Horizon Technology Finance Corp (HRZN) 2015 Q4 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's year-end 2015 conference call. Today's call is being recorded.

(Operator Instructions)

I would now like to turn the call over to Megan Bacon of Horizon for introduction and the reading of the Safe Harbor statement. Please go ahead.

Thank you and welcome to the Horizon Technology Finance fourth-quarter 2015 conference call. Representing the Company today are: Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Chris Mathieu, Chief Financial Officer. Before we begin, I would like to point out that the Q4 press release is available on the Company's website at HorizonTechFinance.com.

Now I will read the following Safe Harbor statement. During this conference call, Horizon Technology Finance will make certain forward-looking statements, including statements with regard to the future performance of the Company. Words such as believes, expects, anticipates, intends or similar expressions are used to identify forward-looking statements. These statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are detailed in their risk factor discussion in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2015. The Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Rob Pomeroy.

Good morning, and thank you all for joining us. It's a beautiful morning here in New England. On today's call, we will provide details of our successful 2015 results, and give you an overview of the markets that we serve.

But first, I would like to speak to several topics that are impacting the BDC sector in general, and reemphasize what is unique and compelling about the Horizon strategy, and its value proposition for shareholders. Share prices for the BDC sector as a whole are trading well below historical levels and net asset values.

Why are BDC share prices depressed? Several macro issues are offered as possible reasons. Including concentrations in oil, gas and energy-related investments, exposure to foreign markets, the possible start of a down credit cycle in middle-market lending, and the potential for interest rates to rise.

It is important to note that none of these macro issues have a direct impact on Horizon. Horizon has no direct investments in the oil, gas and energy markets, and has no direct exposure to foreign markets. Our credit quality remains solid, with a flat NAV, down less than 1% from the third quarter, and we operate on a venture-lending market whose credit cycle historically has not been correlated to middle-market lending. Finally, the coupons on Horizon's portfolio are structured to increase when interest rates rise, so a rising rate interest rate environment is expected to be accretive.

In addition to these macro issues, some shareholders, analysts and commentators have also raised BDC sector concerns, including overaggressive capital raising, deterioration in credit quality, concentration in CLOs, and misalignment of incentives with shareholder interests. With respect to these issues, Horizon has had one equity raise since 2012, a follow-on offering in March 2015, that was accretive beginning in the third quarter. Our NAV has remained basically flat for the past eight quarters.

We do not purchase CLOs or any syndicated loans in the open market. Instead, we do the old-fashioned hard work of directly originating high-yielding loans in especially niche markets. And lastly, Horizon has aligned its management incentives with its shareholders by amending its management agreement in 2014 to add an incentive fee waiver and deferral mechanism, and in 2015, implemented a share repurchase program.

Even more important than avoiding macro and BDC sector issues, Horizon has its own unique value proposition, which is centered on the Horizon strategy. We are a pure play in venture lending to exciting and dynamic technology and life science companies, that are developing game-changing technologies. We love this space, and the opportunities that we see and have seen for over 25 years. As a pure play in venture lending, Horizon provide investors an opportunity to participate in the venture and technology space, with the benefits of lower risk than equity, regular dividends from current income, and the potential for additional dividends or share price appreciation.

Our secured loans provide high current pay yields, as well as the potential for equity upside through warrants and success fees. In addition, our loss experience has been favorable, because our secured loans have relatively low loan-to-value. This was true during the tech boom-and-bust of the early 2000s, and through the financial crisis of 2008 through 2010.

The benefits of our strategy that I have just mentioned, and our solid execution enabled us to report strong results in 2015. Specifically, we continue to achieve an industry-leading and consistent portfolio yield of over 14%. We experienced liquidity events from 17 portfolio companies during 2015. Our earnings covered our distributions for two consecutive quarters.

Including our fourth-quarter distribution, we have paid a stable distribution for 14 consecutive quarters, with $8.03 per share in declared cumulative distributions since our IPO. We have declared distributions totalling $0.345 per share payable during the second quarter of 2016. We continue to maintain credit quality and our cumulative credit experience has remained strong, and we began executing a share buyback with 26% of the total authorization purchased to date.

