Hercules Capital Inc (HTGC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hercules Capital Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Michael Hara, Senior Director of Investor Relations. Sir, you may begin.

Thank you, Sheryl. Good afternoon everyone and welcome to Hercules conference call for the fourth quarter and full year ending 2015.

With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO and Mark Harris, the Chief Financial Officer.

Hercules fourth quarter and full year 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've arranged for a replay of the call on 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 in the final audit results.

In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, 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 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 our website htgc.com.

For today's agenda, first, Manuel will begin with a brief overview of our fourth quarter financial highlights and for the full year followed by an overview of the venture capital markets and the state of the new investment market opportunities and our perspective and outlook for the first quarter and 2016. Mark will follow with a broader summary of our financial performance and results for both the fourth quarter and the full year in 2015. And then, following the conclusion of our prepared remarks, we will open the call for Q&A.

With that, I will turn the call over to Manuel Henriquez, Hercules Chairman and Chief Executive Officer.

Thank you, Michael. Good afternoon, everyone and welcome to the Hercules Capital fourth quarter and full year 2015 earnings call. I want to first start off the call by saying that I'm very happy and proud of our accomplishments and achievements again producing another strong fourth quarterly results and outstanding overall year for Hercules Capital.

We had a very solid portfolio growth during the period. We finished with a strong balance sheet, and a healthy supply of liquidity, positioning us well as we roll into 2016 with plenty of dry powder to make careful and accretive new investments on behalf of our shoulders as we continue to focus on growing our earnings and covering our dividend.

We believe that 2016 is shaping up to be an even greater year than 2015, which too many may seem it could be counterintuitive. But I'll explain why 2016 is rolling into a very attractive year and it is counterintuitive especially with what's going on in venture capital community during my commentary on the venture capital investing activities that took place during the year and what we expect to take place in 2016.

With a materially different and less completive environment early in 2016, we are seeing many of our other BDCs venture lenders in particular continue to struggle. Many of them are facing material challenges given they are trading significantly at discounts to net asset value, in some cases as much as 30% to 40%. Coupled with this absurd and unsubstantial level of activities is their unfunded commitment as a percentage of overall portfolio. Many of these other venture lenders have not learned their lessons and have elevated unfunded commitments that are not sustainable and are causing problems for others in the industry.

This level of unfunded commitments will cause them to have a growing problem on liquidity and thereby impeding their ability to compete in generating new loans. Because of that we are seeing a very nice landscape of new investment activities in 2016 as many of these other venture lenders are facing challenges on liquidity, trade below net asset value or facing the idiosyncratic risk profile in their portfolios that's leading to severe and growing credit losses that we anticipate to be occurring within their portfolio.

We on the other hand has served ourselves well by remaining purposeful and pursuing a slow and steady growth strategy by maintaining a higher liquid balance sheet and adhering to a strong credit discipline over the years which I am proud to say we sustained as evidenced on our continued credit performance as an organization.

I am proud to say that drawing upon my 30 years of experience in working with innovative high-growth venture capital backed companies both as an experienced and seasoned equity venture capitalist investor but also as most recently a venture lender. Add to that having gone through the enormous challenges we all faced and learned back in the credit crisis of 2008, 2010 we purposely have positioned ourselves to be well positioned for exactly at these challenging times again.

Having gone through the 2008, 2010 credit crisis allowed us as an organization to understand the level of performance cadence we want to maintain on both originations and disciplines. We have purposely held back liquidity, we have purposely maintained a high liquid balance sheet to afford us this opportunity that we've spoken about since Q2 of 2015 and now coming to fruition for us. This level of liquidity will allow us to continue to focus on new investments at much more attractive pricing than we would have seen in Q3 and Q4. That was a conscious decision on our behalf that we expect to reap significant rewards and dividends for our shareholders in 2016.

However, a very important statement related to that is the incredible use and management of our unfunded commitments. I'm proud to share with our shareholders that we are true to our words. We indicated to you during the initial issues related to unfunded commitments that the industries face though we made a conscious decision to manage that unfunded commitment down. I am proud to say that this team in this organization has managed down the unfunded commitments by 70% from Q2 to Q4. No other BDC has been able to aggressively manage the unfunded commitment down to these levels. We did that without at all impacting our new business originations and new underwriting criteria. That is true to our words and continues to what we say to our shareholders that we will do.

As I said a minute ago, we are well positioned to enter 2016. We do not have the challenges that many of our BDCs have facing with deep discounts to book value, illiquidity and an overly leveraged balance sheet. We are extremely well positioned. And in fact, we have ample liquidity on hand of approximately $195 million plus additional access to grow our liquidity even further. In fact, we're able to leverage our balance sheet if we so choose by over $300 million additional equity debt capital. Clearly, we're not going to do that.

We've indicated since inception to our shareholders that we believe that maintaining a level of leverage anywhere between 1 to 1, or at the higher end of the range of 1.1 to 1 is what we think is the right level notwithstanding the fact we could leverage our balance sheet up to 1.26 to 1. I want to assure everybody that it's not our intent.

As I turn my attention to continue to pursue our strategy that's worked well for us for many years, the slow and steady growth strategy which many of you may be tired of listening to but it served us well and it's been a beacon to managing us and ensuring that we pursue a course that maintains that rigor that we've always done at Hercules.

But managing our loan portfolio growth throughout 2016, we expect to achieve a targeted loan portfolio of $1.3 billion to $1.4 billion. We do not expect to do that in Q1 and Q2. We expect to be very methodical in doing that and sometime rolling into the second half of 2016, we expect to see our loan portfolio eclipse that $1.3 billion, $1.4 billion level assuming of course that the equity capital markets and the debt capital markets remain cooperative.

By achieving that level of growth in our portfolio, we believe strongly that sustaining a level of yields that we do today we will more than cover our dividends and have potential additional dividends spillover for our shareholders as we continue to grow that portfolio to that targeted level of $1.3 billion, $1.4 billion.

Now we're easily able to do that because where we're at from a liquidity point of view and a leverage point of view, we have $195 million of liquidity easily available for us today. We could also access another $200 million, $250 million of just liquidity before running into that 1.1 to 1 debt to equity ratio. These are very conservative outlooks but allowing us to continue to grow that portfolio.

As a matter of cadence, we expect to grow the portfolio in Q1 on a net basis of up between $75 million and $100 million in Q1. We expect to have similar activities occur in Q2, thus growing that portfolio by approximately $200 million or so in the first half of 2016, positioning us well to achieve those initiatives on portfolio growth and sustaining a portfolio at that $1.3 billion plus level.

