Q1 2025 Hercules Capital Inc Earnings Call
Good day and thank you for standing by welcome to the Hercules Capital first quarter 2025 financial results Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question answer session.
To ask a question during the session you will need to press star one on your telephone you'll then here an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to turn it over to Michael.
Michael: Our managing director of Investor Relations for opening comments. Please go ahead.
Speaker Change: Thank you Kathy and good afternoon, everyone and welcome to Hercules Conference call for the first quarter of 2025.
Speaker Change: With us on the call today from Hercules are Scott Bluestein, CEO, and Chief investment Officer, and Seth Meyer CFO.
Speaker Change: Excuse me its financial results were released just after today's market close and can be accessed from Hercules Investor Relations section of our Investor Dot H T J P dot com and.
Speaker Change: An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call.
Speaker Change: During this call we may make forward looking statements based on our own assumptions and current expectations.
Speaker Change: These forward looking statements are not guarantees of future performance and should not be relied upon in making any investment decision.
Speaker Change: <unk> financial results may differ from the forward looking statements made during this call for a number of reasons.
Speaker Change: But not limited to the risks identified in our annual report on Form 10-K.
Speaker Change: Other filings that are publicly available on the Sec's website.
Speaker Change: 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 will turn the call over to Scott.
Scott Bluestein: Thank you Michael and thank you all for joining the Hercules capital Q1, 2025 earnings call come.
Scott Bluestein: Coming off a record year of operating performance and continued platform expansion our momentum accelerated in the first quarter with very strong originations and fundings, which helps drive nearly $270 million of net debt portfolio growth in Q1.
Scott Bluestein: During Q1, we took steps to further strengthen our balance sheet and liquidity position with the closing of our bond offering of $287 5, million% to 475% convertible unsecured notes due 2028.
Scott Bluestein: Our low cost of capital relative to our peers and our ample liquidity across the platform continues to put us in an advantageous competitive position, especially in market conditions like we are currently experiencing.
Scott Bluestein: Driven by the growth of both the BDC and our private credit funds business Hercules capital is now managing over $5 billion of assets, an increase of 11% year over year.
Scott Bluestein: Our continued ability to scale and leverage our institutional infrastructure combined with our highly diversified asset base and balance sheet should continue to serve us well as we continue to navigate the recent market and macro volatility.
Scott Bluestein: On our most recent earnings call on February 13th we emphasized that we expected higher than normal market and macro volatility.
Scott Bluestein: Given the change in administration and the ongoing challenges taking place in the global geopolitical environment.
Scott Bluestein: We also noted that we anticipated a more favorable new business landscape broadly in the first half of 2025 and that we were positioning the business to be able to take advantage of that.
Scott Bluestein: During Q1 and subsequent to quarter end, both have played out largely consistent with our expectations.
Scott Bluestein: The equity and credit markets have been exceptionally volatile, which has helped drive a significant increase in demand of capital from Hercules.
Scott Bluestein: The evolving messaging from the current administration has created a general sense of unease across the global markets.
Scott Bluestein: While we are monitoring developments closely we continue to believe that we are well positioned in this operating environment with a diverse asset base strong balance sheet.
Scott Bluestein: Conservative leverage position and exposure to industries that are generally less exposed to the impact of tariffs and related trade policy uncertainty.
Scott Bluestein: While we intend to continue to manage our business and balance sheet defensively. We also plan to take advantage of the attractive market opportunities that we are continuing to see in the market.
Scott Bluestein: In Q1, we maintained our high first lien exposure, which remained at approximately 91% and continues to be towards the high end of our BDC peers.
Scott Bluestein: Strong net debt portfolio growth in Q1 helps drive GAAP leverage up modestly from just under 90% in Q4 to just under 100% in Q1.
Scott Bluestein: Our Q1 GAAP leverage remains at the low end of our historical target range of 100% to 115% and below the average of our BDC peers.
Scott Bluestein: We ended Q1 with over $1 billion of liquidity across the platform.
Scott Bluestein: And no material near term debt maturities, which we believe positions us well to benefit from the more favorable originations market that we're currently seeing.
Scott Bluestein: Let me now recap some of the key highlights of our performance for Q1.
Scott Bluestein: In Q1, we originated total gross debt and equity commitments of over $1 billion and gross fundings of over $539 million.
Scott Bluestein: Both of these figures represent the second highest level being achieved in our history.
Scott Bluestein: The strong fundings led to net debt portfolio growth of nearly $270 million.
Scott Bluestein: The second highest level of net debt portfolio growth for a given quarter.
Scott Bluestein: In Q1 over 55% of our fundings occur during the final month of the quarter, which limited the NII benefit that we received from those investments in Q1.
Scott Bluestein: We anticipate that the near record net debt investment portfolio growth from the first quarter will help drive our core income and NII per share higher over the coming quarters.
