Triplepoint Venture Growth BDC Corp (TPVG) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the TriplePoint Venture Growth second quarter 2018 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Andrew Olson, Chief Financial Officer of TriplePoint Venture Growth. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. We are pleased to share with you our results for the second quarter of 2018. Here with me are Jim Labe, Chief Executive Officer and Chairman of the Board; and Sajal Srivastava, President and Chief Investment Officer.

Before I turn the call over to Jim, I would like to direct your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements and remind you that during this call, we may 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. We do not undertake any obligation to update our forward-looking statements or projections, unless required by law. To obtain copies of our latest SEC filing, please visit the company's website at tpbg.com.

And, now, with that, I'll turn it over to Jim.

Thanks, Andrew, and good afternoon, everyone. We're excited to talk to you on the results for the quarter, as we continue to lead the venture growth stage lending market and partner with some of the most successful venture capital investors and lend to some of the most exciting venture capital-backed companies globally.

We had a fantastic second quarter. We hit our all-time record for total investment income, $16.6 million. We matched our record for all-time quarterly net investment income, or NII, $8.8 million. We achieved our second highest portfolio yield ever of 17.2%. We signed $212 million of new term sheets at venture growth stage companies during the quarter, a 45% increase over the previous quarter, which in itself was a substantial increase over the quarter before that.

We closed $140 million worth of new deals with 8 venture growth stage companies. We redeployed the proceeds from our largest single obligor, Ring, after the closing of their sale to Amazon, which helps us further diversify our portfolio. We also got back into our target leverage ratio range during the quarter. And, finally, we received approval from our shareholders to lower our asset coverage ratio to 150%.

We continue to achieve and, in many cases, exceed the goals and objectives that we set out for 2018, and we're just as excited going here into the second half of the year and are focused on delivering a super strong finish for the year.

This progress is not the result of changes to the venture capital market. It's all been related to our focus, reputation and approach, which has always differentiated us in the market, particularly among the venture lending BDCs. We continue to market based on the 3 Rs -- reputation, relationships and references. We continue to target a very specific universe of venture capital-backed companies. These are venture growth stage companies, companies that have meaningful enterprise value, differentiated technologies, substantial equity dollars, very high growth rates, and, most importantly, backing from one or more of our leading select venture capital investors, which are generally considered among the top venture capital funds in the U.S.

One only has to take a look at some of the progress and the publicly-announced fundraising activities, the valuation increases, or exit events at some of our current companies in the portfolio. These are names such as Copac, Toast, Cohesity and Revolut, to name just a few as the basis for our belief that we will continue to see more successful exit events in the future.

To summarize, we plan to continue to stick to our knitting and exercise our investment discipline, and continue to be what we believe will be the name brand in the venture lending industry among these leading venture capital firms. Our industry-leading yield profile, the experience in the management team here, the strong credit quality, our record pipeline, and the activity and progress among our portfolio companies all speaks for themselves.

Once again, we're continuing to forecast that we will have earnings in excess of our dividend this year. We plan to continue to capitalize on this incredible and building 2018 momentum. And with that, I'm going to turn this over to Sajal.

Thank you, Jim, and good afternoon, everyone. In Q2, we signed approximately $212 million of term sheets, and closed $140 million of debt commitments with 8 companies, and added 5 new companies to the portfolio. On a year-to-date basis, we've signed $358 million of term sheets and closed $255 million of debt and equity investments.

The first new company added to the portfolio this quarter was Roli, which is reinventing the experience of music creation with an integrated hardware/software platform for the digital age. Roli makes uniquely touch responsive interfaces, keyboards and other modular music creation instruments and tools to compose and play music that can be consumed and engaged using smartphones and other devices. Musician Pharrell Williams recently joined Roli as Chief Creative Officer as well.

The company has raised over $40 million of equity capital from Balderton Capital, Foundry Group, FirstMark Capital, Index Ventures, Founders Fund, and recently announced a strategic investment from Sony.

The second was OneSource Virtual, which is a pioneer of the business process as a service sector and supports the automated delivery of solutions exclusively for Workday, one of the leading providers of financial management and human capital management software. OneSource Virtual services can power organizations of all sizes through Workday deployment, consulting, training, and in-application payroll administration, benefit administration, and application management services. OneSource Virtual has raised over $165 million of equity capital from TCD and others.