Now I want to briefly highlight Horizon's legislative efforts on behalf of the current effort to reform and modernize the BDC rules and regulations. Last week, I was pleased to join with other BDC leaders on Capitol Hill as the only representative of the venture-lending sector, meeting with senators and their staffs to promote the BDC modernization bill. Horizon is committed to helping get this legislation passed, to further BDC's ability to provide growth capital to businesses.

Before turning it over to Gerry and Chris, I want to welcome Joseph Savage to our Board of Directors. Joe will fill the vacant seat which resulted from the untimely passing of Chris Woodward, our former Lead Independent Director. Joe has an impressive background as a business leader in the Connecticut community, and an extensive career in lending in senior management. He is the Executive Vice Chairman of Webster Bank, and we welcome his experience and leadership to our Board.

Gerry will now update you on our origination efforts, liquidity events, the headwinds in the market, competition in the venture capital environment. Chris will then detail our operating results, capital outlook, and financial condition. Gerry?

Thanks Rob. Good morning, everyone. During the fourth quarter, Horizon funded seven new loans totaling $18.5 million. For the year, Horizon funded 37 new loans totaling $123 million, representing a 29% increase over 2014 fundings of $95 million.

As a result, our portfolio grew by more than $45 million, or 22% for the year. We were able to achieve this measured growth while maintaining a strong pricing discipline, as reflected in our on-boarding yields of over 12% and portfolio yield of 14.2% for the fourth quarter and for the full year.

We experienced liquidity events from three portfolio companies during the fourth quarter, which included receiving total proceeds of $455,000 from one warrant and one success fee. We also received prepayment and accelerated end-of-term payments from one portfolio company. The fourth-quarter liquidity events brought Horizon's total number of liquidity events in 2015 to 17.

As of December 31, 2015 Horizon's unfunded loan commitments, all priced at floating interest rates, were $10 million to five companies. In addition, already in the first quarter of 2016, we have been awarded four new transactions totaling $13 million, and funded four transactions totaling $14 million. We also have experienced one liquidity event in the first quarter. We expect the size of our portfolio to remain flat or to grow slightly for the first quarter.

We are pleased with the measured growth in our portfolio during 2015, and our consistent ability to achieve attractive pricing and maintain solid credit quality. Our ability to achieve these positive results for our shareholders was in part a result of our contrarian marketing strategy over the last eight quarters to weight our portfolio towards technology.

For those of you that have been following Horizon over the last two years, you may recall we have been signaling that our strategy has been to selectively weight our portfolio toward technology, because we believed it provided an opportunity for better quality, higher-yielding investments, compared to investments in an overheated life science market that offered venture debt investors single-digit interest rates, low warrant coverage, inflated valuations, and oversized credit commitments, which resulted in poor risk-adjusted pricing. I am happy to report that are technology strategy was proven very successful in 2015.

Of the six liquidity exits from mergers and sales of our portfolio companies, five were technology companies. In addition, in the first quarter, one of our technology portfolio companies was acquired, and two other technology portfolio companies have notified us that they have term sheets to be acquired in mid 2016. While there is no guarantee that these transactions will close, I believe they are compelling examples of how Horizon is able to consistently maintain one of the highest-yielding portfolios in the BDC industry, through its knowledge and experience and identifying which markets will provide the highest quality and best price investment opportunities.

While we were successfully deploying our strategy in the tech markets in 2015, the life science market began to soften. In the second half of 2015, the life science IPO market weakened, with only 18 life science IPOs in the second half of 2015, compared to 34 life science IPOs in the second half of 2014. As a result, some venture lenders terminated their commitments to life science companies, in order to reduce their exposure to the life science market and their committed backlog.

With a less predictable IPO market for life science companies going into 2016, and with many of our competitors having pulled back or out of the life science market, we are now seeing significantly improved opportunities to selectively and directly source quality life science transactions at much improved pricing and deal structures. As a result, we expect to increase our portfolio exposure to life science companies during 2016, by maintaining a targeted investment approach.

Our rationale for seeking more opportunities in the life science sector is based on several factors, including the following: We are seeing less competition for debt transactions from other lenders that have either left the market or are reducing their exposure to life science. We expect less competition from public equity. And much of the debt incurred by life science companies from 2013 through 2015 provided interest-only terms that did not match their milestone timelines for FDA approval.