Scott Bluestein: We generated total investment income of $119 5 million.
Scott Bluestein: And net investment income of $77 5 million or 45 per share.
Scott Bluestein: We were able to achieve 113% coverage of our quarterly base distribution of <unk> 40 per share.
Scott Bluestein: We generated a return on equity in Q1 of 15, 7% and.
Scott Bluestein: Our portfolio generated a GAAP effective yield of 13% in Q1, and a core yield of 12, 6%.
Scott Bluestein: Core yields declined slightly from 12, 9% in Q4, largely coming from declining base rates and some spread compression on certain new originations.
Scott Bluestein: Our balance sheet with moderate 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 high quality originations versus chasing higher yielding assets, which we believe have more risk.
Scott Bluestein: The focus of our origination efforts in Q1 and quarter to date Q2 was on maintaining a disciplined approach to capital deployment with an emphasis on diversification and avoidance of certain sectors that we believe will be more challenged in the current operating environment.
Scott Bluestein: Our Q1 originations activity placed a slightly greater emphasis on technology companies versus life Sciences companies.
Scott Bluestein: In Q1, approximately 53% of our commitments and 76% of our fundings works of technology companies, while approximately 47% of our new commitments were to life Sciences companies.
Scott Bluestein: We funded debt capital to 15 different companies in Q1.
Scott Bluestein: Of which nine were new borrower relationships.
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 and achieve performance milestones.
Scott Bluestein: Our available unfunded commitments were approximately $455 7 million up slightly from $448 5 million in Q4.
Scott Bluestein: The momentum that we saw in originations in Q1 has continued in Q2.
Scott Bluestein: Since the close of Q1 and as of April 28, 2025, our deal teams have closed 141 million of new commitments and funded $147 8 million.
Scott Bluestein: We have pending commitments of an additional $682 $5 million in signed non binding term sheets and we expect this number to continue to grow as we progress further in Q2.
Scott Bluestein: Many quality venture back companies that have scale and strong credit profiles are increasingly focused on the balance sheet strength and staying power of their lenders, which has helped drive more new business towards Hercules.
Scott Bluestein: We are also beginning to see certain banks moved to more of a risk off posture, which we believe will help drive near term originations momentum.
Scott Bluestein: Given the volatile market backdrop throughout much of Q1, we are pleased with the exit activity that we saw in our portfolio during the quarter.
Scott Bluestein: In Q1, we had three M&A events in our portfolio, which included one life Sciences portfolio company and two technology portfolio companies announcing acquisitions.
Scott Bluestein: In addition, we had one technology company confidentially filed for their IPO in the quarter.
Scott Bluestein: Based on current market conditions, we expect exit activity to remain muted near term as many companies are pausing discussions while they wait for more policy clarity.
Scott Bluestein: Early loan repayments decreased significantly in Q1 to approximately $132 million.
Scott Bluestein: Approximately 42% of our Q1 prepayments were attributable to existing investments refinanced and Upsized by Hercules as a result of strong performance and therefore true early loan repayments were only $75 9 million, which was well below our guidance of one.
Scott Bluestein: $100 million to $200 million for the quarter.
Scott Bluestein: While the lower level of early loan prepayments reduced our Q1 NII per share. It resulted in strong net debt portfolio growth in the quarter.
Scott Bluestein: Which positions us well for strong earnings growth in the coming quarters.
Scott Bluestein: For Q2, 2025, we expect prepayments to be in the range of 200 million to $250 million.
Scott Bluestein: This could change as we progress in the quarter.
Scott Bluestein: Credit quality of the debt investment portfolio remains stable quarter over quarter.
Scott Bluestein: Our weighted average internal credit rating of 2.31 increased slightly from the 226 rating in Q4 and remains well within our normal historical range.
Scott Bluestein: Our grade one and two credits decreased to 61, 1% compared to 65, 9% in Q4 great.
Scott Bluestein: Great three credits increased to 33, 9% in Q1 versus 29% in Q4.
Scott Bluestein: Our rated four credits decreased to four 1% from four 6% in Q1 and rated five credits increased slightly to 0.9%.
Scott Bluestein: In Q1, the number of loans and companies on non accrual increased by one.
Scott Bluestein: We had two debt investments on nonaccrual with an investment cost and fair value of approximately $72 2 million and $19 6 million respectively.
Scott Bluestein: Or one, 8% 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 and our portfolio monitoring remains enhanced.
Scott Bluestein: Given the uncertainty of the current tariffs and trade related environment, we have been proactively working to assess any material impact across our credit portfolio.
Scott Bluestein: Over 85% of our borrowers are domestic and a higher percentage of the business conducted by our borrowers is domestic in nature.
Scott Bluestein: Additionally, nearly 75% of our borrowers are in the software.
