Hercules Capital Inc (HTGC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hercules Technology Growth Capital Second Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions.) And as a reminder, today's conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Jessica Baron, CFO. Ma'am, you may begin.

Thank you, operator, and good afternoon everyone. On the call today are Manuel Henriquez, Hercules's Co-founder, Chairman and CEO; and myself.

Hercules' second quarter 2013 financial results were released just after today's market close. They can be accessed from the Company's website at www.htgc.com. We have arranged for a replay of the call at Hercules' 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 the information of final audit results.

And 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, including, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identified 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 can also 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 or 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 Manual Henriquez, Hercules' Co-founder, Chairman and CEO. Manuel?

Well, thank you, Jessica, and good afternoon everyone, and thank you for joining us today.

I am very proud to report to our shareholders that Hercules had another strong, record high quarterly performance and results for second quarter 2013. As I typically do, the agenda for today will include a brief summary of our operating performance and results for Q2, discussion of the current market conditions, including venture capital and market activities, the outlook for the remainder of 2013 and, of course, I'll turn over the call to Jessica, our CFO, to review in more depth our financial performance and specific results of the quarter.

Now let me turn our attention to the performance of the quarter in summary. Here are a few highlights of our operating performance that I would like to share with you from our strong quarterly results.

We had an outstanding loan growth thanks to our continuing success at expanding the Hercules brand and awareness to innovative, venture capital backed companies by offering customized plans and solutions that address the needs of development-stage companies, and our strong relationship and growing relationship with the venture capital and private equity community, which continued to refer deal flow to Hercules.

We have surpasses for the first time in our strategy the $1 billion mark in total investment assets. This is a remarkable achievement for Hercules and a testimony to the dedication of the organization, the hard work of our investment professionals to -- on behalf of our shareholders. We delivered another strong record, total investment for income of $34.5 million, or an increase of over 44% year over year.

On a net NII basis, we achieved a 43% growth year over year on net NII of $17.6 million, or $0.29 per share, compared to consensus of $0.26 per share. In terms of DNOI, we also saw a strong increase in DNOI, with DNOI increase 42% to $19.2 million or $0.32 a share for the second quarter of 2013.

Because of our strong results, the Board of Directors opted to increase the dividend for the third consecutive time by $0.01 to $0.28 per share

And then finally, our IPO and M&A activities. The second quarter represented a very strong and robust exit for our portfolio and, on a year-to-date basis, having achieved 14 announced liquidity events in 2013 so far, which compares to approximately 12 exit events that occurred in all of 2012. Not to be left behind, we finished the second quarter with 4 companies in IPO registration at the end of the second quarter.

These results reflect our continued commitment to managing our growth and solid performance across our business and very strong loan demand for our many portfolio companies. We are very grateful to our venture capital partners and entrepreneurs in their trust in Hercules as one of their capital partners and continue to fund their future growth needs.

Now, let me turn my attention to our portfolio growth. We had an outstanding loan growth thanks to our continued success in expanding the Hercules brand to both public and private technology and life sciences companies, excuse me. As part of this growth, we remained steadfast and disciplined in our underwriting of new companies during the quarter.

New commitments for the quarter were approximately $253 million, or an 82% increase over the same period last year. This growth was primarily driven by our pulling in transactions that we would have otherwise closed in Q3 that we chose in close in Q2 in order to help stem some of the early payoffs that we received during the quarter.

In terms of fundings, fundings were equally strong during the quarter, with approximately $202 million of fundings that took place during the quarter. And interestingly enough, we saw a return back to our funding ratios of approximately 75% funding ratios when we historically have been expecting a 55% to 75% funding ratio. Although this is a departure from the most recent past, we suspect that this is still not a trend, but one that we're watching as we may find ourselves returning back to our historical levels of 70% to 75% funding rates.

Now, I want to be -- caution everyone that this does not necessarily mean that we're returning back to 75% in funding ratio. We will be monitoring this ratio much more closely and we suspect that we should maintain a 55% to 65% funding ratio to commitments. And I'll expand that further on in the discussion as well.

Total principal repayments. As I indicated earlier, we saw a very robust and very strong principal repayments. In fact, during the quarter we experienced $130 million of early principal repayments and this was mostly driven by us, Hercules, purging out [morsels] of credits and, more importantly, rebalancing our portfolio. As we continue to invest our cash, we've chosen to exit some of our more mature and later-stage companies that were lower margin in yield. And by doing so, the effective portfolio yields go up as we exit those lower-margin transactions that historically were in our books.

On a net result basis, net portfolio growth for the quarter was approximately $72 million on a cost basis and represented about $30 million to $40 million higher than we had anticipated as we pulled in additional transactions from Q3 to Q2, as I said, to help stem some of the early paths that we were experiencing.

As a reminder, the majority of these new commitments continued to fund at the end of the quarter. And in fact, most of these transactions that we refer to that we pulled in from Q3 to Q2 actually closed in the last two weeks of the quarter, which means that little impact on earnings occurred with these assets being brought in into the second quarter. However, the benefit of that is that we commenced the third quarter with a much stronger loan balance, which means we have a higher weighted average balance in the third quarter of assets -- originating assets earning interest income.

Now, let me take a moment to talk to you about our Q3 perspective, as well as some of the views for [2003]. I will expand on these colors and discussions post my discussion on the venture capital community. However, let me take a few seconds here to speak about Q3.

At this point we anticipate Q3 to be flat to down, between $40 million and $60 million in net new originations. This is driven in part with our expectations on early payoffs that we're anticipating during the quarter of Q3, coupled with the lower origination activity that's typically seen in the third quarter in Hercules' history.

This is an important segment to know because, as we've seen these early payoffs, this is another driver of why we actually brought in transactions to the beginning of the quarter, to help drive higher earnings assets at the beginning of the quarter. But, it's important for the investors to know and the analyst community to realize that right now we're forecasting flat to potentially down, $40 million to $60 million, in net new asset growth, primarily driven by early payoffs. If those early payoffs were to manifest themselves as expected, you could see a proportional increase in fee income, which will simply offset any decline in that portfolio that may occur in that period of time.

Additionally, we're seeing an increase in net amortization in the quarter. We're now expecting to see amortization in the $35 million to $40 million level. And we expect to see amortization also increase in the fourth quarter slightly above that level as well. As I mentioned just a few seconds ago, early payoffs in the third quarter are expected to be potentially $40 million to $70 million.

However, I need to stress the importance of this comment. Most of those early payoffs that we are aware of may or may not occur because they're triggered by transactions that the underlying portfolio company may necessarily not accomplish on the expected period of time during Q3, such as an M&A event or an IPO event that would be leading some of these early payoffs. I'd like to remind our shareholders that we do not control the timing of these early payoffs and some of these early payoffs, as I indicated, will be driven external events such as M&A and IPO events that may or may not occur.

