Hercules Capital Inc (HTGC) 2011 Q4 法說會逐字稿

Good day, and welcome to the Hercules Technology Growth Capital fourth quarter 2011 conference call. At this time, all participants are in a listen only mode. We will open up the question-and-answer session and instructions will occur at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce the host for today's conference, Ms. Linda Wells with Investor Relations for Hercules. Please go ahead.

Thank you, operator, and good afternoon, everyone. On the call can today are Manuel Henriquez, Hercules' Co-Founder, Chairman, and CEO, and Jessica Baron, Vice President of Finance and Interim Chief Financial Officer. Hercules fourth quarter 2011 financial results were released after today's market closed. They can be accessed from the Company's website at www.HTGC.com. We have arranged for a replay of the call at today's web page or by using the telephone number and pass code provided in today's earnings release.

I would also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, includingwithout limitation, the risks and uncertainties including uncertainties surrounding the current market turbulence and other factors we identify from time to time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events. To obtain copies of related SEC filings, please visit SEC.gov or visit the website, www.HTGC.com.

I would now like to turn the call over to Manuel Henriquez, Hercules' Co-Founder, Chairman, and CEO. Manuel?

Thank you. Good afternoon, everybody, and thank you, everybody, for joining on the call today. I will follow my typical format as giving everyone an update on the operations of the business, an overview of the environment, and then as I do generally at the beginning of every fiscal year, a perspective of what we are looking for and our expectations for 2012 and share some color on that environment and that outlook, as well.

First, let me turn to our quarterly performance. The fourth quarter marked a solid quarter and capped off a great year for Hercules. As many of you may recall, we started off the year in a very slow and steady pace in 2011, and had finished off in a very strong year of commitments and fundings. The year ended up in a very robust funding commitments and representing a record year in both fundings and commitments for the fiscal year 2011. We ended the year with total assets of $652 million in assets, representing a 38% increase year-over-year in total investment assets. A huge achievement as it converted our additional liquidity into earning assets as we promised.

Further to that point, we saw a conversion of those interest earning assets into increased growth in our net investment income of $0.91 per share for 2011, of which we ended up paying a dividend of approximately $0.88 a share in dividends for fiscal 2011, again, continued strong growth and matching our earnings and our dividends together. Further to that in continuing to show the strength of Hercules, we recently executed a capital raise of approximately $48 million at a net above book value to increase our liquidity and continue to strength our financial position as we look to originating activities in 2012.

Turning my attention more specifically to the fourth quarter and fourth quarter results, wereported total investment income of $21.2 million for the fourth quarter, up 21% year-over-year. On a net investment income basis, we reported $10.8 million, or $0.25 per share, representing a 25% increase over the period of Q3 2011. On a DNOI basis, we had $11.5 million of income, translating into $0.27 a share, and DNOI up $0.23 from the prior quarter. Because of our continued financial performance and continued increase in earnings, our Board of Directors declared a 5% increase in our dividend to $0.23 per share, up from $0.22 the prior period.

Now, turning to portfolio growth. New commitments during the quarter were quite strong. We continue to see a very robust pipeline and continue to be well-received in the venture industry by seeing a very, very active pipeline of new opportunities. In the fourth quarter, we closed new commitments totaling approximately $165 million, representing a 34% increase over the same period in 2010.

Fundings or conversions of those unfunded commitments, or commitments I should say, also was very strong at $97 million of fundings during the period for net portfolio growth in the fourth quarter of approximately $73 million, ahead of plan on most accounts. For the full year, we had a record year. We had $630 million of new commitments, representing a 20% increase year-over-year, or said differently, over $1 billion of capital committed over the last 24 months, continue to show the strength and brand that we have in the marketplace as Hercules, thanks in no small part to our team and the hard work of that team of continuing to build our brand.

Record fundings also occurred in 2011, with over $434 million of fundings on a gross basis in 2011, representing an 8% increase over 2010. We finished the investment portfolio at the year end at $653 million of invested assets, $653 million, representing a 38% increase over the same period 2010.

On the interest earning assets, we had $586 million of interest earning assets, representing a 45% increase year-over-year over 2010, all indications of a very strong and continued growth in our portfolio. However, that growth was not compromised by giving up or giving into credit. We continue to maintain a very disciplined underwriting approach. We will be more than happy to sacrifice quarterly earnings if we do not see the quality of assets in the marketplace to continue to originate new loans.

Overall, our credit rating maintains a very strong rating at 2.01 over the quarter, a slight decrease over the prior quarter, but still very, very solid at a level of two. We continue to focus on portfolio growth in 2012, but we continue to maintain a very disciplined slow and steady strategy where we want to continue to originate assets but continue to take a cautious approach at originated assets, especially in lieu of the macro economic levels that we're seeing in the marketplace on a global basis, as well as an election year that we have this year. That does not mean we will not originate assets, but we are taking a much more guarded approach as we continue to onboard new assets in the year, which I will speak to more about that as I go along.

Moving towards yields. During the quarter, we saw further yield compression as we started -- to remind everybody, we started 2011, indicating to our shareholders that we expect to see yield compressions in the 150 to 250 basis points in calendar 2011. We actually end up realizing approximately 180 basis points yield compression during 2011. This is an indication as we manage the portfolio in different asset classes and different stages on how we helped to manage that yield compression in the marketplace.

As we shifted away from our lower middle market, as we did at the beginning of the year, we saw some of that yield compression manifest itself because of moving away from lower middle market loans. We do not anticipate to have much in lower middle market asset class going to 2012; however, we will continue to selectively make investments in certain lower middle market technology-related companies that we see that are more classified as later stage companies.

