Horizon Technology Finance Corp (HRZN) 2018 Q2 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's Second Quarter 2018 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 introductions and the reading of the safe harbor statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance's Second Quarter 2018 Conference Call.

Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, Chief Financial Officer.

Before we begin, I would like to point out that the Q2 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com.

Now I will be 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, expect, anticipates, intend or similar expressions are used to identify forward-looking statements. These forward-looking 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 forward-looking statements and some of these factors are detailed in the 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, 2017. The company undertakes no obligation to update or revise any forward-looking statements 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. During the second quarter, we made progress implementing our strategies to achieve the goals that we laid out on last quarter's conference call. Specifically, we capitalized on the robust demand for our venture debt products to grow both our portfolio and committed and approved backlog with an emphasis on credit quality. We also continued to proactively manage the credit quality of our existing portfolio and ended the quarter with no loans on non-accrual. Finally, we took important steps to enhance our liquidity and growth potential during a time when we continue to maintain one of the highest yielding floating rate loan portfolios in the BDC industry. We will discuss each of these accomplishments on today's call.

For the quarter, we earned net investment income of $3.3 million, or $0.29 per share, representing our second consecutive quarter of NII improvement and reflecting the earnings power of our larger investment portfolio. Our debt portfolio yield for the second quarter was 15.3%, taking into consideration our normal portfolio interest as well as liquidity events from 3 portfolio companies, including the success fee we received following the acquisition of one of our technology portfolio companies MediaBrix.

As we have discussed on previous calls, the pace of prepayments has normalized in 2018 relative to 2017's higher levels. These levels will continue to present opportunities for accelerated income from liquidity events and more stable portfolio in terms of size and earnings power. We funded 7 new loans in the second quarter of 2018, totaling $34 million, which enabled us to increase our portfolio by $15 million. Of note, we funded our first loan in our new joint venture during the quarter, and we will discuss the JV in more detail later on the call.

We continued to make progress during the quarter on the portfolio's credit quality. In addition to having no loans on non-accrual at the end of the quarter, we had a reduction in the number of 2-rated loans. We are starting to see some activity in the technology market for M&A that has improved the prospects for our portfolio companies. Specifically, our portfolio company MediaBrix was acquired in Q2 and another one of our comp -- portfolio companies has entered into a definitive agreement to be acquired, which they expect to consummate in Q3.

We experienced a slight decrease in our net asset value of $0.05 per share due to the decline in the value of our public warrants during the second quarter, and our distribution slightly exceeding our net investment income. Our focus is on growing NAV over time, and I would highlight that the fair value of our loan portfolio increased during the quarter, primarily due to the improved outlook of our 2-rated credits.

Turning to our distributions, Horizon has declared monthly distributions for October, November, and December of 2018, totaling $0.30 per share. It has always been our practice to set our distributions at a level that can be covered by net investment income over time. We currently maintain $0.05 per share of undistributed spillover in further support of this distribution level, as we focus on continuing to grow our portfolio going forward. The portfolio growth during the second quarter should impact income in the second half of the year, as a majority of that growth funded late in the quarter. Building on the success we had in April extending and increasing our key bank facility, we took important steps to further increase our liquidity and enhance our growth potential. In June, we established a joint venture, Horizon Secured Loan Fund I LLC, which is owned and controlled on an equal basis by Horizon and Arena Investors, a global investment firm.

In addition, New York Life Insurance company will provide an additional $100 million debt facility. Dan will provide more detail later on the call, but I would like to provide a brief overview of our joint venture and its benefits. The joint venture positions Horizon to expand our venture lending brand and market position alongside the strong strategic partners of Arena and New York Life. It also positions us to diversify our investments and achieve attractive economics while maintaining a strong emphasis on credit quality. We believe our joint venture is well positioned to build a sizable high-yielding investment portfolio that contributes to Horizon's income stream on an ongoing basis and increases our ability to capitalize on compelling venture lending opportunities.

