Triplepoint Venture Growth BDC Corp (TPVG) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the TriplePoint Venture Growth earnings conference call for the period ending March 31, 2014. (Operator Instructions). This conference call is being recorded, and a replay of the call will be available as an audio webcast in the TriplePoint Venture Growth website at www.tpvg.com.

I would now like to turn the call over to Harold Zagunis, Chief Financial Officer at TriplePoint Venture Growth. Mr. Zagunis, please go ahead.

Thank you, Lida, and thank you, everyone, for joining us on our first earnings conference call as a public company. As a reminder, the results we announced earlier today, and which we'll discuss on this call, are for the period from the pricing of our initial public offering on March 5, 2014, through March 31, 2014.

Here with me to discuss the results are Jim Labe, Chief Executive Officer and Chairman of the Board; and Sajal Srivastava, President and Chief Investment Officer. Jim will talk with you about the strength of our platform, business, and investment strategy, and why we believe we are well positioned to generate attractive returns for our stockholders over the long-term. Sajal will provide perspective on our portfolio composition, our investment activity, and the growth opportunities in the current and near-term environment. I will then wrap up with our financial results for the 27-day period from our IPO through the end of the first quarter. We will then be happy to take your questions.

Before I turn the call over to Jim, I would like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements, and remind you that during this call we will make certain statements that relate to future events or the Company's future performance or financial condition, which may be considered forward-looking statements under federal securities law.

We ask that you refer to our most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond the Company's control and difficult to predict, and could cause actual results to differ materially from those expressed or forecasted.

All forward-looking statements speak only at the original time of this call, and we do not undertake to update our forward-looking statements based on new circumstances or revised expectations.

With that, here's Jim.

Thanks very much, Harold, and welcome, everyone. Let me start by thanking you for the really generous support and really great enthusiasm that we received during our recent roadshow and the initial public offering. The highlights to us, of which included the first day of trading, where we closed above the offering price; the exercise in full by the underwriters the overallotment option; and a very strong day one institutional investor support. We're really grateful.

This IPO was a significant milestone for us, as many of you know, and we look forward to having a really productive and rewarding relationship with all of you moving forward. While the IPO was the headline of the period that we're discussing here today, the 27-day period following the pricing of the IPO -- which is really the short period we're reporting and discussing today -- is also important, because it underscores the strength of our strategy and our unwavering commitment, our belief, in building a best-in-breed business for our stockholders.

Since this is the first earnings call, I thought it would be useful to review our core strategy and also our market position, including why we believe TriplePoint Venture Growth BDC represents such a great and unique compelling opportunity among all the BDCs.

To recap, the business is providing debt financing to venture growth space companies in the tech, life sciences, and other high-growth industries, which are backed by a select group of leading venture capital investors. The investment objective is simple: we really want to generate substantial current income while preserving capital and retaining an upside return potential through equity kickers, which we get in all of our financing transactions, and are in the formal warrants to acquire stock.

Our BDC benefits from the unique and differentiated platform of our sponsor, TriplePoint Capital, which we built over the last nine years and leverages now by almost 30 years, basically, of being in this venture lending business. Since inception, our sponsor's cumulative venture lending financing commitments have exceeded some $2.3 billion. And that's to more than 355 companies, including Facebook, YouTube, Oncomed, One Kings Lane, and countless others. Based on the credit performance of our portfolio -- during the past nine years, in fact -- we've shown nothing other than positive portfolio and positive book value growth. That's since day one.

At the heart of this investment strategy is what I always call the four Rs. This was the very foundation of TriplePoint from the get-go: relationships reputation, references, and returns. I can't emphasize these enough. We develop strong relationships with our venture capital investors and venture-backed companies. We seek to preserve our strong reputation and franchise. We strive to make every customer a reference. And if we do these first three Rs right, and layer in the specialized investment analysis, we believe we will really continue to generate these attractive risk-adjusted returns.