Now turning to 2012, and giving the same kind of yield perspective that we did in 2011, at this point, we believe that we'll see another 50 to 100 basis points yield compression for new assets originated in 2012, much, much significantly less yield compression that we anticipated in 2011. This equates to, for modeling purposes, new assets being originated in a 12.5% to 13.5% range, as opposed to the typically 14% to 15.5% yields that we have historically seen as we underwrite and shift our asset classes into different sectors of the technology and life sciences categories.

Moving to our balance sheet. I continue to be very happy to see a very strong and solid balance sheet with increased liquidity as we recently added with the capital raise. We finished the year 2011 with approximately $184 million of liquidity, $65 million of that in cash and $120 million of that available in lines of credit that we can further leverage our portfolio and continue to fuel our growth.

In addition to that, as I have disclosed earlier on, we raised $48 million in January of 2012. A portion of that $48 million will be used to refinance an existing SBA debentures. For those of you with us in 2011 in the first quarter, we also did the same exercise where we actually paid back a portion of our SBA debentures and we successfully (inaudible) our interest rate yields on those debentures quite dramatically.

Turning to liquidity in our portfolio. We have achieved approximately seven liquidity events in 2011. The largest of that liquidity event and are historically the highest gain in the history of Hercules was our investment in InfoLogix, which translated into an $8.3 million gain. That represents the largest gain in the history of Hercules. We also saw an abundance of liquidity events in the form of IPOs and continued an M&A event in our portfolio.

We expect to see similar levels of performance of exits in our portfolio in 2012 as we saw in 2011. So far in the beginning of Q1 of 2012, we've already seen one liquidity event realized. BARRX Medical was recently purchased by Covidien for a net gain of approximately $2.2 million to Hercules, representing an IR of approximately 33%. Most recently in February, we also had an IPO completed for Cempra, which completed its IPO recently. Not to be left behind, we currently have seven companies in IPO registration, including our investment in Facebook, which recently filed for its IPO, as well. This represents approximately 10% of the venture staged companies in IPO registration.

As a reminder, in December and successfully closed in February, we made a purchase of $9.6 million in Facebook stock representing over 307,000 shares of Facebook stock at a approximately $31 per share price. Providing further exposure to our shareholders is our promising investment portfolio in warrants and equity and some of what we believe some of the most promising and most interesting companies in America. We currently have over 109 warrant positions, the highest in the history of Hercules into private venture stage companies.

We have over 40 equity position and venture stage companies. The warrant portfolio is valued at approximately $30 million, while the equity portfolio is valued at approximately $37 million at the end of the year. As a reminder, historically, we have seen warrant monetization in multiples of one times to as high as 8.7 times on those warrant realizations. However, we always caution our shareholders and our investors, do not assume an eight times multiple, and we also remind shareholders that we don't expect to see greater than 50% of our warrant to monetize over the course of their lifecycle.

Turning my attention to the venture industry. I'm very happy to report that the venture capital industry continued to show its signs of resiliencies. It achieved $32.6 billion of capital investments, just over 3,200 companies, in 2011, representing a 10% increase year-over-year. This data is provided to us by Dow Jones VentureSource. Q4 alone represented $7.4 billion of capital invested to 803 companies.

And turning to sector allocations. The life sciences sectors experienced an $8.4 billion to 738 deals. Basically, the same amount of money deployed in 2010. $3.9 billion went to biopharmaceutical companies, also representing a flat growth year-over-year. Medical devices, on the other hand, received $3.3 billion of capital and experienced a tremendous increase of over 27% on capital being deployed over 2010, and one of our growth and focus areas that we have for our portfolio.

Medical IT, for some of you, you may recall, that upon healthcare reform, we felt strongly that shifting our focus into medical IT was a key area to help move the process through the Healthcare Reform Act that is going through. That industry received $600 million of capital, representing a 22% increase year-over-year.

Information and technology experienced a flat year at $7.9 billion of capital to over 1,000 companies. Software, representing the largest growth in that sector, had $4.6 billion deployed. On the hardware side, meaning hardware and semiconductors, saw a dramatic decline in capital being deployed to those companies at $2.1 billion year-over-year.

Not a shocking surprise, one of the largest growth sectors in the information technology areas was consumer web companies. These are companies more akin to Twitter, Zynga, Living Social, Groupons of the world and the Facebooks of the world. That sector experienced $5.2 billion to over 452 companies. As you will see on our website, in our warrant holdings of 109 companies, we have a very strong representation into consumer web companies as well in our portfolio, including our investment in Facebook.

Business services and financial services also experienced a very strong year-over-year at $5.1 billion, representing a 36% increase year-over-year in capital being deployed to those sectors. We are also seeing a very interesting shift in stage of companies, something that we ourselves are emulating in our own portfolio as we start shifting assets away from later stage companies, which we feel that are beginning to be well-valued and in some cases over-valued.

We are moving our concentration back towards expansion stage companies and earlier stage companies where we find valuations to be much more attractive, and you will see this shift in our portfolio in 2012. On the exit side, the venture industry experienced 45 companies that went public in 2011 for $5.4 billion, an increase in the number of capital raised but basically flat in number of companies. In 2011 in Q4, we saw ten companies complete their IPOs for $2.4 billion.

There are currently 60 companies in IPO registration today, six of which at year end were Hercules companies. Some meaningful signs of improvement and encouragement is the median time of venture capital dollars invested in a company to exit. We have seen a dramatic compression in this period of time and it is an important leading indicator to the health and vibrancy of the venture industry. We saw the number go from 8.1 years of the first capital invested by venture capitalists to now 6.5 years. That said, although that number is a dramatic improvement, we are far from the days of 3.5 to 3.3 years from the first venture capital dollars to an exit occurring in the marketplace today.