Scott Bluestein: Services or drug development industries.
Scott Bluestein: We believe that this largely insulates the substantial majority of our portfolio from the material negative impacts of the current tariff and trade environment.
Scott Bluestein: Further our investment in credit teams have engaged with most of our borrowers to further assess any potential impacts and we have identified only a very small number of borrowers that may be directly negatively impacted.
Scott Bluestein: At this point and based on those conversations and what we know as of today, we do not believe that any of our portfolio companies will be negatively impacted to a material degree.
Scott Bluestein: We do believe that the indirect impact of the current environment has the potential to lead to a general slowdown across the broader ecosystem and this is something that we are watching closely.
Scott Bluestein: Subsequent to quarter end, we have noted that the overall fundraising environment for certain companies has slowed and become more challenging.
Scott Bluestein: We expect this to particularly impact earlier stage companies and companies that are more directly exposed to the current tariff policy through end markets or the product supply side.
Scott Bluestein: During Q1 Hercules had net realized losses of $1 6 million, primarily due to the losses on warrant and equity investments.
Scott Bluestein: And losses from foreign exchange movements.
Scott Bluestein: Our net asset value per share in Q1 was $11 55.
Scott Bluestein: A slight decrease of 0.9% from Q4 2024.
Scott Bluestein: We ended Q1 with strong liquidity of $615 6 million in the BDC and over 1 billion of liquidity across the platform.
Scott Bluestein: We also received an investment grade credit rating upgrade from Morningstar D Brs from Triple B to Triple B Hi.
Scott Bluestein: And subsequent to the end of Q1 Fitch upgraded our secured debt rating from Triple B minus to Triple B.
Scott Bluestein: With healthy liquidity.
Scott Bluestein: Low cost of debt relative to our peers and for investment grade corporate credit ratings, we remain well positioned to compete aggressively on quality transactions, which we believe is prudent in the current environment.
Scott Bluestein: Venture capital investment activity was off to a strong start to 2025 with $91 5 billion invested according to data gathered by pitch book NVCA.
Scott Bluestein: M&A exit activity for U S venture capital backed companies was $22 7 billion.
Scott Bluestein: IPO activity remained muted with fewer companies going public, but raising more dollars.
Scott Bluestein: Consistent with the aggregate data for the ecosystem during Q1 capital raising across our portfolio increased from Q4 with 25 companies raising approximately $2 5 billion in new capital.
Scott Bluestein: From $961 million raised in the prior quarter.
Scott Bluestein: Given our strong sustained operating performance, we exited Q1 with undistributed earnings spillover of nearly $160 million.
Scott Bluestein: Or 92 per share per ending shares outstanding.
For Q1, we're maintaining our quarterly base distribution of <unk> 40.
Scott Bluestein: And our supplemental distribution of <unk> <unk> per share.
Scott Bluestein: For a total of 47 of shareholder distributions.
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 Q1, Hercules delivered its eighth consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments.
Scott Bluestein: Our success is attributable to the tremendous dedication.
Scott Bluestein: Efforts and capabilities of our 100, plus employees and the trust that our venture capital and private equity partners placed with US every day, we are thankful to the many companies.
Scott Bluestein: Management teams and investors that continue to make Hercules their partner of choice.
Seth Meyer: I will now turn the call over to Seth.
Seth Meyer: Thank you Scott and good afternoon, ladies and gentlemen.
Hercules started 2025 by continuing the strong business originations, we experienced in Q4 2024.
Seth Meyer: Nearly $270 million of net debt investment portfolio growth in Q1 was supported by our $287 5 million convertible debt issuance in March with a very low coupon rate of 475%, helping to keep our weighted average cost of debt just below <unk>.
Seth Meyer: 5%.
Seth Meyer: In addition, we raised approximately $40 million of new capital under our ATM during the quarter, helping us to maintain a conservative leverage position just below one to one on both a GAAP and regulatory basis.
Seth Meyer: We continue to maintain strong available liquidity of more than $615 million.
Seth Meyer: As of quarter end and more than $1 billion across the platform, including the advisor funds managed by our wholly owned subsidiary Hercules Advisor LLC.
Seth Meyer: Just on the performance of the quarter Hercules advisor delivered a first quarter dividend of $1 9 million, which when combined with the expense reimbursement of approximately $3 3 million resulted in approximately $5 2 million in cash delivered to the BDC in Q1.
Seth Meyer: A 15, 6% increase compared to Q1 2024.
Seth Meyer: With that in mind, Let's review the income statement performance and highlights.
Seth Meyer: Unrealized and realized activity leverage and liquidity and finally, the financial outlook first with the income statement performance and highlights.
Seth Meyer: Investment income in Q1 was $119 5 million supported by our growth throughout the prior year and the debt portfolio.