In terms of our investor portfolio, we continue to remain -- or continue to maintain a high bar and cautious on change to originate new assets. This is indicative as you see our cash balances declining $70 million from that of Q1 of over $200 million. We will continue to deploy our capital in a cautious and controlled manner, and we're [hyperly] selective in the assets that we will originate and fund during the quarter. We are not in a rush to simply deploy all our cash proceeds into earning assets at this juncture. We are positioning the portfolio for stronger growth in Q4 and in Q1 in 2014. And as we convert this earning cash, which I'll speak to later on in the call, you'll see the impact on earnings as we convert that $130 million in cash into earning assets.

I would like to reinforce I remain extremely optimistic and bullish on the outlook for 2013 for our new investment activities. And in fact, we are increasing our consensus in terms of guidance in terms of new originations. We had previously stated that we expected 2013 to represent $500 million to $700 million a year in new originations and we are at this point increasing that guidance on new originations to $550 million to $750 million. And it's highly likely that that may also increase further at the end of [2003] as we reevaluate the continued robustness of the market and demand for loan that we're seeing in the marketplace today.

In terms of credit, our credit performance and credit outlook remains stable. We remain very diligent in credit monitoring and we continue to track and monitor a handful of companies on our watch list which are typically the case that are going through a typical round of capital raising as part of their normal cycle. There is currently nothing in the credit side of the equation that gives us much concern on the normal course in business as we watch and monitor our credit performance.

As we last outlined during our last earnings call in Q1, we are still seeing some early signs of flare-up in the marketplace today. This is the reason why we remain cautious in our approach to deploying capital. And we remain very steadfast in the terms and conditions of credit that we will underwrite, and economic considerations or margins that we would require, in order to underwrite the certain risk parameters that we're comfortable with.

We generally continue to remain on the sidelines on many early-stage investings. We are also concerned about the technology companies' outlook, especially when it comes to some of the rich and robust valuations that we're seeing, and also thin margins and underwriting that we're seeing in some technology investment opportunities in the marketplace today.

Because we perceive a higher degree of risk than normal in some technology transactions that we're seeing today, we will remain underinvested in technology for most likely through 2013, and we should start seeing a pickup in technology investing most likely in Q1 of 2014.

That said, valuations remain a challenge for us. We continue to see a very rich and robust valuation in many of the privately funded technology companies that we see. We are deriving the benefit of some of those higher valuations in our own warrant portfolio and equity portfolio as we've seen increases in our asset value driven by some of those increases in valuation. However, some of those valuations on some new investment opportunities give us pause as we think that some of the private companies may be slightly overvalued as compared to the public peer groups that exist in the marketplace today.

Yields. Unlike other B&ECs in the marketplace, Hercules continues to experience widening yield spreads as we have seen our yield increase by 60 basis points over the last two quarters. This is driven in part by our own doing, as I indicated earlier, as we turn to our portfolio and begin to purge -- marshal assets and we begin to cycle out more mature, earlier -- excuse me, more mature lower-margin assets. The mere fact, as we expunge those assets from our portfolio, you will see a natural lift in the aggregate yields in our overall portfolio as those larger credits that were lower yielding are actually paid off or refinanced away from our portfolio.

I want to stress the early repayment is in part driven by us as we help to purge some of those lower-margin credits as we continue to employ and deploy our cash balances in the marketplace today.

These selective lower-margin credits and lower-yielding credits will most likely end up finalizing themselves at the end of Q3, at which point we don't expect to see much more margin expansion in our yields beyond Q3. I'd like to stress the importance of that.

Moving to the balance sheet. We have worked diligently over the last few years to successfully broaden (inaudible) or access to liquidity. Our balance sheet is a source of strength for Hercules and a strategically important part of our capital deployment models. We have worked diligently to ensure that we have a balance sheet that's properly positioned for a rising-rate environment.

Our entire left-hand side of the balance sheet, our assets, 98% of our assets are all floating-rate loans with Libor or Prime-based floors. Commensurately, our right-hand side of the balance sheet, our liabilities, are entirely all fixed rate in nature, which also includes our securitization.

We have received many phone calls and many questions regarding our securitization. I need to emphasize and stress that our securitization is also fixed rate in nature and not floating rate. We have no outstanding liabilities today that are floating rate and the earliest maturity of our (inaudible) liability structure, with the exception of our securitization, is a convertible debt instrument and that convertible debt instrument has no principal payments due until April 2016.

This is an important integral part of our capital strategy and access to liquidity that we put in place over the last two years. I am proud to say that we finished the quarter with a source of strength on the balance sheet of over $239 million of liquidity, which included approximately $130 million of cash at end of the quarter.

As a matter of illustration and as a reminder to our shareholders and our analyst community, we have enormous strength in our balance sheet as we continue to deploy our cash balances. As an example, as a matter of illustration, if one were to assume that the $130 million of cash on the balance sheet were to be deployed or invested at a 12% to 14% current cash yields, that invested cash would be earning $0.25 to $0.30 in annual additional earnings growth per share by the mere fact of converting that cash balance into earning assets. I can assure you that is our goal and objective for the remainder of 2013, but we'll remain cautious in doing so. And it is the expectation that you should see that cash conversion continuing to take place in Q4 and early Q1 of 2014. That fact alone will and should drive earnings further as we do that deployment. That $0.25 to $0.30 in earnings growth excludes any additional leverage that we utilize. Further, that will also drive earnings in that model.

Turning my attention to leverage. A net GAAP leverage, which is very important to note, the net GAAP leverage, defined as total leverage today less cash on the balance sheet, is approximately 71%. We have plenty of room to grow on our leverage if we choose to with approximately net of $269 million of debt capacity that we can borrow and leverage our balance sheet, further driving earnings growth that could represent anywhere between $0.30 to $0.40 in additional earnings if we choose to do that and leverage our balance sheet. A very strong balance sheet for earnings growth for our shareholders and (inaudible) market today.

Now, let me turn my attention briefly to the exit event and IPO activity and M&A activity in our portfolio.

The second quarter of 2013 represented a pivotal accomplishment for Hercules. We experienced a very robust M&A and IPO exit and healthy gains from our warrant and equity investments thanks to the improved exit market for venture capital innovative companies. During the quarter we realized increase in valuation in many of 120 warrant positions, as well as many of our 40 equity positions that we have to some of the best and most promising pre-IPO M&A venture capital-backed innovative companies.

As I said in my opening comments, we have experienced a robust exit in our portfolio as well. We achieved 13 portfolio companies' exits during the quarter and, ironically, we had one company that did a twofer. They did an IPO as well as complete an M&A event in less than 30 days. I have not seen that since the late '90s and it was a testimony to our Management Team selected the right portfolio companies. It's something that is interesting to see in a portfolio, giving us 14 liquidity events for 13 companies in the portfolio.