Given our existing liquidity position as we turn -- as we look to the future and access the debt capital markets, we believe that reaching this loan growth is clearly an important step in continuing to unlock leverage in our portfolio -- on our balance, I should say, to achieve the goals of unequivocally covering the dividend through net investment income which is at that $1.3 billion-plus level.

So, lastly over the past few weeks many shareholders, bond holders and analysts have been reaching out to us along with many other BDCs on seeking a direct clarification as to some relevant exposures. Those exposure questions relate directly to oil and gas exposure as well as, as you're seeing lately, CLO, CMBS and RMBS exposure. From time to time we also get questions of mineral exposure that we have. I want to make sure that all the investors hear this very loud and clear. Hercules does not have any direct oil and gas exposure, has no direct CLO exposure and of course, no CMBS or RMBS exposure.

So (inaudible) during 2008, I find myself having to repeat our portfolio profile. But it's important to continue to differentiate Hercules from everybody else. We do not have those exposures and we do not intend to have those exposures in other areas. So rest assured, the stewardship of your capital is being well looked after by Hercules and its team and we will not be doing any oil and gas or CLO or CMBS, RMBS or mineral exposure.

Now, turning my attention to 2015, we heard many of our investors loud and clear. Many investors were skeptical over our original mission that we started off in 2015 by making the conscious decision as brave [as mad then] to invest at our infrastructure for growth. I know it's very difficult for many to accept that, but we pursued and we're true to that mission by investing in our infrastructure and ensuring that the Hercules platform is well positioned for future growth.

Some of those investments led to lower earnings that many of you would not have liked to seen in 2015. But I'm happy to say that that portfolio and our team performed quite well and that portfolio grew despite having a heavier burden on SG&A.

Mark will cover the SG&A expense overview, but I can assure you that the SG&A growth has now stopped. The infrastructure investments have been made and we'll be covering that in greater detail to show you that now operating leverage will begin to kick in and earnings growth will begin to happen after making these critical and vital investments.

Again, staying true to our core and our mission by maintaining a very rigid underwriting investment discipline, which has served us extremely well for the past12 years, we continue to perform in a very strong credit book as evidenced in the fourth quarter and of course evident by our cumulative loan losses since inception, which remain less than 1 basis point, de minimis.

I challenge many of you to look at any other BDC with such type of credit performance while generating the yields that we do as an asset class. I want to emphasize strongly, we do not chase or pursue many of these high flying now potentially overvalued unicorns. I'm proud to say that unicorns are not our focus. We are now facing -- many of these unicorns are now facing challenges in sustaining their valuations or facing what I consider to be draconian down round valuations that could be as much as [20% or 30%] lower than the last rounds completed within the last year or being forced, even worst, to cut the growth rates in order to preserve capital which will also lead to lower valuations.

Although I like to correct the statement, not all unicorns are bad, but many unicorns are in fact overvalued and many who have made unicorn investments will be suffering through down valuations that could be meaningful and material. As a matter of record, I want to clarify very loudly and very clearly of the 85 existing portfolio companies that Hercules has as its partner companies, we generally --representing a $1.15 billion loan portfolio at the end of Q4 2015, Hercules probably only has two unicorns out of 85 companies. That's basically a 2% exposure on a per company count that serves as evidence of our underwriting discipline and not, I repeat, not pursuing high-profile hot deals, that is not what we do. We stick to our knitting and we stick to what we know how to underwrite too.

We executed upon our strategy, which was laid out at the beginning of 2015, of investing in our platform. By expanding into new geographies and new markets, broadening our investment team of professionals and ensuring that we grow our investment portfolio by $1.3 billion, $1.4 billion without compromising and maintaining our high standard of credit performance and discipline, we achieved a growth of year over year of 18%. As Mark will explain later in his comments that portfolio of 80% growth was also on the eve of having nearly $500 million of loan repayments that took place during the year, once again showing the resiliency of the Hercules platform and the resilience of its team in order to originate new assets and of course our growing brand and awareness in the venture industry as the top leader in venture capital lending to many of the top-tier companies.

In addition, many of you rightfully were skeptical of our increase in SG&A. We heard you loud and clear, but we also persevered and continued to invest in our infrastructure as we believed it was critical to sustaining the investment performance that US shareholders expect to see from Hercules. Those investments were well invested and are now beginning to pay dividends. As I said just a minute ago, we expect to see the SG&A overall tapering and translating to wider net interest margins leading to higher earnings growth and of course covering the dividend simply from NII as it turns to the second half of the year and potentially generating a consecutive third year earnings spillover rolling into 2017. Clearly, that's a very long way out, but at this point if we achieve what we think we will achieve, we believe we'll have additional spillover going into 2017 by maintaining our portfolio discipline.

Now, turning my attention to additional infrastructures that we did in investments, while maintaining a steady hand on our tiller, we continue to invest in our business. We continue to maintain a zero level tolerance of losses as best as we can. Hercules remains the unequivocal leader in venture lending within the BDC landscape. It is the largest and most well-capitalized non-bank venture lender in the asset class itself. We are leaders in the asset class and the category as evidenced by our ability to absorb $500 million early payoff and still grow our loan portfolio. We have a great diversified portfolio across multiple industries and different later stage development companies that we believe are well positioned to continue to pursue liquidity event as we saw take place in 2015.

Turning my attention to some of other high-level achievements and the investment portfolio initiatives that we did, unlike other BDCs, we've also made a conscious effort to expand our Board of Directors. Unlike others we proudly are happy to report that we have three additional and new independent Board Directors who joined our Board totaling seven. Our Board is heavily over weighted with Independent Directors not Insider Directors. We believe that's a good corporate governance and indicative of who we are as an institution.

We enhanced and hired new senior management with strong leadership capabilities, strong historical achievements and more importantly experience in scaling organizations such as our new CFO, Mark Harris, our new General Counsel and Chief Compliance Officer, Melanie Grace and our most recent new addition, heading up our growing company and organization, our Vice President of Human Resources, Jennifer McKay, all of which are here to look after the stewardship of the organization as we continue to grow and potentially pursue additional future opportunities under acquisitions or partnerships that we're actually evaluating.

We were once again tested by the markets, as I said earlier and yet again proved the resiliency of the Hercules platform as we face another record year of total loan repayments and our payoffs of over $500 million, our second consecutive year of realizing nearly $500 million of early payoffs per year.

Notwithstanding that schedule $388 million of that was unscheduled for the second year in a row. And once again, the Hercules team responded by fully absorbing this torrent of early loan repayment and still managed to both replace and grow the total loan investment portfolio by as much as 80% on year-over-year basis. I can't tell you how that speaks volumes of the organization, and more importantly, speaks volumes of the trust, the reputation and brand that Hercules has established during its course of the last 12 operating years of history within the venture capital community. This could not have been accomplished but not for the generous and gracious support of our venture capital partners and their wonderful, amazing, innovative venture growth stage companies. Thank you to our partners for that trust and we not take that trust lightly.

