Hercules Capital Inc (HTGC) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hercules Technology Growth Capital Q1 2015 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Michael Hara, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you, Candace. Good afternoon, everyone, and welcome to Hercules' conference call for the first quarter of 2015. With us on the call today from Hercules are Manuel Henriquez, Co-Founder, Chairman, and CEO; and Jessica Baron, Vice President of Finance and Chief Financial Officer.

Hercules' first quarter 2015 financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at www.htgc.com. We have arranged for a replay of the call at Hercules' webpage or by using the telephone number and passcode provided in today's earnings release.

During the course of this call, we may make forward-looking statements based on current expectations. 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 confirmation and final audit results. In addition, the statements contained in this release that are not really 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 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 on 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 the SEC.gov or visit our website, HTGC.com.

And with that, I will turn the call over to Manuel Henriquez, Hercules' founder, Chairman, and CEO.

Well, good afternoon, everybody, and thank you, Michael, and thank you all for joining us today.

We are off to a very strong start 2015. We continue on our mission to grow our invested portfolio by 30% to 50% in fiscal 2015 from the year-end balance of $950 million of our loan portfolio at the end of the year. Our target is to achieve a $1.3 billion to $1.5 billion invested loan portfolio by fiscal year end 2015.

As our accomplishments now show, we are well on our way to achieving this goal, with our total investment portfolio growing by a total of $135 million, $133 million of that from our loan portfolio alone, representing up 14% quarter over quarter on the investment loan portfolio alone; well on our way to targeted of $1.3 billion to $1.5 billion and this is simply off the first quarter of 2015. So, certainly off to a very strong and good start for the year.

Our portfolio growth continues to demonstrate our strong leadership position within the venture capital lending marketplace. The strength of the Hercules brand, the strength of Hercules' reputation and integrity as the largest specialty finance BDC provider of capital to the venture capital community and the private equity community backing high-growth, innovative, disruptive technology and life sciences companies. No other focused venture BDC fund has demonstrated these capabilities and many continue to struggle to even show or demonstrate any quarter-over-quarter growth in their investment portfolio, as recently proven with many of the other BDCs who have reported their results so far in 2015.

2015, Hercules achieved another major milestone since its founding in 2013. We continued our unprecedented effort to build our investment portfolio and continue to demonstrate our capabilities to the marketplace. We surpassed over $5.2 billion of new commitments to well over 320 companies who have chosen Hercules as their financial partner. Our strong reputation as a strong financial partner and our relationship with many of the leading venture capitalists and entrepreneurs continued to drive high-quality deal flow to Hercules. We are greatly and deeply appreciative of these entrepreneurs and these venture capitalists for recognizing and partnering with us and continuing to provide us the deal flow that they have done over the years and continue to expect in the coming years ahead.

2014 demonstrated Hercules' capabilities by originating nearly $1 billion of new commitments in fiscal 2014, which shows our resiliency and ability to nearly absorb a $0.5 billion in early prepayments in fiscal 2014. And, yet, our organization, our team, our investment professionals strongly proved their ability to not only absorb the $0.5 billion in early prepayments, but to also grow the portfolio above and beyond that in fiscal 2014.

This unwavering confidence in our investment professional team has set forth our ability and confidence in projecting our goals for 2015. And, as I said earlier, those goals are to grow our invested portfolio by 30% to 50%. It is a bold statement, I recognize, but it also amplifies the confidence and belief in our team and our organization to achieve this goal of growing the portfolio to $1.3 billion to $1.5 billion by fiscal year end 2015.

Those targets were based on several key assumptions, some of which I'll review here for you now. First, we believe that the level of venture capital fundraising and investing activity will remain relatively healthy and continue to create a steady deal flow of new opportunities for Hercules to actually evaluate and potentially make investments.

Certainly, through the first half of 2015, the venture capital community itself is off to a strong start. They raised approximately $8 billion in new venture funds to allocate for future new investments on behalf of the venture capital community. They, in turn, have been quite busy investing in new companies. The venture capital community invested an impressive into 800 startups in fiscal 2015 in the first quarter of which $16 billion was invested, according to Dow Jones Venture Source Report. This is a very impressive validation and start to 2015.

Secondly, help fueling the portfolio growth is our expectations on a very subdued early prepayment activities in the first half 2015. We're not expecting to realize the torrent of early repayments that we realized in fiscal 2014, which represented, as I said earlier, nearly half of our investment portfolio turnover, or $500 million of transactions were paid in fiscal 2014. I am happy to say that we do not expect anywhere near that activity of early payoffs in the first half of 2015.

However, as we turn our attention to the second half of 2015, we certainly believe and expect to see a modest pickup to an increasing velocity of early prepayments and repayment activity to begin to take place in the latter part of the second half of 2015 and then return to our more normalized pace of early payoff activities in fiscal 2016. I will elaborate further as to what those expectations will be for early payoffs in the coming future quarters and in early 2016.

This lowering of our composite age of our portfolio by rebuilding the portfolio with brand-new loans helps to minimize if not reduce the drag that may be attributed to early repayments in our invested portfolio. This will allow us to focus on growing our invested portfolio to that $1.3 billion to $1.5 billion without facing that headwind or drag of early prepayments.

Although a short-term adverse impact of not having these early repayments is, in fact, lowering our effective yield, we actually are fine with that lowering our effective yield, which now tends to correlate more closely to our core yields. However, as I said, this is merely a timing issue and we expect as early prepayments begin to take place in the second half of 2015, it's certainly back to a normalized pace in 2016, we expect our effective yields to once again begin to rise and be above that of our core yields by anywhere between 100 basis points to 200 basis points when that begins to take place again in the second half of 2015.

Lastly, and our third point, unfunded commitments. We have continued to prudently build our invested portfolio. We exited 2014 with a healthy unfunded commitment in backlog. Those unfunded commitments typically represent future investment commitments. However, Hercules has and we'll continue to work with our companies and establish very significant performance milestones of which those companies must achieve prior to releasing some or a significant portion of those unfunded commitments.

These unfunded commitments at the end of Q1 represented nearly $400 million of unfunded commitments. And, as I said, much of this is subject to funding milestones. However, this provides us a good insight and perspective as to future portfolio growth that may be already embedded in what we have in our unfunded commitments. This is a very important point to look at when you look at our ability to kind of convert those unfunded commitments to new funded assets and grow our portfolio to that achievement of $1.3 billion to $1.5 billion.

With that brief backdrop, I am pleased to report that our Q1 financial results continue to demonstrate our strong capabilities and efforts to grow our invested portfolio and help to drive future earnings back to our historical levels of $0.28 to $0.31 in net NII EPS over the next coming three to five quarters, subject, of course, to market conditions remaining very favorable.

