Q4 2024 Hercules Capital Inc Earnings Call
Hello, and welcome everyone to the Hercules capital fourth quarter and full year 2024 financial results. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to participate you would need to press star one one on your.
Telephone you built in here in search of Dicing. Your hand this range to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded and now it's my pleasure to turn the call over to the senior director of Investor Relations and corporate Communications Michael Hara.
Proceed.
Speaker Change: Thank you Carmen and good afternoon, everyone and welcome to Hercules Conference call for the fourth quarter and full year 2024.
On the call today from Hercules are Scott Bluestein, CEO and Chief investment Officer.
Seth Meyer: Seth Meyer CFO.
Seth Meyer: These financial results released just after today's market close and can be accessed from Hercules Investor Relations section at Investor got H T. G P Dot com.
Seth Meyer: An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call.
Seth Meyer: During this call we may make forward looking statements based on our own assumptions and current expectations.
Seth Meyer: These forward looking statements are not guarantees of future performance and should not be relied upon in making any investment decision.
Seth Meyer: Financial results may differ from the forward looking statements made during this call for a number of reasons.
Seth Meyer: 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.
Seth Meyer: 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 and with that I'll turn the call over to Scott.
Scott Bluestein: Thank you Michael and thank you all for joining the Hercules capital Q4, and full year 2024 earnings call.
Scott Bluestein: 2024 was another year of record operating performance and solid controlled growth for Hercules capital.
We were able to set several new financial and performance records and demonstrates strong platform growth, while managing the business and balance sheet conservatively.
Scott Bluestein: Our performance in 2024 was highlighted by a record total investment income record net investment income and record total gross fundings all of which put us in position to once again declared a new supplemental distribution program for our shareholders.
Scott Bluestein: Driven by the growth of both the BDC and our private credit funds business Hercules capital is now managing approximately $4 8 billion of assets an increase of more than 14% from where we were at year end 2023.
Hercules capital achieved a significant milestone in 2024 as we celebrated 20 years of investment activity in which our investment platform reached and surpassed the 20 billion mark in cumulative debt commitments since inception.
Scott Bluestein: This achievement underscores our commitment to serving the capital needs of the venture and growth stage ecosystems.
Scott Bluestein: Our success since reception has been made possible by the tremendous work and dedication of our talented employees and the trust that our borrowers and their investors have placed with us.
Scott Bluestein: Our unwavering commitment to venture growth stage companies and our continuous focus on always doing what we believe is in the best interest of our shareholders and stakeholders has served us incredibly well for the last 20 years.
Will help guide us going forward.
Scott Bluestein: Let me recap some of the highlights and achievements for 2024.
Scott Bluestein: Record full year 2020 for total gross fundings of 1.81 billion, an increase of 13% year over year.
Scott Bluestein: Record full year 2024, total investment income of $493 6 million, an increase of 717, 1% year over year.
Scott Bluestein: Record full year 2024, net investment income of $325 8 million, an increase of seven 2% year over year.
Scott Bluestein: Annual R O H E. A 17, 2% and our O a a of seven 3%.
Scott Bluestein: Strong net debt portfolio growth of $457 million, which excludes the portfolio growth of our private funds business.
Scott Bluestein: Total platform AUM of approximately $4 8 billion and.
Scott Bluestein: An increase of more than 14% year over year.
Scott Bluestein: Consistent and growing quarterly dividends from our our I E, which generated $6 8 million in dividend income for the company in 2024.
Scott Bluestein: Received SBA approval for our fourth Spic's license and we now manage two active SBA funds.
Scott Bluestein: Reaffirmed investment grade ratings from our four ratings agencies Fitch KBR, a moody's and Morningstar D. B R. S.
Scott Bluestein: And five consecutive years of delivering supplemental distributions to our shareholders.
Scott Bluestein: As we enter 2025, we continue to expect higher than normal market and macro volatility given the change in administration and beyond it is taking place in the global geopolitical environment.
Scott Bluestein: At the same time, we anticipate a more favorable new business landscape broadly and particularly for certain growth stage companies and sectors.
Scott Bluestein: Our expectation is that we will see more M&A or capital markets activity and more support for technology oriented businesses in 2025, and we are already seeing this come to fruition in Q1.
Scott Bluestein: We intend to continue to manage our business and balance sheet defensively, while maintaining maximum flexibility to take advantage of market opportunities.
Scott Bluestein: This includes continuing to enhance our liquidity position.
Scott Bluestein: Further tightening our credit screens for new underwritings, and maintaining our higher than normal first lien exposure, which was at 91% in Q4 compared to 89, 5% in Q3.
Scott Bluestein: With GAAP leverage under 90%.
Scott Bluestein: Over $1 1 billion of liquidity across the platform and no material near term debt maturities. We believe that we are incredibly well positioned to benefit from a more favorable origination market in 2025 and that this will be a key differentiator of our business. This year.
Scott Bluestein: Q4 is seasonally one of the stronger quarters in terms of equity capital investments and overall market activity across the venture growth stage ecosystem and this year was no different.
Scott Bluestein: The venture and growth stage markets finished strong with respect to venture capital investment activity and venture capital M&A exit activity.
Scott Bluestein: This strength was reflected in our total debt and equity commitments as well as our fundings in the fourth quarter.
Scott Bluestein: Let me now recap some of the key highlights of our performance for Q4.
Scott Bluestein: In Q4, we originated total gross debt and equity commitments of over 619 million and gross fundings of over $468 million.
Scott Bluestein: For the year, we committed nearly $2 7 billion of capital and delivered record funding performance of approximately 1.81 billion.