Seth Meyer: Core investment income a non-GAAP measure increased to 100.
Seth Meyer: $15 5 million.
Seth Meyer: Core investment income excludes the benefit of income recognized as a result of loan prepayments.
Seth Meyer: Non core investment income decreased to $4 million driven by a decrease in the early loan repayments during the first quarter.
Seth Meyer: Net investment income decreased to $77 5 million or <unk> 45 per share in Q1.
Seth Meyer: Our effective and core yields decreased modestly in the first quarter to 13, and 12, 6%, respectively compared to 13, 7% and 12, 9% in the prior quarter.
Seth Meyer: The decline in the core yield during the quarter was largely driven by the fed rate reduction of approximately 50 basis points in the last two months of 2024.
Seth Meyer: As of quarter end more than half of our prime based loans are at the contractual floor. After the recent rate cuts and less the impact of any future rate reductions will be muted.
Seth Meyer: First quarter gross operating expenses were $45 3 million compared to $43 5 million.
Seth Meyer: In the prior quarter.
Seth Meyer: Net of cost recharged to DRA eight our net operating expenses were $42 1 million.
Seth Meyer: Interest expense and fees remained stable at $22 1 million due to lower utilization of our credit facilities. As a result of the ATM activity and due to the issuance of the 2008 $287 5 million convertible note in there.
Seth Meyer: Our late March.
Seth Meyer: S G&A.
Seth Meyer: <unk> increased to $23 2 million.
Seth Meyer: Just below my guidance net of cost recharge to the RIAA the SG&A expenses were $20 million.
Seth Meyer: Our weighted average cost of debt decreased slightly to four 9% for the quarter.
Seth Meyer: <unk> or NII over average equity decreased to $15 7 million for the first quarter and our OE or NII over average total assets decreased to 8%.
Seth Meyer: Switching to the NAV unrealized and realized activity during the quarter, our NAV per share decreased by 11.
Seth Meyer: To $11 55 per share this represents an NAV decline.
Seth Meyer: 0.9% quarter over quarter or less than 1%.
Seth Meyer: The main driver was unrealized depreciation on investments.
Seth Meyer: $25 6 million of net unrealized depreciation was primarily attributable to net realized depreciation on debt investments due to impairments and a rise in yield spreads.
Seth Meyer: Focusing on leverage and liquidity, our GAAP and regulatory leverage increased to 99, 9% and 85, 2% respectively compared to the prior quarter due to growth in the balance sheet largely financed by the convertible debt issuance net.
Seth Meyer: Netting out leverage with the cash on the balance sheet, our net GAAP and regulatory leverage was 97, 4% and 82, 6% respectively.
Seth Meyer: We ended the quarter with $616 million of available liquidity.
Seth Meyer: As a reminder, this excludes capital raised by the funds managed by our wholly owned.
Seth Meyer: Subsidiary inclusive of these amounts the Hercules platform had more than 1 billion of available liquidity, the strong liquidity positions us very well to support our existing portfolio companies and source new opportunities.
Seth Meyer: As mentioned in March Hercules capital issued $287 5 million of convertible unsecured notes due in 2028.
Seth Meyer: With a stated interest rate of 475%.
Seth Meyer: The March interest issuance resulted in a higher dilutive share count outstanding as required by GAAP.
Seth Meyer: And thus a lower diluted change in net assets per share.
Seth Meyer: Despite this required disclosure Hercules capital intends to settle the principal in cash in 2028, we believe the basic weighted average shares is more relevant measurement of our business performance and this is the way that we will continue to evaluate our business.
Seth Meyer: As a final point, we continue to Opportunistically access the ATM market during the quarter and raised approximately $40 million in the first quarter, resulting in.
Seth Meyer: <unk> <unk> of accretion to the NAV per share.
Seth Meyer: Subsequent to quarter end to support our continued strong new business momentum, we raised an additional $41 million.
Seth Meyer: Finally for the outlook points for the second quarter, we expect our core yield of 12 to 12, 5% <unk>.
Seth Meyer: Excluding any future benchmark interest changes.
Seth Meyer: As a reminder, 98% of our debt portfolio is floating with a floor and presently more than 50% of our prime based portfolio is at the contractual floor.
Seth Meyer: So very difficult to predict as communicated by Scott, we expect $2 million to $250 million in prepayment activity in the second quarter.
Seth Meyer: We expect our second quarter interest expense to increase commensurately with the growth of the balance sheet and the prior quarter.
Seth Meyer: For the second quarter, we expect gross SG&A expenses of $25 million to $26 million and an <unk> expense allocation of approximately $2 9 million.
Seth Meyer: Finally, we expect our quarterly dividend from the <unk>.
Seth Meyer: Of approximately one nine to $2 1 million per quarter.