Now, for today's agenda; I will briefly go over the highlights in order to allow for greater time for Q&A, which many of our investors and analysts have requested that we make more time for. So, we are happy to address that and hopefully make this presentation much briefer than normal. I will start with a brief summary of our key operating metrics and Q1 results. I will then turn my attention over to the overview of the current market conditions including venture capital activities, IPO, and M&A, as well as a brief discussion on the competitive landscape as well. Next, I will turn my attention to the outlook for the second quarter of 2015 as well as the second half of 2015 and beyond. Lastly, I will turn the call over to Jessica Baron, our CFO, who will go into the financial details.

However, before I turn over the call and go through my commentary, I want to first acknowledge and personally thank Jessica for her incredible time and commitment and dedication that she's given to the organization of Hercules and specifically to me for nine-and-a-half year commitment to this organization. I am deeply grateful for her commitment and her strong support and her leadership throughout her years. She's been an outstanding contributor. She's an exceptionally hard-working individual and a true team player.

I am personally saddened to see her departure go, but after nine-and-a-half years, I fully respect and understand her decision to go out and explore new opportunities in her career and her professional development. She will be sadly missed in this organization and I personally want to thank her for her tremendous contribution and for offering and giving me 25 years of her living life as part of Hercules in support of this organization. Thank you very much for your continued success and help and I wish you the best of luck, Jessica.

Thank you.

Now, turning my attention to the key highlights of Hercules outstanding performance and achievements during the first quarter. Net portfolio growth grew at $133 million on the invested loan portfolio, representing up 14%. On the aggregate, our entire investment portfolio grew $135 million.

I am not aware of many other BDCs that have been able to demonstrate this ability to grow their portfolio and certainly not one of them in the BDC focus in the venture capital marketplace. This is a testimony to this team's tremendous capabilities and the outstanding team of originators that we have working and looking for new transactions for us.

Debt and equity commitments were also extremely strong, up 75% year over year, representing $272 million of new commitments in the first quarter of 2015. Total investment assets were also up strong at 14% and the total increased to $1.2 billion quarter over quarter or fiscal fourth quarter 2014.

Our record unfunded commitments, which I alluded to earlier at $377 million, are up nearly 99% over the same time in earlier year. And this represents $243 million of those unfunded commitments are backstop or represented by milestones in order to unleash those unfunded commitments.

Distributed net operating income, or DNOI, was also strong at $15.7 million or $0.25 per share. Net investment income, or NII, was $13 million or $0.20 per share, obviously reflecting the loss of early prepayments in the portfolio which we expect to see start returning back in the second half of 2015 and start driving both our effective yields as well as our NII per share as well as we build our investment portfolio.

We also work diligently to ensure that we have a strong liquidity position with $321 million of available dry powder for new investments that are composed of both cash and available dry bank lines of credits we have available to ourselves to continue to fund our portfolio growth.

Core yields and effective yields have once again merged to one each other and basically represent 12.8% and 12.9% respectively. This is a very anticipated phenomena on our side as we have little to no early prepayment activity.

On that same note, I'll turn my attention, then, to normal and early unscheduled principal repayments. In aggregate, we had $74 million of repayments to take place in the first quarter. $46 million of that represented early and unanticipated early payoffs and the balance, of course, of $30 or so million was normal amortization in the quarter.

What is most important about that statement is the early prepayments are down 68%. This is vital as we focus our attention in growing our investment portfolio, which we are actively doing.

We also successfully raised at above book value and accretive to our shareholders $100 million equity raise during the first quarter that we thought was important to continue to increase the velocity of our investment portfolio growth and ensure that we have an abundance of capital that will convert over the next quarter or two into interest-earning assets for the benefit of our shareholders as we continually grow our portfolio and focus on growing both net asset value and net investment income with the new capital that we just raised.

Finally, my commitment to build and prepare Hercules for the next 10 years of growth is well underway. I am very pleased to welcome two highly-accomplished and qualified new independent board members to the Hercules board of directors and our organization. Miss Susanne Lyons and Mr. Joseph Hoffman are both exemplary examples of the individuals that we are seeking to help us continue to build and continue to grow Hercules over the next 10 years. I am very happy to have their addition to the board and their guidance and professional experiences to continue to help and work with our fellow board members and building the organization for the future.

Now, let's turn our attention to our investment loan portfolio and yields. Let me take a moment to discuss the importance of the key assumptions I have discussed at the beginning of this call and how they benchmark against our target to grow our investment loan portfolio.

First, our deal pipeline remains healthy and very robust, as evidenced in Q1, which we generated over $270 million of new commitments. Unlike some other players, these new commitments do convert into funded and closed transaction. We actually funded and closed over $209 million of new debt and equity investments in Q1 alone, exemplifying our ability to identify the right companies and work with those companies to have outstandings and continue to convert those into new funded loans that we expect to be accretive for the benefit of our shareholders as we turn our attention to growing and growing our NII.

Second, as expected, as I explained earlier, Q1 had merely $47 million or $46.5 million of early payoff activities, down from $147 million in Q4. The result of this was a net growth in the portfolio of approximately $135 million in aggregate. $133 million of that was related to our specific loan portfolio, representing up 14% quarter over quarter on the core investment loan portfolio. We ended Q1 with an investment portfolio of approximately $1.17 billion or rounding at $1.2 billion. This is well on our pace to our quarterly achievements on net new growth in the portfolio, which I'll speak to further in this presentation.

Although, I am very pleased with our pipeline and conversion of new investment opportunities I remain frustrated that we continue to realize fundings closing later and later in the quarter, thereby causing little impact of new closed funded loans in the quarter to earnings during that quarter. This translates into earnings being pushed out with new investments being closed during the quarter that will not be accretive until the following quarter because of lateness when they're closing during the quarter. It is a frustrating and ongoing phenomena that we've been seeing now consistently for the past eight quarters and, at this point, I'm willing to realize that this is maybe a trend that's here to stay.

For example, in Q1 alone, we closed $100 million of additional new commitments in the last two weeks of the quarter. This, after we publicly disclosed our activities for the quarter, we were surprised to see that additional closed late in the quarter representing nearly $100 million. That is an example of how loans closing late will not benefit us in the quarter in which they closed.

We continue to remain diligent and enhance our liquidity position. As I said, we ended the quarter with $321 million of liquidity, well-positioned to continue to fuel our growth in our portfolio and certainly achieve the goal of being $1.3 billion to $1.5 billion in new activities.

With this intent to help support our future growth by ensuring our ability to grow our invested portfolio along with the funding of our healthy backlog and unfunded commitments of $377 million, representing a record level, we are well on our way to achieving these goals. It is important to remember these unfunded commitments do not represent commitments to fund the companies. Many of those commitments are, in fact, tied to funding milestones. So, I want to stress the importance that please do not simply calculate that the unfunded commitments should translate into immediately funded assets. That is not the case.