Now that we funded our first loan in the JV, we expect to continue to populate the JV over the next several quarters. By the third or fourth quarter of this year, we expect to reach certain investment thresholds that will enable us to access increasing levels of leverage. We expect that the JV will start to contribute to Horizon's NII later this year with the full impact felt in 2019. On the last call, we briefly mentioned the legislation that passed allowing BDCs to lower their asset coverage ratio and the potential for increased returns for Horizon's shareholders. On June 7, 2018, our board unanimously approved the application of the modified asset coverage requirements to the company as set forth in the Small Business Credit Availability Act. As a result of receiving board approval and effective June 7, 2019, the company's asset coverage requirements for senior securities will change from 200%, equivalent to a 1:1 debt to equity ratio, to 150%, equivalent to a 2:1 debt to equity ratio. Horizon intends to extend our existing venture lending strategy of providing senior secured loans to well-sponsored development stage companies in the life science and technology markets, rather than alter that strategy. At the yields we are able to achieve in this market, the increased leverage even at moderate levels of leverage can produce improved return on equity for our shareholders. We also intend to submit a proposal to shareholders to approve expediting our ability to utilize higher leverage. If approved, the company would become subject to the 150% asset coverage requirement the day after such shareholder approval. Upon the effectiveness of the lower asset coverage ratio, our intention will be to moderately increase our leverage over time from our existing target leverage of 0.75:1 toward a target leverage of 1:1 to 1.2:1.

In summary, the second quarter of 2018 was a positive one for Horizon, as we grew the portfolio, improved credit quality, increased NII for the second consecutive quarter and took steps to enhance our ability to take advantage of growth opportunities. We remain committed to growing our portfolio and earnings power with a focus on credit quality and providing shareholders with distributions and upside potential from our warrant and equity positions.

I will now turn the call over to Jerry who will update you on our business development efforts and market environment, and then to Dan who will detail our operating performance and financial condition.

Thanks, Rob. Good morning, everyone. During the second quarter, we reached a milestone for Horizon of over $1 billion in loans funded as a public company. We originated 7 new floating rate loans, totaling $34 million. We also closed $52 million in new loan commitments, including our first loan in our new JV and ended the quarter with a committed and approved backlog of $31 million. This includes $29 million at Horizon and $2 million at the JV. With a continued emphasis on pricing discipline, we achieved strong onboarding yields of 11.9% and generated a loan portfolio yield of 15.3% for the quarter. Horizon has consistently had one of the highest yielding debt portfolios in the BDC industry with an average portfolio yield of 14.6% since inception. This highlights Horizon's strategic expertise in pricing and structuring transactions without prepayment fees and ETPs, in order to maximize returns when our portfolio companies exit our portfolio -- our loan portfolio.

Consistent with the transactions we funded in the prior 2 quarters, we added investments in the second quarter with the potential for higher prepayment fees and with new ETPs, as we replaced aged investments that had lower prepayment fees and significantly-accreted ETPs. As a result as we have mentioned on prior calls, we now have a larger portfolio with enhanced prepayment fee and ETP potential as well as a more predictable interest income stream from newly originated transactions in net interest only periods. At the end of the quarter, we held warrant and equity positions in 77 portfolio companies with a fair value of $11 million. We experienced liquidity events during the quarter from 3 portfolio companies: NinePoint Medical, MediaBrix and SilkRoad Technology, totaling $14 million in prepayments. We continue to hold a warrant and a potential success fee in NinePoint and a potential success fee in SilkRoad. Subsequent to the end of the quarter, we funded 2 additional loans totaling $7 million and were awarded 2 new transactions totaling $30 million. As of today, we have a committed and approved backlog of $24 million to 7 companies and a pipeline of new opportunities of over $350 million.