Thus, much of the debt will begin amortizing before many life science companies have their FDA approvals, or are generating positive cash flow. As a result, many life science borrowers are coming back to the market to refinance their debt. We expect this trend to continue in 2016 and 2017.

With fewer competitors in the market to meet loan demand, Horizon believes it will be able to selectively source high-quality investment opportunities in the life science sector at attractive pricing, and with strong equity upside potential. This potential will be enhanced by lower life science company valuations in both the public and private markets.

Turning now to venture capital investing during the quarter, while venture capital investment reported by the National Venture Capital Association of $11 billion during the quarter continued to be healthy, it represented a sharp decrease from the $16 billion reported in Q3 of 2015, and was the lowest level of investment since Q3 of 2014. It appears that VCs continue to make significant equity investments in later-stage growth oriented companies, with rational valuations, but VCs are reducing investments in over-valued companies, especially unicorns, and portfolio companies that are significantly underperforming.

M&A activity remained fairly robust in the fourth quarter with 91 VC-backed transactions, of which 62 were technology-related companies. We anticipate this activity will continue to be strong in 2016, as VCs seek to exit later stage technology companies, and technology buyers look to enhance their product offerings through acquisition.

We believe our portfolio of 89 warrant and equity positions and 10 success fees is well-positioned to benefit from M&A activity in 2016, evidenced by the already closed M&A transaction and two potential M&A transactions in our portfolio, which I previously mentioned. With that update, I will now turn the call over to Chris.

Thanks Gerry, and good morning, everyone. Our consolidated financial results for the three months and year ended December 31, 2015 have been presented in our earnings release we distributed after the market closed yesterday. We also filed our Form 10-K with the SEC last night.

For the fourth quarter of 2015, total investment income was $8.6 million, compared to $7.3 million for the fourth quarter of 2014, or an 18% increase. This change was primarily due to higher interest income on investments resulting from the higher average size of our loan portfolio, as well as the additional fee income. For the full year ended December 31, 2015, total investment income remained flat at $31 million, compared to the prior year. Although flat, 2015's investment income included more predictable earnings from a larger portfolio, which was less reliant on the positive impacts of loan pre-payments.

We continue to generate attractive on-boarding yields with new loans, averaging on-boarding yields of 12.3% for the fourth quarter compared to 11.9% in the prior quarter. Combined with portfolio liquidity events, we achieved strong portfolio yields, generating 14.2% for the fourth quarter and for the full year. The primary changes period-to-period to portfolio yields are driven by the timing of new loan originations, and the timing and extent of loan prepayments, and the related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized end-of-term payments.

Total net expenses were $4.5 million for the fourth quarter of 2015, as compared to $4 million for the fourth quarter of 2014. Total net expenses for the full-year 2015 decreased by $3.3 million or 16% to $17 million, as compared to $20 million for the full-year 2014. Interest expense for the full-year 2015 decreased by $3 million or 34% year over year, to $5.8 million, due to a decrease in the average outstanding borrowings of $14.8 million or 14%, along with a decrease in our effective cost of debt.

Base management fee expense remained flat at $4.4 million for the full-year 2015 and 2014. Base management fee expense remained flat primarily due to the waiver of base management fees of $350,000 related to our March 2015 public equity offering, offset by an increase of $6.4 million or 2.6% in our average assets. Professional fees for the full-year 2015 also decreased, compared to the full-year 2014, due to a decreased legal fee and other costs associated with certain non-accrual investments and other assets.

We earned net investment income of $0.35 per share for the fourth quarter, as compared to $0.33 per share for the fourth quarter of 2014. For the full-year 2015, we earned net investment income of $1.25 per share, as compared to $1.11 per share for the full-year 2014. After paying distributions of $1.38 per share in 2015, declaring in 2015 a distribution of $0.115 per share payable in January of 2016, and earning $1.25 per share, the Company's undistributed spillover income as of December 31, 2015 was $0.11 per share.

To complement our distribution policy and growth strategy, in September 2015 our Board authorized a $5 million share repurchase program. During the fourth quarter, we repurchased approximately 113,000 shares of our common stock at an average price of 83% of NAV, at an aggregate cost of $1.3 million. As of December 31, our NAV was $13.85, a decline of $0.09 per share compared to the third quarter.