Lastly, the M&A market continues to be very, very robust. We continue to see very, very strong M&A activities in the venture industry. $46 billion of M&A events took place in 2011 to over 460 companies, a 30% increase year-over-year. And if the first part of 2012 is any indication, I do not see or expect any letup in that M&A activity whatsoever.

In closing on the financing on the venture capital industry, the venture industry raised $16.2 billion to 135 funds. However, the interesting side note of that information was the amount of capital being deployed to early stage funds. $3.6 billion was deployed to early stage funds in the fourth quarter and a total of $5.8 billion of the total $16 billion in 2011 was deployed to early stage funds, giving you an indication of the valuation increases being seen in the private technology companies, in particular, and reinforcing our interest in shifting our focus more to later stage -- excuse me, earlier stage deals.

Now, the outlook for 2012. We think the market remains extremely strong and we see a very, very good market opportunity for us in 2012. However, there is an inordinate amount of macro economic variables outside of our control. With that, we will continue to maintain a disciplinary growth of slow and steady in 2012. We expect to see $500 million to $700 million of new commitments in 2012. We expect to see yields be 100 basis points lower in the 12.5% to 13.5% range. We are very optimistic for 2012, but we want to be cautious given a lot of the uncertainty that is out there.

This is no different than our same strategy we deployed in 2011 where we (inaudible) over $600 million of new commitments. We have a very strong pipeline. We have over $1.2 billion in transactions in the pipeline today. We have $51 million of signed term sheets in-house already. We've already closed over $37 million of commitments in the first quarter.

We have over $168 million of unfunded commitments at the end of the year, which Jessica will expand upon. We expect to see net portfolio growth and the first quarter of $30 million to $40 million net portfolio growth in the first quarter. That number could be affected up or down as we chose to accelerate closing certain transactions that are currently in due diligence, but we feel comfortable with the $30 million to $40 million range of closing net funded deals for the quarter.

In summary, 2011 was a tremendous year for us. Our team executed flawlessly. Their hard work, their dedication and focus on credit quality is exemplary. Without that focus, our credit performance would not be what it is today. We see a very strong venture capital marketplace ahead of us.

We see a strong liquidity environment and we are only encouraged by what we are seeing in the IPO market as it exists today and getting better. We look forward to deploying our capital in 2012 to continue to grow our asset base and continue to see increase in our dividend and earnings as we saw we reported in the first quarter. I remain very optimistic and I'm very encouraged with what I'm seeing in 2012.

With that, I will turn the call over to Jessica, who will run through the numbers for you. Jessica?

Thank you, Manuel, and thanks, everyone, for listening today. I will give a brief recap of the fourth quarter and the year 2011. For the fourth quarter, we achieved approximately $21.2 million in total investment income or revenues, compared to $17.5 million for the fourth quarter of 2010. For the full year of 2011, we achieved approximately $79.9 million in total investment income, compared to $59.5 million in 2010. This 34% year-over-year growth was due to a higher average outstanding balance of yielding assets during the year and due to one-time fees and accelerations of fees related to early payoffs.

As we have shared with you in prior calls, the impact of early loan payoffs on fee and interest income is very hard to predict quarter to quarter. Excluding early payoffs, as Manuel indicated, a normalized run rate for our portfolio effected deals should be 12.5% to 13.5%, and fee income on a normalized basis should also be $1.1 million to $1.3 million per quarter. The effective yield on our portfolio investments during the fourth quarter was 15.6%, compared to 17.7% in the fourth quarter of 2010, and 16.7% in the third quarter of 2011. Excluding the income acceleration impact from early payoffs and fee income from one-time events, the effective yield for the quarter was is 14%, compared to 15.8% in the fourth quarter of 2010, and basically flat as compared to the third quarter of 2011, which was 14.2%.

As Manuel indicated and as we expected, the effective yield, excluding early payoffs to date versus at the end of 2010, have compressed by about 180 basis points. And this is the result of portfolio concentration, transitioning from lower middle market investments, which have higher yields, to technology and life science and debt investments which have lower yields but higher equity realized gain potential. I would like to note that our PIK income, which is noncash revenue, which must in turn be paid to our shareholders in dividends, continues to represent the small component of less than 2.1% of total investment income for the fourth quarter.

Our total cost of debt increased to $4.6 million in Q4 2011, compared to $2.7 million incurred in Q4 of 2010, and $4.3 million in the prior quarter. The year-over-year increase is driven by $1.3 million of expense incurred on our $75 million convertible notes issued in April. Approximately $300,000 of this amount is noncash interest expense attributed to the accretion in the fair value of the conversion feature on these convertible notes.

Our weighted average cost of debt decreased to 6.23% in Q4 of 2011, from 6.27% in Q4 of 2010, and 6.5% in Q3 of 2011. The year-over-year slight improvement was driven by a lower weighted average cost of debt on our outstanding SBA debentures at 5% in the fourth quarter of 2011 versus 6.2% if the fourth quarter of 2010, and this is offset by the higher weighted average cost of debt on our convertible notes at 8.2%.

Operating expenses for the quarter totaled $5.8 million, as compared to $5.4 million the fourth quarter of 2010, and operating expenses for the full year of 2011 was $24.4 million, compared to $20.3 million in 2010. These increases have primarily been related to higher comp expense, which has been a function of expanding our origination team over the course of the year.

Q4 2011 net investment income was $10.8 million, or $0.25 per share based on 43.2 million shares outstanding, compared to $9.5 million, or $0.24 per share based on 38.9 million basic shares in Q4 of 2010. 2011 net investment income was $39.6 million, or $0.91 per share based on 40 million basic shares, versus 2010 NII of $29.4 million, or $0.80 per share based on 36.2 million basic shares. Our net unrealized depreciation during the fourth quarter was $7.4 million, of which $5.7 million is related to net changes in loan values, $907,000 approximately was related to net increases in equity investment valuations, and $860,000 was attributable to net increases in the fair value of the warrant portfolio and other assets.