I would also like to thank the outstanding job and driven -- of our team of investment professionals who executed exceptionally well on all fronts as evidenced by the past two years' amazing feat of originating and funding over $1.6 billion of loan commitments in a 24-month period of time. I am not aware of any BDC within the venture lending marketplace who has the deal flow, the capacity, the capability to literally originate $1.6 billion of new loan commitments over a 24-month period of time while sustaining the strong credit rigors that we have in underwriting and translate it into the continued strong credit performance of our credit book.

Because of tenacious, but highly disciplined efforts, we have extended our already large and growing lead in the venture lending marketplace as the largest BDC. We do not anticipate slowing down as more and more innovative venture growth stage companies are seeking well-capitalized partners such as Hercules to help fulfill the growth capital needs. That does not mean that we're anxious to simply put our capital to work. We remain very selective and we'll continue to stick to our discipline in doing that. But I want to emphasize strongly that we have ample liquidity unlike many of our other BDC competitors in the venture lending space. We have ample liquidity that we intend to deploy in 2016.

Our full year results serve to highlight Hercules' strong market leadership position as it continued unprecedented access to some of the leading and most innovative disruptive financially backed venture-backed companies in the industry. These outstanding visionaries and venture capitalists are tremendous source of deal flow for Hercules as I said earlier.

Our 2015 strategy of slow and steady, staying disciplined, and only originating deals that meet our yield and credit standards criteria, optimizing and protecting our balance sheet, and maintaining a high-level liquidity, and growing our brand and leading presence within the innovative economy has positioned us well to go into 2016.

Now to turn my attention to my closing comments, now for some of the other proud accomplishments and financial highlights within the venture capital marketplace and, of course, Hercules. Growth in 2015 was strong and steady. Record debt and equity fundings of $715 million, representing a 15% year over year. $745 million of total new debt and equity commitment compared to an impressive $900 million in 2014. We actually grew less in 2015, but that was again, purposely done as we manage liquidity and maintain the level of credit we want in our portfolio.

Net loan growth for the period in 2015 was $200 million on a cost base, representing a 21% year over year, and a very important achievement as a consecutive -- by also generating our consecutive year of earnings spillover of $8.2 million or $0.11. This spillover is very important to us. We had a spillover for 2014 to 2015 and now we have a spillover from 2015 to 2016 that will allow us to continue to invest in our business, not be focused on simply growing the portfolio books, simply to cover dividend by having a dividend spillover to work as a buffer as we purposely methodically grow our loan book in a very slow and steady pace. Venture capital activity was robust in 2015. In fact, it was the highest level since 2000 according to Dow Jones VentureSource Q4 2015 Report.

Now some important achievements, 66 companies that are venture-backed successfully completed IPOs. I'm happy to say, 11% of those companies or seven of them were actually Hercules portfolio companies, a testament to our ability to select the right companies. Having 11% representation in the IPO liquidity event is actually quite strong. Not to be left behind, we had eight M&A events completed during the year, representing a total of 15 in aggregate portfolio companies of Hercules to realize M&A events or IPO events completed in 2015. Not many other venture lenders have that type of record.

As we approach 2016, much the same way as we have successfully navigated the volatile market of 2008 and 2010, again overly stated in this call, slow and steady is our game. We prefer not to simply scramble and run to build loan book, but we prefer to be very disciplined in that approach. That may mean that earnings may lag a little more than people would like, but we focus on credit quality and look for the long term, not the short term end of the game, as we make proper investments on behalf of our shareholders.

We have learned from prior markets. This is a highly experienced management team, disciplined in overseeing the stewardship of your capital and making sure we make prudent investments.

We became highly selective on our originations for new deals. We are focusing on yields and credit structures to mitigate risk, not simply looking to grow assets and put assets to work. This strategy may translate into slower earnings growth than other like us to see, but having navigated these waters before the slow and steady methodic origination always wins the race.

For example, Hercules gross fundings as a percent of total venture capital dollars, an important indication, was only 1%. That means that the $72 billion of venture capitals invested, Hercules deal flow of [enclosed] companies represented 1%. Over our 12-year history as a Company, our range of venture capital to Hercules debt capital participation or investor activity is simply 80 basis points to 190 basis points. You'll see this 1% puts us right in the middle of the warehouse. Hercules refuses to chase deals by sacrificing earnings to structure. We choose to maintain a high-level liquidity and look to only underwrite into the best companies possible. If that means we must wait, so wait we will.

We're not a fund, we're not interested in AUMs, we're not interested in incentive fees or asset management fees. We are, however, aligned with you. We care about financial performance focusing on ROA, ROEs, NII and NHS margin for example, all driving sustained earnings growth and eventually dividend coverage for our shareholders.

In short, high and high credit quality overrides the velocity of growth. In 2015, we reached similar levels of commitment as we did in 2011, 2012 and 2013. We believe that our pace of investment is representative of what we think that venture capitalists will return to, which is a $30 billion to $40 billion of originating venture capital dollars per year, down from the $72 billion they did in 2015.

As more and more venture capital dollars are going to later stage disruptive venture growth companies that are basically positioning themselves for pre-IPO pre M&A. For those investors who have been with Hercules a long time, this has always been a wheelhouse. Our core competency is focusing on later stage venture growth companies. That is what we know how to do and that is we'll continue to do. We are not an early stage investor. Despite many attempts by many of our competitors trying to reposition us or claim otherwise our portfolio speaks for itself. We are a later stage investment, we're later stage venture growth investors.

Our traditional focus has been investing in companies that are expected to realize potential liquidity events typically within 36 to 48 months. As an evidence of this, based on Dow Jones VentureSource Report, later stage venture capital investments received a lion's share of capital from venture capitalists. In fact, 68% of the venture capital dollars that were allocated to venture stage companies were to later-stage companies, up from 64% in 2014, well positioning Hercules to take advantage of these companies demanding for capital.

While seed investment and early stage investments continue to see declines, we believe that this is the most dangerous part of the segment to be investing in and will experience the greatest capital losses for many of venture lenders who are focusing on early stage small-ticket investments in these companies.

Credit underwriting discipline, the cornerstone of Hercules platform, we continue to maintain an outstanding credit performance with only $6.9 million of net realized losses since 2003 on a origination commitment of $5.7 billion represent a 1 basis points loss rate, cumulatively per year for a 12-year period of time. It's an outstanding credit performance and an outstanding continued credit discipline on our behalf. And in fact, you'll see that translated into overall weighted credit grades. In fact, our credit outlook improved from Q3 to Q4 as our overall credit rating went from 2.24 down to 2.16.

