Hercules Capital Inc (HTGC) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Hercules Capital Q1 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Michael Hara. Mr. Hara, the floor is yours.

Thank you, Chris. Good afternoon, everyone, and welcome to Hercules conference call for the first quarter of 2022. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO.

Hercules first quarter 2022 financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at htgc.com. We have arranged for a replay of the call at Hercules' web page or by using the telephone number and passcode provided in today's earnings release.

During 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 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 and without limitation, the risks and uncertainties, including the uncertainty surrounding the current market turbulence caused by the ongoing pandemic and geopolitical crisis, and other factors we identified from time to time in our filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements 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 our website.

And with that, I will turn the call over to Scott.

Thank you, Michael, and thank you all for joining us today.

The momentum that we experienced in our business throughout 2021 continued in Q1, where we originated record Q1 gross new debt and equity commitments of over $615 million and gross fundings of over $351 million. More importantly, with early payoffs abating even more than expected, we achieved record net debt investment portfolio growth of over $190 million during the first quarter.

The substantial investments that we have made in our team, infrastructure and platform have positioned us well to be able to take advantage of what we continue to view as a favorable market environment for our business.

Given our strong performance in Q1 and our activity quarter-to-date in Q2, we believe that the company is well positioned to be able to deliver strong net investment income growth over the remainder of the year. This will be further bolstered by our dramatically reduced cost of debt of 4% in Q1 2022 from 5.5% in Q1 2021, and the fact that Hercules debt portfolio is highly asset sensitive, with 94.7% of our loans being variable rate with floors.

Our liabilities are fixed with the exception of our credit facilities. As the FOMC raises interest rates, each 25 basis point increase generates an additional approximately $0.04 of earnings annually.

Let me recap some of the key highlights of our performance for Q1. Our record Q1 originations activity was once again driven by both our technology and life sciences teams delivering strong performance during the quarter. Our commitments and funding activity demonstrated balance between our 2 core verticals, although our investments during the quarter were weighted towards technology. We funded capital to 26 different companies in Q1, of which 10 were new borrower relationships.

In addition to strong funding activity for new portfolio companies, we were also able to, once again, expand our funding relationship with numerous portfolio companies that continue to show strength and achieve performance milestones during the quarter. Based on the record $2.64 billion of new debt and equity commitments that we delivered in 2021, we expect this trend of increased follow-on fundings and the unlocking of milestone-based committed tranches to existing portfolio companies to continue to accelerate in 2022 and drive strong gross funding levels for the remainder of the year.

During Q1, our funding activity was back-end weighted towards the end of the quarter, with over 55% of the quarterly fundings occurring during the month of March. Since the close of Q1 and as of May 2, 2022, our deal team has already closed $335 million of new commitments, and we have pending commitments of an additional $622 million in signed, nonbinding term sheets. Combined, our year-to-date closed and pending new commitments currently exceeds $1.5 billion, which is the strongest start to any year that we have ever had through this period.

Inclusive of our Q1 performance, we have now delivered over $600 million of new gross commitments and over $350 million of new gross fundings in 3 consecutive quarters. We expect this trend to continue in Q2.

Our new deal pipeline remains very healthy and active and currently exceeds $1 billion of potential investments. As a result of the continued volatility across the equity markets, particularly for growth-stage companies, we expect our pipeline to continue to strengthen near to medium term as companies continue to look for creative and nondilutive structured capital solutions from debt providers that they trust.

Our scale, permanent equity capital base and 17-plus year track record are clear differentiators of our business, particularly in periods of equity market volatility. As we indicated on our last call in February, while the continued equity market volatility for certain growth stage companies may negatively impact net asset value short term, as it did in Q4 and in Q1, we expect it to be a long-term net benefit to our business in terms of increased investment opportunities and net debt portfolio growth. This is exactly what we have seen year-to-date.

Consistent with our historical approach to underwriting credit, we will remain patient and disciplined on new originations, irrespective of the market conditions. Based on the current market volatility and increasingly challenging macro environment, we are being even more selective than normal in terms of underwriting new credits, with an increasing emphasis on later-stage and more-established companies where we believe the risk-adjusted profile is better at this time.

During Q1, portfolio company exits and liquidity events for the industry pulled back, but remained healthy across our portfolio. Year-to-date, we've had 3 companies complete their IPOs, including 1 that closed this week, and 5 companies announced or complete M&A transactions, 4 in Q1 and 1 company in Q2. In addition, we have 5 companies that have registered for their IPOs or have entered into definitive agreements to go public via merger or SPAC transaction.