Kathy: In closing the business is positioned well for 2025 after delivering a strong first quarter commitments and fundings were excited to see how the rest of 2025 develops I will now turn the call over to the operator to begin the Q&A portion of the call Kathy over to you.
Speaker Change: Yes. Thank you as a reminder to ask a 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.
Speaker Change: Please standby, while we compile our Q&A roster.
Speaker Change: Your first question comes from the line of Brian Mckenna with citizens. Your line is now open.
Brian McKenna: Thanks, Good evening, everyone. Congrats on another robust quarter of can they made some fundings across the business.
Speaker Change: And it's great to hear that activity remains pretty elevated post quarter end I'm curious, what's driving this continuation of strong activity. Despite the broader macro environment I'm, assuming things may have slowed earlier on in the bonds and that may be recovered as April progressed, but any additional color here would be helpful.
Brian: Sure. Thanks, Brian.
Speaker Change: What we've shown over the course of the last 20 years is that we tend to broadly outperform in periods of market and macro volatility. If you look at our business, particularly over the last five or so years. Our primary source of competition has been and continues to be with respect to equity cap.
Speaker Change: <unk>, either coming from private venture capital firms private private equity firms or the public equity markets, particularly on the life Sciences side. When the markets are more volatile when macro is more volatile equity becomes more expensive equity becomes more dilutive equity becomes scarce.
Speaker Change: And that provides an opportunity for Hercules to selectively pick and target quality companies that are looking for financing solutions.
Speaker Change: Thats the primary driver of the increase in activity.
Speaker Change: Other increased as I mentioned, we have seen some banks moved to more of a risk off model, particularly over the last 30 to 60 days that has created a little bit of a void in the market and we're seeing an increasing number of later stage quality companies that traditionally would gear more towards the bank side of the market approach Hercules looking for.
Speaker Change: Our capital solutions.
Speaker Change: Okay, Great that's helpful and then.
Speaker Change: Maybe just touching on that a little bit thinking about.
Speaker Change: Yield and spreads on new deals given that some of the banks pulling back I mean, what are those look like today relative to even in the first quarter and then even kind of looking at the core yield that came in towards the upper end of the range. So I mean, what's the expectation for the all in core yield as well moving forward.
Speaker Change: Yes, so a couple of things Brian.
Speaker Change: Core yield for the quarter was 12, 6%.
Speaker Change: That was down slightly from 12, 9% in Q4 close to a 100% of that decline was attributable to the to Q4 25 basis point fed.
Speaker Change: <unk> cuts.
Seth Meyer: Our guidance for Q2 as Seth mentioned is 12 to 12, 5% core based on everything that we are seeing to date. We are very confident that we will end up in that target range. We haven't seen a lot of change in terms of new business Onboarding yields over the last maybe two to four.
Seth Meyer: Weeks, we've seen potentially a 25% to 50 basis point increase in yields but that really hasnt worked its way into our numbers yet.
Speaker Change: Got it okay. That's helpful. I'll leave it there I appreciate the time guys.
Speaker Change: Thanks, Brian.
Seth Meyer: You.
Speaker Change: Your next question comes from the line of Crispin Love with Piper Sandler Your line is now open.
Speaker Change: Thank you and good afternoon first on credit just just two loans on non accrual in your book, but are you noticing any changes in behavior from your borrowers either by actions our conversations youre, having with borrowers amid the recent volatility and what's your confidence in credit remaining stable if it.
Speaker Change: It is tougher for FERC oil companies to raise equity capital in this environment.
Speaker Change: Yes. So look overall I think we remain confident that I mentioned in my prepared remarks.
Speaker Change: We still have a generally speaking positive outlook with respect to credit across our portfolio. The markets have certainly become more volatile the operating environment has become more challenging.
Speaker Change: And so we're watching really the indirect impact associated with those things on our portfolio, what we've noticed particularly over the last 30 to 60 days is that companies are sort of freezing decision, making given the uncertainty.
Speaker Change: So decision, making with respect to potential growth investments decision, making with respect to exploring strategic options decision, making with respect to capital raise those discussions those decisions have slowed down and I think a lot of companies are just looking for clarity and looking for certainty from our part.
Speaker Change: <unk> perspective.
Speaker Change: We think that will change hopefully relatively quickly, but that's something that we're watching pretty closely quarter over quarter. When you look at our credit performance in Q4 relative to Q1 really not much changed.
Speaker Change: Weighted average credit rating went from two six to $2 31, which is really immaterial. We had some slight movement within our rated three rated four rated by buckets, but again nothing material and then as you pointed out as of the end of Q1, only two loans on non accrual that makeup 0.5% of our investment book at.
Speaker Change: Fair value.
Speaker Change: Great. Thank you appreciate all the color there Scott last quarter, you talked about <unk> have a noticeable shift in how they were approaching new investments dosing focusing more on valuation.