As further evidence of this robust exit environment, in the first 30 days of the third quarter, meaning basically just July, we have already experienced, and as you see outlined in our earnings press release as subsequent events, six additional M&A events that have occurred so far in the first 30 days of the third quarter. Very, very strong exits being realized in our portfolio that I have not seen in quite some time, and certainly not in the history of Hercules.

As I said earlier, we also completed two IPOs during the second quarter and the six announced M&A events that were previously announced in the second quarter. A very strong representation and a testimony to Hercules' continued selection of some of the best and healthiest companies in the venture capital community.

As I said earlier, in the IPO front we had two IPOs. We had Omthera, which is a company that both went public and, shortly after going public, AstraZeneca announced that it was acquiring the company for over $443 million. We all saw the completion of the IPO of Portola Pharmaceuticals.

Again, at the end of the quarter, or as of today, I should say, we have four companies in active registration today, three of which are JOBS Act companies, and we're seeing a much higher usage of the JOBS Act confidential filings and we expect to see an increase certainly going into Q3 and absolutely expecting to see an increase in IPO registrations in Q4 for similar companies.

I will not go through specifically all the transactions that occurred so far in the first 30 days of July. All those companies can be highlighted and shown in our subsequent event disclosure in our earnings release, giving you specific details of those six events that have taken place in the portfolio today as well.

Turning my attention to our warrant portfolio. We finished the quarter with 120 different warrant positions which had an aggregate GAAP value of approximately $35 million. I want to stress and emphasize to our shareholders that, typically, we have been experiencing exits in those warrant portfolios of 1 to 14x. We're not advocating, nor do we say you should model 1 or 14x. On a historical basis, we have been averaging approximately 4x net realized in our current warrant portfolio on an historical basis. And we'd like to remind our shareholders that we only expect 50% of that warrant portfolio to ever monetize. The nominal value of that warrant portfolio is approximately $75 million if it were to be exercised.

Turning my attention quickly and finally to the venture capital industry. I was pleasantly surprised and happy to see that the venture capital fundraising activity has picked up once again. And in fact, venture capital fundraising -- this is the venture capital firms themselves raising capital to deploy -- raised $6.8 billion during the second quarter. This is compared to $4.6 billion in the first quarter of 2013, an impressive 48% increase in capital fundraising activities by the venture capitalists; and more importantly, at a run rate to currently exceed the capital raised in all of 2012 if they continue at the pace which they're doing, which equates to approximately $11.4 billion raised in the first half of 2013. A good start for the venture capital marketplace and a good recovery from Q1.

And in terms of investment activities, also pleasantly surprised in the activities we're seeing there. We saw that the second quarter of 2013 saw investment capital increase by 7% to approximately $7.2 billion, of which we're invested in 800 portfolio companies. This compares favorably to the first quarter of 2013, where $6.7 billion was invested, ironically, to the same number of companies, 800 companies at the time.

For the first half of 2013 total investment venture capital activities showed nice signs of rebound at $13.9 billion to approximately 1,600 companies. Although we're seeing a nice pick up in the venture capital marketplace, it is Hercules' position and expectations that we are forecasting and expecting to see an approximately 10% to 12% decline in venture capital activities in 2013 as compared to 2012. Or said differently, Hercules is expecting to see $26 billion to $28 billion of venture capital dollars invested in calendar 2013 to innovative technology and life sciences companies.

In terms of exits by sector -- or I should say, excuse me, capital deployed by sector, information technology remains the largest category, receiving approximately 29% of the venture capital dollars, or $2.1 billion of the total capital invested in the second quarter.

Life sciences remains very brisk with $1.9 billion of the capital invested, or 26% of all venture capital dollars going to life sciences or healthcare companies.

We've all seen a nice pick up in business services and financial services companies, which also received 18% of the capital, or approximately $1.3 billion of the capital.

Not to be left behind, and not a surprise given the IPO market and given some of the appreciation that we've seen in some of the public internet companies, consumer services, which includes social media, saw a very robust increase of 40% of the capital and representing 18% of all the capital dollars invested by venture capital, or $1.3 billion.

Finally on exits. IPOs doubled from Q1 to Q2. 18 companies completed an IPO offering, 2 of which were Hercules companies, representing 11% of the IPO companies. M&A event, which was very strong for Hercules. Although we saw a slight decline in terms of number of companies realizing exits, it saw an increase in valuations of those achieving exits in the second quarter, of which 84 companies completed M&A events, which compares favorably to only 87 companies in Q1, raising -- or achieving values at $4.8 billion versus the $8 billion of those that achieved exits in that period of time in the second quarter M&A event.

Lastly, and finally, as I said earlier, our outlook for [2003] in the second quarter -- third quarter of 2013, excuse me, we expect to see the quarter end up between flat to down $40 million to $60 million, mostly driven by anticipating early payouts that may or may not take place. Clearly, if some of those early payouts do not take place, the portfolio should render relatively flat to down slightly on just the normal amortization that's occurring during the quarter. And very important to note.

On early payouts we're forecasting or aware of $40 million to $70 million in potential early payoffs that may take place, driven by M&A and IPO events as I disclosed earlier. As a reminder again, anticipated amortization is in the $30 million to $35 million range in then third quarter, as we disclosed early on as well.

And then, again, re-summarizing this, we anticipate that the continued funding ratio to commitment to maintain itself in the 55% to 65% range, and that we think at this point the 75% funding ratio in Q2 was an anomaly that we're going to watch very closely.

As a wrap up, my summary overview, the pipeline at the end of July was quite robust. We have over $1.3 billion in investment opportunities that we're cycling through and analyzing.

We have over $187 million of unfunded commitments that we have potentially available to fund. Some portion of that contingent upon milestones being reached. We have already closed $39 million of commitments and we've funded approximately $9 million at the close of the second quarter thus far.

We have currently $43 million in signed term sheets as we speak, as of today, and we're very optimistic in our outlook, and specifically for Q4. And we continue to be very bullish on the outlook of the venture capital marketplace as we see it today.

2013 is off to a very strong and healthy start. I am pleased with our performance. I'm very happy to see our team continue to commit to new asset originations. And I'm very pleasantly happy to report that we continue to be judicious in our selecting of companies and maintaining a strong credit book and credit outlook, as we've done in the history of Hercules today.

We continue to expect to see an increase and pick up in venture capital marketplace exits and we are on a long -- enjoying and awaiting pick up in the exit activities and you'll see that manifest itself further in Q4 and in Q1 of 2014. We expect to see some significant exits in our portfolio in our warrant pool that we have today from some high-profile companies in our portfolio that we're aware of that should or may complete IPOs in that period of time.