Early loan repayments were approximately $85 million, well below our guidance of $150 million to $250 million, and a significant decrease from $426 million in Q4 2021. While the lower level of early loan prepayments reduced our Q1 NII per share, it resulted in record net debt portfolio growth in the quarter, which positions us well for strong earnings growth beginning in Q2. For Q2 2022, we expect prepayments to remain low and be between $100 million and $200 million, although this could change as we progress in the quarter.

The lower levels of early payoffs that we experienced and are continuing to project will give us an opportunity to enhance the longer-term earnings power of the business, assuming that originations remain strong. Our private funds business has also continued to ramp up, which has contributed to the increased levels of origination activity that we have seen over the last several quarters.

In Q1, we generated total investment income of $65.2 million and net investment income of $35.8 million or $0.30 per share. As a result of the lower levels of prepayments, total fee income during the quarter was $2.9 million, down $4.6 million from $7.5 million in Q4 2021.

Our portfolio generated a GAAP effective yield of 11.5% in Q1 and a core yield of 11.1%, which was consistent with our guidance for the quarter. With net regulatory leverage at a very conservative 83.2% and continued robust liquidity across our platform, our balance sheet remains well positioned.

Credit quality of the debt investment portfolio remains strong and consistent with what we reported in Q4. Our weighted average internal credit rating of 2.10 was the same as Q4. Our Grade 1 and 2 credits remained the same at 73.2% versus Q4. Grade 3 credits were also relatively the same at 26.4% in Q1 versus 26.3% in Q4. Our rated 4 credits made up 0.4% and our rated 5 credits declined to 0%. Capital raising across our portfolio remained strong in Q1, with our active portfolio companies raising over $1 billion of equity and strategic capital during the quarter.

In Q1, the number of loans on nonaccrual decreased to 1 debt investment, with an investment cost and fair value of approximately $13 million and $97,000, respectively, or 0.5% and 0.0% as a percentage of the company's total investment portfolio at cost and value, respectively.

During Q1, excluding the impact of the nonrecurring loss on debt extinguishment of $3.7 million, Hercules had net realized gains of $1.3 million. This was comprised of gross realized gains of $5 million, offset by $2.1 million due to the write-off of one debt investments, and $1.6 million due to the write-off of legacy equity and warrant positions. We ended Q1 with strong liquidity of $430 million, which provides us with ample coverage of our available unfunded commitments of $371 million, and the ability to continue to fund our ongoing anticipated business activity.

The venture capital ecosystem continued its healthy pace with fundraising activity at $74 billion and investment activity at $71 billion, according to data gathered by PitchBook and the National Venture Capital Association. Fundraising activity is on a record pace to exceed 2021's level of $132 billion, while investment activity moderated from Q4 2021.

We exited Q1 with undistributed earnings spillover of over $171 million or $1.39 per share. The undistributed earnings spillover continues to provide us with the added flexibility with respect to our shareholder distributions going forward and the ability to continue to invest in our team and platform. For Q1, we declared a base distribution of $0.33 and a supplemental distribution of $0.15. We will continue to evaluate the quarterly variable base distribution, with a particular focus on the debt portfolio growth and NII growth that we are expecting to materialize.

In closing, we are off to a terrific start to 2022 and we continue to be well positioned to take advantage of market conditions and grow our core income generating assets, and as a result, the earnings power of the business. We will remain steadfast with our core themes of maintaining a strong balance sheet and staying disciplined on new underwritings, while continuing to invest in our teams and platform. We are thankful to the many companies, management teams and investors that continue to make Hercules their partner of choice.

I will now turn the call over to Seth.

Thank you, Scott, and good afternoon, ladies and gentlemen. As Scott just outlined, we believe that Hercules Capital is extremely well positioned in the current market and there are several key themes that give us confidence with respect to our outlook for 2022. Strong momentum on the originations is continuing, prepayments are slowing, driving net portfolio growth, which is expected to translate to near-term increase of net investment income.

Further, with approximately 95% of our debt investment portfolio floating, the majority of which being prime-based, this positions us well in a rising rate environment for additional net investment income growth. Credit is stable and our balance sheet remains strong. Given the market volatility, we are also monitoring the macro environment closely and maintain the ability to quickly adapt to any changes that we see. Our goal from a balance sheet perspective is to remain long liquidity and flexibility and we have taken several steps year-to-date in this regard.