Turning now to the venture capital environment. VC investment remains at record highs. During the first half of 2018 $58 billion was invested in VC-backed companies, which exceeds the full year total for 6 of the past 10 years. While the number of unicorn financings continue to grow, there is an upward shift in deal size across all stages of investment. For example, early-stage deals between $10 million and $25 million are on a pace to surpass $10 billion in aggregate deal value this year for the first time according to PitchBook. First round VC investments increased for the second consecutive quarter with 35% of VC investment going into first round investments. We view these trends as a variable -- a very favorable indication of new company formation and potential debt prospects in future quarters. In terms of fundraising, after a relatively slow start to 2018, we saw an uptick in the second quarter with almost $11 billion raised. 2018 is now on pace to surpass 2017 totals and fundraising shows no signs of slowing. VC-backed exit activity is beginning to show encouraging signs. As we mentioned last quarter, the pace of exits has increased due to more IPO activity and corporations have more cash available for acquisitions from tax reform. Pharma and biotech had an especially robust quarter in terms of IPO activity, which bodes well for Horizon. The IPO market allows VCs to cash out after a lengthy investment period, sometimes up to 10 years, during which their funds are inaccessible, and we now are seeing these investors following IPOs, redeploying their cash and investing in earlier-stage companies, especially in the life sciences, which we believe is a positive for Horizon.

Turning now to our core markets. In the second quarter, the life science market remained very strong with solid demand for equity and debt. Activity in this market has been primarily driven by the capital needs of development-stage drug development companies. As discussed, the public market's recent strength and investor familiarity with the biotech business model has opened the door for more IPOs. VC-backed biotech companies are taking advantage of the opportunity. Horizon completed a funding for Celsion Corporation, a publicly traded biotech company with a pipeline of drug candidates related to oncology, in the second quarter.

Healthcare technology is a growing market sector for both [deni] and equity. In our own healthcare portfolio, we completed a transaction in June to finance Catasys, a healthcare company that uses big data information; they treat patients with behavioral diseases. And already in Q3 we funded transactions from MacuLogix, which has an FDA approved instrument for early detection of age-related macular degeneration, an incurable eye disease.

Regarding the broader technology sector, the overall market remains very active. Horizon funded New Signature and Verve Wireless in the second quarter, 2 technology related companies with strong revenue growth potential. Internet companies once again represented the large VC -- largest VC funding sector during the quarter with $9 billion raised, according to MoneyTree. Certain technology segments, particularly artificial intelligence, are receiving notable attention. Funding to U.S. based AI companies rose 21% in the second quarter to $2.3 billion after a 37% rise in the first quarter.

Now to the venture debt competitive landscape. The environment in the second quarter was consistent with what we have experienced in prior quarters. Despite competition in all of our markets, particularly life sciences, we continue to see and win quality investment opportunities with attractive onboarding yields. As noted previously, the life science IPO market has shown signs of sustained strength, which creates competition for our debt as well as opportunities for exits.

Additionally, based on very strong VC investment in the second quarter and the preceding quarters, we expect continued opportunities to provide debt financing to growth oriented VC-backed companies. As we progress through the year and building on our growth in the second quarter, we remain well positioned to provide growth capital to innovative companies in our core markets. Our priority is to capitalize on attractive venture loan activity, while maintaining pricing discipline, in order to achieve strong onboarding yields and upside exposure through ETPs, prepayment fees, equity and warrant positions.

With that update, I will now turn the call over to Dan.

Thanks, Jerry, and good morning, everyone. I will now briefly discuss our financial results for the second quarter of 2018. Horizon earned total investment income of $7.3 million for the second quarter of '18 compared to $5.9 million for the second quarter of '17. The increase was due to higher interest income on our investments given the larger average size of our loan portfolio and an increase in one month LIBOR, which is the day's rate for most of our variable rate debt investments. For the second quarter, we achieved onboarding loan yields of 11.9% compared to 13.1% in the first quarter and consistent with our historical performance. Our loan portfolio yield was 15.3% for the second quarter of '18 compared to 14.7% for last year's second quarter.