Now, in our Q4 2014 earnings call we stated that, given the lower effective composite yield of our loan portfolio and given that the portfolio was recently rebuilt with new loans, we continue to expect a very little to no significant activities in early repayments. And, in fact, we only expect to see early repayments in fiscal Q2 of 2015 in the neighborhood of between $25 million to $30 million of early payoffs and normal amortization of approximately $35 million. Together, you're looking at early repayments in aggregate of approximately $60 million to $65 million in Q2 that may come in the form of early repayments.

Because of this subdued activity in early repayments, we expect our yields in Q2 to remain within the tolerance levels of 12% to 13% of our core and effective yields being one and the same in Q2 similar to what you saw occur in Q1.

Despite increased competition, Hercules has chosen not to pursue new investment opportunities that would not yield us strong credit outcomes and strong credit yields in our investment portfolio. We continue to pass on many investments that we feel that are underpriced and represent a significant amount of risk. We will allow some of our new players in the market who are more eager to build assets at all costs to allow the sales to pursue those investment opportunities.

We have chosen and will continue to follow the strategy that's worked well for us for the last 11 years and that is a slow and steady strategy of being very meticulous in identifying the new credit opportunities to invest in. That may entail that we may miss quarterly earnings from time to time, but we are devoted and committed to ensuring continued preservation of our capital and a slow and steady growth of earnings that's more consistent and we continue to adhere to that philosophy and policy. Because of that adherence, you will see our earnings continue to grow in the second half of 2015 and start approaching closer to our historical levels of $0.28 to $0.31 a share as we grow invested portfolio to the $1.5 billion and greater as we build our investment portfolio.

We continue to remain very steadfast looking at credit profiles of underlying companies and we continue to hold fairly firm on being the sole lender or the first lien lender provider to many of our companies. We have thus far chosen not to pursue second lien lending deals or senior stretch deals where we have significant senior bank lending ahead of us at this time, especially given our concerns with the overall marketplace and credit environment that we feel is flaring up a bit in the marketplace. So, we remain very disciplined in our underwriting and less focused on AUM, assets under management, as we are on credit quality and earnings in our portfolio.

With our taxable earnings spillover from 2014 of $17 million as well as the potential to harvest unrealized gains from some of our investments, in particular that of the investment of Box Dot Net, we have nearly $20 million of unrealized gains attributed to the Box holdings alone. Now, clearly, that number may change up or down as we turn our attention to eventually monetizing that exit and harvesting that gain of our Box investment. As I said, as of today, the unrealized gain in the Box holdings is about $20 million. Add that, for example, to our spillover of $17 million; that gives us $37 million, potentially, to continue to cover our dividend as we continue to focus on building our investment portfolio and eventually covering our dividend with our own income from NII from the investment portfolio as we build up the portfolio and catch up to that level.

We have enough liquidity in our portfolio that we feel, at this point, that our dividend policy is more than adequate to cover that dividend in Q1 and certainly in Q2, at which point we'll revisit our dividend policy each and every quarter in fiscal 2015. We will continue to evaluate the dividend policy at the end of every quarter to ensure that the gain potential for the Box investment will be realized in a prudent manner and allow us to use that gain to further fuel or fund our dividend in fiscal 2015.

We will continue to defend our leadership position and we will continue to selectively underwrite credits that may have lower yield spreads but represent higher-quality credit to companies which we feel make sense and are good partners for us in our investment portfolio. We continue to see a very steady deal flow of good opportunities in the portfolio, but we remain very methodical and very purposeful in our underwriting on selecting those investments that we choose to finally make investment decisions for.

As such, we have elongated our time to closing from a prospective new investment opportunity to close, further causing delays of our onboarding of new investments. Again, this is something that we are very comfortable doing and we feel that it's prudent in order to continue to analyze and continue to complete prudent due diligence to mitigate any future capital losses that may derive upon any changes in the economic outlook of our economy or any changes in venture capital funding in support of these companies.

As an ongoing hallmark of Hercules, we remain extremely focused in maintaining high credit quality. We are a credit-quality shop and we will always preserve and focus on credit as a critical component of our organization. I am proud to say that after 11 years since founding Hercules, our cumulative net GAAP losses since inception are just under $9 million. This is cumulatively over 11 years of origination, representing just under 2 basis points on over $5.2 billion of commitments. It's an outstanding record and one that is hard to believe that, 11 years ago when I started this company, I would have sat here on this call and said we would have loss rates of only 2 basis points.

That is a testimony to the integrity and this team and its ability to identify the right investments to make. I am very grateful for the hard work of our investment professionals in preserving the capital for our shareholders and identifying the right companies to invest in. Thank you for that.

Now, let me turn my attention to venture capital exits and liquidity events both from our portfolio and from the venture capital industry.

Our commitment to maintaining a high-quality loan portfolio continues to be exemplified by the number of exits and liquidity events of our portfolio during the first quarter. In the first quarter alone we had three portfolio companies complete M&A events and three companies complete IPO events. Box Dot Net, Zazano (ph), Pharma (ph), and Inotek Pharmaceutical are the three recently completed IPOs during the first quarter. Not to be left behind, we currently have five portfolio companies that filed S-1s to go public in the quarter and are waiting to complete their IPOs, or not, subject to our conditions.

In addition to that, we currently hold 129 different warrant positions in high-growth, innovative technology and life sciences companies representing future potential of value that we may unlock for our shareholders, if and when those companies were to monetize. That's 129 positions, of which we then have 42 different equity positions in our portfolio. These represent significant opportunities for future harvesting of capital gains to both continue to grow our net asset value as well as help continue to fuel and grow our dividend in the future as those events eventually will monetize.

Now, turning my attention to the venture capital community. As I said at the beginning of my remarks, the venture capital community started off 2015 quite strong. $8 billion invested for new funds, $15.7 billion invested in new technology and life sciences companies in the first quarter of 2015. Once again, information technology companies represented the largest share, capturing nearly 29% of those dollars in the quarter; a significant and continued pace of activities. The next area was followed by business and financial services, representing 28% of the capital. And then, rounding out the horn in the back end here, with healthcare and life sciences representing 22% of those capital flows that were invested.

Venture capital activities were strong. We continue to see a very robust liquidity event. 12 companies completed IPOs in Q1, three of which, I'd like to remind everybody, were Hercules Technology companies. Once again, a very strong representation on our companies in the IPO activities of the 12 companies going public in the first quarter. Those 12 companies raised nearly $1 billion. Not being left behind, 122 companies completed M&A activities during the quarter for a transactions value aggregating to $11 billion in transaction value of M&A.

Finally, turning my attention to the outlook for the second quarter of 2015 and the second half of 2015. As I stated earlier, having effectively rebuilt our investment portfolio at the end of 2014 and driving to a lower composite age of our investment portfolio, we do not expect to see significant early repayment activities in the second quarter of 2015. And, as I said earlier, early repayments in the second quarter of 2015 are expected to be between $60 million to $65 million in the portfolio.