Speaker Change: With prior rounds for many companies at elevated valuation can you give us an update here are you continuing to see this broadly and among your portfolio companies and just what it could mean for debt and equity availability in coming months and quarters, especially with the recent volatility.
Speaker Change: Sure. So the answer to the direct question is yes, we are continuing to see a more deliberate focused.
Speaker Change: Misfire across the venture capital community much more selectivity much more sensitivity with respect to valuation.
Speaker Change: Having said that I would point out that we saw very strong capital raising across our portfolio in Q1 I mentioned this on the call, but ill reiterate it in Q1 alone. We had 25 companies raised $2 $5 billion of new capital So despite that.
Speaker Change: This on.
Speaker Change: Quality on valuation.
Speaker Change: We are continuing to see strong volume in our portfolio with respect to capital raising.
Speaker Change: Great. Thank you I appreciate you taking my question.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Doug Harter with UBS. Your line is now open.
Speaker Change: Great. Thanks.
Speaker Change: As you think about.
Speaker Change: Being able to take advantage of the opportunities in the market how are you balancing.
Speaker Change: Increasing leverage raising additional capital and or kind of using the.
Speaker Change: Third party funds to kind of manage that growth.
Speaker Change: Sure, it's something that we evaluate on a continuous basis, we have always run this business and we will always run this business focused on driving the best possible total shareholder return.
Speaker Change: Our leverage despite $270 million of net debt portfolio growth in Q1 remains at the very low end of our historical norm Lee.
Speaker Change: Average at the end of Q4 was <unk> nine GAAP leverage at the end of Q1 was just under 100%. So still at the very low end of our target range, we remain very well capitalized from a liquidity perspective across the platform over $600 million of liquidity in the BDC over.
Speaker Change: One 1 billion of liquidity in the private funds.
Speaker Change: I would also point out that for us and for our shareholders because of the unique structure of our model where the public BDC owns our registered investment advisor, which manages a 100% of our private credit fund business, 100% of the benefit that we generate from our private credit.
Speaker Change: Fun business accrete to the benefit of our public shareholders. So irrespective of whether we are putting deals into our public BDC or a private credit fund business that benefit is accreted up to our public shareholders.
Speaker Change: With respect to equity capital versus leverage capital. We continue to look opportunistically at a variety of different features we did the 287 $5 million convert in Q1, which was very attractively priced and we'll continue to look in the market for opportunities that we think can be accretive long term for our <unk>.
Speaker Change: Shareholders.
Speaker Change: Yes, just one one follow up.
How do you think about what is the rate.
Speaker Change: <unk> to be in leverage within your range is the low end of the range kind of the right spot for this tie.
Speaker Change: A volatile environment or or could you move up more towards kind of at the midpoint of the range.
Speaker Change: Yes, I think we've proved over the last few years that we're willing to go to a low point to make sure that we're able to be more opportunistic in.
Speaker Change: Utilize extra cash on the balance sheet and availability to make sure that we can take advantages of market changes new positions ever since.
Speaker Change: March of 2023, we've really kept it low kept our powder dry and so for us in a market like this we're looking at maintaining it at the lower end, but as we see the right opportunity we could drive that up if we see.
Speaker Change: Reasons to make deeper investments and slow our leverage increase.
Speaker Change: Thank you.
Doug Harter: Thank you thanks, Doug.
Speaker Change: Next question comes from the line of Finian O'shea with WNS. Your line is now open.
Finian O'shea: Hey, everyone.
Speaker Change: Good afternoon.
Speaker Change: Got it early in the remarks, I think you had a comment on leaning more into tact.
Speaker Change: Can you expand on that.
Speaker Change: And sort of a part b.
Speaker Change: As the smart sheet.
Speaker Change: <unk>.
Speaker Change: Operator, do we lose fit.
Speaker Change: Okay.
Speaker Change: Hello.
Speaker Change: Okay.
Speaker Change: This is cathy.
Speaker Change: Hello.
Speaker Change: So.
Speaker Change: [laughter].
Speaker Change: Your next question comes from the line of Casey Alexander with Compass point research and trading.
Casey Alexander: Hi, Good afternoon can you hear me.
Speaker Change: Yes standby please.
Casey Alexander: Okay.
Casey Alexander: Hello.
Casey Alexander: Okay.
Casey Alexander: Hi can you hear me.
Speaker Change: Yes. This is Hercules capital can you put us into our earnings call Keith.
Speaker Change: Im sorry Casey.
Casey Alexander: Okay.
Casey Alexander: Okay.
Speaker Change: Sorry for the technical difficulties Casey Alexanders line is open waiting for your waiting for you.
Speaker Change: Hi, I'm sure. We're all disappointed that we didn't get to hear the rest of fins question. So.
Speaker Change: I'll ask a couple quick ones and then get out of the way so that he can get back in the queue.