Turning to our expenses, total net expenses for the second quarter were $4 million compared to $3.1 million in the second quarter of '17. Interest expense increased year-over-year to $1.5 million compared with $1.1 million in the prior year period. This change was primarily due to an increase in the average borrowings. Base management fee increased year-over-year to $1.1 million compared with $0.9 million in the prior year period. This change is primarily due to an increase in the average size of our investment portfolio. In addition, we recorded $823,000 of incentive fee expense in the second quarter of '18. As previously mentioned in March of '18 the Adviser irrevocably waived the receipt of incentive fees related to the amounts previously deferred that it may be entitled to receive under the Investment Management Agreement for the 2018 year. During the second quarter of '18, the Adviser waived performance-based incentive fees of $160,000, which the Adviser would have earned otherwise. Net investment income was $0.29 per share for the second quarter compared with $0.24 per share in the second quarter of '17 and $0.28 per share for the first quarter of this year.

After paying distributions of $0.30 per share and earning $0.29 per share for the quarter, the company's undistributed spillover income as of June 30 was $0.05 per share. Our NAV as of June 30 was $11.60 per share as compared to $11.65 in the prior quarter. This decrease is due to a decrease in the fair value of our public warrants and distributions that exceeded our net investment income.

To summarize our portfolio activities for the second quarter, new originations totaled $34 million, which were offset by $5 million in scheduled principal payments and $14 million in principal prepayments. We ended the second quarter of 2018 with investment portfolio of $226 million, which includes debt investments in 33 companies, with an aggregate fair value of $203 million; a portfolio of warrant and equity positions in 77 companies with an aggregate fair value of $11 million; Other investments in [core] companies with an aggregate fair value of $8 million; an equity interest in our JV with an aggregate fair value of $4 million. As we discussed in the past, almost 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase when interest rates rise. Considering that, we believe Horizon is well positioned to benefit from a rising rate environment and experience both increasing income and expanding net interest margin.

Looking at our liquidity, Horizon ended the quarter with $31 million in available liquidity. This includes $11 million in cash and $20 million in funds available under our existing credit facility. As of June 30, we had $68 million outstanding under our credit facility with KeyBank. In April, we amended the KeyBank facility to increase the aggregate commitments to $100 million and extended the revolving period to April 6, 2021, and the maturity date to April 6, 2023. As Rob mentioned, we also took steps to enhance our liquidity position going forward. In addition to receiving the board's approval to increase our debt-to-equity ratio to 2:1, in the proposal we intend to submit to shareholders, we established a new joint venture expanding Horizon venture money brand and enhancing growth opportunity. The newly formed joint venture is owned and controlled on an equal basis by Horizon and Arena investors. Each of Horizon and Arena has initially committed to provide up to $25 million of equity to the joint venture and collectively intend to contribute equity capital in the aggregate above $200 million. In order to enhance our JV capacity to pursue attractive origination activities, New York Life Insurance company has provided an initial $100 million senior secured debt facility, which may be increased to $200 million with the mutual agreement of the JV and New York Life. This facility has a 2 year investment period followed by a 5 year amortization period.

Lastly, I'd like to note that we plan to hold our next conference call to report third quarter 2018 results during the week of October 29th. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

(Operator Instructions) Your first question comes from the line of Chris Kotowski from Oppenheimer and Company.

Yes, I wonder if you could share few more details about the JV. And in particular, I mean, it sounds like it has 1:1 leverage, and I guess, why bother putting something into a JV, if you have only 1:1 leverage? And actually, you can have more leverage than that at the BDC now. And also are they going to be the same kinds of investments? Or do you expect it to broaden out the range of companies that you invest in or the types of investments you make?

Yes, so Chris, this is Jerry. So our model has always been even prior to being public, has certainly been (inaudible) and we talk about this regularly, that when we enter into large transactions, especially on the Life Science side, we do in fact participate with some of the best players in the marketplace. And historically the way that has worked, is we will originate the deal and underwrite the deal and then at some point figure out how much of a concentration level we think is appropriate for the public company, and then we will bring in a partner to take the rest of that deal. And historically that's what we've done and that's worked fine, with the exception that we, obviously, lose the economics on whatever portion of the transactions we give away. That's just the way our participation market works. So as it relates to the joint venture what it gives us -- gives our investors the opportunity to do is in addition to sharing and obviously participating in the income portion of the deal that we do, we now get -- can get distributions from a portion of the transaction that goes into the JV that we would have otherwise maybe participated out to a third party participant. So we thought just from that position alone it was a very attractive vehicle. And then of course, we -- today we have certain leverage ratios that we are trying to stay within and so this helps us during that period as well.