Scott Bluestein: As a result, we generated total investment income of $121 8 million and net investment income of $81 1 million or 49 per share.
Scott Bluestein: We were able to achieve 123% coverage of our quarterly base distribution of <unk> 40 per share despite ending the quarter with very conservative GAAP leverage of 89, 6%.
Scott Bluestein: We expect to slowly bring leverage up throughout 2025, which we believe will help partially offset further potential declines in base rates and some of the spread compression that we've seen over the last several quarters on new originations.
Scott Bluestein: Having an abundance of available liquidity to drive net debt portfolio growth near term, while utilizing lower than normal leverage provides us with a distinct competitive advantage in this regard.
Scott Bluestein: This is our seventh consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee acceleration from early repayments.
Scott Bluestein: This puts us in a very solid position to be able to continue to comfortably cover our quarterly base distribution in the current rate environment.
Scott Bluestein: We generated a return on equity in Q4 of 17% and our portfolio generated a GAAP effective yield of 13, 7% in Q4, and a core yield of 12, 9%.
Scott Bluestein: Core yields declined from 13, 3% in Q3, largely coming from declining base rates and some spread compression on new originations.
Scott Bluestein: As at the end of the year approximately 50% of our portfolio has already reached the contractual floor on rates.
Scott Bluestein: Our balance sheet with conservative leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on quality originations instead of chasing higher yielding assets, which we believe have more risk.
Scott Bluestein: The focus of our origination efforts in Q4 was on maintaining a disciplined approach to capital deployment with an emphasis on diversification.
Scott Bluestein: Our Q4 originations activity was driven by both our technology and life Sciences teams.
Scott Bluestein: In Q4, approximately 67% of our fundings were to technology companies, while approximately 42% of our new commitments were to life Sciences companies.
Scott Bluestein: We funded debt capital to 30 different companies in Q4 of which nine were new borrower relationships for.
Scott Bluestein: For the year, we funded capital to 72 different companies of which 32, where new borrower relationships.
Scott Bluestein: This is reflective of our balanced approach during the quarter to focus on select high quality, new originations and prioritize capital deployment within the portfolio, where we know the credit quality and performance history of the underlying borrowers.
Scott Bluestein: We also increased our capital commitments to several portfolio companies during the quarter, which speaks to our unique ability to scale alongside our borrowers as they grow their businesses.
Scott Bluestein: Our available unfunded commitments decreased to approximately $448 5 million.
Scott Bluestein: From 48 point, sorry from $489 million in Q3.
Scott Bluestein: The momentum that we saw on originations in Q4 has continued and accelerated in Q1.
Scott Bluestein: Since the close of Q4 and as of February 10th 2025, our deal teams have closed $252 million of new commitments and funded $201 3 million.
Scott Bluestein: We have pending commitments of an additional $578 5 million in signed nonbinding term sheets and we expect this number to continue to grow as we progress in Q1.
Given the market backdrop throughout much of 2024, we are pleased with the exit activity that we saw in our portfolio during the year.
Scott Bluestein: In Q4, we had four M&A events in our portfolio, which included one life Sciences portfolio company and three technology portfolio companies announcing acquisitions for.
Scott Bluestein: For the year, we had 13 portfolio companies announced or complete an M&A event. So our exit activity remained healthy in 2024.
Scott Bluestein: <unk> year end, we had one portfolio company confidentially filed for an IPO.
Scott Bluestein: Early loan repayments decreased slightly in Q4 to approximately $225 million, which was within our guidance of $150 million to $250 million.
Scott Bluestein: Approximately 40% of our Q4 prepayments were attributable to M&A events or equity capital events, which we view as a positive signal overall.
Scott Bluestein: For Q1, 2025, we expect prepayments to be in the range of 100 million to 200 million. Although this could change as we progress in the quarter.
Scott Bluestein: Credit quality of the debt investment portfolio remains stable quarter over quarter.
Our weighted average internal credit rating of 2.26 increased slightly from the two point to four rating in Q3 and remains at the lower end of our normal historical range.
Scott Bluestein: Our grade one and two credits increased slightly to 65, 9% compared to 65, 2% in Q3.
Great three credits decreased modestly to 29% in Q4 versus 31, 9% in Q3.
Scott Bluestein: Our rated four credits increased to four 6% from two 3% in Q3 and are rated five credits decreased to 0.5%.
Scott Bluestein: In Q4, the number of loans and companies on non accrual decreased by one we had one debt investment on non accrual with an investment cost and fair value of approximately $61 3 million and $18 2 million respectively.
Scott Bluestein: Or one, 7% and 0.5% as a percentage of our total investment portfolio at cost and fair 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.
Scott Bluestein: And our portfolio monitoring remains enhanced.
Scott Bluestein: We have noted a noticeable shift and how certain venture capital investors are approaching the current market for new investments with much more of a focus and emphasis on valuation and less of an emphasis on capital deployment broadly.
Scott Bluestein: This is something that we are watching closely as companies that raised equity capital over the last 24 to 36 months and arguably inflated valuations may struggle to raise new money from new investors in the current market.
Scott Bluestein: This will likely test cards syndicates in terms of their ability and willingness to continue to support their own existing current portfolio companies.
Scott Bluestein: During Q4 2020 for Hercules had net realized losses of $33 5 million comprised of gross realized gains of $21 9 million, primarily due to the gain on equity investments offset by $55 4 million of losses.
Scott Bluestein: The losses were due to $53 9 million from the write off of two debt investments $1 3 million from losses on equity and warrant investments and zero point $2 million from realized losses on debt extinguishment.