We also expect to see the investment loan portfolio grow in the second quarter despite the early payoffs of $65 million. And we expect to see our investment loan portfolio grow between $65 million and $85 million in fiscal second of 2015. Again, without the impact of these early payoffs, we expect to see our GAAP yields in Q2 normalize to match or be the equivalent of that of our core yields in a 12% to 13% range.

I will strongly emphasize that we do expect to begin to see a gradual increase in our effective yield in the second half of 2015 as we begin to see a pickup in early repayment activities in the second half of 2015 and it should lead to a slowly but increased level of fee income and once again driving our effective yields to widen over our core yields. We are still unclear as to what that yield widening may be, but conservatively expecting a 100 basis points to 200 basis points widening of those yields in the second half of 2015 may not be an unreasonable assumption. But we will give better guidance or perspective on that at the end of Q2 when we have better indications of what activities we can expect in early payoffs.

We are well on our way to achieving our goal of growing the portfolio to $1.3 billion to $1.5 billion. That goal cannot be achieved without the hard work and tenacity of our investment professionals. They are diligently working on and harvesting our very strong, robust pipeline that we have in new deals. But I will caution everybody that speed is not something that we care about. We care more about making sure we underwrite the right loans. I've already given indications that we expect the loan portfolio to grow in Q2 between $65 million and $85 million, continue the slow but steady pace of growth to achieving the $1.3 billion to $1.5 billion.

We will continue to evaluate our dividend policy quarter to quarter, but, as we indicated earlier, we have sufficient amount of spillover and potential capital gains to continue to maintain a dividend policy consistent to what it's been in the past. But we have chosen to continuously evaluate that dividend policy quarter to quarter and take any necessary steps to adjust up or down if we see that our realized gains and continued pace of earnings growth may change subject to market conditions, of course.

With that said, I turn my attention to wrapping up this call. And we are confident in our ability to execute and derive our continued portfolio growth. I am very proud of our achievement in Q1. I continue to optimistically look to a return to earnings growth as we grow our portfolio. And I would caution it is a slow and steady strategy that we have deployed in the past and we will execute meticulously on that strategy and continue to drive that growth in that portfolio into that $1.3 billion, $1.5 billion to ensure that we achieve our earnings and NII growth that we expect to be achieved by year end.

We also continue to believe, optimistically, that our investment portfolio and warrants and equity should also be achieved to generate additional capital gains for us to further supplement our dividend and net assets growth by harvesting those gains throughout the second half of 2015 and early 2016.

Q1 was very strong. I am very confident in our outlook and am very optimistic in the marketplace. And I certainly welcome the recent consolidation within the banking venture industry that is going to eventually lead to a slower competitive environment, which will allow us to continue to grow our investment portfolio while others may not have access to liquidity and the balance sheet such as we do to take advantage of that right market opportunity that we believe will translate into the second half of 2015 further fueling our investment portfolio growth.

With that, I'll turn our call over to our CFO, Miss Jessica Baron.

Thanks, Manuel, and thanks, everyone 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 first quarter of 2015.

Turning to operating results, we delivered total investment income or revenue of $32.5 million, a decrease of 9.1% when compared to the first quarter of 2014. This year-over-year decline is primarily due to decreased yields on a portfolio do to a decrease in early payoffs year over year.

Our core yield during the first quarter was 12.8%, which excludes the effect of the accelerations that occur from early payoffs and one-time events. The all-in effective yield on our debt portfolio was 12.9%, as has been covered, down approximately 310 basis points relative to the previous quarter, again attributed to the decline in early payoff and fee accelerations quarter over quarter.

Interest expense and loan fees were approximately $9.4 million during the first quarter of 2015 as compared to $9.2 million during the first quarter of 2014. The slight increase is attributable to us securing additional capital to invest in our portfolio, specifically the $103 million of 10-year bonds we issued in July of 2014 and the 2014 $129.3 million securitization we completed in the last quarter of 2014.

The weighted average cost of debt decreased to 6.1% in the first quarter of 2015 versus 6.9% during the first quarter of 2014. This decrease is primarily attributed to the issuance of lower-cost debt positions between the two periods.

Operating expenses for the quarter was $10.1 million as compared to $8.2 million in the first quarter of 2014. The increase is primarily due to an increase in stock-based comp and due to an increase in recruiting and legal costs associated with strategic board recruitment and executive hiring objectives.

First quarter net investment income was $13 million compared to $18.3 million in the first quarter of 2014, representing a decrease of approximately 29%. Net investment income per share was $0.20 for the first quarter of 2015 compared to $0.30 for the same quarter ended 2014.

We recorded approximately $5.2 million of net unrealized appreciation on our investments during the quarter. Of the $5.2 million of appreciation, $800,000 of appreciation was primarily attributed to net collateral-based impairments on debt, equity, and warrant investments in four portfolio companies. $6.7 million of appreciation was due to market or yield adjustments in fair value determinations. And approximately $2.3 million of depreciation was related to reversals of prior appreciation due to loan payoffs and sales of warrants and equity investments.

We recorded $4.3 million of gross realized gains primarily from the sale of warrant and equity investments in four portfolio companies. And these gains were offset by gross realized losses of approximately $1 million resulting from the liquidation of warrant investments in three portfolio companies.

We ended the first quarter 2015 with total investment assets, including warrants and equity, at a cost basis of approximately $1.17 billion. This was net up by $135.5 million from our investment portfolio at the end of 2014. The increase was primarily driven by our strong originations and funding activities of new investments totaling approximately $209.4 million in debt, equity, and warrant investments, offset by approximately $74 million of principal repayments and proceeds from the sale of investments.

The debt portfolio company counts decreased by three from 94 to 91 since the end of 2014. This net change is due to the addition of debt investments to eight new companies and offset by 11 loan payouts during the quarter.

A reminder that debt investment amortization typically commences nine to 12 months after the interest-only period we have on our term loans. And then the amortization is scheduled to occur over a 36- to 42-month timeframe. Apart from early repayments, we currently have scheduled amortization on our portfolio of $30 million to $40 million on a quarterly basis. This amount will increase throughout 2015 and through 2016 as the investments we added throughout 2014 commence amortization.

With respect to credit quality, our loan portfolio credit quality remains very solid. The weighted average loan rating on our portfolio was 2.26 as of March 31st, reflecting a slight degradation from 2.24 reported at the end of 2014.

We had four investments on non-accrual at the end of the quarter with a cost basis of 3.1% of the debt investment portfolio and 1% as a percent of the total investment portfolio at fair value.

Regarding Hercules' liquidity, at the end of the first quarter, we had approximately $321.8 million in available liquidity, which includes $171.8 million in cash and $150 million of credit facility availability. As of March 31st, our debt to equity leverage ratio including our SBA debentures was 80.5%, lower than the 95.1% as of December 31. 2014. This improvement is primarily due to the $103 million equity raise we did in March of 2015.

