the BDC, and nearly 850 million of liquidity across the platform. We are under levered relative to our historical targets from a gap perspective and from a regulatory perspective.
Scott Bluestein: Over the next year or so.
Scott Bluestein: In terms of the balance sheet the balance sheet as we've mentioned several times is very well positioned.
Scott Bluestein: We have nearly $500 million of liquidity in the BDC nearly $850 million of liquidity across the platform. We are under levered relative to our historical targets from a GAAP perspective and from a regulatory perspective.
Scott Bluestein: And so we think we're very well positioned to be able to take advantage of growth. I think the key caveat and comment that I'll make is we're going to take advantage of the growth if it's quality growth, right? We're not interested in growing the business just for the sake of putting assets on the books. Every deal that we do has to meet our credit screens, and it has to be a deal that we think is in the long-term best interest of our shareholders and stakeholders.
Scott Bluestein: And so we think we're very well positioned to be able to take advantage of growth I think the key caveat and comment that I'll make is we're going to take advantage of the growth. If it's quality growth right. We're not interested in growing the business just for the sake of putting assets on the books every deal that we do has to meet our credit screens and it has to be a deal that we think is in the long term best interest of our shareholders and stakeholders.
Scott Bluestein: <unk>.
Speaker Change: Got it thank you.
Speaker Change: Thank you for your question.
Speaker Change: Our next question comes from the line.
Operator: Thank you for your questions. Our next question comes from the line, "of Christopher Nolan. The floor is yours."
Scott Bluestein: Christopher Nolan the floor is yours.
Christopher Whitbread Patrick Nolan: Hey guys, congratulations on a really good quarter. Last week, Moody's gave a downgrade to Outlook or gave caution to the Outlook for direct lenders. Well, Hercules was not specifically listed among the ones that did. Have you guys had any direct conversations with Moody's related to this at all?
Christopher Whitbread Patrick Nolan: Hey, guys congratulations on a really good quarter.
Christopher Whitbread Patrick Nolan: Last week Moody's.
Christopher Whitbread Patrick Nolan: <unk>.
Christopher Whitbread Patrick Nolan: Gave.
Christopher Whitbread Patrick Nolan: Downgrades.
Christopher Whitbread Patrick Nolan: Outlook or give caution to the outlook for direct lenders, while Hercules was not specifically listed among the ones that did.
Christopher Whitbread Patrick Nolan: Have you guys had any direct conversations with Moody's related to this at all.
Scott Bluestein: We are in constant contact with all the rating agencies with which we work. There's no indication that they have any concerns about our business. In fact, the guidance they shared with us was just trying to be cautious about the sector and the outlook. The performance of our competitors, as you know, Chris, has not been stellar. So I think that we stand out a little bit differently from them, and that's basically the conversation that they have with us as well.
Speaker Change: So we are in constant contact with all the rating agencies in which we work with.
Scott Bluestein: There is no indication that they have any concern about our business.
Scott Bluestein: They shared with US was just trying to be cautious about the sector. The outlook. The performance of our competitors as you know Chris has not been stellar.
Scott Bluestein: So I think that we stand out a little bit differently than them and that's basically the conversation that they have.
Christopher Whitbread Patrick Nolan: Okay, and have they been expressing any concerns or outlook or anything related to the venture capital market? Venture Ecosystem, which? Because you guys do sound a little bit apart from the other guys.
Scott Bluestein: With us as well.
Scott Bluestein: Okay and have they been expressing any concerns or outlook or anything related to the venture capital market.
Christopher Whitbread Patrick Nolan: Victor ecosystem, which.
Christopher Whitbread Patrick Nolan: Because if she goes to send a little bit of part from the other guys.
Scott Bluestein: Not that they have shared that with us, but I would definitely discuss that with them and, you know, see what their view is on that.
Christopher Whitbread Patrick Nolan: Not that they shared with us, but I would definitely discuss that with them and.
Scott Bluestein: See what their view is on that.
Christopher Whitbread Patrick Nolan: Finally, you have some debt maturing in 2024. Is the idea to just use the credit facility to refinance that? Presently, that is the plan.
Scott Bluestein: Finally, you have.
Christopher Whitbread Patrick Nolan: Some debt maturing in 2024 is the idea to just use the credit facility to refinance them.
Seth Hardy Meyer: Presently, that is the plan. We'll take a look at the market a little bit closer to that maturity. It's 105 million, well below the capacity that we have in the 800 million of credit facilities in total, so we'll make the assessment closer to the date.
Christopher Whitbread Patrick Nolan: Presently that is the the plan we will take a look at the market a little bit closer to that maturity is 105 million well below the capacity that we have in the $800 million of credit facilities and total so.
Seth Hardy Meyer: We will make the assessment closer to the date.
Speaker Change: Great. Thank you Scott.
Speaker Change: Thank you for your.
Seth Hardy Meyer: Question.
Scott Bluestein: That concludes the question-and-answer session. I would now like to turn it back to Scott Bluestein, CEO and Chief Investment Officer, for closing remarks.
Seth Hardy Meyer: That concludes the question and answer session I would now like to turn it back to Scott Bluestein, CEO and Chief investment officer for closing remarks.
Scott Bluestein: Thank you, operator, and thanks to everyone for joining our call today. As a final note, we will be participating in the Wells Fargo Financial Services Investor Conference on May 14th in Chicago. If you are interested in meeting with us at this event, please contact Wells Fargo directly or Michael Hara. We look forward to reporting our progress on our Q2 2024 earnings call. Thanks, and have a great night.
Scott Bluestein: Thank you operator, and thanks to everyone for joining our call today.
Scott Bluestein: As a final note we will be participating in the Wells Fargo Financial services Investor Conference on May 14th in Chicago.
Scott Bluestein: We are interested in meeting with us at this event, please contact wells Fargo directly or Michael Hara.
Scott Bluestein: We look forward to reporting our progress on our Q2 2024 earnings call.
Speaker Change: Thanks, and have a great night.
Scott Bluestein: <unk>.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Scott Bluestein: Yeah.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Operator: Okay.
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Operator: Okay.
Operator: Okay.
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