We've accomplished all this while maintaining a high-level liquidity. Again $195 million, we can go up to $300 million if you want to go up to full leverage capacity, which we will not tend to do. Our preference is to maintain a 1 to 1 at most at 1.1 to 1 debt to equity capital ratio, giving us access to another $200 million, $250 million of additional leverage beyond the $I95 million. We are well positioned to access debt capital market. We have recently been received by affirmation from S&P of BBB- and of course a BBB+ from KBRA, Kroll, which gives us access to the bond market.

Our stock continues unlike others to trade at a premium to an asset value and we will continue to work hard to maintain that level of premium in our stock by working hard on behalf of our investors making Hercules the only one of a handful to be able to claims this achievement of trading above net asset value.

In addition, late in 2016 we plan to begin preparatory work and potentially accessing working with our partners at the SBA, our third SBA license under the Family of Funds Act. Because of our leverage position we do not anticipate or intent to actively pursue that third license until sometime in late 2016, early 2017.

Closing, Hercules remains the largest non-bank venture lender and is a top-ranked, top-valued BDC. We are internally managed, we are directly in line with our shareholders, management owns considerable shares in Hercules aligning financial results and performance with our shareholders. We're not focused on AUM, we're not focused on asset management fees or incentive fees. We work to have a strong and diversified investor portfolio of later-stage venture growth companies. As I said at the beginning of the call, we have no oil and gas, we have no CLO, we have no REITs, we have no CMBS, RMBS, no mining or minerals exposure.

With that, I will turn the call over to Mark. And he'll give you the overview of Hercules in its financial performance. Thank you.

Thank you, Manuel. Good afternoon, ladies and gentlemen. I'll now briefly discuss the financial results of the fourth quarter 2015, try to add some depth to the reported numbers and give you some forward guidance in terms of 2016.

I'm pleased to report that Hercules Capital had a record year for fundings of $712.7 million in 2015. This is a 15% increase from 2014, which was also a record year. In the fourth quarter, our loan portfolio increased to $1.152 billion at cost compared to $1.109 billion in the third quarter of 2015 or an increase of approximately 4%. We had strong new fundings of $180.7 million in the fourth quarter, partially offset by $105.5 million of unscheduled payoffs and normal amortization of $23.8 million.

Our effective yields were 14.2% in the fourth quarter from 16.4% in the third quarter, a decrease of approximately 220 basis points. The decrease is primarily related to the composition of early payoffs and the acceleration of interest and fees as Q3 had younger loans than that of Q4.

Given the current market conditions and the age of our loan book, we would expect in the first half of 2016 to see similar payoffs to what we saw in the first half of 2015. Core yields, which exclude the effect of the fee accelerations from early pay off increased to 13.3% in the fourth quarter compared to 12.6% in the third quarter or approximately 6%. And we would expect our normalized core yields to be between 12.5% and 13.5% on a going forward basis.

In December, we saw the United States Federal Reserve increased benchmark interest rates by 25 basis points. This led to an increase in the prime rate from 3.25% to 3.5% on December 17, which impacts our investment income favorably. Due to delayed timing of this increase, it did not have a meaningful impact on our financial statements in the fourth quarter. We anticipate a 25 basis point increase in prime to have approximately a $2 million or $0.03 NII per share of favorable impact on an annual basis as we are highly asset sensitive, given 94% of our investment loans, our variable interest rate loans, and a 100% of our long-term debt is fixed rate debt.

In the first quarter of 2016, we have seen new loans originations with higher yields due to, one, an increase in the benchmark interest rates; two, a favorable competitive environment; and three, increased demand, which led to core yields of over 13% today. It should be noted that while we're seeing better underwriting of terms and yields, our weighted average loan-to-value based on the last round of financing was approximately 10% in the first quarter of 2016, which is an improvement from our year-end loan-to-value of approximately 16% based on last round of financing. Thus we believe we're originating new loans without taking on incremental risk at better rates and terms, demonstrating the dislocations we're seeing in the market.

Before moving to the income statement, I'd like to remind our investors that Hercules Capital continues to adhere to our historical aversion to PIK. PIK is less than 50 basis points of our yields in the fourth quarter and less than 3% of our total investment income for 2015. Thus PIK is a very small part of our business, unlike the other competitors and BDCs.

Turning to the income statement, our investment income was $39.4 million in the fourth quarter versus $47.1 million in the third quarter of 2015. However, this isn't a true reflection of the underlying performance, mainly due to the unusually large one-time accelerations of income in the third quarter. In the fourth quarter, we saw a $105.5 million of unscheduled payments which was a decrease of 44% compared to the third quarter of $189.2 million. The average age in the fourth quarter of these loans was significantly older than that of the third quarter, leading to lower fee acceleration and prepayment fees. Removing these accelerations, we actually had an increase in investment income of about 1% in the fourth quarter compared to that of the third quarter.

The interest and fee expenses was $9.5 million in the fourth quarter compared to that of $8.9 in the third quarter. However, as we've announced previously in the fourth quarter, we had a one-time non-cash charge of approximately $0.8 million related to the $40 million buyback of our September 2019 notes related to unamortized issuance costs. Backing out one-time non-cash expense, our interest expense would have been $8.7 million in the fourth quarter, which would be a reduction of approximately $200,000 over the third on a like-for-like basis.

As a result of our continued active management, we anticipate our weighted average cost of debt to be approximately 5.4% on a going forward basis. While we saw there was a weighted average cost of debt at 6.2% in the fourth quarter, again a lot of this is related to the one-time non-cash charge. We continue to look for new ways to reduce our weighted average cost of debt to below our target of 5% and we'd like to meet this objective by the end of the first half of 2016, assuming the capital markets cooperate.

Net interest margin was $29.9 million in the fourth quarter. Net interest margin, adjusted for the effect of income acceleration and one-time non-cash expense, we would have a normalized NIM of $28.2 million in the fourth quarter versus $27.5 million in the third quarter or a growth of about 3%. Our net interest margin yields as a percentage of average yielding assets was 10.2% in the fourth quarter from 13.4% in the third quarter, making the same adjustments for acceleration and non-cash one-time expenses, both the third and the fourth quarter NIM yields would be approximately 10%.

Operating expenses, excluding interest and fees decreased in the fourth quarter to $9.8 million from $14.7 million in the third quarter or a change of 33%. We expect our operating expenses excluding interest and fees to maintain around $10 million to $11 million per quarter in 2016. We're focused on operating expenses and in the previous quarters we had non-recurring charges around the recruitment of strategic Board and management positions, as well as corporate expenses that we don't anticipate going forward.