We are very pleased to report strong execution across all our business lines. We're well positioned to an interest rate increase. We have a well-diversified balance sheet. We have a strong, robust balance sheet. We have over $130 million in cash that we deploy to earning assets. That represents $0.25 to $0.35 in earnings.

And as we continue to grow and expand the Hercules franchise, we continue to evaluate and explore new strategic initiatives. We're continuing to evaluate multiple different new product offerings to expand our financial solutions to help our portfolio companies grow further. We are engaged in active negotiations and discussions with strategic options, as I said earlier. And as an important part of long-term strategy, we are committed to making Hercules one of the strongest specialty finance companies and the company of choice for innovation companies to finance themselves at all stages of development.

With that, I turn the call over to Jessica, our CFO. Jessica.

Yes, Manuel. And thanks, everyone, again for listening today.

I'd like to remind everyone that we filed our 10-Q, as well as our earnings press release, after the market closed today. I'll briefly discuss our financial results for the quarter ended June 30th of '13.

Turning to our operating results, as Manuel mentioned, we delivered a record total investment income or revenues of $34.5 million, an increase of 44% when compared to the second quarter of '12. This year-over-year growth was driven by increased interest income from higher average outstanding balances of yielding assets and an increased income from -- attributable to loan fee accelerations compared to the same period a year ago. Note that our period and debt investment balance on a cost basis was $967 million as of 6-30 of '13, an increase of close to 50% from $661 million as of June 30th of '12.

The GAAP effective yields on our debt investments during the second quarter was $15.7%. Excluding the income acceleration impact from early payouts and one-time events, the effective yield for the quarter was 14.2%, up approximately 40 basis rates relative to the previous quarter. As Manuel mentioned, we do not expect yields to trend higher much beyond Q3, assuming some of the anticipated early payouts occur as scheduled.

Interest expense and loan fees were approximately $8.8 million during the second quarter of '13, as compared to $5.2 million during the second quarter of '12. The increase is primarily related to interest and fee expenses related to the total $170 million of baby bonds issued in April and September, and the $129.3 million of asset-backed notes issued in December of 2012. This is all partially offset by the decrease in interest and fees related to a refinancing of approximately $50 million of SBA debentures that transpired all over the course of last year as well.

Our weighted average cost of debt, comprised of interest and fees, was approximately 6% as of the second quarter of '13 versus 6.7% during the second quarter of '12. The lower weighted average cost of debt is primarily attributed to the asset-backed notes which we issued with our securitization in December of '12, which accrue interest at 3.32%, obviously having a weighted average cost lower, and that brings our total cost of debt down.

Operating expenses for the quarter totaled $8.2 million, as compared to [$6 million] in the second quarter of '12. The increase is primarily due to increased headcount, variable compensation accruals and additional restrictive stock grants during the first quarter of '13.

Q2 of '13 net investment income was $17.6 million compared to $12.3 million in the second quarter of '12, representing an increase of approximately 40%. Net investment income per share was $0.29 for Q2 of '13, as compared to $0.25 for the same quarter ended 2012.

Our net unrealized depreciation from our loans, warrants and equity investments for the second quarter was approximately $800,000, driven by $5.9 million of warrant and equity net fair value appreciation, offset by $5 million approximately of net debt investment on realized depreciation. Note that of this $5 million fair value reduction incurred in the debt portfolio, $4.1 million of the total was due to yield-based fair value adjustments and $1.2 million of this depreciation was attributable to collateral-based impairment on investments in 9 portfolio companies.

Our net realized gains for the second quarter was approximately $2.2 million. We recorded $6 million of gains from the sale of investments in 8 portfolio companies, offset by the liquidation of the Company's investments in 6 portfolios companies for gross realized losses of approximately $3.8 million.

Our net asset value as of June 30th was $621.8 million, or $10.09 per share, compared to approximately $615 million, or $10 per share as of March 31st of '13.

Noted earlier, we have seen significant growth in our portfolio over the last year as a result of our debt investment origination activities. We ended the second quarter of '13 with total investment assets, including warrants and equity at fair value, of approximately $1.04 billion, an increase of $318 million, or 44% from a year ago, reflecting continued growth of our net new originations.

I'll remind everyone that amortization typically commences after a 9 to 12-month interest-only period on our term loans and is scheduled to occur over a 36 to 42-month timeframe. Given the recent growth of our investment portfolio, apart from earlier payments, as Manual mentioned, we now model 35 -- $30 million to $40 million for normal principal amortization per quarter.

Moving on to credit quality, as Manual mentioned, our loan portfolio of credit quality remains very solid. The weighted average loan rating on our portfolio was 2.11 as of June 30th, reflecting a slight increase from 2.03 recorded at the end of the first quarter.

We had two debt investments on non-accruals at the end of the quarter, with one with a fair market value of approximately $5.5 million and a cost basis of $9.5 million, and one loan with no fair market value and a cost basis of approximately $350,000.

Now, onto liquidity. At the end of the second quarter we had approximately $238.9 million in available liquidity, which includes $133.9 million of cash and $105 million in credit facility availability.

At June 30th our debt-to-equity ratio, excluding all SBA leverage, was 92.9%, lower than 95.4% as of the end of March 31st, 2013 due to organic net asset value growth and approximately $10 million of paydowns on our class-based securitization notes.

We'd also like to remind investors that our $225 million of SBA debentures are excluded for regulatory leverage calculation purposes. Thus, the exemption effectively allows us to leverage beyond the 1-to-1 debt-to-equity limitation to 1.36-to-1, which means at the end of the quarter we have capacity to add incremental debt of approximately $270 million.

Our net leverage, which is calculated as total debt of approximately $578 million less approximately $134 million in cash divided by total equity of approximately $622 million -- or net asset value of $622 million, was 71% at the end of June.

Finally, as Manuel mentioned, we increased the quarterly dividend by a penny from $0.27 to $0.28 to be paid to our shareholders in August.

So in closing, as Manuel mentioned, we will continue to take a cautious and steady approach to on-boarding assets in the third quarter. Note that we currently expect [note] portfolio for Q3 to be flat to down $40 million to $60 million, driven by the potential for increased early payoffs anticipated in the third quarter, as well as the typical calendar lull of investment activity we see during the third quarter late summer months.

We remain committed to our strategy of controlled growth and intend to continue to apply our stringent underwriting standards, which have resulted in our exceptionally low loss historical rates as we enter the second half of 2013.

Operator, we are now ready to open the call for questions.

Certainly. (Operator Instructions). And our first question comes from Greg Mason from KBW. Your line is open.

Great, thank you. Good afternoon, everyone. And Manuel, nice quarter.

I wanted to see if we could first talk about the potential gains on the exits post-quarter end, most namely iWatt. I believe the equity was written up from, call it $1.1 million of fair value in the first quarter and now $5.3 million at the end of the second quarter. Does that reflect kind of the final takeout value from Dialog or could there be potential additional accretion in both iWatt as well as all of the post-quarter end exits that you had?