As a reminder, our $190.2 million of SBA debentures are excluded for regulatory leverage calculation purposes. This exemption effectively allows us to leverage beyond a 1-to-1 debt to equity ratio to 1.25 to 1, which means that, at the end of first quarter, we had additional capacity to add $340 million in leverage to our balance sheet. Our net leverage, which is calculated based on total debt minus cash, was approximately 58% at the end of March.

Our net asset value at March 31st was $763.3 million or $10.47 per share compared to approximately $658.9 million or $10.18 per share as of December 31, 2014. This increase is primarily due to the accretive effects of the public offering of approximately 7.6 million shares in March of 2015.

Finally, as previously noted, we will be distributing a dividend on $0.31 to our shareholders and this payment is scheduled for May 25th.

In closing, as Manuel mentioned, we are optimistic due to what we're seeing in the venture debt marketplace, but we will continue to take a cautious and steady approach to onboarding selective investments in 2015.

So, with that, operator, we're now ready to open the call for questions.

Thank you. (Operator Instructions). Robert Dodd, Raymond James.

Hi, guys. Just on the competitive environment, obviously the question with various consolidations in tech banks, etc. I mean are you seeing any of that have any material effect on your market? Obviously, you guys are pretty selective; don't go in behind those guys, etc. So, there's that dynamic.

And then, secondly, on the pricing, your yields being -- well there's prepayments -- but on pricing can you give us any color? Is there any change right now in structures or pricing for kind of like-for-like assets you actually are willing to do?

I think that competition has changed at the end of Q1 and we expect to see a continuation of change leading in the second half of 2015; meaning that we expect the magician to not necessarily disappear, but we're certainly seeing a retraction or a less competitive environment that we would have saw in third or fourth quarter of 2014. It's not to say that competition does not exist because it does. But the threat and the insatiable appetite for assets that we saw in Q3 and Q4 is certainly not as evident in the end of Q1 and certainly rolling into Q2. So that's changing quite a bit.

So, I think you begin to see probably yield stabilization. Our core interest yields will probably stabilize. Again, we're not like other lenders who claim that they do senior loans, but they have these sizeable end of term payments which are all non-cash and behind a bank. We think that's quite dangerous, especially if an economic downturn were to occur. We have chosen not to pursue that avenue at this point.

And I think that the competitive environment has also shifted quite meaningful away from those who have capital and those who do not have capital. And that's becoming a different (inaudible) in the game right now that we're well-positioned to take advantage of while others are not.

But I don't want people to feel that somehow competition has disappeared. I don't think that is the case at all. But I think that the competitors that existed in Q3 and Q4 are shifting and are different than what we expect to see in the second half of 2015. And a lot of these venture banks were not necessarily direct competitors to us because we're a larger capital provider. I think that those who are smaller, providing sub- $5 million to $7 million loans, probably felt a lot more competition than we did from those players.

Great. Great, thanks. On just kind of extending that. I mean are there particular verticals, I mean life science, tech, or whatever where you're seeing a greater or a lesser easing of those competitive pressures?

Well, look it, it is obviously an easy statement to reconcile that technology lending is by far less complex and easier than that of life sciences lending. And so, the skill sets that a life sciences team requires are significantly higher. And there are verticals within the technology sector that are quite difficult to underwrite and understand.

But, as a whole, to your comment, I think that technology, as represented by the venture capital investment activities, nearly 30% of the dollars were earmarked in technology, is the fastest, largest-growing, segment of the market and probably the easiest one for folks to pursue. So, I think that you'll continue to see above normal competitive pressures in the technology lending world than you will in the life sciences world.

Okay, great. Thanks. And one more, if I can. I mean your expectations for Q1 net portfolio, that's that $65 million to $85 million, but as you point out -- sorry, for Q2. For Q1, you had a large set of closings in the last couple weeks. When we look at kind of your indications for Q2, can you give us a ballpark on the confidence interval in terms of like the $65 million to $85 million that you've got 95% confidence level but that could be plus or minus some 2X factor or a 50% factor. I mean could you give us a ballpark part, given how choppy those closings can be?

Yes. No, look it, we don't tend to exaggerate and enter into a lot of hyperbole that as other BDCs or managers may do. We're pretty slow and steady and a very practical organization and we tend to guide in the more conservative side of the equation.

I think that the $65 million, $85 million net up in the investment portfolio in Q2 is probably a very solid assumption. It's not going to get overshot by $20 million. And so, to answer your question, there's probably a $20 million plus or minus swing on that number, but I think the $65 million, $85 million is probably the right range and the upper end of the range with what we know today. That may change, but as of right now, I think there's a high level of confidence that that's a pretty solid, good number to go after.

It's not going to be $150 million and I don't expect it to be $125 million. It could reach $100 million, but I doubt it. I think $65 million, $85 million is certainly a good number, especially when we anticipate $65 million or so early repayments that will take place that will absorb that number anyways.

Now, what that means is that if one of the early repayments does not take place, yes, then you could have a plus or minus $15 million, $20 million up. Repayments are very difficult for us to forecast because sometimes we are not made aware of an early repayment taking place because the company may be acquired or pursuing other strategic options.

Got it. Thank you.

You're welcome.

Thank you. Aaron Deer, Sandler O'Neill.

Good afternoon, everyone.

Hello, Aaron.

Jessica, I don't think I could top Manuel's enthusiastic comments regarding your service there, but I certainly echo his enthusiasm for wishing you well in whatever you do next.

Thank you very much.

Manuel, one of the comments that you made in your opening remarks, you used the term in reference to the credit environment as flaring up. Can you give us a little bit more color about what you mean by that?

And, on a related note, you said that many of your competing BDCs have not been able to show growth while you guys are and, yet, you're passing up on deals. So, I'm curious on the deals that you are passing up on, who is it that's booking those credits?

Well, we can thank the Federal Reserve for that. Banks are continuing to have an insatiable appetite for getting their NIMs, their net interest mortgage, to grow and convert those deposit ratios. And I think a lot of that fuel -- or a lot of that consumption I should say, excuse me -- is coming from banks as opposed to both BDCs or other privately specialty finance companies. I think banks remain very aggressive interested borrowers out there. We are, indeed, working more with banks than we probably had in the past. And we are certainly willing to work with the appropriate banks that do not over-lever the companies and we formulate an appropriate strategic partnership with. But, banks are, by far, the largest consumers of credit in this platform.

Okay. And then with respect to your flaring up comment, can you tell me a little bit about what you meant by that?

Yes. I think there is a topic, which I didn't really cover in the opening remarks that does give me concern. And that is the whole premise of companies talking about unicorns. And, for those outside the venture industry, a unicorn ostensibly is a company that has a valuation over $1 billion, of which there are approximately almost 40 venture-backed companies, probably a little bit more than that in Q1, but approximately 40 or so companies that have over $1 billion in valuations.