Speaker Change: On the on the $56 million.
Speaker Change: And loans that were that were refinanced Scott is it would it would it be normal for you to pass on any prepayment fees on those deals in order to facilitate the refinancing.
Speaker Change: Yes, so great question, when we refinanced one of our own borrowers where that company is performing and we are upsizing and expanding that facility. We will generally waived the prepayment penalties that would otherwise be due we do not way backend fees or end of term fees, but if theres a portfolio company that is outperforming.
Speaker Change: Patients and we are working with them to upsize and expand the facility, we will generally wave prepayment penalties associated with that refinancing.
Speaker Change: And so that would that would also partially explained some of the lower fee income for the quarter.
Speaker Change: Exactly correct combination of what you just said and just the lower overall number with about $75 million of actual outside prepayments versus the guidance that we had given which was significantly higher.
Speaker Change: Right.
Speaker Change: And as you look forward and you have kind of some line of sight to $200 million to $250 million.
Speaker Change: In repayments in Q2 is there some percentage of that that you would also expect to be refinancings, where we might see lower fee income.
Speaker Change: Not at this time Casey, but based on what we know as of today and the latest information that we have that number that we provided I would say we have a high degree of confidence in and that's all external.
Casey Alexander: Okay, great alright, thanks very much.
Speaker Change: Thanks Casey.
Casey Alexander: Thank you.
Speaker Change: Your next question comes to the lineup Paul Johnson with <unk>. Your line is now open.
Speaker Change: Yes. Thank you.
Speaker Change: In terms of just some of the gravitation towards later stage deals and larger deals.
That that Youre seeing what are you seeing in terms of equity cushion in those deals there are sponsors and vcs, putting money in at the same time that there.
Speaker Change: Im going to you as a borrower lender.
Speaker Change: We have not seen much change in terms of how venture capital firms are approaching companies that we're interested in speaking to.
Speaker Change: We've always said this and we will continue to say this or that capital is not designed to replace equity capital.
Speaker Change: It's designed to supplement equity capital so one of the things that our investment teams, whether it's on the technology side or on the life Sciences side spend a fair amount of time focused on is ensuring that the companies that we're lending to have the ability to continue to raise equity capital.
Speaker Change: It's not always the case that when we underwrite a new loan that companies raising equity at the same time, but we do have certain metrics and certain things that we're looking for in terms of Rms.
Speaker Change: Our ml minimum liquidity thresholds recent NASA newness of equity capital into the business and that really drives our decision making.
Speaker Change: Got it appreciate that.
Speaker Change: And then.
Speaker Change: Along the lines of just kind of more later stage companies, which use.
Speaker Change: Consciously done that with your portfolio and shifted more.
Speaker Change: And to that later stage.
Speaker Change: Yes.
Speaker Change: I mean with all the trouble I guess in the VC market today, I mean does that create an opportunity to go down company size into earlier stage companies or it's just too early to say that.
Speaker Change: I think it's too early to say that.
Speaker Change: We have been of the view for the last several years that that's the more difficult challenging part of the market and I think our our approach over the last several years to largely stay away from earlier stage companies has has proven to be the right decision. We do think that that medium to long term there is <unk>.
Speaker Change: Going to be an opportunity for us to step back into that part of the market. We just wanted to have a little bit more conviction and a little bit more stability before we make that decision.
Speaker Change: Got it. Thank you very much that's all for me.
Paul: Thanks, Paul.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone and wait for your name to be announced.
Speaker Change: Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Christopher Nolan: Hey, guys a.
Speaker Change: Follow up on Paul's question about the VC market ever since Silicon Valley Bank went down the whole market has sort of been.
Christopher Nolan: In the doldrums and I know this is a public forum, but.
Christopher Nolan: What do you think is I mean, it's lost its Mojo can you.
What you think what bills are what the cure might be briefly.
Christopher Nolan: Yes, Chris I think we would we would fundamentally disagree that the market has been in the doldrums since the SBB situation of March of 'twenty three.
Christopher Nolan: We've seen tremendous momentum with respect to our business since March of 2023.
Christopher Nolan: Our commitment volumes are up our funding volumes are up.
Christopher Nolan: Our team's assessment is that the quality of the new business that we've originated since March of 2023 is up considerably and I think we've demonstrated that in terms of our performance I would also just point out anecdotally two.
Christopher Nolan: 2024 was a relatively strong year for VC capital equity investment $214 billion invested from venture capital investors that was up from $163 million in 2023, and if you look at the Q1 data in isolation with $92 billion raised.
Christopher Nolan: That's arguably the strongest quarter that the industry has seen in quite some time.
Christopher Nolan: Where we've seen some signs of softness is more on the fundraising side. So venture capital fund raising activity has slowed considerably over the course of the last several years.