Our G&A in the fourth quarter was $4.5 million, which was consistent with the third quarter. We expect this to maintain between the $3.5 million and $4.5 million on a quarterly basis into 2016. Employee compensation decreased by 61.2% or $4.9 million due to changes in variable compensation in the quarter. We expect compensation to move in line with origination and business performance as it is directly correlated with our variable bonus program. Therefore, we expect employee compensation to be between $6.5 million and $7.5 million in 2016 on a quarterly basis. Adjusted DNOI, which is a non-GAAP measure and excludes $0.01 per NII of non-recurring, non-cash expense related to the buyback of our September 2019 notes was $23.1 million or $0.32 per share. And including the expense, our DNOI would have been $0.31 per share.

Turning to net investment income, our investment income was $20.1 million in the fourth quarter versus $23.6 million in the third quarter. Much of this decrease is related to the unusual high prepayments income in the third quarter and the one-time non-cash expense in the fourth quarter. Compared to the second quarter, a better proxy for normalized performance, fourth quarter NII was up 20% or $3.3 million. On a per share basis, net investment income in the fourth quarter was $0.28 per share, however, backing out the one-time non-cash expense, we achieved an NII of $0.29 per share in the fourth quarter.

Our ROA was 6.1% in the fourth quarter and our ROE was 11.7%. We expect our ROAA to be between a 5.5% and 6.5% and our ROAE to be between 10% and 12% on a going forward basis. We had unrealized depreciation on investments of $2.7 million in the fourth quarter. For further details on changes in unrealized depreciation, we direct you to our press release where we provide a more detailed table, which illustrates the components of both credit and mark-to-market-related adjustments. During the period, the aggregate loans changed in our portfolio from unrealized depreciation was $10.5 million, this was a mix of market yield adjustments under fair value accounting impairments and reversals due to pay-offs. Our equity and warrants had unrealized appreciation of $7.2 million in the fourth quarter. This is consistent with the fourth quarter capital markets. The Russell 2000 Biotech Index was up 12% from the third quarter to fourth quarter. The Russell 2000 Technology Index is up 6% in the same period. Using a simple average basis between these two indexes, we saw an appreciation of 9% and our unrealized gain was approximately 6%. So we believe this shows strong correlation to the market.

With this, I'd like to turn to credit. With respect to credit quality, we continue to focus our credit discipline that we have seen and we have seen our efforts pay off. As Manuel noted earlier in the call, we experienced improvements in our weighted average loan rating to 2.16% in the fourth quarter from 2.33% in the third quarter. This is a result of our categories, three, four and five loans, becoming 12.2% of our loan portfolio at fair value in the fourth quarter. Whereas in the third quarter, this was 22.5%, coupled with new loan originations. This is a result of our continued focus on late-stage disruptive, innovative, venture-backed companies with strong financial sponsors.

Our non-accruals as a percentage of debt investment and cost decrease from 4.4% in the third quarter to 4.1% in the fourth quarter. This decrease was not what we anticipated as we're expecting a large drop in the non-accruals due to projected M&A transactions that were unfortunately pushed out from the fourth quarter into 2016. However, we expect to see this continued to improve in the future periods.

Under treasury, we had cash of $104.4 million at the end of the year. Unrestricted cash was $95.2, down from $147.3 in the third quarter. Our liquidity, as Manuel rightly pointed out, is $195.2 million at the end of the fourth quarter, which consists of the $95.2 million of unrestricted cash, plus $100 million of undrawn available under our revolving credit facilities subject to borrowing base leverage and other restrictions, compared to $297.3 million of liquidity at the end of Q3. This $102.1 million change in liquidity mainly came from $129 million of amortization of early payoffs, offset by $181 million of funding's and $40 million of September 19 note buyback.

Our unfunded commitments have been reduced to $115.9 million or a decrease of 72% from the peak of Q2 2015, as we manage down our unfunded commitments as indicated on our third quarter 2015 earnings call. Further, we had available unfunded commitments of $75.4 million at the end of Q4, which was a reduction from $109.6 million in Q3 and significantly down from $159.1 million, we had in Q2 of 2015. We expect our current unfunded commitment will stabilize at this point and may marginally grow with the growth of our business objectives.

Our net regulatory leverage excluding SBA, as we have an exempted relief from the SEC, offset by cash was $43.9 million at the end of the fourth quarter versus 35% at the end of the third quarter. Net-GAAP leverage, which with the SBA offset by cash was 70.4% at the end of the fourth quarter versus that of 61.3% at the end of the third quarter.

Based on a regulatory leverage ratio, we have the ability to add another $306.9 million of debt without breaching our debt to equity ratio requirements. Although we have the ability to raise as much debt, we believe then our prudent course would be to grow our GAAP leverage between 1 to 1.1 to 1 or approximately $200 million to $250 million of additional debt capacity. Net assets was $717.1 million at the end of the fourth quarter. NAV per share was $9.94 at the end of also the fourth quarter, a modest decline from the previous quarter.

Further, we continue to optimize our capital structure and engage in our share repurchase program. In the third and fourth quarter of 2015, we repurchased approximately 437,000 shares at an average price of $10.61. In the first quarter of 2016, we purchased another approximately 450,000 shares at an average price of $10.64. We believe these purchases demonstrate our alignment with our shareholders and will continue to support the Company when management deems it appropriate.

We're also pleased to report that we have another year of earnings spillover. We will carry forward un-distributable taxable income from 2015 into 2016 of approximately $8.2 million or $0.11 NII per share. Further, we have an unrealized box of gain, up $12.3 million or $0.17 NII per share at the end of Q4 for potential future distribution. Finally, we're pleased to be declaring our 42nd dividend of $0.31 per share, that will be paid on March 14 as approved by the Board of Directors with a record date of March, 7th.

With that report, I will now turn the call back over to Manuel for closing comments.

All right. Thank you operator and thank you all for joining us here today. I'd like to remind everybody that we intend to participate in the Jefferies Mid-Atlantic C-Level Conference in Baltimore on March 4, as well as continue to do some non-deal roadshow with our various partner investment banks, with JMP Securities in Boston on March 7 and of course the RBC Capital Markets Financial institutional conference in Manhattan on March 8 and March 9. If you have an interested in meeting with us please feel free to contact the respective investment bankers or of course our Investor Relations Department, Michael Hara.

With that, I'd like to turn the call over to the operator to answer any questions.

(Operator instruction) Jonathan Bock, Wells Fargo Securities.

Thank you for taking my questions and thank you for the remarks. Manuel, one question that I have simply relates to comp expense only because you made some significant investments as you've outlined and you saw the comp expense drop meaningfully quarter over quarter, perhaps more than our and maybe even others' expectation. That line is always very tricky, but how do we look at that? Was there seasonality or could we also build into the fact that venture markets in general have kind of trade it off and perhaps allow you a little bit more leverage on the cost line in light of the route that other venture lenders are experiencing moving forward?