Chris, this is Dan. I'd just like to add -- to respond to your first question. The debt facility that we have at the JV allows us to leverage up to 2:1 in the facility. So it's $100 million commitment with 2:1 leverage growing into that 2:1 leverage.

Okay. And, I guess, I'm trying to think of how to phrase the question, but in terms of the of the fee waivers, obviously that was important in getting close to covering the dividend. Can you share your thoughts about future incentive fee waivers.

So just to be crisp about this, we waived the recoupment of the previously deferred fees during the calendar year 2018. There was no other negative impact on the management fee from the fee cap and deferral mechanism in the second quarter.

Your next question comes from the line of Ryan Lynch from KBW.

First one, I want to talk about kind of the strategies and I think I know the answer to this, but I just want to make sure that I'm clear on it. For both your strategies for the 2:1 leverage, the incremental leverage that you're going to add to your balance sheet, as well as the strategy for funding investments in the JV, are you going to use the same strategy that you currently use to fund investments on your balance sheet? Or do you guys intend to try to focus on more senior secured, lower yielding, lower risk investments for both those kind of strategies?

Yes, it's definitely the former. There is no real strategy shift here at all or refocus. I will say as we have said on every conference call, we've been continually working on improving the quality of the credit -- credit quality of the portfolio, seeking higher and higher quality transactions as we go forward, and we think that this is a way to do that. There is no intention to go to a different product or class of investing.

Okay. And then as far as the additional leverage on your balance sheet, you said a target leverage range of 1x to 1.2x debt-to-equity. If we look at the upper end of that, that's about $50 million of additional debt capacity, to use that upper end of that range. How do you guys plan on funding that? If I look at your guys' credit facility, you guys could draw it out further on that, but I think you guys would still need some additional capacity beyond what's currently allowed on your credit facility. So how do you plan on funding the additional asset that you plan to lever up your balance sheet with?

Yes, so our intention is to do that -- is to build towards those that target range over time. There are a few important steps that have to happen, first. We have to actually get -- if we're going to expedite this before June of next year, we have to actually get the shareholder approval, otherwise we'll look forward -- we have the capacity to get pretty close to 1:1 with the existing long term debt that we have -- fixed rate and the line with KeyBank. But we'll be looking as we go later into the year to strategize about where we think would be most effective for us to add any additional cushion of debt capacity, but that's probably a mid-2019 event.

Your next question comes from the line of Christopher Testa from National Securities.

Just another one on the JV. I know that you guys were saying that you get enhanced economics from being able to take larger commitment sizes to larger companies with your partner. How does that happen -- just generally speaking how does the size of a company in the JV going to differ, if at all, from the size of a company you would fund on balance sheet?

And so really it doesn't and it goes back to what I was saying before. The way we would do that historically is we would just find a participant for any part of a transaction that we felt was too large to put on our balance sheet, and we would just -- we would participate that part out. And so from an investor's standpoint you wouldn't really see that part of the -- I mean, you'd see it was a $25 million deal, but let's say we just split it 50-50 then really on our balance sheet the only thing that would be evident would be the $12.5 million. And now we have an opportunity through the JV to take some of the economics that we historically have kind of given away. But in terms of size of transaction, we don't have to change our strategy at all. These are the exact kind of transactions that we have been seeing in our pipeline really since we've gone public. This just gives us a greater capacity and ability to take advantage of them.

Got it. Okay, no, that's helpful and makes sense. And will be -- will HRZN actually be holding some piece of these on balance sheet as well? Will this be co-investing? Or will these be 2 totally separate portfolios?