The third was Grove Collaborative, which is a branded direct-to-consumer e-commerce platform for natural home and personal care products, with a flexible recurring shipment model. Every product Grove offers, both from their flagship Grove Collaborative brand and from exceptional third-party brands, has been thoroughly vetted for health, sustainability and efficacy. Grove has raised over $60 million of equity capital from Norwest Venture Partners, Mayfield Fund, and others.

The fourth was UNTUCKit, which is a leading omnichannel, direct-to-consumer apparel brand, which started out as men's casual dressing by offering an untucked shirt that fit and looked good, and then expanded its product line to include men's sweaters, jackets and more. UNTUCKit has raised more than $30 million of equity capital from Kleiner Perkins and others.

The fifth is Fiverr, which is a freelance services platform and offers a marketplace for creative and professional services. Fiverr gives entrepreneurs, freelancers, small businesses and even enterprises the resources they need to get things done quickly and flexibly. Fiverr has raised over $111 million of equity capital from Accel Partners, Bessemer Venture Partners, Lightbank and others.

Overall, during Q2, we funded $53 million of debt investments to 9 companies, $500 million of equity in one company, and acquired warrants valued at $1.2 million in 8 companies. On a year-to-date basis, we've funded $91 million of debt and equity investments to 12 companies.

We also had a $50 million prepayment from Ring after it closed its acquisition by Amazon during the quarter. As a result of this prepayment, our portfolio yield was 17.2%. Without customer prepayments, our portfolio yield was 13.9%, which was up from 13.6% last quarter.

Moving on to credit quality, as of June 30, the weighted average internal credit rating of the debt investment portfolio was 1.92, as compared to 2.03 at the end of the prior quarter. As a reminder, under our rating system, loans are rated from 1 to 5, with 1 being the strongest credit rating, and new loans are initially generally rated 2.

During the quarter, we removed $50 million of loans from Category 2 due to prepays; we added $53 million of new loans to Category 2; upgraded 2 customers, Copac and BlueVine, with a combined principal balance of $45 million, from Category 2 to Category 1; and downgraded one customer, Munchery, with a principal balance of $3 million, from Category 3 to Category 4.

During the quarter, 6 portfolio companies closed new rounds of equity financing. BlueVine raised $60 million in a round led by Menlo Ventures. Cohesity raised $250 million of equity in a round led by SoftBank. CrowdStrike raised another $200 million, at a reported $3 billion valuation, co-led by Accel and General Atlantic. Fuze raised $150 million in a round led by Summit Partners. Revolut raised $250 million, at a reported $1.5 billion valuation, led by DST. And Toast raised $115 million, at a reported $1.4 billion valuation, led by T. Rowe.

On top of that, as Jim mentioned, Amazon announced its acquisition of PillPack for $1 billion. These are all great developments, and we congratulate our portfolio companies. We hold warrant investments and/or equity investments in all of these companies.

With regards to strategic objectives, our highest priority in 2018 remains to capitalize on the strong demand for venture growth stage lending and grow the company from an exceptional but small-cap BDC to a larger and more diversified BDC. I'm pleased to say that we are ahead of our plan for 2018 and our brand, reputation and relationships continue to differentiate us in the market with prospective portfolio companies.

As Jim mentioned, in Q2, our shareholders approved the lower asset coverage requirement. We thank our shareholders again for their support, and as we've described in our proxy, we do not plan to change our investment strategy, product mix, security profile or the targeted yield profile of the investments we will make as a result of the availability of additional leverage.

We see this as providing us with greater flexibility in our ability to meet -- to continue to meet the strong demand and pipeline we have today and expect to continue to see. We intend to use the additional leverage in a focused and balanced way, and in particular, expanded our target leverage ratio range to 0.6 to 1.0. We believe that with this approach, we are not materially changing the risk profile for our shareholders, while increasing the potential to drive higher returns on equity through higher net investment income.

On a year-to-date basis, we have made substantial progress on diversifying our portfolio and some of our larger customer concentrations. During Q2, we completed our first co-investment with our sponsor and have several more opportunities in the works. We also rotated out of our largest loan exposure with the acquisition of and prepayment from Ring, which was a $50 million exposure. And as we announced today here in Q3, we've rotated out of another top 5 obligor, resulting in $3 million of additional investment income this quarter as a result. And we, again, expect to put all these prepayment proceeds back to work this quarter and have put $18 million to work so far.

