Triplepoint Venture Growth BDC Corp (TPVG) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. Third Quarter 2022 Earnings Conference Call. (Operator Instructions) This conference is being recorded, and a replay of the call will be available on an audio webcast on the TriplePoint Venture Growth's website.

Company management is pleased to share with you the company's results for the third quarter of 2022. Today, representing the company is Jim Labe, Chief Executive Officer and Chairman of the Board; Sajal Srivastava, President and Chief Investment Officer; and Chris Mathieu, Chief Financial Officer.

Before I turn the call over to Mr. Labe, I'd like to direct your attention to the customary safe harbor disclosure in the company's press release regarding forward-looking statements. We remind you that during this call, management will make certain statements that relate to future events or the company's future performance or financial condition, which are considered forward-looking statements under federal securities law. You are asked to refer to the company's most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements.

The company does not undertake any obligation to update any forward-looking statements or projections unless required by law. Investors are cautioned not to place undue reliance on any forward-looking statements made during the call, which reflect management's opinions only as of today. To obtain copies of our latest SEC filings, please visit the company's website at www.tpvg.com.

At this point, I would now like to turn the conference over to Mr. Labe. Please go ahead.

Good afternoon, everyone, and thank you for joining TPVG's third quarter earnings call. During the quarter, we further capitalized on the strong demand for our financing while continuing to grow the portfolio in a disciplined manner. We're pleased to have efficiently invested the capital from our recent accretive $55 million equity offering. This helped us grow our portfolio to a record fair value of almost $1 billion, generate net investment income, or NII, of $0.51 per share and achieved a weighted average portfolio yield of 13.8%.

For the third quarter, our NII again exceeded our quarterly distribution, and we're proud to announce that our Board made the decision to increase the regular quarterly distribution to $0.37 per share. Given our sizable portfolio, coupled with favorable fixed rate financing and increasing portfolio yields, we believe we remain in a strong position to both generate NII that covers our new $0.37 per share dividend and to further increase yields and returns to shareholders over time as we've done today.

Since going public more than 8 years ago, we have now declared $12.60 per share in regular quarterly distributions. And in addition, 3 special dividends for total distributions to shareholders of $12.95 per share. Notably, our NII has exceeded our distributions on a cumulative basis during this time, while also maintaining sizable spillover income.

Turning to yields. We have now grown our core portfolio yield to over 6 past quarters and expect the positive trends and opportunities to continue. In seeking to capitalize on the opportunities in the market, we will continue to focus on investing in what we believe are the most attractive venture growth stage companies with the strongest prospects and a focus on quality. We believe there will be increasing opportunities in the many months ahead, especially given favorable market conditions that we expect to last throughout 2023.

Turning to the venture markets. U.S. steel investment activity decreased in the quarter, although I'll note that the investment activity remains above all the pre-COVID levels and it's already exceeded all previous years so far, except for 2021. As you know, TPVG primarily works with a select group of venture capital investors and the companies in which they invest.

Given today's market choppiness and uncertainty, these venture investors are being more selective with their dollars, and they're also being far more cautious and mindful of new investments, which we believe is a positive development. They deployed far less capital during this past summer and used the pause to continue to focus on existing portfolio companies, many of whom appropriately revised their plans to more moderate rates of growth and monthly cash burn rate, which again, we view as a positive development in this environment.

Having said all this, our select group of leading venture capital investors that we work with have no lack of capital to deploy. In fact, several of them raised substantial funds this year. As a whole, U.S.-centric capital fundraising has already set a new annual high through the first 3 quarters of this year. According to PitchBook NVCA, through the 9-month 2022 period, U.S.-based center funds have raised $151 billion, surpassing last year's previous record and taking the last 21 months fundraising total to more than $298 billion. Last quarter, 6% of the funds accounted for 62% of the capital that was raised. And we note that several of our select venture capital investors were in that 6%.

Given the recent quarterly raises, combined with the previous record fundraising years, there's an ample supply of venture capital sitting on the sidelines and the so-called dry powder has climbed to new heights last quarter. PitchBook NVCA now estimating it still at more than $300 billion.

TPVG's portfolio companies are in a strong position to continue to benefit from this over time. In fact, last quarter, our portfolio companies raised more than $270 million of capital. And year-to-date, TPVG portfolio companies have raised more than $2 billion. And many continue to raise additional capital attesting to the quality of our companies.