We have a very specific and highly selective focus, with narrowly defined parameters in terms of the type and stage of venture-backed company to which we provide debt financing. Said in short, we're picky. We don't work with just any venture capital-backed firm. We work with only a select group of leading venture capital investors with whom we've had these long-standing and very profitable relationships. Consistent with this highly selective focus, were also very tunnel-focused. It's like having binoculars. We lend primarily to those companies who are in what we call the venture growth stages.

These are substantial companies that are growing very rapidly. They have at least $20 million or more in revenues and very meaningful enterprise value. They are generally not profitable yet, and that's because they are investing so heavily in their growth. These companies have already gone through a number of financing rounds. They have raised significant amounts of venture capital. They typically have a leading position and product or service in the market. And in many cases, a liquidity event such as an IPO -- it may be only a year or two, or even less, away. These are companies that -- the term we use in-house is -- have crossed the chasm. They generally offer much lower profile than companies in any other stages of growth.

The venture growth business, I want to emphasize, is not a new business for us. It's not a new business for TriplePoint. We've been doing this through our sponsor, and well before this IPO. We have underwritten now more than $777 million worth of these financing commitments in this business, and that's to a portfolio -- already has more than 40 venture growth companies, with absolutely no credit losses to date.

As we look to the future, we're in a strong position to capitalize on the numerous opportunities before us. Concurrent with this IPO, we closed an additional, initial $150 million multi-year credit facility with the syndication of four different banks. We are focused on scaling our platform in a highly disciplined fashion for sustainable growth over the long-term.

We intend to grow this portfolio in a manner that is accretive to our stockholders and provides them with an attractive yield on their investment. Rest assured, we are going to continue to run this business with a constant focus on these four Rs. I will never forget these; we will never forget them: relationships, reputation, references, and returns.

We will also continue to operate in a shareholder-friendly fashion. As many of you know, not only does our incentive fee include an 8% hurdle rate for investors, but it also includes a total return requirement. This means that no income-related incentive fee will be payable, except to the extent that 20% of the cumulative net increase in net assets, since the date of our IPO, exceeds the cumulative incentive fees accrued or paid to us. Again, as I think of this, this equates to a lifetime cap with a look back, if you will, to our IPO in perpetuity. The trust you'll place in us motivates this team to remain aligned, focused; and, really, we are all extremely enthusiastic.

Let me turn this over to Sajal, who will discuss the portfolio, investment activity, and our operations.

Thanks, Jim, and hello, everyone. As many of you know, we used the IPO proceeds to purchase our initial portfolio from our sponsor, TriplePoint Capital. And as Jim mentioned, we used our $150 million credit facility to provide us with additional funding capacity. Our initial portfolio is quite strong. As of March 31, we ended with 47 investments in 17 companies in our portfolio, with an aggregate fair value of $143.6 million. That includes two direct equity investments, 16 warrant investments, and 29 debt investments as well.

We have received strong support from our marketplace, as indicated by our attractive pipeline of new investment opportunities. We believe this reflects generally solid fundraising and investment activity across the venture industry, and in particular from our select venture capital investors. Overall, there has been continued fundraising activity by our select venture capital investors, along with a steady amount of new and follow-on equity investment activity, and healthy demand for debt financing, with returns that are consistent with our expectations.

We would like to reiterate that this demand for debt financing is not tied to IPO activity. Rather, increased demand for debt is tied to fundraising activity by our select venture capital investors, their equity investing activity, and the need for companies to grow. This need to grow is important for all venture capital-backed companies, but critical to those companies in the venture growth stage in particular.

We also benefit from the reputation and track record of TriplePoint Capital's direct originations platform. During the 27-day period, we generated approximately $25 million of signed, non-binding term sheets to venture growth-stage companies. These are in addition to the $25 million of signed, non-binding term sheets generated in the first quarter, prior to the pricing of our IPO. From the IPO's pricing through quarters ended, we also entered into $7.5 million of new commitments and funded six debt investments for $18.2 million.