Our net realize losses for the fourth quarter was approximately $680,000, primarily due to the write-off of approximately $720,000 in equity and warrant investments in two technology companies offset by the warrant gains in one technology and one life science company. Since inception, net realized losses total $50.1 million on a GAAP basis. When compared to total commitments of $2.7 billion over the same period, net realized losses represent 1.8% of total commitments, or on an annualized loss rate of 20 basis points.

Now, I will move on to the balance sheet. I would like to first provide a summary of the investment portfolio. We saw significant year-over-year growth, as Manuel mentioned, in our investment portfolio as a result of our debt investment funding activities. As of December 31, 2011, total investment assets were $652.9 million, an increase of $180.8 million, or 38.3% from the same time a year ago. As Manuel mentioned, we closed a record number of commitments and fundings in 2011. Commitments of approximately $630.3 million represent an increase of about 20.5% year-over-year and fundings are approximately $433.6 million represent an increase of 8.1% year-over-year. During the fourth quarter, we closed commitments of approximately $165.3 million and funded $97.2 million to new and existing portfolio companies.

Since quarter end, we have closed an additional $36.9 million of commitments and we have $51 million of pending commitments today. As Manuel indicated, we are optimistic about portfolio growth in 2012, but we will take a cautious approach given the uncertain economic environment and remain selective in our investment approach. We experienced a more normal level of principal amortization and repayments during the fourth quarter.

Total repayments was about $24.5 million. The net results of our funding and principle collection activities almost 46% growth in the fair value of our yielding portfolio balance from $401.7 million at December 31, 2010, to $585.8 million at the end of 2011. Some additional points about our loan portfolio, as of year end, 90.7% of our loans have floating rates, or floating rates with floors, and 99.2% of our loan investments are in senior debt investments.

We are particularly pleased with the loan portfolio credit quality. The weighted average loan rating on our portfolio was 2.01 at December 31, 2011, compared to 2.22 on December 31, 2010. I would like to point out that we only have one debt investment on nonaccrual at the end of the year.

At December 31, 2011, our warrant and equity investments combined at fair value represent approximately 10.3% of our total portfolio. Our warrant position in 109 portfolio companies provide us with the option to potentially invest $73.7 million of additional capital. In addition to this, we have $37.1 million of equity investments at fair value at the end of the year. We believe these noninterest-bearing assets can provide capital returns to the Company in the future.

Now, describing our liquidity, at December 31, 2011, we had approximately $184.3 million of availability, comprised of $64.5 million of cash and $119.8 million of borrowing capacity under our credit facilities. We ended the quarter with $225 million of debentures outstanding. As Manuel noted, in 2012, we repaid $24.3 million of our SBA debentures and these had a cost of debt of approximately 6.6%. As a result, we will have a one-time expense in the first quarter of 2012 of approximately $500,000, or about $0.01 of NII. This is due to the amortization acceleration of fees that we paid on these debentures at commitment.

We will submit a commitment request to re-borrow these $24.3 million of debentures, and based on the pricing of the debentures at the September 2011 pooling, which was at less than 3%, we expect to reduce our cost of debt on these borrowings by approximately 2.5% to 3% over the long-term. Our net asset value as of December 31st was $431 million, or $9.83 per share based on 43.9 million shares outstanding, as compared to $412.5 million, or $9.50 based on 43.4 million shares outstanding at the end of the quarter, the previous quarter.

Also subsequent to quarter end, we raised $48 million in equity, not below book value, further adding to our balance sheet flexibility. We should point out that the earnings impact due to dilution of this capital raised will be approximately $0.02 per share until we fully invest these funds over the course of the next couple of quarters.

Finally, moving on to our dividend, as you may have seen from our press release issued earlier today, we declared and distributed a dividend of $0.22 per share during the fourth quarter 2011, and announced that the Board has declared a $0.23 dividend payable on March 15 of 2012 to shareholders of record on March 10.

In closing, we had a strong fourth quarter as well, we onboarded in excess of $72 million of quality yielding assets. Our credit quality is solid and reflects our conservative investment approach. While we expect to slow down our investment activities in the first half of 2012 given market uncertainty, our liquidity places us in great position to service the high demand out there for venture capital debt and build our portfolio in 2012. Operator, we are now ready to open the call for questions.

Thank you. (Operator Instructions). We have a question from the line of John Hecht with JMP Securities. Please go ahead.

Good afternoon, guys. Thanks for taking my questions and congratulations on a good quarter. First question, it just wasn't clear on the yields. You're talking about 100 basis point compression over the course of the year to 12.5% to 13.5%. Does that mean you'd expect that Q1 to be around 13.5% zone going down to 12.5%over the course of the year, oris this -- you kind of think things will go down from 14% in the last quarter down to 13% now and then stabilize there?

The reason why we are actually making these disclosures is we get these questions a lot, and wewant to make sure the investors understand the multiple different components of yield. But to answer your question specifically, the 100 basis points in compression that we are advocating is for new deals. So the legacy portfolio of over $560 million, earning a yield in the 13.5% plus range.

It is the new yields or the new deals that we're onboarding that we expect to see a 12.5% to 13.5% yield compression from the historical yield. So what happens is on overall blended portfolio level, you will probably see a portfolio compress between 30 to 65 basis points over the calendar year as loans amortize down and new loans are added into it. You won't see an immediate reduction in yields of the legacy portfolio. It will be a gradual waiting of 25, 30 basis points in Q1 and Q2 time period, and then approaching the 100% or so yield over the remainder of 2012, but it's not going to be an immediate hit.