Scott Bluestein: $41 9 million out of the $53 9 million was already recognized as an unrealized loss in 2023, and therefore did not have any impact on net asset value.
Scott Bluestein: Our net asset value per share in Q4 was $11.66 an increase of two 3% from Q3 2024.
Scott Bluestein: We ended Q4 with strong liquidity of $658 8 million in the BDC and over $1 1 billion of liquidity across the platform.
Scott Bluestein: Our balance sheet with healthy liquidity of <unk>.
Scott Bluestein: Low cost of debt relative to our peers and for investment grade credit ratings continues to position us well and afford us the ability to compete aggressively on quality transactions.
Scott Bluestein: As discussed earlier, we saw a significant improvement in the venture capital ecosystem during Q4.
Scott Bluestein: Venture capital investment activity of 209 billion for 2024 increased 29% from 2023, according to data gathered by pitch book NVCA.
Scott Bluestein: In Q4 venture capital investment activity was $74 6 billion rebounding from the lower levels that we saw in Q3 and discussed on last quarter's call.
Scott Bluestein: Fundraising activity finished 2024 at $76 1 billion.
Scott Bluestein: M&A exit activity for U S venture capital backed companies finished at $82 6 billion, an increase of 27% from 2023.
Scott Bluestein: IPO activity remained muted with fewer companies going public, but raising more dollars.
Scott Bluestein: We believe that the ecosystem will remain healthy and at the recent numbers reflect a continued reversion back to the historical pre COVID-19 norm.
Scott Bluestein: Consistent with the aggregate data for the ecosystem during Q4 capital raising across our portfolio increased from Q3 with 18 companies raising approximately $961 million in new capital up from $704 million raised in the prior quarter.
Scott Bluestein: For the year, we had 66 portfolio companies raised over 6 billion of new capital, which was higher than the amount of equity capital and number of portfolio companies raising new capital in 2023.
Scott Bluestein: Quarter to date in Q1, our portfolio companies have already raised over $1 2 billion of new capital, which speaks to some of the overall market momentum that we are seeing.
Scott Bluestein: Given our strong operating performance in 2024, we exited Q4 with undistributed earnings spillover, increasing to over $163 million or 96 cents per ending shares outstanding.
Scott Bluestein: For Q4, we are maintaining our quarterly base distribution of <unk> 40 cents and we declared a new supplemental distribution of 28 for 2025, which will be distributed equally over the next four quarters or seven cents per share per quarter for a total of 47 cents of shareholder distributions each quarter.
Scott Bluestein: This is our fifth consecutive year of being able to provide our shareholders with a supplemental distribution on top of our regular quarterly base distribution.
Scott Bluestein: In closing 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 in.
Scott Bluestein: In Q4, Hercules delivered its seventh consecutive quarter of over $100 million of quarterly core income, which again excludes the benefit of prepayment fees or fee acceleration from early prepayments.
Our continued success is attributable to the tremendous dedication.
Scott Bluestein: Efforts and capabilities of our 100 plus employees.
Scott Bluestein: And the trust that our venture capital and private equity partners placed with US every day.
Scott Bluestein: We are thankful to the many companies management teams and investors that continue to make Hercules their partner of choice.
Seth Meyer: I will now turn the call over to Seth.
Thank you Scott and good afternoon, ladies and gentlemen.
Seth Meyer: Scott mentioned, the fourth quarter capped off our 20 year anniversary with a number of records for Hercules capital in.
In addition to record funding activity in 2020 for Hercules broke quarterly and annual records in many dimensions, including total investment income and net investment income all while managing the balance sheet conservatively with low leverage and strong liquidity.
Seth Meyer: 2024 was another year of validating the benefits of operating at scale by growing our platform AUM by approximately 14% to approximately $4 8 billion, while our non interest operating expenses grew less than 5% year over year.
Seth Meyer: Our return on average equity ended the year at 17% and our Q4 net investment income provided 123% coverage of our base dividend. Despite the 100 basis points of prime rate reduction in the second half of 2020 for putting us in a very strong position.
Seth Meyer: Heading into 2025.
Seth Meyer: During 2024, our weighted average cost of debt was approximately 5% and.
Seth Meyer: And the leverage remained conservatively low putting us in a position to be able to take advantage of what we expect to be a more favorable new business environment in 2025.
Seth Meyer: During the year, we added a new SP I see license, providing us with $175 million of favorably priced debt.
Seth Meyer: In addition, we upsized and renewed our 300 million dollar credit facility led by S. M. B C and subsequent to year end, we extended our $175 million letter of credit facility.
Seth Meyer: With S N B C by two years now available until February 2028.
Seth Meyer: To cover a good portion of our available unfunded commitment and a more cost effective manner.
Seth Meyer: In 2024, we continued to supplement liquidity by raising net of fees approximately $218 million.
Seth Meyer: Throughout the year via our ATM program, we ended the year with approximately $660 million in available liquidity in the BDC.
Seth Meyer: Inclusive of the or a managed private funds available liquidity was over $1.1 billion for the entire platform.
Seth Meyer: With all this in mind, let's review.
Seth Meyer: Income statement performance and highlights N a V unrealized and realized activity.
Seth Meyer: Leverage and liquidity and finally, the financial outlook.
Seth Meyer: Turning first to the income statement performance and highlights total investment income in Q4 was $121 8 million driven primarily by our growth throughout the year and the debt portfolio.
Seth Meyer: Core investment income a non-GAAP measure was a solid $114 5 million.