Given this progress to date, our taxable earnings are on track for the second year in a row to exceed our distributions. We continue to be thoughtful about the impact of our continued portfolio growth, as well as prepays and our exceptional portfolio, as well as the benefits of higher leverage that have kept our quarterly distribution at $0.36, and we'll continue to reevaluate based on our outlook and progress.

I'll now turn the call over to Andrew to highlight some of the key financial metrics achieved during the quarter.

Thank you, Sajal. I'm pleased to report another exceptional quarter of performance. Some of the highlights included record investment income, debt investment income in excess of our dividend, stable credit performance, positive portfolio exit activity, driving net realized gains, and NAV appreciation.

Total investment and other income was up 31%, to $16.6 million, or $0.93 per share, for the second quarter of 2018, compared to $12.6 million, or $0.71 per share, for the first quarter. Our investment portfolio generated a weighted average yield of 17.2%, including prepayments and other activity.

The increase in total investment income and yield, relative to the prior quarter, was primarily due to higher prepayment and other income-related portfolio turnover. Portfolio yield excluding the impact of prepayments was up 30 basis points, to 13.9% from 13.6% in the prior quarter, resulting in an increase in investment income when excluding the impact of prepayment and other activity.

Debt investment income for the quarter was up 48%, to $8.4 million, or $0.50 per share, compared to $5.9 million, or $0.34 per share, in the first quarter of 2018. Expenses during the quarter were $7.7 million, consisting of interest and fee expense of $2.5 million, base management fee of $1.8 million, income incentive fee of $2.2 million, and administrative and general expenses of $1.2 million. The increase of total expenses from $6.6 million in the first quarter of 2018 is primarily due to higher base management fees and income incentive fees due to portfolio growth and strong fund performance.

We recognized net realized gains of $0.8 million, or $0.04 per share, in the second quarter of '18 from the disposition of investments in 3 portfolio companies. In addition, we had a net change in unrealized appreciation during the quarter of $1.2 million, or $0.07 per share, consisting of the reversal of previously-recognized net unrealized appreciation into net realized gains of $2.9 million, primarily from Ring, offset by mark-to-market appreciate of $1.7 million on the investment portfolio.

The above activity resulted in a net increase in net assets for the quarter of $8.3 million, or $0.47 per share, compared to $7.9 million, or $0.45 per share, in the prior quarter, bringing year-to-date net income to $16.3 million, or $0.92 per share. On an annualized return basis, we generated return on equity of 14.2% in the quarter.

Now, turning to the balance sheet, we funded $53.4 million of debt and equity investments in 9 companies during the quarter and had one company repay its outstanding obligations in full, in the amount of $50 million. All told, we ended the quarter with long-term investments of $398 million, or generally flat from the prior quarter.

At quarter end, we held 124 investments in 45 companies, with a cost in fair value of approximately $399 million. The company's debt portfolio ended the quarter with a cost of $381 million, of which 57% carry floating rates.

We continue to see strong demand and have a robust pipeline for near-term opportunities. Our unfunded commitments totaled $203 million to 16 companies, of which $87 million is dependent upon the companies reaching milestones. Of those total commitments, $58 million will expire in 2018, $76 million will expire in 2018, and $70 million will expire in 2020 if not previously drawn.

We ended the quarter with total liquidity of $134 million, consisting of cash of $11 million and $123 million of undrawn availability under our revolving credit facility. Total outstanding borrowings as of quarter end was approximately $160 million, consisting of $75 million of long-term fixed-rate notes at a cost of 5.75%, maturing in 2022, and $87 million outstanding under our revolving credit facility, which carries a rate of [L+300]. This put us at a leverage ratio of 0.68x, within our target range of 0.6 to 1.0.

We ended the quarter with $239 million of equity capital, or $13.45 per share, up $0.11 from $13.34 per share in the prior quarter. At NAV, our annualized distributions generated dividend yield of 11%. As of June 30, 2018, we estimate earnings in excess of our distribution, or spillover income, to be $4.2 million, or $0.23 per share.

And with that, I'm pleased to announce for the third quarter of 2018, our board of directors declared a distribution of $0.36 per share, payable on September 14, to stockholders of record as of August 31. This marks the 18th consecutive quarter we have increased or maintained our quarterly distribution rate.

And now, with that, I'll turn the call back over to Jim.

Thanks again, Andrew. At this point, we'll be happy to take your questions. Operator, can you please open the line?

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from George Bahamondes of Deutsche Bank.