Okay. That makes sense. And, Manuel, can you comment on the competitive environment?Last year, I think your tone was that some of the largest banks were causing some of the yields to compress, and if I hear you, you're a little bit more optimistic that maybe it is stabilizing with the new assets and the 12.5% to 13.5% zone. Are you feeling better about the competitive environment or the rationality of the competitive environment, or is there something else we should be thinking about?

It's a great question because the yield compression is actually not being driven by competition whatsoever. It has a little bit of impact, but it's not material. The real yield compression is what is going on in the industry. And what I mean by that is that having to doing this for 25 years, there's a leading indicator in the marketplace, and that is when companies start approaching a very strong well-valued valuation, the venture capitalists themselves would now rather start giving up equity and start negotiating harder on the interest yield components.

When the portfolio companies are undervalued, they will fight tooth and nail to keep as much equity as they possibly can, but give you a lot more on the interest rates. And so today, what we are seeing is we're seeing a much more heated debate with the venture capitalists on interest rates but much more willing to give up on the warrants, which is a further indication where are you on the valuation cycle.

Now, that may sound very draconian, but in a very perverse way, that actually is both good and bad for us. Because what happens is when we have this whole legacy portfolio of 109 warrants, you will see all of those legacy investments appreciate in value quite dramatically, which is why you see net asset value increase.

And conversely, new assets that you onboard, you want to make sure that you are being very staged independent, so we're throttling back the portfolio away from later stage deals, which we think are extremely well valued and looking at more in the mid bracket expansion stage and early stage deals where we think that the valuations are much more attractive and so are the yields right now. That, more than competition, is what is driving the change in yield spreads.

Okay, thank very much. And final question related to your debt outstanding and liquidity. At this point, you have a lot of liquidity, but there's a lot of -- seems like there's a lot of deal flow out there. How fast can you ramp up -- you think you can ramp up your accordion, and/or would you consider doing a baby bond deal as we have seen some other BDCs do recently? And then finally on that measure, what level would you take your BDC qualified leverage to and your total leverage to? What would you be comfortable with?

A lot of fantastic questions imbedded in there. Let me try to think in the order you basically asked. Liquidity, there's no question that we have a very strong liquidity position, but as we historically have done, I don't think that liquidity position is necessarily sufficient.

And what I mean by that is that we can turn originations on and off relatively quickly within a quarter or two if we think the quality deal is there and the market opportunities are there. Right now, we're coming out of Q4 and we are saying we grew very strongly in 2011, we want to take a slight pause in Q1 to kind of catch up and get our liquidity position in place to really understand where are we on unfunded commitments, where are we on the horizon on looking at deals that are in the pipeline today from a use of cash.

As to what we are comfortable with, there's absolutely no question that what other BDCs have done in the marketplace has not gone unnoticed by us. The issuance of baby bonds led by one very large established BDC has not gone unnoticed by us. We actually believe strongly that our preference remains and continues to be to leverage the balance sheet further than it is to do equity capital raises. However, that said, we prefer that leverage to being five years to seven year durations as opposed to relying very heavily on short-term bank borrowing to finance that growth, especially of what we learned in the 2008, 2009 timeframe.

We think that relying on bank leverage, it's probably a 25% to 35% of our liquidity will be in the form of short-term bank leverage with the balance of that coming in convertible bonds or baby bonds as you referred to today, so we have a very high expectation of that. That said, we recently filed a new shelf offering with the SECto allow us to be able to go out to the marketplace in 2012, to actually issue a baby bond. Our current shelf today does not allow us to issue a baby bond, and we are waiting for the SEC approval to be able to have that mechanism in place to be able to pursue that.

On the leverage statement, on the qualified leverage basis, we continue to remain very much where we have been historically for the last five years, and that is leveraged on a qualified basis, that means excluding SBIC leverage, is in the 65% to 70% range is what we feel comfortable with using qualified leverage excluding SBIC. With the SBIC fully burdened on the leverage equation, you are looking at probably 120 to 125 leveraged position with a total capacity that we have today of 1.5 leverage, with our SBA fully drawn at 225 and our balance sheet the way it is today.

Great. Thanks, Manuel.

Thank you. And our next question is from the line of Joel Houck with Wells Fargo. Please go ahead.

Good afternoon, Jessica and Manuel. Nice way to finish 2011. Congratulations.

Thank you for that.

Just to follow up on I think it was John's question on leverage, I often think investors don't fully appreciate the nature of your assets, the fact they are amortizing much shorter duration than a typical BDC. With that being said, it would seem logical that you would apply more of the traditional bank credit leverage. I understand your comments about what happened in 2008 and 2009, but is there something else that's driving kind of the lack of traditional leverage here beyond just being averse to the credit crisis or financial crisis that we saw several years ago?

I think that we have -- I think three banks today, Wells Fargo, Union Bank, and RBC, who are our financial supporters, Wells Fargo, of course, being the largest and probably our most steadfast partner on the short-term bank lines marketplace. The issue that we have is that because those traditional bank lines don't have tails to them, meaning that you have a balloon payment at the end of the duration period, at the end of the three years, if those bank lines -- if those commercial banks would return back to circa 2007, 2008, where you had a one year or 24-month tail to them, I would feel a lot more comfortable borrowing under those facilities because you are able then to, with your statement at the beginning of your comment, you are able to use the amortization to kind of buy down and pay down that line in a very controlled manner as opposed to having to rush to kind of pay those lines down if they aren't going to renew those bank lines, so that's part of the driver.