Seth Meyer: Core investment income excludes the benefit of income recognized as a result of loan prepayments.
Seth Meyer: Net investment income decreased to $81 1 million or 49 cents per share in Q4.
Seth Meyer: Our effective and core yields decreased modestly in the fourth quarter to 13, 7% and 12, 9%, respectively compared to 14, 4% and 13, 3% in the prior quarter the decline in the core yield during the quarter was largely driven.
Seth Meyer: By the fed rate reduction of approximately 100 basis points in the last four months.
Seth Meyer: And our focus on first lien securities as of year end, approximately 50% of our loans are at the contractual floor. After the recent rate reductions and thus the impact of any future rate reductions will be muted.
Seth Meyer: Fourth quarter gross operating expenses were $43 5 million compared to $44 3 million.
Seth Meyer: In the prior quarter net of cost recharge to the R E E.
Seth Meyer: Interest expense and fees decreased to $22 1 million from $22 4 million in the prior quarter.
Seth Meyer: Due to lower utilization of the credit facilities as a result of the ATM activity.
Seth Meyer: Yes.
Seth Meyer: And due to use of the Spic's facility.
Seth Meyer: We have drawn down 104 million out of the $175 million available from the new Spic's facility in the fourth quarter.
Seth Meyer: SG&A decreased to $21 4 million just below my guidance.
Seth Meyer: Net of cost recharge to the R. E D. SG&A expenses were $18 6 million.
Seth Meyer: Our weighted average cost of debt decreased slightly to 5% quarter over quarter.
Seth Meyer: R R O AE or NII over average equity decreased to 17% for the fourth quarter.
Seth Meyer: R. R O a a or NII over average total assets decreased to eight 9%.
Seth Meyer: Yeah.
Seth Meyer: Switching to NAV and unrealized and realized activity during the quarter, our NAV per share increased by 26 cents to $11.66 per share.
Seth Meyer: This represents an <unk> <unk> per share increase of two 3% quarter over quarter.
Seth Meyer: The main driver was accretion due to the use of the ATM.
Seth Meyer: Our $13 8 million of net unrealized appreciation net of the impact of foreign currency movements was primarily attributable to $10 7 million of net unrealized depreciation on the debt investments and other investment related payables to six.
Seth Meyer: Net unrealized depreciation attributable to valuation movements on publicly traded equity and warrant investments.
Seth Meyer: $2 2 million of net unrealized depreciation attributable to valuation movements in the privately held equity warrant and investment funds.
Seth Meyer: <unk> 6 million of net unrealized depreciation attributable to net foreign exchange movements. In addition, Hercules recorded $25 5 million.
Seth Meyer: Appreciation attributable to reversal of previous quarter's depreciation upon a realization event.
Seth Meyer: Moving to leverage and liquidity, our GAAP and regulatory leverage decreased to 89, 6% and 75, 6% respectively compared to the prior quarter due to the utilization of the ATM in the quarter.
Seth Meyer: Any out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 83, 9% and 69, 9% respectively.
We ended the quarter with nearly $660 million of available liquidity as a reminder, this excludes the capital raised by the funds managed by our wholly owned or a subsidiary <unk>.
Seth Meyer: Inclusive of these amounts the Hercules platform had more than one 1 billion of available liquidity.
Seth Meyer: The strong liquidity positions us well to support our existing portfolio companies and source new opportunities.
Seth Meyer: Finally on the outlook points for the first quarter, we expect core our core yield to be between $12, two five and $12 75% excluding.
Seth Meyer: Excluding any future benchmark interest changes.
Seth Meyer: And I would note that there are two fewer days in Q1 2025 compared to Q4 of 2024, which will reduce the interest revenue accordingly.
Seth Meyer: As a reminder, more than 97% of our debt portfolio is floating with a floor and presently approximately 50% of our prime based portfolio is at its contractual floor.
Speaker Change: Although very difficult to predict as communicated by Scott, We expect 100 to 200 million in prepayment activity in the first quarter.
Speaker Change: We expect our first quarter interest expense to remain flat compared to the prior quarter.
Speaker Change: For the first quarter, we expect gross SG&A expenses.
Speaker Change: Approximately 23.5 to $24 5 million.
Speaker Change: And in our a expense allocation of approximately $2 8 million as a reminder, the first quarter always has higher payroll taxes and benefit expenses.
Speaker Change: Finally, we expect our quarterly dividend from the R. A a of approximately $1 $8 million to $2 million.
Speaker Change: This will reoccur quarterly throughout the year, which is another increase to my prior guidance.
Speaker Change: In closing our balance sheet remains strong to support our existing portfolio as well as to be used opportunistically to invest in the best opportunities.
Carmen: I will now turn the call over to the operator to begin the Q&A portion of our call Carmen over to you.
Carmen: So much ethane as a reminder to ask a question simply press star one on your telephone and wait for your name to be announced to remove yourself simply press star. One again, please standby for our Q&A roster.
Speaker Change: Our first question is from the line of Brian Mckeon out with citizens JMP. Please proceed.
Brian Mckeon: Thanks, Good evening, everyone. It's great to see another record year of the origination activity two years in a row now you've set records on this Brian I know, it's a little early here, but based on the pipeline today and everything you could see across the business 2025 end up being another record year.
Brian Mckeon: And I guess, what I'm getting at is it reasonable to expect another year of double digit growth.
Brian Mckeon: And within the investment portfolio.
Sure. Thanks, Brian I think the short answer is if credit quality as there were.
Brian Mckeon: We're certainly hopeful that this will be another record year for us I think we've proven over the years that we're not going to chase the market and just book deals for the sake of showing growth.