Just a few questions following your prepared remarks. You had mentioned there's about $53 million of fundings in the second quarter across 9 companies. Can you guys disclose how much of the $53 million was tied to investments that were closed in the second quarter versus prior commitments that were unfunded and then funded in the second quarter?

George, we can get that information. We don't have that breakdown handy, but I would say generally it's a break -- it's some from existing unfunded commitments and then a portion from customers that closed during the quarter. But if I were to guess, I'd say it's probably 50/50, but we'll look through it and come back to you once we get that information.

Great. We can follow up offline. That's fine. The next one, you had mentioned that there's a co-investment in the second quarter. Are you able to provide any additional color?

We don't generally disclose who are the co-investees. I think the good news is, again, along the seams of portfolio diversification, keeping our maximum transaction sizes reasonable, with the goal of diversity, so I think it was consistent with that objective.

The next one here, I may have missed this -- you mentioned you rotated out of a top 5 investment. Was that in the second quarter, or is that subsequent to 6/30?

Both. So Ring was our largest investment during Q2, and so Ring prepaid at the beginning of Q2, and then here in Q3, we had another top 5, as we announced in today's earnings release, as a subsequent event. We had another top 5 rotate out.

Our next question comes from Christopher Nolan of Ladenburg Thalmann.

Sajal, I'll just confirm, you iterated a leverage target of 0.6 to 1.0 times NAV? Is that correct?

Correct.

And then are you guys still -- need to renegotiate the bank revolver if you want to take the leverage ratio above 1.0?

No, no, no. As we mentioned in our proxy, we have -- our lenders are supportive. We could, and there may be periods where we may take that leverage ratio higher, as we said in the proxy, in between capital raises for short periods of time, but the target is 0.6 to 1.0.

And then, Andrew, it seems to me that most of the prepayments or almost all the prepayments may have come from Ring. Is that a fair characterization?

That's correct.

And what was the end-of-term payments in the quarter?

The aggregate amount -- I don't have it offhand, but generally it's about 2% of the total yield.

Okay, so we have 17.2%, and it'd be 2% of -- so it'd be 2% off that 17%?

Yes. I think it was 2.2% was the accretion during the quarter.

From the non-prepayment.

Correct.

So of the 17.2%, 3.3% was related to prepayments, and 2.2% was related to end-of-term payment -- or income accrual.

And then, finally, I guess for Jim or just for anyone, I'm trying to get -- you guys sound pretty enthusiastic about the conditions. I mean, obviously, the pipeline is starting to grow, the margins are expanding, and so forth. What are you seeing in the venture debt lending space? Are you seeing new entrants come in? If you can give a little characterization of them, that would be helpful.

Yes, and thanks. I like how you're asking all 3 members of the team here. I didn't want to be left out. So I'd say, overall, there really hasn't been any change. Things still remain the same in the sense of it's all about reputation, references and relationships, what we call the 3 Rs, and it's a fairly closed community here among the leading venture capital investors, and experience counts, track record counts, also that you know what you're doing. So the venture growth stage, our biggest competition remains one thing, equity, and that's it. Other entrants may float in and out and do venture lending here and there, but really haven't seen any change in the landscape. There's real high barriers to entry in the segment.

Our next question comes from Ryan Lynch of KBW.

A clarification and also a question. I believe you guys said you guys had another top 5 investment prepay in the third quarter. Did you say that there was $3 million of additional income associated with that prepayment? And then, also, you guys have about $60 million of prepayments quarter-to-date in the third quarter. That's really strong. Can you just give us a sense of so far quarter-to-date how much accelerated income you guys have already received so far?

Let me start, and then Andrew can jump in. Correct, Ryan, so $59.3 million of early principal payments so far in the quarter, offset by roughly $18 million of new loan fundings that we've had, so a strong start. We're only 1 month in to the quarter, so redeploying those proceeds. And, yes, I did say from the prepayments, over $3 million of additional interest income as a result. Andrew, any more color on that?

No, I think you've covered it.

Was the $3 million additional interest income -- was that from all of the $59 million prepayments, or just from the one top 5 investment?

Correct, all $59 million.