The second element of the equation as to why we don't want to use greater than 25% or 35% of liquidity from traditional commercial banks is the premise that we're still unclear as to whether or not we can actually bring other banks into that syndicate to grow that loan pool to where we think it should be. We would be delighted to see a $300 million syndicate on commercial bank lines with tails on them, but in this current credit environment, it is still not there yet.

Okay, so that's really -- the factor is more of the structure of the facility as opposed to any aversion to using it?

Yeah, it is all inherent in the structure.

Thanks, I appreciate the explanation.

Thank you. And our next question is from the line of Troy Ward with Stifel Nicolaus. Please go ahead.

Thank you. Manuel, can you talk a little bit about the SBIC, paying backstop of that SBA debt? Obviously, clear benefit to lowering the pricing 2% to 3%, but I'm assuming you also get to basically just reset the maturity on that to where now it's -- when you redraw, it will be a new ten-year note? Is that correct?

I'll let Jessica who has been spear-heading the whole effort field that.

Sure. That's correct. It will be a new borrowing with a new ten-year life. I think the life on the debentures we paid down had about seven years remaining.

Okay. And then how much from a yield perspective, obviously, that's the more important side of it it looks like than the maturity, how much more of that do you have in that 6% plus range?

This is actually the last chunk at this particular pricing, but the debentures we borrowed over the course of 2007 and 2008 all have pricing that we're looking at. As you know, the pooling of the debentures over the past couple of sessions have been significantly lower than the rates we saw in 2009, and even the first half of 2010. So we will always be looking at that as a vehicle to lower our cost to debt.

And then, Jessica, also, the K is not out yet, but you said in the press release that $7.5 million -- I'm sorry, $7 million of the appreciation was on two life science debt investments in the quarter. Can you outline what those were? And were they previously marked below par significantly and that's why they had so much appreciation, or what caused that appreciation on the debt investments?

You hit the nail on the head. They are primarily exactly that. The credit outlook has improved quite dramatically in those companies with some tangible evidence and results, actually, have driven our confidence in remarking them up.

Okay, that's good. And then, finally, Manuel, can you just -- kind of a two part question -- first of all, what is your currentheadcount? And given the asset growth you had in 2011, I know you are still expecting more in 2012, do you expect to continue to build out your platform or will shareholders start to see some economies scale start to flow through?

No, I think -- okay, for one thing, what we are doing right now, and part of it is why we're taking a slight pause in Q1, although I look at it more as a breather given our spectacular growth in 2011, the reason why we are taking a little bit of pause is right now we are purposely going through and repositioning our whole technology group. We feel very strongly about this point.

We are in the process right now of reformatting our whole technology group to be much more industry vertical focused, so we're going to have individuals who are exclusively focused on the networking communications areas, individuals focused simply on a multiple different layers of software. So we are gravitating much more to vertical expertise and really driving the group into vertical expertise, because we think it is a better value add proposition.

The venture industry is asking us to move that direction, as well. They are moving that direction, as well, and we believe it's a much better partnership to have industry -- very tight industry subvertical expertise in that area. I do not anticipate any meaningful headcount in order to continue the transformation that we're doing in our tech group. We currently have 56 people on a headcount today, we are looking at two or three invested professionals in the first half of 2012, but we're not in a rush to do that.

Like we make investments, we are highly selective on the individuals and the characteristics and the make up of that individual that we are looking to hire to fill those positions. We are -- just like we invest, we prefer to take our time in hiring, just like we prefer to take our time in investing.

Great. Thanks for the color and congratulations.

Thank you.

Thank you. And our next question is from the line of Jason Arnold with RBC Capital Markets. Please go ahead.

Good afternoon. Just curious if you can comment on what players, competitively speaking, you are finding coming to the table most often against with on deals?

The problem is there's no single answer to that question because, just to remind you and the investment community, we have four verticals that we have in the business. We have our clean technology group, we have our life sciences group that's further divided to medical device and small molecules, we have our technology group that spans stage issues, and we have our lower middle market situation group that focuses on later stage venture stage companies or maturing technology companies or technology-related companies.

There is no one sole competitor that transcends all those verticals or subverticals. So the answer is we don't have a common player in all those areas. Where we continue to see -- the most persistent example of a single player is probably a small commercial bank out here that does venture lending in the marketplace that we see most often. But beyond that, we don't have any real other player out there who continuously shows themselves out there.

Okay. And then I guess kind of a follow-up to that, do you find that the competitors that you are coming up against on deals are acting relatively rationally or irrationally in any particular segments? Maybe a little of both, that would be helpful.

Sure. I mean, look it, we're an investment organization. I have no idea what the word market share means. When some of these banks talk about market share, I scratch my head because we are an investment operation. So when you have 70% market share, by definition, any asset you originated beyond 70% is going to be a marginal asset in quality.

We focus on credit quality, not market share. I don't understand what that means. I'm also not a depository aggregating institution, so Idon't really care about my market penetration and market size. I can't use deposits. So from that perspective, the competitive environment out there remains robust. I don't want to walk away saying that we don't have competition.

Every deal has competition, and every deal should have competition. But when we win, and why our team wins a deal is not on price, but on the skills, the relationship, and the vertical knowledge that our team has in the particular space that they are in, that the investment community wants to pay a premium and is willing to pay a premium for the knowledge and skill set that our team brings to the table, coupled with our creative structuring capabilities. It is not about price and it's not about market share.

So I don't see the market competitive environment changing much than it was in 2011. Now that said, the only real competition out there is the commercial banks who have extremely low cost of capital and are doing some still irrational deals out there, which we are more than happy not to chase down that rabbit hole.

Makes sense. Okay. Thanks for the color and nice job this quarter.

Thank you.

Thank you. And our next question so from the line of Jasper Burch with Macquarie. Please go ahead.