So the way, Chris, you'll think about it, is that it's another investment platform for Horizon. And we do our same due diligence, our investment strategy and so there is a possibility Horizon will be holding pieces of the same investment that's in the joint venture.

Got it, but it's not formulaic that it will always have a piece of what's originated between you guys and Arena in that vehicle?

That's correct.

Okay, got it. And I might have missed a little bit of this, I'm sorry, I know you were answering Ryan's question. On the right hand side your balance sheet, the current key facility only goes 1:1. So you guys, you're expecting maybe a mid- to late 2018 decision on maybe adding another revolver or amending that to 2:1 or possibly issuing some other debt. Is that the right way to look at that?

Yes, the response to the question was that we have the capacity now to get to 1:1. We'll be looking for addition ways to do that, but all of that is reliant upon the shareholder approval or June of '19. So yes, we would be looking at that later this year. Let's put it that way.

Got it, okay and assuming you guys get the shareholder approval, I mean, I'm sure that you've been doing your diligence on this. So how have the discussions been with, whether it's KEYBANK or another bank, how have the banks kind of responded to you guys not only increasing the balance sheet leverage, but also the economic leverage through now with the SLF as well?

Yes, we are obviously always in constant contact with our lenders and the way they look at it is they look at their facility and the structure of their facility and they're comfortable with that. As you know, it's a separate entity, an SVB. So they're comfortable with the structure. They like the structure and they're fine with our strategy.

Your next question comes from the line of Robert Dodd from Raymond James.

Another one on the JV. I mean, you mentioned in the prepared remarks that by the end of the year, towards the end of the year before you'd be able to touch some of that leverage and it start to add NII, and then talked about '19. Can you give us any color on when you expect that JV to be -- generate earnings that are incremental to ROE rather than -- I mean, generating some NII is great but potentially a drag in the near-term. It certainly was this quarter. When is it accretive to ROE for the overall business?

What I said in the comments, Robert, is that we expect to access the first levels there of the leverage probably late third quarter or early fourth. And then as we populate that and get the concentrations to a level we'll get to the point where the leverage exceeds the 1:1 leverage, and so we'll start to see incremental NII contribution from the JV probably late this year or early next.

Right. But just -- so that's -- by incremental NII, you mean incremental above what you..

Other than just the restructure -- yes.

Got it. Got it. And then just to clarify on the incentive fees waiver here, this was just to do with the previous commitment you'd made to waive previously. So is it fully caught up? Or are we going to continue to see this for the rest of the year as various things play out and things true up?

We don't give guidance, but what I said previously is that based on the formula, there would be the opportunity to recoup some previously deferred fees in the third and fourth quarter; that's subject to no adverse change in the credit quality of the portfolio. And when that happens, we will not take those -- that recoupment and those fees will therefore become permanently waived.

Right. Got it. And then getting almost back to Chris's question on leverage. (inaudible) we don't know ahead of the shareholders whether they're going to approve it. The rules are tough getting votes for anything for BDC, whether it's a good idea or not, right. What would you said -- what's your target leverage, ahead of either getting shareholder approval, or June next year where your target -- where your approval obviously kicks in from the board. I mean, are you willing to take a higher level of leverage in the run up to that knowing that, I mean, at worst you next year you've got approval to go above 1:1?

Our target leverage has always been 0.75:1. I think that that really is more like a range of 0.7:0.8. But we don't plan to go to 0.9 and 0.95, as we get to the finish line. We'll be hopeful and that we'll get approval sometime late third or early fourth quarter from the shareholders, and then we will take action to move towards the higher level of leverage.

Got it. And then one last one if I can. On the yield, I mean, obviously, last quarter your annualized portfolio yield on debt was 14.4%, this quarter 15.3%. And it's 90 basis points up. Obviously, rates moved in your favor; there was the success fee, et cetera, but that still seems like a large increase given your prepaid fees, et cetera were -- and accelerated amortization, et cetera wasn't particularly up. So can you give us any more color on -- I could explain maybe half of that. Why such a big pickup?