Brian Mckeon: Right now we're off to a great start I provided some color in terms of our closed commitments quarter to date, which are $250 million and additional $578 million of signed pending commitments that puts us arguably off to the best start we've had in the last five years in terms of early Q1 activity.
Brian Mckeon: So we're very optimistic about the new business environment for 2025, and if the credit quality is there to support it our balance sheet is incredibly well positioned to allow us to take advantage of it and the result of that could be yet another record year for us on the new business front.
Speaker Change: Okay, Great that's helpful and.
Speaker Change: And then on the RIAA I believe youre going to be in the market fundraising to your next bond this year.
Speaker Change: Just talk about the potential size of that how quickly you think you can raise the capital and ultimately how long it takes to get that capital invested.
Speaker Change: And then just add this.
Speaker Change: Begin to earn fees et cetera, how should we think about the earnings contribution to <unk> from <unk>.
Speaker Change: From the RIAA, and 2025 and really longer term as well.
Brian Mckeon: Yeah. Thanks, Brian.
Brian Mckeon: Private credit fund business continues to be a really exciting and growing part of the overall Hercules platform. We have publicly disclosed that we currently are managing three distinct institutional private credit funds. We don't have any disclosure to make on this call in terms of the next fund, but as we've sort of.
Brian Mckeon: Distantly said, we would expect to be in the market at some point over the next year or so.
Brian Mckeon: Raise an additional fund given how well those first three funds have performed and how aggressively we have been able to deploy capital, we'll obviously make some public disclosure.
Brian Mckeon: When it's appropriate to do so in terms of how that's going.
Brian Mckeon: But I think pretty consistent in terms of how we've approached the market. Historically our goal is never to raise as much money as we can and invested as quickly as possible. Our goal has always been whether it's in the BDC or in the private fund business to raise enough capital that allows us to appropriately go after quality credits in the market.
Brian Mckeon: Without being forced into a position where we have to deploy capital just for the sake of overall capital deployment. So we're going to continue to manage both the BDC and the private fund business with more of a controlled managed growth mentality, but I would expect for.
Speaker Change: For our investors shareholders stakeholders stakeholders to see growth in both the BDC and continued growth in the private fund business in 2025 with respect to the earnings power generated from the private funds business all have Seth address that yeah. Just in my guidance, we continue to update the dividend.
Speaker Change: Expectations coming out of the RIAA and that's reflective of that earnings growth that's occurring off the funds.
Speaker Change: I wouldn't expect it to be beyond what I guided as a quarterly distribution for the current year and in the timing of when we launch the next fund and the and close it.
Speaker Change: Would certainly change that but I wouldn't foresee that and be impacting 2025.
Speaker Change: Okay, Great that's helpful I'll leave it there.
Speaker Change: Thank you one moment for our next question. Please.
It comes from the line of Chris <unk> with Piper Sandler. Please proceed.
Speaker Change: Thank you good afternoon on credit quality, just one non accrual now, but you had $54 million in realized losses from a couple of debt investments and a pickup in the grade four bucket. So can you detail what drove both of those which companies <unk>.
Speaker Change: And your views on credit going forward and also how much of the 54 billion was an unrealized previously.
Speaker Change: So as Scott guided.
Speaker Change: The amount that was in.
Scott Bluestein: The $54 million was approximately $43 million of that and that was related to the convoy realization event. Scott do you want to cover the other dimensions of that yeah sure Christian.
Speaker Change: Of the $53 9 million.
Speaker Change: About $42 million of that was already in unrealized so very little impact in terms of net asset value. The single largest driver of the realized loss was just a crystal <unk> and the completion of our convoy workouts that was an investment that went on non accrual in 2023, we began our workout efforts in the second half of 'twenty three the work.
Speaker Change: Out efforts culminated in Q4 this year, so we just crystallized.
Speaker Change: That unrealized into our realized position.
Speaker Change: The only other realized loss of substance was one debt investment to a public biotech company that ended up filing bankruptcy that we worked together with the investors that company was liquidated we had a pretty substantial recovery on the deposition, but there was a there was a small realized loss on that investment as well. So those were the two biggest drivers.
Speaker Change: In terms of the realized loss activity and again $41 9 million out of the $53 $9 million had already been recognized as an unrealized loss in 2023.
Speaker Change: In terms of overall credit as it relates to great for you are correct. There was a small movement in the rated four bucket in Q3, two 3% of the portfolio was in grade four credits in Q4, $159 4 million so about four 6% still.
Speaker Change: Below our norm, we generally want to see great for us at 5% or below so we're at four six we're certainly closer to the high end of that but still below the average that we've typically seen and the biggest change and that was three credits that were having trouble of fund raising we proactively move those credits down from grade three grade four in the quarter. Our teams are actively.
Speaker Change: Working with each of those three credits and we would expect to have a more substantive update over the next 90 days that we can speak to on our Q1 call outside of that when you look at the portfolio as a whole pretty pleased by what we're seeing weighted average credit rating of two to six so no real change from the two to four that we saw.
Speaker Change: In Q3.
Speaker Change: <unk> to see companies being able to raise a healthy amount of equity the one caveat that I would make the comment that I made in my prepared remarks is that we have seen certain syndicates.
Speaker Change: Essentially struggling with raising new capital with high valuations and so companies that raised money in 'twenty two 'twenty three at relatively high valuations. If they are approaching the market right now for new investors to come in they're getting substantial pushback and we've seen that from not just our portfolio, but really across the ecosystem.