Sure. Let me address that post-quarter end event because it's very important. And this is reflective of what I've been advocating now almost since the founding of Hercules, which is, at this juncture, we always think that 50% of the warrant portfolio may never monetize any real value or meaningful value. And in the example of the six or so events that have happened now subsequent to quarter end, iWatt being the outlier, the rest of the ones in that group represented little to no real gain to speak of and that's why most of them, as you'll see in our schedule investment, have historically been carrying a relatively low value to no value on that. So, it's often the case that some of these warrant positions that we have may not monetize, hence the 50% in non-monetization.

Now, clearly, I wish all of them were iWatts or better, but they're not going to be. But, iWatt is certainly an outlier. And iWatt now, that realization in value, as we indicated in a subsequent disclosure section, does represent the fully-baked value end and you'll see a slight increase in the Q3 financials in NAV that we finally cut it.

As a reminder for everybody on the iWatt question, the iWatt was a bit of a surprise. iWatt, as oftentimes is the case, you saw it earlier in our lifecycle of the company call NXG -- NX Capital, duh. NX -- excuse me. A similar company that also has an IPO registration, it, too, got acquired while it was in IPO registration, very similar to what iWatt did. And because that information is difficult, fair value becomes hard and the only thing we can go off is generally the IPO filing range that they have for the company. And iWatt got a premium even above that. So, all -- a good outcome there, indeed.

And is the potential premium above your current $5.3 million mark? Is it meaningfully above that or just slightly above?

No, no. No, because the accounting rules have -- when an event happens that occurred so quickly after the quarter, you have an accounting aspect, which is you need to mark it up or reflect -- that gap needs to get closed. So at quarter end, when that event actually happened, the gap between the value and the ultimate value we realized is pretty tight.

Okay.

So, it's been fully recognized into our net asset value already.

Great. And then I just wanted to talk about potentially where your focus is on maybe moving into some larger portfolio companies. I kind of looked a year ago and you had five loans with a size of over $20 million. And I think that number's up to -- call it 10 loans today. And four of them are over $30 million we look at box, Merrimac, BrightSource, Jab. Can you talk about -- is there a shift to moving into larger deals? Why would you do that and what's the attractiveness of doing that?

Sure. A couple reasons. We're growing up. And as you grow up, most people tend to forget that just in 2010 our net asset value -- our net assets were about $400 million and today they're north of that, obviously. And what happens is that the historical ratios I tend to focus on running the business is (inaudible) companies represent about 8% of the net asset values. And so, as we've gotten bigger, we're able to pursue those larger transactions as well. And by pursuing those larger transactions, we're able to get widening spreads and better credit terms and better underwriting conditions. And so, that's one of the reasons why we're doing it.

In terms of the invested book and the comparison to that comment, most people tend to forget -- and you'll see that in our 10Q filing, is that just in 2010 we ended up with a $472 million investment portfolio. And today, we're over $1 billion. So, that gives an indication that we're growing and, as we grow, we're able to kind of work with a $250,000 company that's looking for capital to a $40 million company that's looking for capital.

However, when I look at larger credits, the underwriting prerequisites for a larger credit, large investment opportunity, are much more stringent and much more rigid. And because of that, we see a lot more enterprise value and, in doing so, you're going to see a better ED coverage on a more tangible basis when you're looking at larger credits, when we go into those larger transactions that we're doing today.

I was curious about your comment that you could actually see wider spreads on those larger companies. It would seem intuitively that they're bigger, better, they should be able to get cheaper financing. Can you comment on why you can find wider spreads there?

Because these companies are without lower middle market credits. They're not typical to ABL lending and they're not typical lending on multiple of EBITDA. As often is the case, which is most of what we do for a living, is that most of these companies do not have EBITDA and sometimes they don't even have revenues to begin with. And so, the art of what we do, if not the science of what we do, is the combination of looking at extrapolating what the value is, the intellectual property of these companies, and determining what it is the enterprise value on the adjusted basis that we deem to be appropriate for those companies.

So, typical banking underwriting doesn't necessarily lend itself to that area because you don't have traditional ABL or EBITDA multiples to go off of. It is much more of a specific craft that our team has here, which is why Hercules is the largest provider of capital into that segment of the market. And it's a highly specialized team, that you need to have experience in doing that. And we currently are one of the few players that have the capabilities to do transactions that size in those areas.

Thank you, Manuel. Nice quarter.

Thank you, sir.

Thank you. Our next question comes from Kyle Joseph from Stephens. Your line is open.

Afternoon, guys. And congrats on a great quarter.

Thank you, Kyle.

Manuel, can you give us the fair value of the companies that are -- that have been sold or are in definitive agreements to be sold post-quarter end?

Yes, most of those you'll see in our schedule invested are probably near the zero value--.

Okay.

On most of those invested. So, as I said in the previous question, the majority of those in section IY are just basically a good exit event for our companies. But, because of the strike price of the warrants that we may have, that strike price of those warrants may be under water. And we may be, for example, in a $100 million valuation and the company got sold for $90 million, for example, which is why we've been advocating for time in memorial that 50% of the warrant portfolio may never monetize and that the other part that does will monetize handsomely as well.

But do those companies make up the majority of the $40 million to $70 million, I think you said, in expected repayment this quarter?

No. No, these are -- the five disclosure events are warrant-driven events. The $40 million to $60 million are M&A or IPO events that are different, that are not even announced yet that we are potentially -- well, we're aware of, but they are, themselves, are still in negotiations with the potential acquisition partners or filing under S1 or going through the JOBS Act S1, for example, process.

Yes, Kyle, as you know, you look at the name of those companies and just correlate them with our SOI. And in fact, for most of them you see we won't have a debt position outstanding.

Okay.

If you want to go back you can say that we did have debt positions to the majority of them as they were warrant positions, but we were paid off in full in previous years on those debt investments.

Yes, most of these are quite old legacy investments.

Yes.

Gotcha. Thank you for that clarification.

Can you give us the yields on repayments in the quarter and yields on new commitments?

I can't give you the exact figures, but we've gone through and pulled those analyses together as we've been asked that question previously. And the exiting yields are between 150 and 200 basis points. It's lower than the new investments which we're bringing onboard.

Okay, that's helpful. Thank you.

Yes.

And then, Manuel, you've spoken in the past publicly about potential investments in smaller tech companies that have actually gone public, but are still in need of funding. Is that market opportunity still there and was a portion of the second quarter capital deployment into those companies?

No. We continue to study the so-called public orphans, which has always been one of my thesis since we started Hercules, that we will go from time to time, look at investing in those public orphans or those fallen angels, as they're also know, which are previously venture-backed companies that are public.