With that in mind, let's review the following areas: the income statement performance and highlights; the NAV unrealized and realized activity; leverage and liquidity; and finally, the financial outlook.

Turning our attention to the income statement performance and highlights. Net investment income was $35.8 million or $0.30 per share in Q1, a decrease compared to the prior quarter, driven by a reduction in early repayments. The reduction in early repayments caused total fee income during the quarter to decline to $2.9 million from $7.5 million in Q4 2021. Total investment income was $65.2 million, a decrease compared to the prior quarter, again driven by a reduction in early repayments.

Our effective and core yields in the first quarter were 11.5% and 11.1%, respectively, compared to 13% and 11.2% in the fourth quarter. The slight decline in the core yield was due to a modest decrease in coupon interest and was consistent with our guidance.

Turning to expenses. Our gross operating expenses for the quarter decreased to $30.8 million compared to $33.7 million in the prior quarter. Net of costs recharged to the RIA, our operating expenses were $29.4 million. Interest expense and fees decreased again quarter-on-quarter to $13.5 million from $14.1 million in the prior quarter. The acceleration of the unamortized debt issuance cost and premium on repayment of the October 2022 notes is shown separately as a realized loss in the current quarter.

SG&A expenses decreased to $17.3 million from $19.6 million in the prior quarter, lower than my guidance. The decrease compared to the guidance and the previous quarter was driven by lower variable compensation and tax expense due to the decrease in NII related to the reduced early repayments. Net of cost recharge to the RIA, the SG&A expenses were $15.9 million.

As Scott mentioned, our weighted average cost of debt was 4%, which represents a further 50 basis point decrease compared to the prior quarter of 4.5%. The reduction is due to the refinancing of $230 million of convertible debt that matured in February, and early retirement of the $150 million October 2022 notes, carrying a combined average interest rate of approximately 4.5%, with the January issuance of $350 million of institutional unsecured notes at a fixed coupon of 3.375%.

Our ROAE or NII over average equity was 11% for the first quarter, and ROAA or NII over average total assets was 5.5%.

Switching to NAV and unrealized activity. During the quarter, our NAV decreased $0.40 per share to $10.82 per share. This represents an NAV per share decrease of 3.6% quarter-over-quarter. The main driver for the decrease was the $36.7 million of change in unrealized depreciation, primarily related to the mark-to-market movement on our publicly traded equity positions. NAV was further reduced by the $3.7 million loss on debt extinguishment, offset by $1.3 million of realized gains, resulting in a $39.1 million decrease to NAV.

The net realized gain of $1.3 million comprised of $3.4 million of net gains from the disposal of equity and warrant positions, offset by $2.1 million of realized losses relating to the write-off of one legacy debt position that was on nonaccrual. The previously communicated impact of settling the option value of the convertible notes repaid in February and distribution of the increased supplemental dividend paid in March, decreasing NAV by $0.09 and $0.15 per share, respectively, was completely offset by the accretive value of issuing shares through our ATM program at an average share price of $17.73 during the quarter.

Regarding leverage and liquidity, our GAAP and regulatory leverage was 100.8% and 87.7%, respectively, which increased compared to the prior quarter due to the net growth of investments. Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 96.3% and 83.2%, respectively. We ended the quarter with liquidity of $430 million. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary.

As previously disclosed in January, we issued $350 million of institutional unsecured notes at an attractive fixed coupon rate of 3.375%. The proceeds were utilized in February to redeem the $230 million of 4.375% convertible notes upon maturity and $150 million of 4.625% October 2022 notes, with a small premium for early redemption.

On the outlook points, for the second quarter, our core yield guidance is 11% to 11.5%, which is consistent with our first quarter guidance. As a reminder, approximately 95% of our debt portfolio is floating with a floor, so the anticipated interest rate hikes in 2022, like yesterday, will benefit our core yield going forward.

Although very difficult to predict, as communicated by Scott, we expect $100 million to $200 million in prepayment activity in the second quarter. Consistent with prior guidance, we expect quarterly prepayment to result in a lower acceleration of fee recognition rate of 2.5% to 3% due to the average vintage of the payments. We expect our second quarter interest expense to remain stable compared to the prior quarter.