Speaker Change: So that's something that we're watching pretty closely we want to see how that plays out but nothing material that we see right now in our portfolio outside of what I just said.
Speaker Change: Great. Thank you for that all very helpful.
Speaker Change: In recent quarters, you've talked about healthcare company is waiting for rates to come down to add debt capital and you definitely had a significant pickup in fundings in the fourth quarter.
Speaker Change: That was driven by companies waiting post election, after a slowdown leading into the election or other or are there any other callouts of key drivers of the activity you saw in the fourth quarter and what that activity backend loaded mostly.
Speaker Change: Yes, I think I think the two biggest drivers were just the election and fed rate uncertainty that we saw in the Q3 Q4 time period when.
Speaker Change: When we did our Q3 call we spoke about just overall caution across the ecosystem. We saw that in our Q3 funding numbers, but we did guide to an expected uplift post fed action and post election outcome and that's exactly what we saw I think once the uncertainty of the election was lifted once it became clear what the fed was going to do.
Speaker Change: In both September and again in December we've just seen a lot of momentum on the new business side, and we really don't expect that to slow down I think the other thing that's been a tailwind is the fact that base rates are now down roughly 100 basis points over the last two quarters and so I think a lot of companies are looking to take advantage of that.
Youre also seeing I think companies now sort of come to the recognition that we're likely to stay in the current rate environment for the foreseeable future and the notion that there will be numerous additional cuts in 2025 as it is becoming increasingly less likely so I think companies are just looking at it and saying if were going to do something let's do it now its not continue to wait.
Speaker Change: For rates to come down because they frankly may not come down much further.
Speaker Change: Great. Thank you makes sense to me and I appreciate you taking my questions.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Finian O'shea with Wells Fargo Securities. Please proceed.
Finian O'shea: Hey, everyone. Good afternoon.
Finian O'shea: I wanted to move over to the core yields.
Speaker Change: Hum about 12, and a half guidance first can you remind us that's a that's a global portfolio number.
Speaker Change: And if so what's the sort of new money core yields youre deploying at today.
Speaker Change: And then what does that imply that they will be.
Speaker Change: At the end of the year with your deployment assumptions. Thank you.
Speaker Change: Thanks, Dan So yes. The guidance was 12.25 to $12 75 for Q1 that is a global number that would be our average core yield over the entire portfolio and Scott you want to take the second part yes sure. So you'll find if you look at Q3 13, 3% core yield across the totality of the poor.
Speaker Change: Folio in Q4 12, 9%.
Scott Bluestein: The fed rate cut in Q3 was at the very end of the quarter. So virtually no impact in Q3, the entire impact hit in Q4, which drove that $13 $3 to $12. Nine we saw roughly the same thing happened in Q4, where the fed rate action was towards the back end of the quarter, So very little impact on core yield in Q4.
Scott Bluestein: We expect that to flow through to Q1, which is why set gave the guidance that we that we currently gave.
Scott Bluestein: Right now we're originating consistently in that 11, 5% to 13% range. So right within our core yield target our modeling for this year shows that we will be able to employ to deploy up to our stated objectives by holding our core yield guidance in the range that <unk> provided so I think overall, we feel very confident that our core yields are going to see.
Scott Bluestein: <unk> in that 12% range and based on everything that we're seeing right now in terms of capital deployment, we think that we can bolt hit our funding objectives and maintain that core yield target of being in the 12% range.
Scott Bluestein: Okay, that's helpful and sort of.
Scott Bluestein: Related but longer question Theres been.
Scott Bluestein:
Scott Bluestein: Lower grind of the end of term fee.
Scott Bluestein: Got it in the portfolio as it's grown obviously the market has been.
Scott Bluestein: All over the place in recent years as you know better than I.
Scott Bluestein: But seeing if this is a secular change in the nature of what you do is it going up market.
Scott Bluestein: Our fees coming out of these structures or should we anticipate a come back in more meaningful.
Scott Bluestein: End of term fees in your origination.
Scott Bluestein: Sure I think it's really a combination of three things.
Scott Bluestein: Number one we.
Scott Bluestein: We've been fairly conservative in our mines and originations over the last two or so years, we've gone significantly up in terms of first lien exposure are first lien exposure. If you look at it two years ago was in the mid seventies today, it's at 91% we've gone upstream in terms of.
Scott Bluestein: Scale and sophistication and overall maturity of the companies that we're lending to those two things generally come with slightly lower economics, and that's a trade that we've been willing to make because we think that's in the best interest of our shareholders and stakeholders long term. So that's number one.
Scott Bluestein: Number two there is a tremendous amount of liquidity in the ecosystem and a lot of larger asset managers are looking to deploy capital in every vertical and so we have over the last handful of years seen large asset managers try to do deals in the growth stage part of the market.
Scott Bluestein: That are just not typically structured or priced for how the market has historically worked so those are lower economics lower fees, so far or historically LIBOR based rates versus prime rates.
Scott Bluestein: And so we've obviously reacted to that to make sure that we defend market share. We don't think that's sustainable we don't think that's long lasting and that will just take some time to work its way through the system. We are very confident that we're going to be able to maintain our core yield target for the year and I think at the end of the day. When you look at how we manage the business, where we manage it to core yield.
Scott Bluestein: But we're actually solving for that effective yield which includes the benefit of the acceleration and the Prepays. We are consistently generating somewhere between a 13 and a 15% effective yield on this portfolio, including 13, 7% in Q4. Despite the fact that base rates have come down by 100 basis points.
Speaker Change: That's very helpful. Thanks, and if I can do a bonus.