And not to be cynical; unicorns don't exist in life and neither do leprechauns. So there's a big day when those unicorns will have to reconcile their insatiable appetite to burn capital because they're growing so rapidly and the days that that capital is no longer available to them, the reconciliation of valuations is going to be a very difficult day for many players out there.

Now, from a lender perspective, I think the lenders should generally be fine because these companies have good business models, but they're probably well ahead of their skis in terms of the valuation point of view.

And so, the comment on flaring up is that I think that a lot of unsophisticated, unexperienced venture lenders out there are underwriting assets that, frankly, should not warrant the valuations, let alone the pricing that these providers are doing. And I think that they are overextending too much credit to companies that may not be able to service that credit. And I think that you're building a potential credit storm that may come to a head here in the second half of 2015. And we certainly expect to see a credit flare up in, at least, the first half of 2016, for sure. This pace is unsustainable.

Those are helpful comments. Thank you. And then, just a quick question on the liquidity levels. I'm curious how often is it that companies fail to hit their funded milestones, allowing you to free up some of that funding for other investments?

You know, I don't have the numbers in front of me purposefully, but I'll give you anecdotally. It is safe to assume that probably 50% of the unfunded commitments will not reach their milestones. We are fairly judicious in our credit underwriting with the 30-plus years' experience doing what we're doing that we're very, very meticulous in selecting what we consider to be value-unlocking events or collateral-enhancing events to release more capital to these companies. We are less interested in simply putting assets to work from an AUM point of view and, therefore, we structure probably one of the more disciplinary industry milestone structures in our deals, which is what led to our credit loss to be so significant and give us the confidence in having a larger than normal unfunded commitment portfolio because those milestones are fairly meaningful to hit.

Okay. Great. Thanks for taking my questions.

Thank you.

Thank you. Greg Mason, KBW.

Great. Good afternoon. Manuel, I know you historically haven't given NOI guidance, but given that we had a $0.20 quarter this quarter, some kind of push-pulls that I can think about, you've got a full run rate of the equity raise next quarter. You're going to have some acceleration of the debt calls that you did. But you get a full run rate of all the assets. So, there's just a lot of moving parts. I just wondered if you would be willing to give us a little bit of guidance of what you think maybe next quarter could be versus the, I think everybody's thinking low $0.20 number this quarter.

You know, I mean, look it, it's very difficult to forecast DNOI on the tight tolerance level. I think that -- and especially the eve of the new 7.2 million shares that we had as the denominator effectively giving a new denominator on a diluted basis, almost 73 million shares. That obviously will have an impact on NII and DNOI in Q2. So, I think that I don't expect to see DNOI and NII really not moving materially until the second half of 2015 when I start converting that liquidity.

You know, a way of looking at it at a high level is we did about $133 million of loan growth in Q1. We're forecasting $65 million, $85 million of loan growth in Q2. You could probably look at Q3 optimistically today, which we'll give better perspective on at the end of Q2, but you could model safely assuming, let's say, $100 million, $125 million of net loan growth in Q3. And then Q4 is a more difficult quarter to forecast from today, but certainly, if you look at our historical levels, anywhere between $150 million to $200 million of net new loan growth in Q4. And that gives you a pretty perspective of looking at loan growth of the portfolio net anywhere between, conservatively, $500 million to $550 million, for example, which will drive you towards that $1.3 billion, $1.5 billion.

And so, we feel, with what we know today, that that cadence of originating at that level on a net basis is within a reasonable framework for us to execute on, assuming the market conditions stay strong as they are today.

Clearly, we will tap the debt capital markets sometime later this year both to lower our interest costs as we retire more portions of our seven-year bonds that we're considering. Although, we have not really penciled out a date yet. But, clearly, the ability to swap out 7% bonds for lower-cost bonds today that we could do that can translate into nearly 250 basis points or more in interest rate savings will only further fuel our NII growth.

And so, one of the things that we're looking at is as we meticulously convert that liquidity into that pace of net loan growth that I just described to you, we have plenty of capital and additional abundance of capital through our debt offerings to achieve those growth milestones through a combination of our existing liquidity, cash, and future bond offerings to achieve those milestones and grow NII. So, I think NII will begin to move here probably in the second half of 2015. Q2 will be adversely impacted by the new 7.2 million shares that we just onboarded.

And then, one additional question is subsequent events. You say that you've amended the Wells facility and lowered the interest rate on that facility. You haven't used that facility in years. So I was just curious on why lowering the rate? Why pay the amendment fees? And is that a sign that you want to start using your bank facilities?

Absolutely. One of the things that we are actively going to do is to change the leverage of the balance sheet and drive ROEs higher. Today, we're effective leverage around 55% leverage on a net basis, taking into account our cash balance. On a GAAP basis, ignoring the cash balance, we're at 80%. We can go to 1.2 to 1 with our exemptive order. There's absolutely no question that you will see us leverage the balance sheet in fiscal 2015, absolutely tap our Wells line and our other bank syndicate lines, and begin to use those lines as well as supplement those lines with additional bond offerings to drive greater value for our shareholders in fiscal 2015. There's no question about that. That is what our intent is.

Well, that's great. And then one last question. In the press release you talk about potentially expanding the SBIC program and that the Senate had passed a bill. That's actually the first I had heard of it. I just wondered if you had any additional color beyond what was in the press release.

Well, let me be very clear. I truly enjoyed meeting our senators and congressman, but I will never try to handicap what they will do. It was a very encouraging set of meetings that we had in Washington D.C. two weeks ago. A consortium of BDC industry executives participated in various senatorial and House of Representative meetings. I found those meetings to be very encouraging. I feel that the congressmen were very receptive and very understanding of the economic impact that the BDCs bring to the lending environment and the benefits that the SBA does. I am very encouraged by the questioning from the congressmen. And so, I believe, maybe optimistically, that I believe that a June, September timeframe we actually may see a passage of the SBA bill increasing leverage to 350. And I am greatly encouraged by that. And that would hugely economic beneficial to BDCs such as ourselves.

Great. I appreciate it. Thanks, Manuel.

Thank you.

Thank you. Chris York, JMP Securities.

Good afternoon and thanks for taking my questions. Just one clarification. Forgive me if I missed this in the prepared remarks, but help me understand how you guys are thinking about the Box position once it becomes unrestricted. Would you guys think about immediately selling that? My question kind of gets at the fact that, clearly, Box has come back in closer to its IPO price. Or would you be thinking about holding it a little bit longer and taking more of a position there?

Look it, we are big, big believers in Box. We are huge supporters of what that organization has done and what they've accomplished. We have no interest in simply dumping the stock, if you will. And we are, as we do with many of our holdings, we are much more focused on controlled disbursement or controlled liquidation of that position. So, no, we are not interested in simply turning around and just selling it right when the lock-up expires.