Hey, good afternoon, Manuel and Jessica. Just to start off with, it looks like you have a nice little runway with your dividend here, even with a little bit of pull back in the first quarter. I was wondering if you could give us any number on what your undistributed distributable income is or was at the end of the year?

Sure. Our tax bill over is approximately a penny or slightly less than a penny from 2011 to 2012.

Okay. Thank you. And then -- yeah.

Jasper, we expect, as we saw, we had $0.285 in NII and $0.27 in DNOI, and we only paid $0.23. We will continue with what we have been saying since 2007, and we are one of the first BDCs to go out there and say we believe strongly that dividends should trail earnings from a taxable point of view, and we continue to discipline that we don't believe you should over payout your dividends without earning them.

Okay. Definitely a good position to have. Manuel, in your opening remarks, you talked about the elections coming up, I was wondering if you could point us to any regulatory or legislative topics that you are watching and that you think might be impactful to your company,

Absolutely. There's two sectors in particular we are very concerned about on potential change of the administration. The first and foremost is the impact on potential change in administration, and, by the way, we aren't saying political science here, republic or democrat, we're agnostic, but there is an implication that if the change in administration happens, that one administration's more friendlier to environmental issues and the other one is more friendly toward oil issues.

Which means is that the clean tech industry could see adverse acceptance with a change in administration in government subsidies, government tax regulations, inducements to build green plant, etc., were to go away, that would have an adverse impact on the clean tech industry. This is why we are taking a more managed control outlook, for example, on the clean tech industry right now, will continue to invest in clean tech. It's about 12% of our portfolio today, but we are taking a more managed control outlook on clean tech to making sure that we avoid companies that have to have a heavy dependency on subsidies or tax grants or government programs in order to thrive. We remain active and will remain active in any clean tech investments. We are going to shy away from those companies that have high government dependencies.

Conversely, the healthcare services side, if you believe Obamacare will get reformed or will get abolished, there's an implication on healthcare information systems where if healthcare reform were to go away, this seems ironic, the need to have greater visibility to avoid fraud and bring technology into reforming healthcare may be at risk, making healthcare investments a less attractive area. So those are the two high macro level area that we're focusing on right now.

Lastly, although we are very pleased with what we are seeing as a thawing of the FDA processon the clinical drug trial approvals, we still think that the FDA has a long way to go to still improve and reform itself to accelerate the ability to get new drugs approved through the system itself.

Okay, that's helpful. And you aren't really looking at then tax policy and the potential for either the deal flow and when things come through?

Unlike every over BDC out there, we aren't driven by tax law changes, that driving deal flow. Our deals are totally benign to any tax law changes out there. Because our companies are disruptive technologies, they are being nurtured and built today for disruptive solutions that are being three to five years out from -- in the market later on, so they don't really give a crap what happens with tax policies today.

That's helpful. And then just one small modeling question. Your G&A has been low the last few quarters verses the first half of 2011. I was just wondering if you can give us any color is this a new run rate that we have seen in the last couple quarters or might it tick up again?

No, I think that the run rate is sustainable at this point. As I said at the beginning of this -- the previous caller, we expect to see anywhere from two to three additional headcount added in our tech portfolio, and we may add one more in our life sciences portfolio in 2012, but it's going to be opportunistic and if it makes sense to add it. But that's not going to be a meaningful movement of the needle.

The draw between the first half of 2011 to the second half of 2011 was all conditioned upon the expungement of the low middle market group. We divested ourselves outside the lower middle market group, we still maintain a presence in the later stage technology-related areas where we have 2.5 principals in that area focused in that vertical. But we don't have the headcount focusing on lower middle market deals, which we continue to believe are very low margin, high leverage deals.

With respect to G&A, there is some level of seasonality in the first couple quarters of the year, so I think that what the pattern that you may have seen in 2011 will be consistent with 2011, irrespective of the headcount discussions.

But not a dramatic increase in SG&A. No, not a dramatic increase.

Okay, but higher in the first half than the second half regardless.

There are some expenses that transpire in the first couple of quarters based upon seasonality, yes.

Okay. Well, thank you guys very much and nice job on the quarter and the year.

Thanks.

Thank you. And our next question is from the line of Aaron Deer with Sandler O'Neill & Partners. Please go ahead.

Hi, Manuel. Hi, Jessica.

Hi, Aaron. How are you?

I'm doing well, thanks. I know this call is running long, but I just have a couple of quick questions. One was on the repayments in the quarter, it seems like the pace of those slowed down a bit. I know, obviously, that's pretty volatile quarter to quarter. I'm wondering if, however, you did see anything occurring in the quarter and kind of what you are seeing year to date, and how that translates to your guidance for $30 million to $40 million in net growth this quarter?

Yeah, in terms of principle repayments, as you know, we've added a bunch of new assets over the past couple of years. And with the structure of our debt yields, we typically don't have amortization occur at day one of the investment, but amortization on average occurs at about six months. So the fourth quarter principle repayment was representative of the fact that our investments were basically new. And you'll see amortization pick up over the course of 2012 as we get the maturity in our portfolio.

And, Aaron, for modeling purposes, modeling out a $20 million to $25 million NOL quarterly amortization is in line with where we expect it to be. To the second part of your question, we did have an early payoff in Q1 of approximately $5 million. Q1 will experience a $5 million early payoff.

Okay. And then lastly, this more curiosity, how did you come upon the opportunity for the investments in Facebook? And then what are you thoughts there after the IPO? Is that just -- does the thing get liquidated right away or is that something you hang on to?

Well, as I said when I first made the announcement, it would be crazy of us to be in the Valley and not be a part of one the largest and probably most successful public offerings of a social media company in the history of venture capital. An interesting indicator of that is that today, and I think the Wall Street Journal yesterday actually alluded to this, Facebook shares, according to the Journal yesterday, are trading at I want to say it's either $42 or $43 a share.