And finally, for the second quarter, we expect gross SG&A expenses of $20 million to $21 million and a similar level of RIA expense allocation compared to the first quarter.

In closing, we're positioned well to benefit from this market, and we look forward to continued growth of our core income.

I will now turn the call over to Chris to begin the Q&A portion of our call. Chris, over to you.

(Operator Instructions) Our first question comes from Crispin Love of Piper Sandler.

So as you said, you seem pretty well positioned for NII growth for the rest of the year. But Seth, just building on your comments just now, how are you thinking of the ramp of core yields through the rest of the year if the forward curve plays out with the numerous rate hikes that are expected from the Fed and then the few that we've already had? And then also, what could that mean for what core yields could be as we exit 2022?

Yes, sure. A couple of things on that, Crispin. Thanks for the question. One is when I think about it from a Q2 perspective, we should note that the majority of our originations occurred in the first quarter towards the back end of the quarter, as well as the rate increase by the Fed of the 25 basis points was only effective as of March 17. So we would expect to see a benefit upswing in Q2, even without the recent 50 basis point increase as of yesterday, effective today.

So what we would expect to see is a portfolio that is benefiting almost one for one. As you can see when we do the graph associated with the increase and what it translates to an earnings per share, it's fairly linear. In that, a 25 basis point increase, we estimate, is a $0.04 annually increase on the earnings side and then it ratchets up 50 basis points is $0.08, et cetera, et cetera. So it's fairly linearly driven, noting that the majority of our portfolio is prime based, and of course, LIBOR and SOFR move a little bit different. So on the yield side, you would also expect it to be fairly linear.

And the way that I would mathematically do it if I was going to model it out, Crispin, is I would assume anywhere from 65% to 70% direct effective yield impact, because not all of it is going to increase at the same rate as those rate increases. But that's how I'd model it.

That's very helpful. And then just looking at your tech and life sciences exposure, are you inching one way or another for new fundings? I know it's been a tough environment for tech with higher rates at least in the public equity markets. And I know, I think Scott mentioned earlier in the call, that you had more tech fundings in the first quarter. So I'm just curious how you're thinking about future fundings and the weighting between tech and life sciences and what could drive you one way or the other.

Sure. Thanks, Crispin. The key operative word for us is balance and diversification. We've often said publicly and in some of our private conversations that in periods of volatility, the focus for us is on maintaining balance and diversification, and that's exactly what we're trying to do now. Our target exposure right now is approximately 50-50. So we want to be weighted 50% tech, 50% life sciences. That may toggle quarter-to-quarter because it's difficult to control the exact timing of when these fundings will close. In Q4, we were slightly weighted towards life sciences. In Q1, we were slightly weighted towards tech.

If you look at the business over the last 6 months, it's almost 50-50 on the nose, and that will continue to be our target allocation certainly short to medium term here.

Our next question comes from Kevin Fultz of JMP.

In your prepared remarks, you mentioned that only one debt investment is on nonaccrual, which is great. But could you provide some insight on the 2 debt investments that came out nonaccrual during the quarter?

Sure. One was the legacy Sungevity/Solar Spectrum investment, and that may be a name that rings a bell for some of those that are on this call. That was a company that went through an insolvency proceeding several years ago. We restructured that debt. We ended up funding the NewCo coming out of it, and that company has had substantial progress over the course of the last 6 months. The company, which is now named Pineapple Energy, completed a reverse merger and did a pretty significant capital raise in the first quarter. So that loan has come off nonaccrual. They are current pay with all obligations to Hercules. And the other one was the one small legacy loan that Seth mentioned, we had a small realized loss. We ended up selling that loan back to the investors in Q1. We took a small realized loss on that, but that also came off nonaccrual during the quarter.

Okay. Appreciate the color there, Scott. And then last quarter, I believe you mentioned targeting regulatory leverage north of 1x. As of quarter end, you're well below that at 0.88x. Just curious if your target leverage range has shifted at all given the current backdrop.

No, no change in it. We remain at a target ceiling of 1.25 to equity on a GAAP basis. And we do have the ambition, should prepayments continue to remain low, of continuing to drive that ratio up a little bit closer on a regulatory basis to 1:1.

And next, we have Finian O'Shea of Wells Fargo.

First question on the adviser, are you considering or undertaking more than one, multiple fund lines? And what -- if so, what strategies would the new ones be in?