You guys had, quarter-to-date, another strong quarter of prepayments. You guys had strong prepayments in the second quarter as well. I mean, you guys are lenders. That's a good thing to, obviously, get your money back, and particularly when you guys are getting strong fees associated with that, so there's no doubt that's a good thing, and maybe that speaks to the quality of the companies you guys are underwriting that they're paying back early because they're having that much success. Just the other counterpoint to that, though, is with those strong prepayments, obviously it's hard to grow the portfolio in that environment. Can you just give any sort of outlook on where we are quarter-to-date? There's already been strong prepayments, but do you guys foresee that continuing? And if that does, how do you guys grow your portfolio in that environment, which, again, it's good to get your money back, being a lender, and you guys are getting strong fees on that, but also talking about the portfolio --

Good question, Ryan. Maybe to start with, a customer gets cornered, so we can't avoid getting our money back, and that's the touchdown, to use Jim's favorite analogy. And so we helped our customers score the touchdown, and we're appreciative of that. To the extent that customers finance us out because of significant equity capital raises, from those perspectives, we use the analogy, again, that it's halftime, we're going to sit back on the bench because most of our portfolio companies burn cash. We expect to be called back in the game in a quarter or 2, and so those are not lost opportunities. Those are income-generating and return-generating events, and then we can come back, see how they perform, and come back and provide them more capital. So I'd say, again, overall very positive events, and we're very pleased with them in general, especially given -- I know some of the concern was concentration in our large exposures, and so we want to be mindful of some of that feedback, and again, that with the co-investment relief and the additional leverage, it will allow us to optimize the portfolio size, so working hard to address some of the concerns associated with our portfolio. I think to the bigger picture, as Jim talked about, the venture equity markets are strong. The venture debt -- or the demand for venture debt is particularly strong, as reflected by the $200 million of signed term sheets. I think that was a record level for a quarter for us for signed term sheets, and then $140 million of closed deals. The pipeline is the biggest it's been. So I would say, again, it's -- we continue to feel pretty confident in our ability to grow the portfolio on a year-over-year basis. And, again, we're blocking and tackling on a quarter-to-quarter basis.

That's helpful and makes sense. And, again, yes, getting repayments and prepayments is always a good thing as a lender. Just one last one, on PillPack. I'm not sure if you can answer this, but I obviously saw you guys talk about that getting repaid in the third quarter. There's a nice 9% end-of-term payment. I also saw you guys had like a $55,000 equity investment with the cost in fair value both at $55,000. Do you guys expect that to appreciate in the third quarter? And can you give us any sense of what sort of gain you guys are anticipating with that sale?

I can answer that, Ryan. I think, overall, we have written up the position to what the exit value is, because it was an announced transaction relatively early in the quarter, so this isn't something new to us. So I think, going back to the quarter, it should --

If you look at the Q that we just filed, you'll see the fair value associated with the markup.

Yes, the fair value -- I think the fair value as a position was written up to around $800,000 or $900,000.

Okay. Sorry, I was -- that makes sense. I was referring to the old Q, because I guess your Q1 -- or Q2 hadn't come out, but it just came out, so the fair value in the second quarter should reflect the exit value. Okay, that's helpful.

Our next question comes from Casey Alexander of Compass Point.

The $59 million of early principal repayments that have occurred in the subsequent event, would those have come from the clear category?

There was a combination, so a number of those positions, because of the timing of when the prepayments occurred, we had upgraded them during the quarter. So I would say a larger percentage is just going to come from that one --

Some, but not all.

Correct.

Some, but not all. Okay. Well, as we haven't had a chance to take a look at the Q, can you walk me through what the top 5 names are in the portfolio as of the end of the second quarter?

Yes. So our -- if you have any specific questions about the companies themselves, I think Jim and Sajal can answer them for you, but FinancialForce is our #1 position. View is #2. Rent the Runway is #3. WorldRemit is #4. And Virtual Instruments is #5.

I'm sorry, I didn't hear #4.

#4 is WorldRemit.

WorldRemit. Great. Okay. And on the 2 orange, which is Munchery and, I assume, still Mind Candy, any update on what you guys are doing to help realize the value of those?

We continue to work actively with the companies, investors and help them kind of as they reposition themselves, and so I'd say we continue to be very active as they optimize their businesses. I don't think there are any public updates specifically to those companies, but they're hard at work.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Labe for any closing remarks.

Thanks, operator. In short, if you can't tell, we're pretty excited to hear about the remainder of 2018 and what we believe it holds in store for our business. I'll close again by expressing my appreciation to all of you for your continued interest and support in TriplePoint Venture Growth. Thanks, everyone, and we'll speak with you again soon. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.