Scott Bluestein: For you or perhaps us.
Speaker Change: There's a lot of unsecured.
Speaker Change: And your debt stack, that's going to start to roll out is good already has I think you paid one post quarter you mentioned in the release.
Speaker Change: Should we expect.
Speaker Change: This level of unsecured debt mix or.
Speaker Change: Any color you could provide us on how this might.
Speaker Change: Shape up well hard to predict if theres any sort of.
<unk>.
Speaker Change: Directions, you are leaning thank you.
Speaker Change: Yeah, that's a good question and thanks.
Speaker Change: So we did pay off $50 million of a private placement unsecured.
On February 5th in June we have 120 that matures. That's all for 2025 Youre correct that over the next three years.
Speaker Change: We do have some others maturing more significant in 2006 and 'twenty seven.
Speaker Change: As far as the mix between secured and unsecured.
Speaker Change: It will stay more heavily weighted to the unsecured side, but we've always said that we would be opportunistic and in the secured side should rates favor such a decision. We just will not go heavy in that market as we are no longer required to do that meaning the IND.
Speaker Change: History itself as well as the size and the scale of the balance sheet of Hercules capital itself doesn't warrant necessitating dipping into that market too heavily so.
Speaker Change: The vast majority will be unsecured.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question one moment please.
Speaker Change: Comes from the line of John Hecht with Jefferies. Please proceed.
John Hecht: Afternoon, guys. Thanks, very much for taking my questions.
Speaker Change: First one is on.
John Hecht: I know for you guys run a conservative balance sheet and so forth.
John Hecht: Your leverage ratio now.
John Hecht: It's kind of I think it's below the midpoint of the target.
John Hecht: What's your desire to increase leverage, especially that would be an offset to that.
John Hecht: A decline in rates recently.
John Hecht: I think John that's one of the distinct advantages that we have heading into 2025.
Speaker Change: Youre seeing across the BDC space across the private credit space, some yield compression, both with respect to base rates coming down and with respect to new onboarding yields on originations.
Speaker Change: Being under Levered with a lot of liquidity puts us in a distinct competitive advantage to be able to offset some of that by being a little bit more aggressive on leverage and thats exactly what we intend to do you are correct that right now when you look at our GAAP leverage at 89, 6%. When you look at our regulatory leverage of 75, 6%.
Speaker Change: That is well below our historical norms, and frankly below our targets, but we've intentionally been conservative in terms of leverage because we think that by utilizing leverage more aggressively. This year, we're going to be able to deploy capital aggressively continue to take market share and offset a good portion of that overall yield.
Speaker Change: And that we're seeing across the ecosystem.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: Non related follow up Scott.
Speaker Change: Obviously people are thinking about the changes in administration and what that might be the industry.
Speaker Change: Any thoughts on your side and what the.
Speaker Change: Kind of hot Subsectors that you.
Speaker Change: Well maybe.
Speaker Change: <unk> your approach to this year, whether it's.
Speaker Change: Increased or decreased allocation.
Just anything on.
Speaker Change: Yes.
Speaker Change: That threat of where youre focused from a technological perspective.
John Hecht: John Great question, and our investment teams both on the Tech side and the life Sciences side have spent a lot of time thinking about that question and <unk>.
John Hecht: Frankly and to be honest, we have started some rotation into some sectors more aggressively and out of some sectors more aggressively and certainly not going to tell.
John Hecht: Telegraph to the market, where we're being aggressive in where we're being more conservative, but we have absolutely started to react to.
John Hecht: What we expect the new administration to do in terms of both policy and rhetoric.
John Hecht: Would say that overall, we are pretty bullish in terms of the general backdrop for 2025, particularly with respect to new originations.
John Hecht: <unk>, we're looking at an environment that we think is going to be characterized by less regulation more M&A activity more capital markets activity more investment in technology and technology enabled solutions. So we think that there is a lot of positive overall momentum. The caveat is I think a lot of this is going to come.
John Hecht: With just a lot of volatility a lot of uncertainty a lot of people waking up every morning to check their Twitter accounts to see what was said and what actually got done. So we are watching that sort of volatility very closely because that could have a real impact on credit, but with respect to the new business market were actually pretty bullish in terms of what this year should look like.
John Hecht: Yeah.
John Hecht: Yes.
John Hecht: Thank you one moment for our next question. Please.
Speaker Change: It comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed.
Speaker Change: Hey, guys Scott on a follow up to the last question on leverage are.
Speaker Change: Are you targeting leverage so your EPS is sufficient to cover the dividend plus a supplemental.
Speaker Change: So thanks, Chris for the question, we're targeting a leverage to make sure that we're giving a good return to our investors at the moment, we've been keeping our powder dry in anticipation of being opportunistic.
Scott Bluestein: We'll continue to evaluate the market, but scott's been very clear that we plan on driving leverage up.
Scott Bluestein: As we see opportunities or leverage ceiling that we've communicated is one to five and we will stay a fair distance away from that.
Scott Bluestein: Historically no noise no further north in 1.15, so we're a fair distance off of that and we have a ways that we would go until then and Chris I would just add on that point when we when we're managing the business are our view is that the base dividend is sacrosanct. So when we're thinking about how we run the.
Scott Bluestein: <unk> and where we need to see NII.
Scott Bluestein: That 40, <unk> based distribution is something that we hold very near and Dear to our hearts.
Scott Bluestein: The supplemental distribution is being paid out of that spillover, which as we noted is $163 6 million or <unk> 96 per share at the end of the quarter. So that just puts us in a really strong position to be able to make sure that we continue to cover comfortably that base distribution with NII irrespective of the rate environment.