Our marketplace is responding positively to the continued expansion of the TriplePoint Capital platform. TriplePoint Venture Growth is the latest example of this expansion, and was created to meet the continued demand from our select venture capital investors and venture growth-stage companies.

Since the end of the quarter, we have actually closed $40 million of commitments and funded $10.3 million of investments. The TriplePoint Capital platform has also entered into $55 million of additional signed term sheets with venture growth-stage companies. These opportunities are subject to a number of conditions, including completion of due diligence, negotiation of definitive documentation, and investment committee approval, as well as compliance with the TriplePoint Capital allocation policy.

We are in a unique position, given the strong originations efforts of the TriplePoint Capital platform, and the strong liquidity position of both our sponsor and our BDCs. Given the demand and pipeline of opportunities, we are focused on evaluating and pursuing the best investment opportunities and the best returns. This approach is translating into signed term sheets and attractive pipeline. We are committed to taking a balanced and steady approach with allocations to our BDC, given our current $140 million of unfunded commitments as of March 31.

Unfunded commitments provide great visibility to our investors of where our capital will go, although they do not necessarily represent current or future cash requirements or future earning assets for the Company, since these unfunded commitments may be drawn later than expected, or may expire without being drawn upon.

Speaking of portfolio, there has been no change to our credit watch list, indicating continued strong performance. As of March 31, our portfolio's weighted average loan to enterprise value had not materially changed from the less than 6% listed in our final IPO prospectus. During the period following our IPO pricing through the end of March, several changes did take place within our portfolio, including one company going public; as well as positive developments in the operations, execution, and fundraising activity for others.

Finally, I'd like to point out that we haven't seen any material change in our competitive landscape, nor signs of spread compression. There are high barriers to entry for venture lending; and, generally speaking, experienced participants in our industry are not focused on generating volume for volume's sake. Rather, participants understand the importance of balancing risk and return, given the highly specialized nature of venture lending to venture capital-backed companies.

We continue to look for the right companies, and apply the optimal financing structure so that we mitigate the risk inherent in any venture capital-backed company and generate an attractive return. We are also able to reduce our risk relatively quickly, since we provide short-term financings, typically with amortization. We also expect our loans to generally be prepaid prior to their maturity date.

As we look to the future, we are focused on scaling our platform in a highly disciplined fashion for sustainable growth over the long-term. We will grow our portfolio in a manner that is accretive to our stockholders and provides them with an attractive yield on their investment. The trust you have placed in us motivates this team to remain aligned, focused, and enthusiastic.

I will now turn the call back to Harold who will walk you through our performance for the period ending March 31, and our liquidity position.

Thanks, Sajal. I will start with a summary of our financial position. On March 11, we announced the completion of our IPO. In the offering, including the full exercise of the overallotment and the concurrent private placement of senior members of TriplePoint Capital and its affiliates, we sold more than 9.8 million shares of common stock for total gross proceeds of $147.6 million. As you may recall, TriplePoint agreed to pay 50% of the underwriting fees, and all organizational and operating expenses in excess of $1.75 million.

We used most of the net proceeds of the offering to repay the bridge loan we had taken to fund the purchase of our initial portfolio from TriplePoint Capital. We have detailed our financial results for the period ending March 31 in the press release we issued earlier this afternoon. I won't repeat all the information presented there, but I will highlight a few items for you.

For the period from March 5 to March 31, the Company's investment income totaled $1.3 million, representing an average yield of 14.3% on the average balance of its investments for the period held. Of that 14.3% yield, 11.2% was from cash coupon, and 3.1% was from the accretion of discount and end-of-term payments.

We recorded net investment income of approximately $569,000, or $0.06 per share. Excluding the impact of the capital gains incentive fee accrual of $275,000, the Company's core net investment income was $844,000, or $0.09 per share. Core net investment income is a non-GAAP financial measure. For a reconciliation of core net investment income to net investment income, please see the press release we issued earlier today.