You actually answered the question with some of the things you said. So remember that the prepayment fee is separated as a line item that become -- separate from interest income. Included in interest income is accelerated end of term payments and success fees.

Yes, but that was only up $100,000 from the first quarter according to the cash flow statement, right? So unless I did the math wrong. Or according to the MD&A, which discloses $1.4 million in the second quarter, it was $1.3 million in the first. So that's not relatively small.

I don't have all of the information in front of me, but it probably has more to do with the weighted average portfolio size, when you divide it.

Your next question comes from the line of Casey Alexander from Compass Point Research.

Jerry, I was listening to your presentation, and I'm not sure I understood something quite correctly. I thought you were indicating that you have sort of an underwriting strategy with slightly lower onboarding yields in order to compensate for that with a higher prepayment fee than you've been getting in the past. Did I get that right?

No, but you've got the components kind of right. When we underwrite a transaction, Casey, one -- as it relates to the structure and pricing of the transaction, we're not just looking at the onboarding yield for the company. We're looking at where the company is positioned on its kind of exit curve. Is it at the beginning, is it -- are we close to a company that's going to be exiting the market through IPO or M&A in next 12 months. And we try to position our overall pricing in a way that we maximize the value of the transaction. And I don't want to give too much because there is some art to this that actually helps us from a competitive standpoint in the marketplace. But we actually look at how we can maximize the value of that transaction on an IRR basis for our investors that can be unique, beneficial to the company and enhance the value for the shareholder beyond just what the onboarding yield is. So if it is a transaction where we don't see a whole lot of upside from a warrant or the ETP, then we might have a, in fact, to your point, we might have a higher onboarding just interest rate. But if we do believe that there's going to be an exit in a relatively short period of time, and we have a say, a 48 month transaction, and we put a very big ETP at the end of that knowing or -- there's some obviously some risk to any kind of pricing. But with the opportunity to pull that ETP forward because we believe it will be an exit in say the next 12 to 18 months, that can create significant value in the transaction. And yet from the company's perspective, the value alone is good and the interest rate they're paying is competitive.

Okay. So it's a sort of linear assessment of where you are in the life cycle of the company that depends upon how you weight the front-end versus the back-end.

That is correct.

How many companies does Horizon have in the portfolio that have currently filed for IPOs?

I don't believe we have any that have announced that they have filed for IPOs.

Okay. In the JV, does Arena have -- I mean, first of all, does the JV get a look at every deal that Horizon underwrites?

No. The JV works like all other JVs. There is a 4 person board member, 2 members from -- 2 people from each member. There's no obligation to provide an investment by each member of the JV, but we've agreed to show the -- each investment to the JV.

You agreed to show each investment to the JV. And Arena can veto anything and keep it from going into the portfolio, is that correct?

It's like I said, it's a 4 person board and the 4 person board member has unanimous voting (inaudible)

Okay, if I understood the discussion correctly, the point to the JV is for Horizon to ultimately end up taking bigger slices of deals than they have in the past. I'm not sure I understand the point of the JV if the company is already authorized the resolution to expand the leverage. If the company wants to take larger pieces and more risk of transactions, why not just do it on balance sheet?

I think the answer to that, Casey, in our market, especially in the life science and healthcare market, given its growth and everything that we're seeing in that marketplace, is having both is a -- gives us a distinct advantage. Because there is the issue of how much do you want -- of any transaction -- how much do you want to put on your own balance sheet? And then there is the issue of having a partner, which we always have partners, it's a question of whether we get any benefit from that partner other than helping us get the transaction done. Do you want to have a partner that helps us mitigate concentration issues within our portfolio. So just because we can do a $30 million transaction, because we're at higher -- have higher levels of interest, it might be beneficial to us because we have 10 of those transactions we're looking at, to spread those -- that risk over more of the transactions, do more of them and have less concentration on our own balance sheet, and yet get the economic -- get some of the economic benefit of sharing the transaction with another partner and in this case our JV.

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

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again in October. This will conclude the call.

Ladies and gentlemen, as stated, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.