It's very typical that when lock-up expires the stocks get a little bit depressed. And we're not interested in simply fueling that downdraft. So, we will take our time and work diligently not to adversely impact the stock and its trading activity. So, we have plenty of time to realize those gains and, as I said, it may take one or two quarters, maybe longer. But we're not interested in just dumping the position.

Great. I guess one additional question here as I think about the business and the liability side of your capital structure. So, you got investment-grade rating with Kroll. Have you had any other additional conversations with other rating agencies in regards to potentially getting an investment-grade rating with them?

Yes. No, as I'm sure you realize, I think it was in Q4 -- I may be off here -- in Q4 we got an investment-grade rating at the corporate indicative level from S&P. So, we're BBB- investment-grade rating from S&P.

Oh, got it. I missed that. Okay. Thank you very much.

Alright.

Thank you. Jonathan Bock, Wells Fargo Securities.

Good evening and thank you for taking my questions. Manuel, one item that we tried to understand is the security position in VC-backed loans. And you've got a very high percentage of senior-secured loans, some with and some without AR revolvers in front. Could you give us a sense of the percentage of your portfolio that does have perhaps, let's say, a venture receivable loans or venture bank loans ahead? And how you think about risk in the senior-secured kind of term, the first lien, the senior-secured term loan behind a venture bank with a small receivable loan, and then a pure second lien loan? I'm trying to understand relative risk-reward in this environment.

Sure. Despite some of the misinformation that some of our competitors may say, we actually have very little to none of our loans have a senior lender ahead of us. And, in fact, as many of you may recall, back April of 2014 -- excuse me, April of 2015 -- no, I'm sorry, I was right the first time -- April of 2014, we indicated that we are effectively, ourselves, commenced doing senior loans in our portfolio, which has helped bring down our core yields as we've done those senior loans. And I don't have the number exactly in front of me, but I believe that, of our $1 billion or so loan pool, I want to say about $125 million of that, plus or minus $25 million, may be ABL revolver provided by us to our companies.

It is not to say that we may not consider, but we are very careful with the bank partner that we may choose to work with. And we will only work with a very select group of banks in that area. But we tend to not want to forego what's called collateral agency of control of the credit and having a bank have control of that. And so, because we're much more of a credit shop we have a lot of concerns that, in the event if an economic downturn were to happen, you as a venture lender may not have full control of your collateral and, therefore, you are at risk of the handling of that workout. Or, said differently, the standstill period will kick in and you may not be able to take action as a venture lender until such as a first lien senior-secured lender has chosen to take whatever action they choose to do. And that puts you at a highly precarious and risky position to be in. And this is why we're not a fan of that lending activity.

Also, we are not a fan of a large growing end-of-term payment as some other are doing out there, which is non-cash earning stream that we've seen that party end ugly as we saw at the end of 2008, 2009 when many other lenders were having a large component of end-of-term payments or PIK that then caused their dividends to collapse. So, I've been around a long time and I am more focused on credit than I am of growing the portfolio at the cost of credit quality.

I appreciate that. And then, a question just as it relates to the prepayments that you experienced a bit, obviously. And maybe even going a quarter back, trying to understand the nature of the prepays themselves as there is a lot of buoyancy in the tech market. How would you kind of define the prepayments in terms of folks that are growing and having raises at higher valuation rounds to take you out versus, perhaps, another lender or you bringing in the loan yourself? If you could maybe give us some insight as to how these prepayments work and what the relative percentages are where we are today.

That's a fairly meaty question. Let me just spell some something that I think investors and analysts may not fully grasp. Our biggest competition today is not what you think it is. It's actually equity. And it's equity coming from non-traditional players such as mutual funds and hedge funds that are reaching down and trying to buy IPOs before they become effectively IPOs and secure larger positions. There's nothing wrong with that and obviously it's a good thing to happen.

But there is a risk that when these private companies remain private for extended periods of time because they're burning $100 million, $200 million, in some cases even $300 million of cash a year, and that growth is unsustainable. And all of a sudden, the growth begins to taper off and they're faced with trying to access the public markets. And the public markets will not reward them for growth of 50% or so. They may have an event where the IPO may actually end up being a down round.

There is a great degree of risk currently in the market as these so-called unicorns continue to see an increase of velocity of valuations and continue cash burns that the day that music stops those unicorns may, in fact, end up being what they are; nonexistent, fairy tales, fantasies. And there's a huge degree of risk in that right now in the marketplace. There are valuations in private companies that are questionably unsustainable that the public peer groups are not representative of what those valuations can be sustained in the public markets.

It does not mean that these companies are bad business models. They're not. They happen to be very good business models, a lot of them. But the sustainability of the cash burns and the desire to continue to fuel that cash burn is continuing driving them to higher and higher valuations that I just feel are not sustainable.

And so, the issue on prepayments, to be specific, is that prepayments, in my book, I believe will come down as more and more companies will prefer to keep debt on their books than actually repay that debt off with an equity raise as an insurance policy to supplement and maintain enough working capital in the event that the music stops that they're not then faced with a lack of debt capital or not enough capital to fund their business growth.

So, we are, in fact seeing a greater demand of debt for larger and larger transactions whereby our size makes a big difference in the marketplace where many other small BDCs cannot afford to play in that marketplace or they must club up to play. So, now, historically, we would have seen deals simply done at $10 million to $15 million ranges. We're now seeing transactions being completed in the $30 million to $50 million range. And there's not many BDCs who have the wherewithal or the capability such as we do to be able to fund that growth and that demand for large size credits that way.

Got it. I appreciate that. And also, as we think about the increased expense as it relates to compensation and also just the general attractiveness of originators, particularly originators with strong VC backgrounds, given that you're the largest in this space, just curious on how you'd talk about the competitive environment for you people, right? Because we've seen several BDCs all look to start different venture platforms and sometimes the best place to go is to go to someone who has a demonstrated track record. So, can you give us a sense of how you think of retaining and growing the executive and the origination bench at Hercules going forward as the attractiveness of your asset class continues to get more and more interesting?

Well, Jonathan, thank you for costing me, now, more SG&A. You're absolutely right. Just like our portfolio is the best place to go get a good quality assets and one of the better providers of the asset class, one of the best place to look for talent is in the best provider in the asset class.

So, we fully recognize that, but I think our investment professionals are smart enough to realize that money itself is not everything when you go to a new provider, if that new provider has no real foundation or basis to underwrite this asset class or understand this asset class. So, the intangibles are equally as valuable as the tangible from a compensation point of view.

However, as you rightfully recognize, we have continuously and will continue to support and work diligently to retain our most talented origination team. But a lot of those individuals, I fully recognize that they have their own ambitions in life as well and so I'm not necessarily willing to say that we do not expect to see a normalized turnover. I think it's a natural part of the business.