We're seeing a dislocation in valuations currently, meaning in layman's terms that we're seeing better opportunities investing in some of those public technology venture companies that we're seeing in the private venture capital companies that we think are quite healthily valued. And we're kind of scratching our heads on the additional incremental returns that you can make from those investments, as opposed to the wider or better returns that you can make from some of the public companies that are out there today.

So, we are purposely underinvested in technology. I think we'll continue to be underinvested in technology for most of 2013. But, we have brought down the portfolio purposefully so and you can expect to see a technology book begin to grow probably in Q1 2014. So, a steady state in technology is probably what you should expect. And we are still looking at some of those public opportunities out there but, as you may or not know, many public companies have other challenges as well in the evaluating process on making investments that we are still going through our analysis on.

Got it. Thank you. And then the last question, just on the securitization. It looks like it's running off about $10 million a quarter. Is that a good run rate going forward? Is it going to be a more of a 10% range, or --?

No, I think that's a good run rate for the next few quarters.

Okay. And then --.

(Inaudible), Kyle. As you know, eventually, when it gets to a certain threshold it will go into what's known as more super amortization, which is --.

Yes.

They'll taper off a little rapidly. But at least for the next two or three quarters, that's probably a good run rate.

Yes.

And then are you guys looking at doing another one, given the attractive cost of funds there?

Well, I think that we're certainly looking, as I said, in my -- in our opening comments, or actually our remarks, where we're diligently and continuing to diversify our source of funding on the balance sheet. We're dramatically driving lower our cost of capital. And so, securitization is certainly one of the facets in doing that and one in which we'll pursue quite diligently. So, the answer is -- certainly in the near-term the answer is yes. As to that near-term being in the next three to nine months is probably the right window.

Alright, great. Thanks a lot for answering my questions and congrats again on a great quarter.

Appreciate it. Thank you very much.

Thank you. Our next question comes from Jason Bock from Wells Fargo. Your line is open.

Yes, this is Jonathan Bock.

And just one quick question, actually for you, Manuel. Interested in the higher yields that you're getting on the portfolio. Can you walk us through -- I mean, obviously the competitive dynamic's relatively favorable in terms of just interest in general in this space, as well as activity. Would you say those yields -- or it's better yields that you're getting on investments are a function of your willingness to take lower warrant coverage, or a function of the fact that the environment's just generally better and spreads have widened a bit?

Well, let me correct a misstatement, if you don't mind and I apologize for that. (Inaudible) that we're getting a higher yield, per se. What we're saying is that, as re-load balance the portfolio, moving away from more mature, established companies than we have legacy investments, is that the mere fact that I remove say a 10% yield loan on our investment portfolio today that say is a $30 million loan, and then I replace it with two $10 million, 13%-14% yield loans, the mere fact that as I remove those $30 million legacy loans that are 8%, 9%, 10% coupon rate, just by removing those away my weighted average yield's going to go up naturally.

So, it's not that I'm getting higher disproportionate new yields, it's that I'm not doing historically lower-yield, mature companies that I did in the past.

Okay. Okay, appreciate that. Now, that actually kind of comes into the general view of where value sits. And Manuel, I mean, really a focus on later-stage companies. Would you kind of say as you start to look at these kind of smaller, perhaps newer-stage companies, that the vast preponderance of value sits in early stage, or is there maybe a growth stage of a company that's not yet EBITDA positive, but about to be, and that's still a good sweet spot with which to make excess return?

I think certainly it's the latter versus the former on that comment. So, yes, I think it is more in that higher-growth phase than early stage. We think that some of the early stage valuations are -- I'll say it, nonsensical. I don't understand. I've been doing this for 30 years and I'm seeing early-stage valuations that I just scratch my head and say, okay, let somebody else do it because I'm not going to do it. They're just way too -- they're silly. It's getting to the point of silliness.

And so, I'd rather wait it out on some of those companies that I think we need a little bit of a valuation correction in the market. Or said differently, I need to see some of the public technology companies appreciate in value. And I think you started seeing it this week with the LinkedIns of the world, the Facebooks of the world. But then again, Jive takes you back.

So, it's getting a mixed bag of valuations out there today. And the technology, and as most people realize this, that the S&P technology index has been historically lagging in the (inaudible) indexes today and that's one of the things that we've been looking at seeing this dislocation in value in technology investing. So, this is why we're taking our time on technology investing.

People need to understand. Hercules is not a market share operation. I don't really care if I own 20% market share or 80% market share. I have no idea what that means because we run investments. So, we need to make sure that we're achieving the credit and risk profile that we're looking to underwrite to and getting the proportionate spreads or yields that we need for our business. So, we're going to maintain the high level of flow activity and be lesser concerned about volume in our business.

And so, with that statement, we're kind of more sheepish and bearish on tech private today. At least it'll continue most of 2013. And we're hoping that the realignment of valuations on that will occur in sometime in Q4 or early Q1 2014.

Appreciate that. And then, Manuel, just a question, and perhaps I missed it if -- I hopped on the call a little later, but looking at the substantive cash balance, what is the right amount of cash liquidity to have on the balance sheet? You've been very conservative and you always choose to protect the balance sheet first. And that's obviously shown in the valuation. The question is, we do have two facilities that have yet to be drawn on. And so maybe can you walk through the need to deploy that cash versus also raise additional equity capital in advance of strong quarters of 4Q to the latter half of '13?

So, as I said in my remarks, I mean, I want investors and the analyst community to really understand this. This is important. And you can use whatever numbers you want.

If you assume $130 million of our current cash balance were to be deployed in earning assets between now and Q4, that mere act, whether it's a 12%, 10% or 14% interest rate, you're looking at accretive earnings, EPS growth, of anywhere between conservatively a 10% probably at $0.20 a share, and at 14% probably close to $0.30 a share. So, very, very impactful on our ability to convert that earning -- those cash into earning assets that we will do.

And because we're internally managed, we don't have an incentive to simply go originate assets and go raise capital and dilute our shareholders. We've very cognizant of that and I'm very, very deliberate in not doing that act itself.

So, specifically to your question, is that how you should look at the minimum cash balance. Historically, as I operate Hercules, I looked at the cash balances to be a bit of a cushion for the unfunded commitments. It wasn't until fiscal 2011 that I moved that model to start saying that unfunded commitments would be mostly funded by our bank lines. And that's why I moved the unfunded commitment ratios to be much more in line with our bank lines.

Another point to note on how we treat, and our change in philosophy on unfunded commitments, is that historical ratio of commitments-to-funding ratio, that over the 9 years at Hercules lifespan typically average between 70% and 75% commitment-to-funding ratio. What that means is, for every $10 million of commitment, I only expected to see $7.5 million to $8 million per $10 million that actually get funded. Today, the last three quarters, Q4 of 2012, Q1 of 2013, that ratio was more modulated downward into the 60% to 65% range; meaning for every $10 million, we were only expecting $6.5 million out to fund.