So we currently are managing 2 distinct parallel funds in the private fund business. We are certainly beginning now to think about what's next in terms of potential funds down the road, but there's nothing imminent and there's nothing near term to discuss. The 2 private funds now very consistent with the strategy that we've laid out historically, and those funds continue to ramp up ahead of expectations and they're doing exactly what we expected them to do in terms of helping us not only increase the total addressable market for us, but also helping us do larger later-stage transactions and stay with our borrowers for longer periods of time, which is extending out duration and increasing the earnings power of the business.

That's helpful. And is there any -- I think that you hit a lot on your commentary, which is helpful, but it sounds like everything is pretty healthy, holding up well in terms and yields and all that. Has anything -- or is it comparatively more interesting to you anywhere in the public stock markets where a lot of the, I think, companies you would work with have sold off pretty drastically? Understanding there'd be exposure limitations on that kind of thing, but I think you've done a little of that in the past and wondering if that's interesting to you today.

And in terms of equity purchases or debt transactions for those companies?

Equity.

Yes. So not on the equity side. We continue to have about 6% to 7% of our investment portfolio in equity securities. That has obviously come down proportionately as the markets have declined over the course of the last 6 months. We will opportunistically make direct equity investments in some of our public borrowers. It's just case specific. So we've had several companies over the course of the last several quarters that have completed some fairly large, in our view, attractively priced equity transactions, and we have participated in those. That's typically done through our RTI, which is the right to invest that we get in the majority of deals that we do. But those -- on an overall basis, those are a pretty small part of what we do on a quarterly basis. Those tend to be somewhere in the range of $1 million to $5 million on the high end per deal.

Our next question comes from John Hecht of Jefferies.

I apologize if you comment on this. I did miss the front end of the call just because I got -- was juggling earnings. But in terms of timing of -- you had a lot of deployments in the quarter, but were they back weighted? Or anything you can comment in terms of the timing of the deployments?

They were. So very strong investment activity in the quarter, $615 million in commitments, $352 million of fundings. Approximately 55% of the fundings in the quarter occurred in the month of March. So very heavily weighted towards the back end, which obviously will provide some significant power for Q2 and the go-forward periods.

Okay. Helpful. And then I understand how rates will affect revenues and earnings. How do you think rates have -- a couple of percent from here, does that start to slow repayments, do you think? Or early payments? Or is there -- you can't -- it's really unpredictable in terms of the behavior there?

I think the prepayments are just very difficult for us to predict, and we talked about that on a pretty consistent basis. I think the one theme that we absolutely can speak to is that over the course of the last several months, we've seen a significant change just in terms of sort of the mentality of boards and companies. Whereas last year, refinancings were sort of a priority for a lot of these companies. And as liquidity built up, they were using that excess liquidity to pay off debt, and that's why we saw nearly -- actually over $1 billion of prepayments last year.

The messaging that we're hearing from boards and from companies in this market environment is just different. So even the companies that are still very strong and long liquidity, the boards are just taking a little bit of a different approach. And given some of the volatility, choosing not to pay off the debt, which, again, for -- given the quality of our credit book, we're perfectly happy with those deals staying on the books for longer periods of time.

Okay. And just any changes in kind of your emphasis or focus on different subsectors given inflationary trends and how that might impact how industries work?

Sure. We tend not to want to talk about moves that we're making, just given that we want to be kind of cognizant of what others are doing. What I would tell you is that, and we spoke about this in our prepared remarks, we have absolutely, over the course of the last 2 quarters, begun to position the portfolio into more later-stage, more established scaled companies, both on the tech side and on the life sciences side. If you look at the majority of deals that we booked in Q4 and the majority of deals that we booked in Q1, you would see those 2 themes pretty meaningfully in terms of later-stage, more-established scale tech companies, and then larger, public borrowers on the biotech side, diversified drug discovery, drug development platform companies that are very strong from a liquidity perspective. Those 2 general themes are going to continue.

Right now, we think the risk-adjusted return profile in those areas is just much better than what we're seeing in some of the earlier-stage type opportunities, where we think the risk curve is up pretty materially. There are absolutely sectors that we are rotating away from and that we're not investing into, but I'd rather not comment on specifically what those are.

(Operator Instructions) Our next question comes from Ryan Lynch of KBW.