We ended 2015 with an investment portfolio of $250 million, an increase of $45 million or 22% as compared to 2014. This portfolio consisted of secured loans to 52 companies, with a fair value of $242 million, and a portfolio of warrant and equity positions in 89 portfolio companies, with an aggregate fair value of $8 million, including 13 companies that are already public. New loan originations in the fourth quarter of 2015 totaled $18.5 million to seven portfolio companies, which were offset by $8 million in scheduled principal payments and $8 million in principal prepayments.

Loan originations for the full-year 2015 totaled $123 million to 37 portfolio companies, which were offset by $27 million in scheduled principal payments, and $48 million in principal prepayments. At year end, 92% of our loan portfolio was performing at or better than expected at the time of underwriting. We did have one non-performing loan in the portfolio at the end of the year, with a cost of $2.7 million and a fair value of $500,000.

Subsequent to the end of the year, we exited that debt investment. We received cash proceeds and a royalty and sale agreement in connection with the exit, equal to an aggregate fair value of $500,000. Now that we have successfully reached our overall target leverage, we expect to maintain or slightly increase the current portfolio, and make up of the portfolio in 2016.

In terms of liquidity, Horizon ended the fourth quarter with $23 million in available liquidity, including cash and funds available under our credit facility. As of December 31, we had $68 million outstanding under this facility. While we extended and expanded this facility in August, we will continue to look towards further expansion.

In addition to our credit facility, our asset-backed notes had a remaining balance of $14.5 million outstanding at year end. We expect the notes be fully paid off in the second quarter. We continue to have $33 million in publicly-traded baby bonds which we expect will be held until maturity until 2019.

We continue to see demand for all of these leverage products in the market, and are exploring the expansion of our credit facility and asset-backed securitization, to provide us additional capital to leverage our investment portfolio. It continues to be our intention to target overall debt levels to a target ratio of 0.75 to 1. At December 31, our actual leverage ratio was 0.72 to 1, as we increased the use of our credit facility as our primary source of capital in 2015.

One last topic before we go to questions. We want to share a little background on our interest rate sensitivity. Like all BDCs, we may be subject to financial market risks, including changes in interest rates. As of year-end 2015, 93% of the outstanding principal amount of our debt investments for interest debt floating rates. This compares favorably to 64% as of year-end 2014. We expect that our debt investments in the future will primarily have floating interest rates.

Based on our December 31, 2015 consolidated statement of assets and liabilities, we have determined that for a 100 basis point increase in LIBOR, we would increase annual net interest income by $1.6 million, or $0.14 per share. This increases to $2.8 million or $0.25 per share, with a 200 basis points increase in LIBOR. And further, $3.5 million or $0.32 per share with a 300 basis point increase in LIBOR. The bottom line is that Horizon is not afraid of rising rates, but rather embraces the potential for rate change, and expects to benefit from both a modest move and a more dramatic move in LIBOR.

Before we open the floor to questions, I would like to note that we plan to hold our next conference call to report first-quarter results during the week of May 2.

This concludes our opening remarks, and we will be happy to take questions you may have at this time.

(Operator Instructions)

Leslie Vandegrift, Raymond James.

First of all, good quarter. Coming in -- I know it was a hard end of the year, but coming in right in line with originations, so congratulations. I wanted to ask about that actually specifically. You were right on in your guidance for the fourth quarter, so I was hoping to get some more color on your expectations for 2016. And then, after that, some color on net asset value on the markdowns, because you were less obviously than your peers by a good bit. Obviously, we saw spread widening in the space versus some credit issues at other BDCs, and so just some of that breakdown would be nice.

Sure, thanks for the broad question on looking at 2016. So as it relates to 2016, we think our portfolio is at a stable level. We've hit our overall target leverage of pretty near 0.75, so we think the portfolio will be generally flat to slightly up. So the earnings potential of the portfolio is pretty strong, with consistent on-boarding yields. We will be looking for some normal prepayment activity, although it's hard to estimate when or how many. From an NAV perspective, I guess your real question is asset quality, so let me just turn that over to Rob to just talk about the asset quality and the portfolio.

So the NAV was down less than 1% from the third quarter. The primary, a lot of ups and downs in that, but we believe our credit quality remains very solid. Chris did mention the one non-accrual loan, but we were able to resolve that early in January. You never like to have that kind of outcome, but I think the negative impact of that is contained, and really has no impact going forward on our NII.