But I will say unequivocally that we have implemented an extremely attractive new compensation program in fiscal 2015 that rewards our origination team quite handsomely and aligns their compensation with that of our shareholder value both on yield and credit quality of those new loans that we onboard. And those individuals who are quite good at what they do will receive very generous compensation payments for loans that they originate.

So, we feel that we have a very good and very strong new compensation program. And I can tell you that because, as we've been talking to recruiters on growing our organization -- most of you realize that we are growing our organization. We are actively looking to grow the organization by eight to 12 additional and new originators to help us complete the pace of the market. And we are actively looking at that. And I can assure you that when we speak to our executive recruiters out there, they find our program to be quite generous and quite good.

Great. Thank you for taking my questions.

Thank you.

Thank you. (Operator Instructions). And our next question comes from Christopher Nolan of MLV and Company.

Hi, Manuel. Are you guys still targeting raising operating expenses by $1 million per quarter through 2015?

The answer to that is yes. I think it's lower than what I would like it to be. But the answer is yes. It's not going to happen in Q2. And I expected to see that -- I'm probably running one or two quarters behind, to be perfectly honest with you. So, the answer is yes, but it's probably delayed by two quarters.

Great. Thanks for taking my question.

Thank you. Hugh Miller, Macquarie.

Hi. You've given us a lot to think about here. I just had a couple of quick ones. Given the environment that you guys have been talking about with industry credit potentially on pace to see some challenges in late 2015 and into 2016, can you just talk about why not be a little bit more selective now with credit extension and kind of hold back? I mean I realize the rationale for trying to sustain a dividend. But as you think about that, how does that play into your mind about credit extension now and the opportunities for stronger yields possibly six to 12 months from now?

Hugh, I can assure you that we are holding back an inordinate amount right now. I think we've probably rejected more transactions over the last couple of weeks than we've had in a long time. There is a fairly robust demand for capital out there. And to be very blunt, if we decide to loosen our strings, we can probably achieve a $1.5 billion loan book a hell of a lot sooner.

That's not what we want to do. I think I gave a pretty specific cadence of what that new origination activity is going to be in fiscal 2015 with $65 million, $85 million in Q2, $100 million to $125 million in Q3, $150 million to $200 million of activities net up in Q4. I think that gives you a pretty consistent cadence of doing, basically, $100 million or so a quarter, on average, leading up to the fourth quarter, which is our strongest quarter. So, I can assure you we're not growing out of control or doing every deal we see. Despite our deal team's probably wanting more of that, we remain fairly judicious and selective in what we do.

Okay. That's good color there. And then the other question I had was; as we think about the potential for impact on competition and your ability to grow if we do have a change in kind of the leverage from the BDC space, is it safe to kind of assume that you guys are likely to be impacted less than many other BDCs just given the competitive landscape and kind of the focused nature of your business? That in other spaces maybe it allows for other firms to be more aggressive from BDCs, but that you guys, it's probably a net positive for you given the fact that a lot of your competition is outside the space.

There's absolutely no question about it. The two bills circulating within the halls of Congress, the SBA bill to 350 and the BDC leverage going to 2 to 1, would be highly accretive to us and it's something that we strongly would welcome. Those initiatives would be very impactful for a BDC such as ourselves. Especially when you have an investment-grade rating like we do, to access the debt and equity capital markets would be highly accretive to our shareholders.

So, as an industry, the larger venture lenders, we're certainly seeing a greater impact and benefit because of their access to a wider and deeper portfolio. So, yes, it's going to be quite beneficial for us.

As I alluded to in our release, we are certainly optimistic and anxiously awaiting a favorable vote from the SBA bill and we welcome working with the staff at the SBA, which we think they're quite diligent and, frankly, very, very great partners to have. So, we certainly intend to move fairly judiciously and quickly on maximizing our SBA access to capital at 350. And I don't believe that the 2 to 1 leverage bill will get voted on until probably September, maybe early 2016.

Okay. Thank you very much.

Vernon Plack, BB&T Capital Markets.

Thanks very much. And I didn't see it in the Q, but do you have an estimate of spillover income at 3/31?

No, we don't provide an estimate of the spillover income as of today. But what we do stick with is the disclosures regarding the spillover from 2014 to 2015 of $17 million.

Okay. And Manuel, the portfolio performance has been great over the life of Hercules as a public company and I'm just sitting here thinking; have you put much thought lately into, as you look back and as you look at the current market, what you can and cannot do? Has there been the thoughts of, perhaps, maybe try to push a little bit more in terms of the amount of warrant you get versus the coupon that you charge? There could be a tradeoff there and, perhaps, maybe there's a way to even optimize that further.

Well, there's absolutely no question that those two toggles are critical to our business; the toggle of interest, the coupon, and the toggle of that of the warrant coverage. However, given the environment that we're in and the unicorn-ish environment that we find ourselves in, we are a bit more sanguine in our views on taking on well-valued private equity or warrants in private companies at the cost of foregoing current interest income. We're not an equity shop now will we ever be an equity shop per se. So, we'd much care about cash yields and strong credit and lesser on the warrant coverages and warrant returns because they are, as evidenced in our portfolio, 129 different warrant positions waiting to be harvested and we know that probably 60% of that will never monetize. So, to forego attractive current economics for additional warrant upside, I'm probably one of the few BDCs in the venture space that will tell you that in this environment that's probably a silly trade.

So, do you feel as though in terms of your mix of -- and, again, I don't know how much flexibility that you have over this. I know there are some constraints. But, you feel as though, right now, if you look at the warrants that you give versus the coupon, you think that mix probably optimized.

I think that the venture lending market is currently highly efficient right now. And both venture capitalists, entrepreneurs, and competitors are all quite sharp-pointed pricing right now. And I think that the pricing got a little silly in Q3 and Q4 specifically, with the desire of many of the recently being acquired venture banks aggressively underwriting loans for simply asset growth.

There are other private venture lenders which are currently being sold or are attempting to be sold who also aggressively build their loan books with the desire to try to look bigger than they actually are who onboarded loans at pricing and structures that probably weren't as prudent as they should have been. And so, we think that the second half of 2015 is going to, I believe, begin to stabilize pricing and warrants. And we believe that we should see better economics in the second half of 2015 than we've seen in the early part of 2015.

Okay. Thank you.

You're welcome.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Manuel Henriquez for any closing remarks.

Thanks, Candace. Thank you, operator, and thank you, everybody for joining the call today. We will be participating on a non-deal roadshow here over the next couple of weeks. If investors would like to request time with Hercules, I would encourage you to please contact our Investor Relations department and Michael Hara to coordinate the potential for a meeting in the respective cities that we are touring. We will be doing non-deal roadshows over the coming months of May, June, and July and we look forward to scheduling time with those interested parties who want to get to know Hercules better or ask more probing questions. With that, thank you very much and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.