Our net change in unrealized gains on investments was $1.4 million, or $0.14 per share, consisting of $0.9 million of net change in unrealized gains on warrants, and $0.5 million of net change in unrealized gains on debt investments. We had no realized gains or losses during the period. Our net increase in net assets resulting from operations for the period from March 5 to March 31 was $1.9 million, or $0.20 per share.

As Sajal mentioned during this period. We funded $18 point million (sic - see press release, $18.2 million) of new investments. Of this amount, approximately $10.7 million was funded in the two weeks following the pricing of our IPO, and $7.5 million was funded on the last day of the period. As of March 31, we held debt investments with an aggregate fair value of $137.2 million, and warrants and equity with an aggregate fair value of $6.4 million. The net asset value of our portfolio as of March 31 was $143.5 million, or $14.58 per share.

At the end of the quarter, we had $21 million of cash and $130 million of available capacity through our revolving credit facility, providing us with a strong liquidity position. We are managing our fundings on a balanced and conservative basis despite the strong liquidity position, since we are still (technical difficulty) lockup period. We expect to increase our leverage, given the lockup, and will provide more specific guidance regarding our steady-state target leverage rate after we pass through the lockup period.

The good news for investors is that we have access to leverage, and we are working to increase those lines as well as to add facilities, including a small business investment company facility. Our performance affirms the strength of our investment strategy and targeted dividend yield. Our Board authorized and declared a dividend of $0.30 per share for the second quarter. This dividend is payable on June 17 to stockholders of record as of May 30. The dividend equates to an annualized dividend rate of $1.20 per share.

As you also know, we paid a dividend of $0.09 per share for the period from March 5 through March 31, which also equated to a quarterly dividend rate of $0.30 per share, and an annualized dividend rate of $1.20 per share. That dividend was paid on April 30 to stockholders of record as of April 15. Our dividends are based on our forecasted earnings from our existing portfolio, and we expect our earnings and dividends will increase over time as our portfolio grows.

With that, I will turn the call back over the Jim.

Thanks, Harold. At this point, we'd be happy to take any of your questions.

Let me turn this over to the operator.

(Operator Instructions). Jon Bock, Wells Fargo Securities.

Yes, can you hear me now?

Yes we can (multiple speakers).

I apologize. So, Jim, Sajal, real quick, if we can talk a little bit about the signed term sheets; and we're pleased to see the investment growth out of the gate. But walk us through the need for these fundings -- or the need, or the speed, at which these signed term sheets will fund -- just to give us a sense of net portfolio growth. Typically, one can assume a signed term sheet might become a funding within a quarter or two. But just curious on your thoughts, in light of the environment that we're in, which you mentioned is quite positive -- can you give us a sense on timing of those?

Sure. It's a great question, Jonathan. This is Sajal. I'll start first; and then Jim, please, jump in. I think at the high level, the first thing to start with is we're taking a very disciplined approach when it comes to our underwriting and the quality of opportunities; focusing, again, on the best venture growth-stage opportunities that we can see and that are out there.

And so I think the other key element is with venture stage growth companies -- these are, again, strong businesses on strong growth trajectories; proven leaders, typically, in their industry segments. And so our capital is complementing the substantial equity capital base that they have.

And so I think the interesting dynamic is, as our customers grow, as the equity market conditions continue to improve, there's an element of them relying on their equity capital, which results in potentially a time that delays on their utilization of our funding commitments.

And so, generally speaking, I would say that given, again, their strong performance, their ability to raise equity capital, that's probably causing a slight delay in the timing of their utilization of our facilities. We still expect a meaningful amount of our commitments to actually be drawn. But I think we're seeing that there is a delay in the timing by which they actually utilize on our financings.

Yes, I would only add that, yes, we continue with a disciplined approach. We are only 27 days old, as I think of that, and the financings used to supplement and enhance the equity financings. And I wouldn't say there's any kind of trend, based on the horizon. Again, hard to predict the future, but that I actually see some shift in that and some increase in fundings.