Okay, perfect. Thank you. That's all for me.

Ryan Lynch, KBW.

Thank you for taking my questions. First one, over the past two quarters, you have had some fee waivers, and with those fee waivers, the dividend has been fully covered. As we move forward, you have met the conditions where those fee waivers are not required anymore. So now that those fee waivers are not going to be required, going forward, how confident are you are around covering that dividend, excluding those fee waivers, and what are your thoughts around potentially extending those fee waivers to the extent necessary that you're not covering the dividend with NOI earnings?

Thanks, Ryan. We implemented those fee waivers primarily as we built the portfolio back up from raising the capital. We were pretty confident that we could -- that, that would be accretive long term, and now that we have reached our target leverage, we expect that the earnings portfolio -- earnings from our portfolio will be strong enough to cover our dividend with NII over time, and that's really been what we have been preaching for quite a while.

Okay. And then, I want to just go back to the fair-value marks and the write-down for the portfolio this quarter. So it looks like you had about a $2 million write-down, and I'm probably going to butcher this name, but of ZetrOZ, the one non-accrual this quarter. So, if you exclude that -- it was $2 million of a write-down this quarter -- your portfolio was -- had unrealized depreciation of about $1.4 million. So excluding that one write-down in your non-accrual, it looks like the portfolio actually appreciated by about $600,000. So, am I thinking about that math right, number one? And, number two, how did the portfolio actually appreciate its fair-value mark in the quarter, excluding the one non-accrual, given the backdrop of the credit markets in the fourth quarter?

Yes, so your math is pretty close to being spot on. On balance, our credit quality remains very strong. We have normal migration of accounts, and we actually feel like the portfolio actually improved, notwithstanding that one bad loan that we made to ZetrOZ. The other rest of the movement sort of in the warrants. And so I think you are thinking about that correctly, Ryan.

Okay, and then just one last one. I believe you said that you believe that your asset-backed notes are going to pay down at the end of the second quarter, or by the end of the second quarter. Looks like you have about $45 million of assets still pledged in that securitization, so is the thought process, once that wind down -- once those notes wind down and pay off, to take those assets and pledge them to the credit facility, and expand the capacity on that credit facility? Or what are you thinking about on the liability side going forward, as those asset-backed notes pay down?

Yes, exactly what you described. So we do have two options. One is to, once we relieve the debt obligation on the securitization we can move those assets to any other vehicle we choose, which would include the KeyBanc facility. Currently, it's a $70 million facility, and we have the ability to increase that up to $150 million, by either having existing lenders provide more capital or bringing in other quality lenders into the syndicate.

So that's certainly a very good option for us, to bring those existing assets into that existing portfolio. The thing is, though, those are really good assets, and they are well diversified and seasoned, so the facility would absorb those very well in the structure that's there. The alternative is to go out and seek where there is substantial interest in a securitization to effectively take the portfolio and put it into a securitization pool, much like we did in the general structure a couple of years ago.

Got it. Those are all the questions for me.

Casey Alexander, Ladenburg Thalmann.

You have answered most of my questions, but as it relates to the ZetrOZ resolution, should we be -- you mentioned that there is a contingent, a forward-looking piece to the resolution. Still, from a booking standpoint, should we be booking a $2.2 million realized loss and a corresponding $2.2 million unrealized recapture, and therefore no impact on NAV? Or is this going to be booked differently somehow?

No, you are correct Casey. So the $500,000 is the fair value at December, and that was what the basis of the transaction was, that we completed in February.

So booking a $2.2 million realized loss, a $2.2 million unrealized gain and no further impact on NAV?

Exactly correct.

Okay. Secondly, obviously there was -- while there was volatility in Q4, there was clearly a high degree of volatility in the first six weeks of 2016. Was the Company able to take advantage of any of that volatility and push the share repurchase program a little further down the road, and maybe at even more advantageous prices than they did in Q4?

Unfortunately, no, because we are using -- we are subject to the lock-out -- black-out policy, Casey, so we have to wait until after we've cleared the earnings.

Okay. Well, I mean, I would argue that the price right now is still slightly below your average price in Q4, so we should be out of that black-out period in the next 48 hours or so. Is it the Company's intention to push the share repurchase program a little further down the road here in Q1?