First question I just wanted to focus on was just the core yields or spreads that you guys are anticipating throughout the year. You obviously talked about a lot of volatility in the marketplaces today. I think increasing the attractiveness of potential borrowers to access venture debt, which I think would allow you to maybe have a little more pricing pressure -- or pricing power, excuse me, from a spread standpoint. But then at the same time, you have rising rates, which I would think, at times, can put some pressure on spreads. So I'm just curious, how do you see those 2 interplay playing out.

Sure. In terms of the core yields, the guidance that we gave for Q2 is consistent with the guidance that we delivered for Q1, which is at 11% to 11.5% core yield target. We didn't mention this, but towards the back end of 2022, we certainly would expect to be on the higher end that yield guidance from a core yield perspective, largely driven by what the Fed has already done and what we expect the Fed to continue to do.

In terms of overall theme, I'd say a couple of things with respect to yield. So we are seeing some opportunities for increased yields in the market. It's on a deal-by-deal basis. It is not across the board. It's very company specific. And I would also say that there are a number of opportunities that we've seen over the course of the last several months in the market, where there are opportunities for substantially increased yield, but those deals and that increased yield is being driven by increased risk. And you've got companies right now that are willing to pay up from a yield perspective to get increased leverage, to get looser structured deals. And those are just 2 things that historically we've been very hesitant to chase. And so you should not expect us to chase those on a go-forward basis.

So I think from an overall perspective, we do expect there to be some core yield accretion over the course of the next several quarters, but I would not expect it to be material given that we're going to continue to chase quality and not chase yield and increase risk.

Okay. That's helpful commentary. One thing I also noticed in your press release, you guys have the debt portfolio composition breakdown. And it looks like your first lien senior secured loans have dropped from about 83% of your portfolio a year ago to about 73% today. Can you just talk about what's kind of the driving factor behind that mix shift? It's obviously still significantly weighted towards first lien senior secured, but a little bit less so from a year ago.

Yes. So as you pointed out, right now, about 73% of the portfolio is in true senior secured first lien debt, that is down slightly from where it was over the last several quarters. And that is directly correlated to what we talked about in our prepared remarks in terms of what we've been intentionally doing over the course of the last few quarters as we've moved more aggressively into some of the later-stage, more established companies, those companies tend to be a little bit more mature, a little bit more scaled from a growth perspective. And in many cases, those companies have relatively cheap, small, inexpensive revolving credit facilities in place. And so when we do some of those larger, later-stage structured transactions, in some cases, we are going behind small formula-based revolving credit facilities that are provided from commercial banks at prime, prime minus 1, prime plus 1, and so that's what's causing that number to decrease slightly. But it's certainly not a material move from our perspective, and those companies tend to be of much better credit quality in our opinion.

Okay. That makes sense. And then just one last one that I had. You kind of lay out on Slide 40 of your deck, the venture capital fundraising and investment activity. And it was interesting to see that venture capital investment activity was down or at least on pace to be down relative to 2021, which is not surprising. But then when you look at investment venture capital fundraising, it's up significantly and on pace, at least to significantly eclipse what we saw in 2021. I'm just curious if you -- if there's anything that you can read into that on any sort of impact that could potentially have later in the year to see so much capital raise, but yet so little deployed in Q1?

Yes. I think it's all from our perspective, very positive and very much expected and it speaks to a very healthy and vibrant VC ecosystem. Fundraising continues to not only be strong, but actually to exceed what we saw in 2020 and 2021. $74 billion of venture capital funds raised in Q1 relative to $132 billion raised in all of 2021. So on pace to significantly exceed what we saw last year. that speaks, I think, very nicely to our expectation that VC inflows into venture capital growth stage companies will continue.

On the investment side, you did see a little bit of a pullback in Q1. It was certainly not material when you look at it in sort of the grand scheme of things. In Q4, VC firms invested $90 billion. In Q3, they invested $83 billion. And in Q1, they invested $71 billion. So it did come down slightly, which was not a surprise to us just given some of the volatility in the market. And some of the rationalization that you're seeing from a valuation perspective. But the fact that fundraising is remaining so healthy and so strong, I think from our perspective, speaks very well to what we expect to be a continued strong environment for the remainder of 2022 in terms of companies being able to raise capital.

And speakers, I see -- I do not see any more questions in the queue. I will turn the conference back over to Scott Bluestein for closing remarks.

Thank you, Chris, and thanks to everyone for joining our call today. We look forward to reporting our progress on our next earnings call. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.