Got it. And would it be fair to say -- this is one thing -- to the extent that you have portfolio companies that have raised equity capital, and perhaps flush with liquidity, that the all-in credit profile of your investment is likely improved?

Absolutely. This is Sajal here. Yes, absolutely. And so, in fact, in the quarter, we had two events with two portfolio companies. One company went public, and one company raised a substantial round of equity capital, which caused an accretion in the value of our loan portfolio, given that substantial capital base that they had, which improved the credit profile of those companies.

Okay, got it. And while I do probably have a leverage question or two, I know you mentioned -- wait until the lockup period expires, so I will respect that. Just curious on what you believe the true run rate cash balance should be in the future, and what you'd hope, maybe Harold, to keep on balance sheet over time. Can you maybe give us some insight on the number that you feel prudent to keep liquid?

Well, certainly, we want to manage our liquidity position. And given that we have access through credit facilities, we just have to be prepared to fund our customers as they require it. So, any quarter end is just a snapshot of that time. We will certainly manage our liquidity and our cash balance very strongly, but I would imagine it would be $10 million to $20 million.

Yes, I think generally is we want to make sure we have the ability of liquidity on hand to fund a next day -- a funding request if it comes from a customer, just to, again, deliver on the service and the responsiveness that we provide our portfolio companies on their funding requests.

Okay. And then also, just as it relates to the venture environment, this is a long-standing question that's been asked a number of venture firms -- the discussion of spread compression. So can you, Jim and Sajal, maybe walk through. You mentioned you don't see it. Maybe parse through where you see areas in the market that are getting more competitive, and what is likely driving that, and how you are able to effectively avoid that?

I'll start, Sajal here, with at least the venture growth segment. And then, Jim, maybe if you want to characterize with regards to the overall market.

I would say, generally speaking, again with regards to experienced providers in our industry, I think we all understand that it's a very specialized business, what we do. Very high barriers to entry. And it's not easy to lend to high-growth startup companies, particularly those at the growth stage. And so there is an inherent amount of risk associated with these companies.

And I think, again, most experienced lenders in our industry recognize that there is an appropriate level of return that one should get for providing capital to these companies, particularly given the value that we provide, not only from a growth perspective, but also from an equity dilution benefit to those companies.

And so I'd say, generally speaking, I think we're all particularly focused on generating attractive risk-adjusted returns. And we're not forgetting that there is a risk element associated with what we do. This isn't something easily understood with our niche industry. And so, again, the experienced providers we see consistently holding the line when it comes to appropriate returns.

Yes, I would concur. As we always say, it takes more than money and a business card to be in this business. It really is specialized, as Sajal mentioned it. And it's not a business where you want to do volume for volume's sake, and simply generate volume. So we haven't seen any changes in the competitive landscape, and continue to use our disciplined approach and live within our means.

And then I would also add that just with regards to our select sponsor focus, so again, our mandate is not to lend to just any venture capital-backed company. It's to focus on our core group of select sponsors and provide their portfolio companies creative debt financing. And so again I think, given the creativity, given the relationships, given the value add of our capital, we are able to, again, as a whole, provide -- or at least keep the yields where we expect them to be.

And then maybe two more questions. One just relates to credit quality. Sajal and Jim, you mentioned credit quality -- obviously, as we can see by unrealized marks, is generally positive. It's a good environment.

One question that comes to mind when people look at individual BDC portfolios is they see a term, a second lien, right? And not all second liens are created equal, particularly in the middle market.

And can you walk us through, given that you do have senior secured as well as a mix of second lien, maybe the value proposition that you see in a second lien security, and perhaps what makes that different relative to maybe other second liens? Or just what makes that an attractive place to deploy capital?