We have $5 million program. We've executed 26% of it in the first quarter that it was in place, and we will remain focused on doing that.

Well, we certainly appreciate the fact that, unlike some others in the BDC group, that you have announced a share repurchase program, and you've actually executed against it -- that's very favorable. Is the Company holding back -- I see cash has moved up to $22 million. Is the Company holding back some cash from investment because of the potential closeout of the Horizon funding trust? Is that the capital structure strategy that we are seeing play out here?

No, the securitization actually deleverages itself as the loans pay back, so that's not the strategy. The cash that's on the books is really to fund -- between the cash and the available liquidity on the revolver, is to fund our existing commitment level in that --

So what you're saying is -- because I thought there was a trigger at like $10 million where if it came down to $10 million, whether or not you had a pay-off event against it, you had to go ahead and close it out. What you're saying is that, during the second quarter, it's going to naturally close out through repayments that you see on the horizon?

No, the provision you are referring to is a 10% provision, which allows optional prepayment by the Company. So when it hits $9 million, we have the option but not the obligation to pay off that debt. So it's an option for us, but not an obligation. There's no triggers that we see on the horizon that would force an acceleration or a prepayment. And that --

So you are just saying it's going to naturally pay down by your payoffs, by some time in Q2?

Either naturally or through expansion of the revolver that we may choose to take the assets that are on the securitization and move them over to an expanded credit facility.

Okay. And you are in active discussions with potential lenders to expand the revolver?

Yes. I think for the past -- back in August, we added a lender and we communicated to the Street over the past couple of quarters that, that's an interest to grow the facility at a reasonable rate, rather than bringing on a whole bunch of lenders all at once. And so that's a natural progression for us, to continue to stay in the market to talk to not just lenders, but also securitization investors. So that's always an ongoing process for us.

Okay. And just to make sure that I heard this right, what you are suggesting is, flat-to-slight portfolio growth for the year of 2016, and similarly a similar language for Q1 of 2016?

Agreed.

Okay, great. All right, thanks for taking my questions. I appreciate it.

(Operator Instructions)

Christopher Testa, National Securities.

Thanks for taking my questions. Just with the $18.5 million of originations in the fourth quarter, it seemed a little bit light. Were you somewhat holding back on the originations, or the opportunity is not as good in terms of structure or pricing comparatively to what it was in the previous quarters? Can you just give some color there?

Yes, sure. This is Gerry Michaud. Actually we actually experienced somewhat of a slowdown in opportunities in Q4, especially toward the end of the year. I don't know if companies were just focused on growing their business and restructuring their finances, but we actually didn't see a whole lot of high-quality opportunities during Q4, which was a little unusual because usually that is a pretty good quarter for us.

However, I will say that, literally, right out of the gate in Q1, activity picked up quite significantly, and our pipeline grew rather rapidly. So, whatever caused that was clearly temporary and, like I had mentioned earlier, we're seeing a lot of opportunity in the life science sector, either for refinance opportunities for debt that had been put on the books in 2013, 2014 that's now coming off interest-only, and also new opportunities in the life science sector. So --

With the life sciences commentary, just I guess, real quick, how much could you quantify how much incremental yield are you being able to pick up on that market so far in 2016? And do you see that becoming, because of the better opportunities, becoming a bigger portion of your portfolio, or should that be somewhat constant with what it's been?

As it relates to picking up yield, we have a pretty disciplined on-boarding yield policy around here. And, having understood the risk of venture lending for many, many years, we don't stray from that too much, because markets might get a little overheated, which is why we pull back a little bit from the life science market. So what we are seeing now are yields that are more consistent with our strategy. And so, to the extent that those opportunities present themselves, we love the life science market, we always have, and so we are now very interested in just shifting the weight a little bit back toward life science.

That said, we always maintain a 60/40 portfolio, and we work within that 60/40 technology and life science, depending on what's going on in the market at any given time. And so, over the last two years, we're seeing much better opportunities on the tech side. So if you look at our portfolio, it's a little bit more weighted on the tech side today, but that -- generally, that pendulum only swings by about from between 60/40 one way or the other. So we're going to look to rebalance that a little bit more back toward life science, but still stay within a very diversified 60/40 ratio life science/ technology.