Sure, I will let Mark expand on this, but I would like remind everybody that a lot of our comp expense is variable in nature and it's really correlated with our portfolio activities. And you are absolutely right, we saw a fairly frothier fourth quarter in origination environment whereby we pulled back a little bit more than we probably were anticipating but for the right reason.

And because of the pull-back we actually funded and originate a bit less than we probably would have targeted, but certainly right within the range.

And because of that we probably had an over accrual rolling in that we pulled back-- choose to pull back on that. But Mark will give you more color on that. But it's variable in nature.

Absolutely. Hi, Jonathan. The answer is really kind of two fold, right. One is -- well, three fold. We wanted our base, which we always have in terms of first salaries and discretionary bonuses, et cetera. The second one is, Manuel already pointed out, we have a variable comp plan. That is in some quarters certain individuals will unlock more value or accelerated value versus others and that's always a little bit difficult to predict but as always aligned with the shareholders' interests. That is in term we're making sure that we're originating loans and if there is any clawback provisions they would happen.

And the third overall comment I would make is, just kind of around the comp itself. That is we have one-time expenses that obviously are a part of our compensation for hiring et cetera that we had in different periods which also makes a lot of noise. That's why I try to give you a little bit of a normalized going forward plan which would be pretty consistent for 2016.

Okay. And then my second question is, Mark, you outlined that if you follow the biotech index in the fourth quarter of 2015 you guys were right on the mark as it relates to how you chose to mark those assets and I think we used the Russell. Just in light of the route in biotech in specific I think it's actually down 20% year to date. Would we also expect downward pressure on the portfolio? And Manuel to your -- it's a bit of a two-part question, so downward pressure on biotech investments, Mark. And then second, Manuel, just overall defaults and the view of defaults, you are senior secured, you've seen this before, we've seen the performance, but just in light of tech moves today, the default outlook on portfolio in specific and how we should be thinking about that in terms of modeling?

A couple of factors there, number one we are not an equity shop, so the correlation directly to the equity capital market's performance is more of a kind of a proxy leading indicator as opposed to a directly correlated indicator to overall portfolio performance. I'd like to remind everybody that many of our life sciences companies often times will have a lesser equity derivative component just as a warrant in those deals where we may choose to have a cash payment in lieu of a warrant, because we felt that some of the biotech companies may have been overvalued, mis-valued or said differently, we felt that the capital appreciation available onto these derivative securities, these warrants were probably less attractive than securing a cash payment.

So I think that in the history that we've done here, I think that we've pruned and groomed our portfolio that we, unlike others, have taken the medicine, if you will, on marking our venture portfolio down proactively in Q3, rolling in Q4, which means that I believe that we're well positioned for less volatility related to mark-to-market issues on our equity derivative exposure.

As to the outlook on life sciences, it's well written and documented that life sciences companies are clearly experiencing a bit of a challenge. But as we've seen now, I believe that life sciences companies are continuing to raise capital. We're seeing evidence in our own portfolio that notwithstanding the more challenging times those companies that have viable long-term solutions who made it to the FDA process, which is a critical indication of the vibrancy of these companies, are able to secure additional growth capital. And in fact, we're seeing that happening today. In fact, we've seen some biotech companies moving towards IPOs or M&A events taking place right now.

So our outlook in biotech actually remains pretty strong. We like it. I think that our issue, right now, is want to manage that exposure overall. I think we're sitting kind of in the [mid-50s] from a portfolio allocation. I think it's an area that we probably want to be at, not necessarily grow that, but we remain very confident in our biotech exposure.

The third part of your question is default. At this point, we're not seeing any precipitous increase in the default rates right now. I think most of our companies continue to secure new rounds of capital. I think that what we are seeing is expectations of M&A events that were to take place in, for example, Q3 rolling into Q4, are probably spilling over for a longer duration and maybe happening now in Q1 as opposed to Q4. But we're still seeing M&A activities in our portfolio and we still see a lot of our companies engaged in M&A discussions as we speak today. So I'm not seeing any material rise of defaults right now in the portfolio.

Thank you. Thank you so much.

Christopher Nolan, FBR & Company.

A quick question. The decline in the biotech valuations, does that affect your outlook for spillover income generation for 2016 given that spillover income is partially a function of realized gains?

Well, just to be clear, I'm not a tax expert, but typically what happens here that spillovers are impacted by realized tax losses. And so unrealized depreciation will have a little impact on spillover unless it converts into realized. So I don't see any correlation right now related to a up or down gyration in the biotech market on impacting the spillover. The spillover is only impeded by realized gains -- by realized losses. Mark?

Got it. And a follow-up question would be on core yields. I think Mark mentioned, he is expecting -- I feel the effective yield is 12% to 13.5%. Manuel, your comments were indicating that you're seeing a more favorable environment for Hercules in terms of less competition and thus potentially improved deal terms. Should we look at that improved deal terms will be offset by less prepayment income in 2016?

Great question, Chris. We at this point believe that we're going to see the same phenomenon that you'll see in our financial statements that we saw in the first half of 2015. So we actually do not expect early payment activity in the first half of 2016 to be any different than we saw in the first half of 2015, which is to kind of remind everybody back of the envelope you have about $40 million a quarter in Q1 and Q2 of 2015. We're expecting almost the same level of activity in the first half of 2016.

So, yes, that is affording us to have this portfolio growth without putting a lot of pressure on our portfolio by simply not having the pressure of early payoff giving us that headwind. So, we're rolling into the first half of 2016 with not a lot of headwinds. And, yes, to your point, a lot of our competitors most of who you can read about that we'd probably hear very shortly are faced with significant capital constraints. And because we maintain liquidity in a high flexible balance sheet we're able to underwrite better margins, better quality assets and better terms right now. And I'll say it again, we're not embarrassed to say no to deals that we think are best price and we'll continue to do so.

Great. Thank you for taking my questions.

John Hecht, Jefferies.

Manuel, you discussed distressed competition and obviously that gives you opportunity to be more selective in what you're choosing, but does it also give you any potential acquisition opportunities, whether it would be portfolios or whole companies?

So, look we are asked -- I mean, enormous continues -- this question is constantly being asked of us and I will give our investor confidence in this statement. We are interested in acquiring companies like we invest. And what I mean by that is when we look at some of these portfolios, we think some of these portfolios are mismarked. And when you put the Hercules credit screen over these portfolios, we think that these companies are mismarked materially in some cases whereby conducting a transaction that we think is the right clearing price from the right net asset value to how they have been valued today of fair value are materially different thereby causing a great crevasse of their bid and ask spread on getting a transaction done.