I'll start first, and then, Jim, please jump in. Thanks, Jon. I think that's a great question for us to answer. So, let's start first with the definition of venture growth-stage companies that we target. So again, these are companies that have backing from one of our select sponsors -- focused life science, technology, high-growth industries. They have completed their product development. They have meaningful customer sales, at least $20 million or more. They generally have a leadership position in their market, experienced management teams. They have deep, deep, deep capital base, with millions -- if not some of them have hundreds of millions of dollars of equity capital that they have raised that is junior to our debt financing. Plus again these -- and more importantly, they have large enterprise values, as indicated by their last round of financing. So, these are strong companies. They generally have strong liquidity positions.

And so if you haven't noticed, we charge generally meaningful returns on our capital. And so we would expect for some of the stronger-profile companies to have some form of bank financing. And so generally, when we look at bank term financing is how we define our quote-unquote second lien business. We will not be junior to a non-bank. We are only junior with regards to our second lien business. And again, I don't think second lien is the right word, but I will get there.

Being we're still fully secured, but below a term or in amortizing bank facility -- again, those typically are low-priced, formula-based, covenant-laden type financings; which again are small relative to the equity capital base, as well as the overall loan to value.

And so on top of that, when you think second lien, you think of 4 to 6 times or -- if not higher total leverage, with regards to the financial profile of our companies. But again in these situations, we are junior to a very small percentage of debt from a bank financing. And the other way we look at it, too, is we look at our portfolio loan-to-value metric.

And so, as we mentioned on the call earlier that we are consistent with the percentage of that we listed in our prospectus of roughly 25%. I would actually mention that with regards to our quote-unquote second lien positions, they actually have a lower loan-to-value than the portfolio average. So these are really strong businesses; companies with if not $100 million, $0.5 billion of revenues. And so we are junior to a small amortizing bank facility. So, again, we get comfort that these aren't middle-market second liens with aggressive leverage. These are small amounts of bank financing.

Yes, I would only add that, yes, I've been doing the venture lending business now for almost 30 years, and we were adding it up the other day. It's just at about $6 billion worth of these venture loans. And in this segment, the companies in this venture growth segment, the way we define and think of it -- the name of the game is really this loan-to-enterprise value.

We have learned about this LTV, over a long period of time here, as being one of the main things to focus on. There is lots and lots of equity cushion, as Sajal mentioned, behind us. And, again, we have written now almost $800 million worth of this for the last eight years, plus running with zero losses. So, you pick up some things in this segment.

No, that's fair. And the last question just relates to the overall environment. So we mentioned it's positive. Of course, when we look at technology valuations in IPO markets with some soft issues, can you maybe give us a forward view of how that is playing into the valuations for the companies at which they are currently rated capital today? Can we expect downward pressure? Or would you say it's a non-event?

This is Sajal here. I will start off. I think it's a non-event. Again, I think it's sector by sector. And so you really have to peel back the layers and break down the subsectors of technology and the outlook for those sectors. And so I'd say, generally speaking, we're not so focused on the IPO window -- is it open, or it's closed? We're focused again on the venture landscape, the venture debt market, and the quality of the opportunities.

But I'd say, again, when we had such unrealized gains in our portfolio in the first quarter, based on the events -- the fundraising activities of some of our portfolio companies. And that's absent -- that's in light of a balanced IPO market for the tech and life science market. So, again, I think we think it's hard.

We don't have a crystal ball in terms of our ability to tell you when the window opens, and for which sectors. But I think it's a non-event, as we look to it. And, again, as we focus on credit quality, it doesn't have a material impact, as we look at it, to credit quality. If anything, I think a challenging IPO markets creates opportunity for debt financing. And so we look forward to the opportunities that it will create for us.

Okay. Thank you so much for taking my questions.

(Operator Instructions). That concludes today's question-and-answer session.

I will turn the call back over to Jim Labe for the concluding remarks.

Thank you, operator. I will close by saying that we feel we're off to a really great start. We have the right strategy, the right capital structure, and the right team on hand to deliver our promise to you. We will continue to work hard, and we look forward to keeping you appraised of our progress along the way. Thank you for taking part in our first earnings call. We'll speak with you all soon.

That concludes today's conference call. You may now disconnect.