Scott Bluestein: And we continue to do the right things to make sure. We're returning as much of that spillover as we can to our shareholders, which ultimately we think is the right thing to do.
Scott Bluestein: Great.
Speaker Change: Follow up question <unk>.
Given all the moving pieces going on and with the New administration.
Are you getting any twinks out there of possible reconsideration by the SEC.
Speaker Change: The rule.
Speaker Change: Dancing directly from the SEC, but we participate in different groups in supporting them.
Speaker Change: To the extent that legislation can be put forward to address that issue at the moment.
Speaker Change: What are we I know it feels like we're three months into the administration.
Speaker Change: Already but at the moment it is not been something that has been pushed forward yet and we are waiting to see who would sponsor bill. This time. So there's no progress to report at this time other than yes, we remain interested in that topic.
Speaker Change: Sounds good okay. Good quarter good year, thanks, guys.
Speaker Change: Thanks, Chris.
Speaker Change: Thank you.
Speaker Change: We have a question from the line of Paul Johnson with <unk>. Please proceed.
Speaker Change: Yeah. Good evening, Thank you for taking my questions.
Scott Bluestein: Scott So when you reference a certain syndicated.
Companies that you're referring to.
Scott Bluestein: Sensitivity to valuations here I'm, just curious maybe what exactly youre referencing here is this are we talking about certain D. C. Investors in the market that are becoming much more sensitive to companies that were raised at much higher valuations or is this is this more.
Scott Bluestein: Or like a cohort of <unk>.
Scott Bluestein: Companies that are essentially held by maybe a certain syndicated of D. C that are struggling to raise.
Scott Bluestein: Capital.
Scott Bluestein: Yes, no I think it's a pretty broad based comment Paul what we have seen over the last handful of quarters is that new investors looking at new investments.
Scott Bluestein: Are much more focused on valuation than we have seen over the last handful of years. So to the extent that you have a company that raised a large round of financing at what arguably now isn't inflated valuation in 'twenty, one 'twenty two and that company is coming to market looking for a new investor.
Scott Bluestein: The new Investor what we are seeing not in every case, but certainly in some cases is much more sensitive to that valuation discussion and so that puts more pressure on that company's current existing syndicate.
Scott Bluestein: To essentially fund the company on its own without new investor money coming in.
Scott Bluestein: And what we have started to see is that there is some stress in existing syndicates in terms of their ability and willingness to continue to fund some of those legacy legacy companies. So it's something that we're watching closely we've seen it take place in a small handful of situations, but it is something that we're watching and we want to see how it plays out over the next several quarters.
Got it. Thank you that's helpful.
Scott Bluestein: And then I was.
Scott Bluestein: Wondering maybe just a little bit more broadly on.
In terms of maybe getting an update on unfunded commitments.
Scott Bluestein: It looks like they were pretty stable all year looks like they also went down just a little bit quarter over quarter.
Scott Bluestein: <unk>.
Scott Bluestein: Just trying to get an update maybe on what you're seeing in terms of revolver draws liquor.
Scott Bluestein: Liquidity within portfolio companies, possibly where you're starting to see it get stretched at all.
Scott Bluestein: Yes, so overall, our unfunded commitments declined in the quarter. So unfunded commitments at the end of Q4, $448 5 million Thats down slightly from $489 million in Q3 that number if you look at it over the last sort of several.
Scott Bluestein: Several quarters has been relatively consistent although it is starting to trend down we're not seeing any noticeable trends in terms of companies choosing to draw or not draw. The one caveat to that would be we are seeing some instances where.
Scott Bluestein: The existing portfolio companies that we had booked maybe two or three years ago that had unfunded commitments, where the rates are much higher on those deals because where the base rates were at the time those companies or a lot less likely to draw. So we've seen a lot of companies, let those unfunded commitments expire.
Scott Bluestein: And that's just a trend that has has partly contributed to that decline in unfunded commitments over the last couple of quarters.
Scott Bluestein: Okay.
Scott Bluestein: Got it thanks that's helpful.
Scott Bluestein: Last one.
Speaker Change: Just on volunteer this quarter Thats, obviously been a very successful investment for you guys.
Speaker Change: You only closed that position out in the fourth quarter. I was wondering do you have a way to quantify how much that drove any of the unrealized.
Speaker Change: A portion of the gains this quarter.
Speaker Change: So that was the biggest driver of the realized gains on the equity front.
Speaker Change: Roughly in the $15 million range in terms of realized gains in the quarter on that investment.
Speaker Change: Got it and actually also in the SaaS kind of if there was any additional.
Speaker Change: Appreciation during the quarter from that investment and if there is a way to quantify that.
Speaker Change: From the 930 Mark.
Speaker Change: So the investment was exited in Q4, so there wouldn't be anything on the balance sheet as of the end of Q4. If you look at the realized gains on the equity positions for the entire quarter, roughly $22 million or $21 9 million during the quarter. The biggest driver of that was Palin tier we also exited.
Speaker Change: Firstly, several other public equity positions, where we had some some meaningful appreciation during the quarter.
Speaker Change: Okay got it thanks for that that's all the questions for me.
Speaker Change: Thank you so much and as I see no further questions in queue I will turn the call back to Scott Levine for final comments.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Thank you Carmen and thanks to everyone for joining our call today, we look forward to reporting our progress on our Q1 2025 earnings call. Thanks, everybody.
Speaker Change: Thank you and with that we conclude today's conference you may now disconnect.
Speaker Change: Yeah.
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