So we're going to wait to see how prudent, a lot of these BDC managers probably mark their books and at which point I think they will start seeing hopefully a more stable and real -- and realistic net asset value by which we can engage in a fruitful conversation.

We prefer not to do hostiles, we prefer to be very friendly acquirers, i.e. the work partnership. And so we remain open in doing so, but we're going to take our time and we certainly are active and interested in that area and looking at some acquisitions. But we acquire like we invest, if it doesn't make sense, we're not going to do it just because the assets are out there, it's got be properly marked and it has to be accretive to our shareholders.

Great. And then -- and the flip side, how do you kind of -- how would you characterize the venture capitalists' mindset right now, given the kind of -- what you see out there is depressing equity values? Are they -- A, are they interested in investing now and B, to the extent they raise capital portfolio company, would there be more inclined to do it from a debt perspective as opposed to an equity prospective?

Great question. There is no question that we anticipate venture capital dollars would taper off. But I'd like to remind everybody that during our 12-year history for six, seven years, venture capitalists were investing $25 billion to $35 billion of activities. And I will call your attention to our investor deck where we have on page 13 and more importantly on page 11 of our investor deck available in our website, you'll see that for many years from 2002 through 2013, you had a normalized level of venture capital investing, about $25 billion, $35 billion a year. And we were doing just fine in that marketplace. And I think that the venture capitalists are clearly got ahead of their skis a little bit and 2015 I thought a lot of people were probably misinterpreting the liquidity window that was available to a lot of the companies, giving birth to now a 125, 127 unicorns that are going to face challenging times.

It doesn't mean by the way that all these unicorns are bad companies. It means clearly they are overvalued and they need to readjust the valuations. But fundamentally a lot of these unicorns represent very attractive candidates to us after they do their valuation adjustments. And yes, there is no question that having a liquid balance sheet as we have and the ability to do transactions $50 million, $70 million on our own accord does afford us the ability to look at very attractively priced companies that are well structured. And in fact what that really means is that, once these unicorns go through their valuation adjustments that they could be down 30%, 50% you're looking at really quite attractive LTVs, loan to value in some of these companies.

Today, we think those LTVs are a little inflated, so we want to see those get adjusted. So again we're being purposeful in waiting, but we think the competitive landscape is quite attractive. Our competitors are strapped for capital or have no access to capital and the pipeline of companies looking for capital is quite strong and quite robust. So we like this market opportunity, allowing us to really continuing to cherry pick some of the best companies out there. So this is why we maintain liquidity back and we think that 2016 is going to be a great year, a vintage year for growth and investment.

Thanks very much, Manuel.

Ryan Lynch, KBW.

Good afternoon and thank you for taking my questions. I just wanted to talk about the commentary you made around your guys name change (inaudible) I guess in a couple of weeks. You guys talk about change the name to potentially pursue new opportunities, product offerings and acquisitions. So from reading the commentary, I was under the assumption from reading that the name change could potentially lead to you guys perusing some different opportunities outside of the VC lending realm. And so number one, am I correct in that assumption? And number two why would you guys potentially shift away at all from the VC lending asset class when you guys have such great opportunities, such great experience and a really great track record in that arena?

So, Ryan, first of all welcome to your new position. And to answer your question unequivocally there is absolutely no circumstances that I can actually imagine or think of that we're leaving or abandoning the venture lending landscape. We're the largest player, we intend to remain the largest player, we intend to defend our position as a venture lender and in fact we intend to grow our franchise and our platform within the venture lending marketplace. One of the reasons why we changed the name was very simply for the conversation earlier in the call that sometimes life sciences companies don't want to have a company out of the technology they stay in, they rather have a more broader platform name like Hercules Capital.

So we felt that back to my original roots when I started the Company, which was Hercules Capital, we were back to the original roots of our name. But I can assure our investor community we are not leaving at all or diluting our interest or focus on venture lending. So I want that unequivocal for the record. We intend to maximize our velocity in that area.

The issue on acquisitions is that there are multiple different platforms that are focused on venture lending or venture equity that are also attractive, but there are also segments of business that we think are complementary to our existing business such as ABL. A lot of our companies that begin to mature are also looking to have some component of ABL financing and we simply believe, for example, that's a line extension of our core business that having an ABL type platform or even leasing platform to help service the needs of our companies within the venture lending community is a prudent thing to do as you look to grow. But no, do not think that we're leaving venture lending.

Okay. Great. I appreciate the clarification and I'm glad to hear that. That's all for me.

Aaron Deer, Sandler O'Neill.

You just commented on the unicorn valuations and you suggested that some of these are probably see some warranted valuation adjustments of 30% or something. But at the same time earlier in the conversation you said that well some of your companies have become unicorns. That's obviously not your focused niche. So, I guess just when you say that you want to see valuations come in to get you more involved, are you suggesting that some of the smaller valuation growth companies are also going to be subject to those sorts of reductions in their values and subsequent funding rounds?

We're not seeing evidence of that, we're still in -- the term that we've coined or we use quite a bit around here is the [neutracorns], the neutering of unicorns. And I think that's probably more appropriate to see. We're not seeing evaluations compressions under the sub-billion dollar level that you're seeing in the unicorns, we've got ahead of their skis on this issue.

Again a lot of these unicorns are still attractive companies. But we'd rather wait to see them adjust evaluations and thereby representing a much more attractive and more realistic honestly, loan to value at that point. Because today the last thing you wanted to do is trade off your derivative securities or warrants and the security that is going to be overvalued that's going to be facing a down round over the next 12 months. I'd rather go into those companies after they have done the valuation adjustments, reassessed the likelihood of monetization of those warrants and determine what is the upside in those derivative securities as you do the underwriting of these new loans. So we're going to be patient. We're not looking to bolster our position in unicorns and nor do we think and are not seeing the non-unicorn companies seeing the same experience at valuation adjustments as you're seeing realized today with unicorns. So they're not directly correlated.

Okay. And then on the buyback, can you just kind of give your kind of philosophical thinking in terms of -- obviously you've got some tremendous growth opportunities in the year ahead. So you want to retain capital but at the same time you've been doing a little bit of buyback and with the stock down here around book value, it could start to become tempting to do some more of that. Can you talk about how you are thinking about that going forward?

Sure. Look, we unlike others when we say we do things as we did with the unfunded commitments, managing them down by 70% just like we said, we are going to have a stock buyback to look after the best interest of our shareholders, the fact that we're sitting on abundance of liquidity, we felt that it was a prudent thing to do, especially in the wake of looking at a lot of overvalued companies or companies that are seeing thin margins or frankly crappy underwriting, we chose to remain on the sidelines and not pursue that. And so, as we sat here with an abundance of liquidity, we felt that allocating just under $10 million to protect our shareholders and allocate $10 million to buy 1.2% of our stock was absolutely the prudent thing to do as we sat here with liquidity that has a negative spread. So we think it's a good investment. We did that.