Why is that? Because as we moved into a more conservative outlook on credit, we have purposely structured into our deals -- the commitment-to-funding ratio is driven now by performance-based milestones that -- by which those performance milestones are met, meaning unfunded and then we would fund, we're funding into a company that's much more risk -- it's been de-risked, if you will, because it's enterprise value has been realized greater because these milestones are pivotal in making decisions on credit underwriting. And because of that, we saw the unfunded commitment balances actually flair up purposely, we controlled that. And we have, as we disclosed, of that $160 million, $180 million of unfunded commitments, almost $90 million of that is subject to milestones. That means that that cannot fund.

So, as we turn into the second half of 2013, you'll see us drive down cash lower because we have, also, bank lines available of $105 million today, and we will probably -- as one of the strategic comments that I said earlier, you will probably see us announce here later on 2013 that strategically we're also expanding our leverage point on our balance sheet and we expect to draw on our bank lines and leverage further into fiscal 2013. That would further drive up earnings growth as we start tapping leverage and consider our cash balances.

Great, appreciate it. And I guess -- I imagine that statement, that would be predicated on not issuing new shares and so I appreciate that.

And then just one last question as it relates to Greg's previous question. I just found it quite interesting that -- and while you mentioned that obviously the crux of what you do is underwrite the -- underwrite, I'd say, a hard to value to understand credits where there is unique value in the underlying collateral and there had been strong returns as a result.

But, getting to the crux of the question, why is it that a bigger company gets a wider spread? That's -- just -- maybe just one more time. Maybe I missed it, but why is that specifically, that a bigger company that you would loan more to, that likely is larger with an increase in total value, how is it possible for them to get wider spreads?

Sure. So, a couple of things. I want to make sure that the previous sound byte doesn't go unmitigated. I did not say we will not be using equity capital raises in the near term. I said that we would prefer to use leverage on our balance sheet. We will always have the option to tap in the capital market, equity capital markets. But, you're absolutely spot on. It is not my preference to do that and nor do that in any meaningful way, especially the $130 million in cash balance. My balance sheet as well as access to additional leverage on the balance sheet and capital line. So, I just wanted to clarify that point.

Appreciate that.

As to the widening spreads -- and please, I don't mean to be pejorative or condescending in this comment. The notion is that the argument larger is safer is a bit of a misnomer if you are -- if you do not have tangible evidence of traction in that company as you see in a lower middle market credit, i.e. EBITDA, or EBITDA multiples that you're seeing on a purchase price exit.

So for example, if you're looking at a company doing $10 million of EBITDA and the purchase comps are eight times multiple, you're looking at a company that's worth $80 million, as an example. The problem with that is, in our universe and what we do, because there is no tangible evidence of a revenue, and in some cases EBITDA, it is a much more art in what you're doing underwriting value. And when you start getting to $40 million or $30 million credit exposure, there are a few institutions in this country who have the wherewithal, the stamina and the expertise that we have to underwrite those credits when you don't have ABL or EBITDA multiples to point to.

And because that world doesn't exist, which is why Hercules thrives and grows in that environment, is that you have to understand that credit underwriting parameters. And you have to have the stomach and the stamina to understand that those companies will trip up. Those companies have to raise capital every 9 to 14 months. And if they don't, you could be looking at a highly challenging credit situation that, if you're a bank, the regulators are not going to let you have that type of asset on your books because you're not staffed nor are you able to be taking that kind of credit risk profile.

So, that universe exists where traditional banks don't necessarily operate in there, because lending $40 million to a cash flow negative company that has no EBITDA and sometimes no revenues is not what they should be doing.

I got it. I got it. So obviously, the concentration risk for many other institutions, that really this isn't their entire bailiwick. It's just in some cases too hard to handle and, as a result, the wider spread. Understood. Not pejorative at all and thank you very much.

You're welcome.

Thank you. Our next question comes from Aaron Deer from Sandler O'Neill. Your line is open.

Hey, good afternoon, guys.

Hi, Aaron.

Hi, Aaron.

Most of my questions were addressed, but I just wanted to follow up. The -- you guys have broken down a little bit the realized and unrealized gains in the quarter. I just wanted to circle back on the net unrealized loss on loans, where that was centered and if you can give any additional color on that.

Sure. That's a result of our fair value yield analysis, where we are required to mark-to-market every asset using AFCA-20. So, we must drive an exit price out of the measurement base for the investment. So, there was $4.1 million of depreciation realized under that part of our process on the portfolio.

So, these are companies where we take a look at the yields that we have on them and then, as we've indicated in our particular space, yields have slightly gone up. So, that means that the yields that we originated in previous periods are less for the same quality credit, let's say, as the yields we could have originated these investments for as of the measurement date.

So, that's what's driving that $4.1 million of depreciation on the portfolio as of the measurement date. Obviously, that's not a yield to maturity or a hold to maturity kind of an analysis, it's just applying fair value.

And this is an example why we are purging out some of these older, lower-margin assets, for exactly this unrealized depreciation, because we can actually expunge those assets right now. Because the beautiful about what this economy is that banks are so hungry for C&I lending that some of these credits are now mature enough that they're better suited for the bank because they have more traditional lending parameters and we're happy to have them graduate and move on.

So, is that the type of credit where these adjustments were centered, was in the middle market lending, the older legacy stuff?

Yes, I mean, this phenomena is sort of stratified across the board. I mean, yes, the lower middle market does still represent a good chunk of our portfolio. And we did happen to have a couple of credits in that space. If you compare SOIs from 331 to 630, you'll see a couple large, lower middle market positions which did exit the portfolio. And as typical, those investments do have lower yields than our other sectors.

Okay. And then, Manuel, you had mentioned some strategic initiatives and new products that are being looked at. And I guess you discussed a little bit the orphan subject. But, are there other areas beyond that that you've been looking at that we should be thinking about?

Yes, there's multiple different areas that we're looking at but, as the word would imply, strategic and still in process. I'm not going to tip my hat in terms of what we're working on, but I can assure you that we are working on multiple different strategic initiatives to expand the Hercules franchise and expand the product offerings to our portfolio companies and continue to grow our portfolio. That may include strategic relationships as well.

Given our size and given what we do in the marketplace, we are oftentimes being asked to -- would you do this? Will you do that? And we historically have been saying no, no, no and having some of those product offerings go to banks. And now we're a bit changing that color. As we've gotten larger we're looking at new initiatives to continue to provide additional products to the existing legacy company -- legacy portfolio companies, as well as companies that otherwise we have turned away and said no to. We're now looking at new product offerings that would actually allow us to capture that by-kill, if you will, by-product of our normal origination efforts.