Christopher Nolan: Part of that is linked in our assessment to a declining exit environment.
Christopher Nolan: Where M&A is down Ipos are largely nonexistent, so venture capital firms have not been able to recycle capital to the normal pace that they are used to but we continue to see a relatively vibrant venture capital ecosystem. It is not without challenges right now the macro and geopolitical environment.
Christopher Nolan: Creating headwinds I think for growth companies broadly, but we continue to look at things optimistically and we continue to be excited about the operating environment that we're in.
Christopher Nolan: Great. Thank you.
Christopher Nolan: Sure.
Christopher Nolan: Thank you.
fin o'shea: Your next question comes from the line of Fin O'shea with W. <unk>. Your line is now open.
fin o'shea: Hi, everyone can you hear me.
Speaker Change: Yes, Sir.
Speaker Change: Okay, I'm going to try to live up to my friend Casey's hype here.
Speaker Change: I wanted to ask about the life science portfolio.
Speaker Change: The global sort of trade tariff developments.
Speaker Change: Like to what extent does your typical borrower go go head to head with a Chinese competitor and clinical research so forth.
Speaker Change: And has there been any impact there good or bad.
Speaker Change: Thanks, and I just wanted to say certainly apologies for the disruption. There I think you were about to ask such a great question that the lines just went dead on you.
Speaker Change: But in all seriousness.
Speaker Change: Answering the first question that I think you were in the middle of asking last time, so I don't want that to go unaddressed.
Speaker Change: Activity in Q1 was slightly weighted towards technology companies about 53% of our commitment activity was to technology companies, 47% to life Sciences companies. So there was a shift but it was it was it was not material.
Speaker Change: The largest driver of that honestly was just the volatility that we saw across the public biotech markets in Q1 and that has continued into Q2, the <unk> index, which is the most closely watched index and the public biotech space.
Speaker Change: Very volatile over the course of the last three to four months and down pretty materially and I think that has caused a fair amount of uncertainty across that part of the market for us with.
Speaker Change: With respect to the second part of your question.
Speaker Change: Really not a direct link or correlation between the companies that we're lending to competing with with Chinese or other drug.
Speaker Change: Drug development drug discovery drug discovery companies.
Speaker Change: In our view the volatility is really being driven by two specific things.
Speaker Change: Number one there has been a tremendous amount of turnover at the FDA.
Speaker Change: That has created a sense of uncertainty with respect to timing with respect to approvals with respect to clarity in terms of clinical trials.
Speaker Change: Done a full assessment of our current portfolio and we do not see any material risks associated with those things.
Speaker Change: But that has caused a general slowdown in uneasiness across the broader landscape.
Speaker Change: We saw several very strong opportunities in Q1 that we took advantage of we've seen several strong opportunities in Q2, and the life Sciences side that we plan to take advantage of and so we're going to continue to be very active on both the tech side and life Sciences side.
Speaker Change: Then the last part of your question with respect to tariffs and the trade environment.
Speaker Change: The one piece that we are watching is a majority of drug discovery drug development companies globally source a lot of their API is from China, and so to the extent that those things are included in the tariffs to the extent that those things become a bargaining chip between China.
Speaker Change: Not wanting to or not being willing to send them in quantity to the United States that would potentially cause some concern when you look at the materiality of that impact, though it's pretty small given that that does not make up a material portion of any of these companies true costs.
Speaker Change: Okay. Thanks.
Speaker Change: Can I I didn't realize you heard half of the first question.
Speaker Change: We saw smart sheet this quarter.
Speaker Change: No you've done some of the large sponsor buyouts in the past but.
Speaker Change: Just given this is a <unk>.
Speaker Change: Pretty big buy pretty interesting timing for those can you talk about if this is.
Speaker Change: Perhaps more of a pivot to those sort of large market flow unit tranche deals.
Speaker Change: Sure Great observation and great question.
Speaker Change: Not a pivot at all.
Speaker Change: We have we have said publicly and we will reiterate that we have a very diversified asset base. We have a very strong team on the technology growth side, we have a very strong team on the life Sciences growth side, and we have a dedicated strong team that focuses on more of the private equity sponsor side, we selectively we will participate in.
Speaker Change: These transactions that we think are strategic where we have an angle, where we have a particular relationship and understanding of our business and the loan that you referenced was one of those opportunities that the team felt strong strong about and we were able to take advantage of it.
Speaker Change: Very good thanks, so much.
Speaker Change: Thanks Ben.
Speaker Change: Thank you.
Scott Bluestein: This concludes our question and answer session I would now like to turn it back to Scott boosting for closing remarks.
Speaker Change: Thank you Cathy and thanks to everyone for joining our call today, we look forward to reporting our progress on our Q2 2025 earnings call.
Speaker Change: Yes. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
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Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.