Hercules Capital, Inc. Q3 FY2024 earnings call

• Strong operating results in Q3 2024 with record total investment income and NII. - Managed ~$4.6 billion in assets, a 10.9% increase year-over-year. - The venture and growth stage markets slowed in Q3, leading to intentional slowdown in new originations. - Pending commitments stood at approximately $630 million, with optimism for Q4 funding. - Achieved sixth consecutive quarter of over $100 million in quarterly core income. - Return on equity in Q3 was 18.9%. - Focused on disciplined capital deployment, with technology and life sciences teams driving fundings. - Credit quality remained strong, with a weighted average internal credit rating of 2.24. - Net realized losses were $0.6 million in Q3, and NAV per share was $11.40, a 0.3% decrease from Q2. - Ended Q3 with strong liquidity of $572.3 million, including a fourth SBIC license unlocking $175 million.

In Q3 2024, Hercules Capital delivered record total investment income of $125.2 million, a 7.3% year-over-year increase. Year-to-date through Q3 2024, total investment income was $371.8 million, a 10% year-over-year increase. Net investment income (NII) was $244.7 million or $1.52 per share, a 12.2% year-over-year increase. As of the end of Q3, Hercules was managing approximately $4.6 billion of assets, a 10.9% increase from the prior year. Despite intentionally slowing new originations in Q3, Hercules delivered record year-to-date ending Q3 2024 total gross fundings of $1.34 billion. In Q3, approximately 61% of fundings were to technology companies, while approximately 56% of new commitments were to life sciences companies.

• Anticipate higher than normal market and macro volatility due to the upcoming presidential election and global geopolitical challenges. - Pending commitments of ~$630 million, with optimism for Q4 funding and expectation of a record year of new gross fundings for fiscal year 2024. - Q4 core yield expected to be between 13% to 13.3% excluding future benchmark interest changes. - Prepayment activity in Q4 expected to be in the range of $150 million to $250 million. - SG&A expenses in Q4 expected to be $22 million to $23 million, with an RIA dividend of approximately $1.6 million to $1.8 million per quarter.

• Market and macro volatility stemming from the upcoming presidential election and global geopolitical environment. - Uncertainty around Fed interest rate actions impacting borrower debt decisions. - Competition from larger private credit players, though Hercules has a 20-plus year track record and $21 billion of deals experience.

Q: Thoughts on deal activity in BDC broadly and Hercules' position?

A: Scott Bluestein stated longer-term optimism about the venture capital ecosystem, but Q3 was slow due to market hesitancy; pending commitments have increased post Fed rate action.

Q: Implications of the election on venture capital and Hercules?

A: Concerned about a disputed election leading to paralysis; need clarity on the winner of the election.

Q: Competition in the space?

A: Scott Bluestein said the market is competitive, but Hercules has 20+ years of experience and a $21 billion deals track record, which is hard to replicate.

Q: Dividend coverage and base dividend?

A: Strong dividend coverage, Board decides the dividend, and there's intention to continue supplemental distributions.

Q: Interest rate uncertainty and origination flexibility?

A: Majority deals have contractual rate floors; post Fed cut, more companies are willing to finance.

Q: AI impact?

A: Tangential exposure, with selective approach due to market volatility.

Q: RIA dividend guidance?

A: Seth Meyer said the RIA dividend guidance was increased due to portfolio performance and growth.

Q: Tax on unrealized gains and regulatory changes for BDCs?

A: Seth Meyer said tax on unrealized gains impacts similarly to other investment businesses; top regulatory wish list includes ineligible asset restrictions and AFFE issue.