And so, that in itself could further drive earnings growth in the future if we so choose to ultimately pursue some of these strategic initiatives that we are currently in the midst of evaluating and analyzing.

Would this be like mezz debt or something like that where you're looking at hiring some additional lenders to add new lines or--?

I think that I'd rather -- not to not be responsive to your question, but I will not -- I won't get into strategic initiatives. I don't want either my competitors or others to try to emulate what we're doing. I'd rather have the surprise if and when it happens. And you'll see the logic behind what we're doing if and when we do do it. But, there's certainly multiple different offerings beyond just the one you just said that we are evaluating and looking at.

Okay, great. Thanks for taking my questions.

Thank you. Our next question comes from Robert Dodd from Raymond James. Your line is open.

Thank you. Hi, guys. Just one quick one and I'll follow-up on the others later.

I mean, on -- just on the competitive environment, we've heard a couple of other EDCs start to talk about entering the venture debt space. And obviously, it's very specialized, as you pointed out. Do you have concerns that the flows in from other sources are going to further distort or distort the potential pricing? I mean, it doesn't look like it with yields heading up at the moment but, I mean, what are your concerns about potentially inexperienced new actors in the space?

Well, Robert, all are welcomed. The water's warm. My comment on competition is, just because you think you know what we do, doesn't mean you can do what we do. And many have tried and many can't scale. It's a very, very difficult business. It's a very labor-intensive business. It's a very time consuming business. It is nowhere near like lower middle market underwriting. It's highly specialized. Its vertical specialized. Its stage specialized. The skill sets you need for early-stage investing are materially different from the skill sets you need for later-stage investing. The skill sets we have for life sciences are dramatically different than that of technology or that of clean technology.

So, you have to have a broadly diversified source of investment professionals like we have at Hercules. And those investment professionals are not cheap; they're expensive. They are highly special to what they do and they want to be in an environment where the credit culture and the Management itself has a high understanding and high knowledge of that area.

The best way to describe Hercules is that we're a bunch of geeks that have financial backgrounds, as well as new technology and life sciences understanding that we are. And we love the science of what we do and we love the structuring -- the finance professional of what we do as well. And as a fusion of those two worlds that makes us very unique.

We're not business development officers that you see typically in banks and we're not ratio lenders that you see in lower middle market organizations. Not to be disparaging to what they do. It's a different world and a different underwriting and it's a lot more complex.

I appreciate and I really welcome new players into the asset class. I spent 10 years stumping and being the voice piece for venture lending and so I think it's phenomenal. As I said in the past, I think that Ares in the asset class is terrific. I really welcome that caliber of investor in this asset class and I welcome the discipline of that type of investors.

So, no, I'm not worried about it. I think it's actually a good addition to the asset class and you bring more sophistication and more quality underwriters into the asset class.

Okay, thank you. I'll follow-up on the others later.

Thank you. And our next question comes from Douglas Harter from Credit Suisse. Your line is open.

Thanks. Manuel, you've talked about -- I know you guys expect to kind of get $30 million to $35 million of paid -- of scheduled amortization a quarter. I guess now that you guys are a bigger company, what would you expect as kind of a normalized quarter for early payoffs? I imagine we sort of continually see some. What would you say is like a range for a normalized type environment?

Well, I mean, that is a $60 million question of the hour. I would tell you that a normalized rate of $40 million a quarter is probably a good run rate to use. The problem with that, Doug, is that when you have a vibrant M&A and now a picking up IPO market, that in itself would cause an acceleration of additional payoffs, which is what the issue is. And this is a quality problem. Because what happens when you have early payoffs is you have an acceleration of any unearned differed revenue or income on your balance sheet. You may have a prepayment penalty that kicks in as well. And so, those two items alone will cause a spike in earnings that will drive that.

On top of that, if these events are driven in M&A and IPO event, you could all find yourselves seeing a realized gain on your warrant portfolio, or conventionally, a depreciation of unrealized value in your warrant and your equity investments.

So, in this current market that we're in, and I don't see any signs of it materially ebbing, that M&A and IPO activity should remain relatively robust for the remainder of the year, which means that I think that you're going to be having a normalized rate on that probably $40 million to $70 million range. And I can't handicap more than that because I just don't know.

Got it. So then, combined with the normal amortization, that would -- obviously not going to hold you to this on a quarter-to-quarter basis, but $70 million to $100 million feels like a decent range for payoffs in a normalized type environment; could be better, could be worse on any particular quarter?

Yes, I think that number is probably fine if you then allocate plus or minus $30 million to it, but yes.

Okay. Thank you.

Thank you. Our next question comes from Kenneth James from Sterne, Agee. Your line is open.

Hey, good afternoon.

Hey, James. How are you?

Good. I wanted to just circle back to something you said about rising rates and floating rate loans and positioning for higher rates. Do you have a -- and I'm just kind of thumbing through your last 10Q here, but I guess a certain level that the Fed would have to raise short-term rates before it really kicks into the portfolio given where the floors are, which they appear to be kind of in a lot of different areas. But, some loans it looks like we benefit right away, but others look like it would take 300 or 400 basis points of -- tacked onto prime of 3 before the loan itself would reset higher. Am I looking at that right or--?

Yes. I mean, a very good question. I'm not sure it's 300 or 400 basis points. That's a little wide. But certainly, to your statement that some loans would definitely proportionally benefit earlier than not, I don't have the weighted average of what that index would need to change, but -- as a reminder to that comment, yes, the issue that most people don't realize is that the index -- the majority of our loan, unlike lower middle market credits, the majority of our index are prime rate based and not Libor.

So, I have no idea what your view or my views are on prime moving, but the fact that we are indexing off of prime and not Libor in the majority of our portfolio, that yes, you would have to see a prime rate move probably by 50 basis points before you see any meaningful accretion into the overall portfolio than on the prime. There are some Libor stuff, but it's mostly prime.

Okay. Thank you very much. Most are -- most of my other questions have been answered. I appreciate it.

Alright, Ken. Thank you.

Thank you. I show no further questions at this time and would like to turn the conference back to Mr. Manuel Henriquez for closing remarks.

Well, thank you, Mary. Thank you, Operator. And thank you, everyone, for your continued interest and support of Hercules Technology Growth Capital.

We look forward to meeting many of you at our upcoming investor conferences. We'll be at the RBC Financial Institutions Conference in September 17th and the 18th in Boston, and we'll be at the JMP Financial and Real Estate Conference in October in Manhattan, New York City. And if you'd like to arrange a meeting between those conferences or other times that we're traveling to visit our investors, please let us know by contacting Investor Relations or Hercules directly.

Again, thank you very much for being our shareholders, for being interested in Hercules' story and for your continued support.

Operator, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.