And the secondary markets, and just to remind everybody on this call, we're in at $31 a share, so we're already seeing a pretty significant step-up in valuation attributed to that. We get offered shares often times by multiple different sources in the marketplace. We often times turn them down, but I felt very strongly that, given what we knew about Facebook, given the tremendous achievement that they have done as an organization, and the near term exit that we are pretty confident that they are going to pursue as evidenced by the recent S-1 filing, it made all the sense in the world to take a position in that company, which we did and we are very happy to do that and we are happy to see them continue their extremely healthy success.

Looks like that will work out well for you. That's it for my questions. Thanks for taking the time.

Thank you. And our next question is from the line of Vernon Plack with BB&T Capital Markets. Please go ahead.

Thanks. Jessica, could you -- you talked in terms of the yield, but could you tell me what impact fee acceleration on early payoffs and one-time events had on NII for the quarter?

I believe that NII, excluding the one time impact, was the 14%, and including was 15.6% for the fourth quarter, so there you go, about 1.6% was due to early payoff and one-time events.

And is that in terms of yield did you say?

Yes. Yes, the effective yield.

What about the -- I can do the calculation, was that a penny or two?

That is correct.

I wasn't sure that I heard you in terms of the amount of SBA debentures you refinanced.

$24.3 million.

Okay, I'm trying to -- if you look at the $24 million, I know that at least the debentures that were issued back in 2007 and 2008, if you look at the total, it's more like $84 million, and I'm trying to understand why the number 24 verses the amount that you had out which --

Sure. Well, we have to repay the debentures with the funds available in the subsidiary. That was one I would say cap on the amount of debentures that we could refinance. Just a reminder, as well, that we did this amount of refinance also in the beginning of 2011. And also we are working with the SBA to make sure that -- most SBICs don't do repayments and we want to make sure that we are in compliance with the program. So that sort of drives the amount, as well.

And further to that point, our (inaudible) of SBA is very, very strong and to their request, we have adhered to their $25 million bite size, Vernon, and it does not mean that we won't do another $25 million in fiscal 2012 (inaudible) don't extrapolate that (inaudible).

Got it. And can you tell me what the -- what gain you actually realized in your warrant position on the separate IPO?

The separate IPO is all unrealized and, at this point, it's flat to slightly down.

Okay. Thank you.

And one more point, on the SBA refinancing, the SBA alone will have $0.01 negative drag on Q1 numbers right now as they exist, simply attributed to that one time event, coupled with the capital raise of Q1. When you actually factor that in, that will add another penny or so in dilution from an EPS point of view.

Right, thank you very much.

Thank you. And our next question is from the line of Calvin Hotrum with Sterne Agee. Please go ahead.

Hey, guys. I'm standing in for Henry Coffey. I think most of my questions were actually answered, butjust trying to get a general read on I guess the environment for exiting some of your portfolio investments, and I mean it looked like currently, things are looking a little better. And basically just trying to get an idea of if the more favorable environment is going to act like a catalyst for you guys exiting and maybe entering into some new investments?

So there is no question that we're probably the most encouraged we've been in the last six years since starting this business. We had 45 or so IPOs completed in 2010, we had 45 or 46 in 2011, we're very encouraged. But we can't ignore the IPO market in 2012 without talking about the big elephant in the room and that's Facebook. The whole world is looking to Facebook as kind of a confirmation or affirmation that the markets are there.

Truly, Zynga raising $1 billion absolutely helped validate that the market can and is willing to absorb a capital raise of that size, and the continued success of LinkedIn post-IPO has been quite tremendous and quite strong. So that all serves to give confidence in the investor community that the technology companies are in fact a good place to allocate capital to. The biggest challenge right now that we have as an industry is what I said, that the private investor stage companies are so well-valued that the new norm is $1 billion clearing price. I think it's a little lofty.

I would like to see (inaudible) going out in the $300 million to $700 million range as opposed to everyone being a billion dollar company. But so be it, everybody has aspirations of being a billion dollar company and that is causing some of the investors to step back and take a pause saying, "Okay, I see the growth story, I see you have a good business model, but $1 billion is a little bit lofty for me to get my arms around," and I think Facebook will help drive that confirmation of validity in the social networking and other companies that are out there. But we are very encouraged by that.

We are encouraged by our own companies we have and having 109 different warrant positions and over 37 different equity positions, we are probably the biggest cheerleaders out there to seeing an IPO market come back to solid shape.

All right. Great. That's exactly what I was looking for. Thank you.

Thank you. And our next question is from the line of Douglas Harter with Credit Suisse. Please go ahead.

Thank you. My questions have been asked and answered already. Thanks.

All right, Doug. Good hearing from you.

Thank you. This concludes the Q&A portion of today's conference. At this time, I would like to turn the call back over to Manuel Henriquez, Co-Founder, Chairman, and CEO of Hercules for closing comments.

Thank you, Catalina, and thank you, everyone, for your continued interest and support in Hercules Technologies Growth Capital. If you want to arrange for a meeting or have any questions, please feel free to contact our Investor Relations group. Jessica and I will be on the East Coast and participating on the Sandler O'Neill and the Citibank conferences next week in New York City and in San Francisco. If you'd like to have a meeting with us, please let us know and if we have time, we will certainly schedule a meeting with our shareholders. Again, thank you very much for being our shareholders and for being part of Hercules Technology Growth Capital's story. Thank you and have a good evening.

Ladies and gentlemen, thank you for your participation in the Hercules Technology Growth Capital fourth quarter 2011 conference call. This does conclude the program. You may now disconnect. Thank you and have a wonderful day.