To the other part of your question, we don't necessarily indicate when we buy stock at what prices that we do. But you could definitely rest assured that unlike others who have stock purchase programs we intend to the best interest of our shareholders to continue to pursue those programs if and when compared to our pipelines and available opportunities we will balance between those two options. Mark, anything you want to add to that?

The comment I will make is on the bond question which you had, which is again as we've talked about with the early prepayments in Q3 and in Q4 we were sitting on plenty of liquidity, we looked at our capital stack and we basically decided to take $40 million off the baby bonds that had a high effective interest rate, if you want to think about it that way. We believe strongly given our credit facilities and our liquidity, we did a lot of forward analysis and our understanding was it was a good move to protect getting into further way [down our cost for that].

We're going to be rotating out in fiscal 2016 further on our more elongated higher-cost debt. So I can assure you that our intent is overall lower cost of capital which gives us a further competitive advantage in widening our NIMs on behalf of our shareholders. And so doing a controlled stock buyback, reducing our cost of capital and then making -- converting our liquidity into higher yielding assets at a better structure all represent a fairly highly accretive investment opportunity for us in 2016.

Chris York, JMP Securities.

So you stated competition had declined and I'd just kind of be curious to learn what type of investor or maybe lender have you seen the most at the proverbial table in the fourth quarter and then maybe in the current quarter?

Well, I'm not in a business of dispersing or calling out my competitors. I mean some of these guys are my friends as well. I think it's safe to assume that as you see your Q4 earnings releases coming out they will be self-evident on who is actually matching the rhetoric with reality and I think that that's going to be pretty self-evident here in the next couple of venture lenders start reporting here on whose truly growing their loan book, who has truly managed down their unfunded commitments, who has liquidity and who is experiencing credit losses.

And I think they'll be self-evident on those who are actually adhering to what they say and matching the rhetoric with reality. We perform to what we say we're going to do, we deliver results as we say we'd do and we execute on the items that we said we're going to do. I think managing down the unfunded commitments by 70% that most people were skeptical that we're able to do was an amazing achievement that we did do dropping down for $400 million plus down to $100 million or so. So I think that a lot of this reality is going to get reconciled naturally here by the release of Q4 earnings and 10-Ks by everybody and I think you'll see that here pretty quickly.

Got it. And then switching gears a little bit, so you talked about the potential fall in LTVs and unicorns that could make the investment opportunity attractive. So is there a specific business model or sector among what you guys are calling the neutracorns that you think present a good opportunity for investment via collateral hard assets or attractive IP?

Well, there are many lines of businesses that we find attractive. Obviously there's many SaaS companies that have seen inflated valuations get adjusted by just public comps for example of Workday. But you're seeing a lot of SaaS [malls] that are quite attractive. Cyber security is an area that publically has gotten beat up pretty bad, but there's some interesting cyber security private companies that are out there. You're seeing big data mining as another interesting area that's seen pretty inflated valuations, but there is also a very large unicorn in this area of Palantir for example, that I their valuation is quite sustainable and has a very strong business model. So really the unicornization, the neutracorns that you referred to, I think it's going to come down to those companies valued just under $10 billion to the $3 billion level. I think that's where you're going to see probably the greatest pressure on that the $2 billion to $10 billion level.

These companies I think still have good strong fundamentals, but I think that they've been overvalued and doesn't make them bad. But I'd rather wait to have those valuations being more realistic and then to determine what the probability due to an eventual liquidity event will be the multiple on that because a lot of these companies are unicorns facing and IPO would actually be a down around, and so that's not an option for them.

And then, if they are overvalued as unicorn, the attractiveness from an M&A event also becomes fairly unappealing. So their own fate and their own destiny is going to be contingent upon swallowing hard and getting the proper valuation to kind of match or exceed expectations over the next two to three years, and that's a hard thing to determine. And boards and venture capitalists are actively engaged in those discussions as we speak right now. So we're going to wait it out a little bit and let that kind of fall-out happen and then we evaluate what those opportunities look like, they may still not be attractive for us.

Great. Thanks for sharing all that on the environment. That's it for me. Thanks.

(inaudible) Raymond James.

Most of my questions are that already been answered. The one thing I have left, at the beginning of the call, we were talking about the unfunded commitments and you guys have done a lot this year. You talked about really having the liquidity position improved just in that aspect by decreasing those unfunded commitment out there. Have you seen any pushback from borrowers or anything you had to give in when it comes to the table for borrowing possibly in pricing terms or covenant terms because you are no longer offering any or as much of those unfunded commitments?

We think that a lot of other lenders are abusing unfunded commitments, because our relation with our companies is quite strong. And given my team's openness and candor with our companies, I don't see any evidence whatsoever on pushback or animosity that may have been created by managing down our unfunded commitments. We are partnered to our companies, we're partnered to our venture capital firms, and the process on managing down unfunded commitments it's a collaborative process. It's not done in its draconian Machiavellian way. And so, our team has done an outstanding job of working through that process. Clearly it took us two quarters to do that. But as we said, we perform to what we expected and we do not see any impact whatsoever in our pipeline or deal flow related to that.

And then on -- just a little bit of a modeling side here, you talked about SG&A run rate between $3.5 million, $4.5 million per quarter going forward, but then talked about you expect it to taper off. Can we expect it to be kind of at the higher end of the range early on and taper down from that or kind of average out over the whole year (multiple speakers) in 2016?

Sure, [Lessie]. I will let Mark, our CFO, kind of give you more color on that. Mark?

Yes, sure. The answer is typically you would see some fluctuations quarter to quarter. That's why I gave the range between of $3.5 million and $4.5 million on a quarterly basis. My comment would be -- is to take the midpoint and just kind of use that as a good place, if you will, to put it through the quarters and if there is a little bit up and a little bit down during the different periods, it's still going to average out to be about the same thing.

So, you do expect that average to maintain and not taper off the year.

Correct.

Okay. All right. Perfect. That's all for me. Thanks.

And I am showing no further questions at this time. I would now like to turn the call over to the management for any closing remarks.

As I said previously thank you everybody for joining us on the call today. Again, we'll be at the Jefferies Mid-Atlantic Conference in Baltimore on March 4, we're participating in JMP Roadshow in Boston on March 7 and of course we'll be at the RBC Capital Markets Financials Conference in Manhattan on March 8 and 9.

With that thank you everybody and look forward to seeing everybody in the couple of weeks. Thank you, operator.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.