Okay, great. And just with regards to leverage, I know you have tried to stay between 0.75 to 1 times. What should we look at as your appetite to take on balance sheet leverage, just taking into account potential for fair-value marks to be negative, given where spreads are going? How are you looking at the market environment and your portfolio, and where we should expect balance sheet leverage to be at for the coming year?

Good question. So, we have stated our long-term strategy of being at 0.75 to 1, and that remains our strategy. And, being at 0.72 today, we think that we are right in that wheelhouse, and so we may move up a tiny bit here from time to time, but we're right where we want to be generally, from a leverage perspective. The particular leverage vehicle may change or increase or shift, but the overall leverage, we're right where we want to be now.

Okay, great. That's all from me. Thank you.

Jonathan Bock, Wells Fargo Securities.

Thank you for taking my questions. So one item, as it relates to biotech. You do have some life sciences in the portfolio, and as we've seen the biotech industry -- or the index rather, down about 30% since 12/31, give us a sense of potential stress and/or forward valuations of your biotech holdings, and how that ties to your leverage? Because I understand you are in debt, but when we generally see stress in equity, it always leads a question investor to ask is, are there potential valuation hits to come with an index off that much?

Thanks for the question, Jonathan. I think that's one differentiator between us and some others in the market, is that we only have from an equity perspective, $8 million of our total $260 million portfolio in equities, and a substantial portion of that is actually in the warrants of private companies, well diversified, as Gerry said, not really heavy in the biotech arena.

So although we do have about a dozen companies that are public, and are in some cases biotech, that is not a big piece of our portfolio. So even if there was a large shift in that little niche of our portfolio, it would not have any material impact on NAV, and therefore not really any impact on the overall leverage of the Company. But it's a good question.

Maybe I will rephrase it a bit. Are you seeing valuation or enterprise value compression across your life sciences to the point where your venture capitalists are now contemplated with the choice of down routes?

Well, we do see that as overall valuations become tighter, that the capital raising is more difficult, but all of that is fully reflected in the ratings and fair value, and that we do have the loans, Jonathan.

Got it. And then I guess the need for debt then rises, but maybe your view in terms of credit quality going forward, because it's more of companies with adequate liquidity, et cetera. In light of the tighter capital-raising environment for VCs, and given the legacy investments that all BDCs have, in venture -- no one is any different -- just curious if you would find it appropriate for us to model some amount of non-accruals a bit higher, or if you actually expect over time this is normal, well-underwritten loans, really no expectation of near-term or credit losses going forward.

Just a question everyone's asking, in light of what they see in public equity. And to your point, Chris, everybody realizes it's not the same, I totally get it. But, generally when valuations compress, it tends to affect everybody, hence the question.

Yes, again, it's a valid question, Jon, and I think that this is not our first time to the rodeo. We've been through these kind of cycles before. We are seeing support. These companies have long, long development horizons and timelines, and where the money comes from, whether they are public already and they have to be supported by pipes, or whether they are -- the investors remain supportive, all of that is fully vetted into our analysis of our portfolio, and our fair-value mark. So we are certainly keenly aware of the cycles within these markets, and we stay on top of these loans very aggressively.

Great. It's always better for the investors to be in debt instead of the equity, and I thank you for your descriptions. I appreciate it.

Thank you. There are no further questions. I would now like to turn the call back to Robert Pomeroy, Chairman and Chief Executive Officer for closing comments.

Thank you, and in summary, during 2015, we continued to execute well on our investment strategy. We grew our investment portfolio 22%, and achieved solid net investment income. Our portfolio yield is one of the highest in the BDC industry, accompanied by solid credit performance.

Horizon represents a pure play in the venture lending space, and offers a compelling opportunity for shareholders. Our venture loan portfolio, which is directly originated by experienced end-market managing directors, underwritten and managed by industry-knowledgeable professionals, and led by a Management Team that has worked together for over 15 years creates a robust earnings platform. Horizon has the necessary market knowledge and market access to continue to execute on this vision.

The technology markets we serve present exciting investment opportunities with upside, and we've covered our distribution the past two quarters, and remain -- our strategy remains to earn that dividend over time. So thank you for your interest in Horizon. We look forward to sharing our progress with you again in May.