All this capital raising aside, many of our portfolio of companies continue to grow. Some are experiencing tailwinds in this environment. A number of others have achieved profitability. Some are in thriving niche or niche software sectors and still others are in some very high interest sectors such as micro satellites, breakthrough health tech technologies and other sectors.

The market drivers behind the demand at growth stage companies for our venture lending continues to be favorable as well, and we believe will be sustained in the months ahead. Many companies who relied previously on equity alone have continued to turn towards debt and layering it in as part of their go-forward plans. In addition, growth stage companies that raised equity over the last year or so at attractive valuations are increasingly turning towards venture lending given today's valuation-sensitive markets.

Longer time lines for public listings and the need for additional runway between equity rounds serve as another driver. These days, growth stage companies are planning out their timetable and encompassing debt in their financing strategies and capitalization plans. And still other examples, some companies are increasingly commencing with drawdowns under their existing credit lines as part of augmenting their financing base.

We've seen each of these scenarios play out in the third quarter and expect the trend to continue in 2023. These trends, combined with a lower risk appetite from commercial banks, has helped to create strong and sustained demand for venture lending and provides advantages to us with our deal structures and opportunistic pricing.

To wrap up, we've demonstrated the significant earnings power of our sizable and high-quality portfolio through growing it now to nearly $1 billion, generating record NII and posting an attractive portfolio yield. We expect conditions to continue into 2023 and beyond, allowing us to continue to invest in a highly selective and disciplined manner with compelling growth stage companies as well as in the process achieving further portfolio, yield and NII growth. We're pleased to increase our regular quarterly dividend and are well positioned to continue to provide shareholders with a strong and increasing return over time.

With that, I'll now turn the call over to Sajal.

Thank you, Jim, and good afternoon. Q3 was a strong quarter where we not only grew and diversified the portfolio, but we also demonstrated both the earnings power of the business and our alignment with shareholders. With regards to investment portfolio activity during Q3, TriplePoint Capital signed $269 million of term sheets with venture growth stage companies and we closed $103 million of debt commitments to 10 companies at TPVG.

Signed term sheets and closed commitments during Q3 reflected not only the seasonality of the third quarter, but also our continued discipline as we seek to capitalize on the exceptional demand in the market while selecting only the highest quality opportunities, given we expect demand to remain strong and continue to grow throughout 2023. In fact, of the 10 companies we committed debt capital to during the quarter, 7 were new portfolio companies and 3 were existing portfolio companies.

We also received warrants valued at $1.9 million in 16 portfolio of companies and made $2.6 million of direct equity investments in 6 companies. During the third quarter, we funded $101.7 million in debt investments to 14 portfolio of companies in line with our guided range for Q3. These debt investments carried a weighted average annualized portfolio yield of 14.5% at origination, up from 13.6% in Q2 '22.

Our core portfolio yield, which again is yield without the impact of prepayments was 13.8% during the quarter, up 100 basis points from last quarter and represented the sixth consecutive quarterly increase. Regarding prepayments, we had 1 small prepayment in the quarter that didn't materially contribute to portfolio yield.

I would like to also point out that our Q3 portfolio yield does not yet fully reflect the 75 basis point increase announced on September 20, which will more meaningfully impact portfolio yield starting in Q4. For Q4, we continue to expect portfolio growth with targeted gross quarterly fundings in the $100 million to $200 million range, offset by prepayments so far totaling $34 million, which will generate over $1 million of additional income in this quarter.

We also made continued progress on diversifying the TPVG portfolio as we achieved a record portfolio size at the end of Q3 with 59 funded obligors as compared to 40 1 year ago. In addition, our top 10 obligors represent 32% of our total debt investments as compared to 44% 1 year ago.

Our equity and warrant portfolio grew as well with 152 warrant and equity investments as of Q3 '22 as compared to 105 investments as of a year ago. During the quarter, our public warrant and equity holdings experienced $2.5 million of unrealized losses, ending the quarter with a fair value of approximately $8.7 million. Approximately $2.1 million of the net unrealized loss was related to our holdings in ForgeRock, which announced in October that it agreed to be taken private in a deal that values the company at $2.3 billion.

ForgeRock, which has been a portfolio company of the platform since 2016, of TPVG since 2019, and went public in September 2021, is an example of the quality of the TPVG portfolio and the upside potential of our warrant and equity investments. This transaction is anticipated to close in Q1 2023 and will result in a $2.6 million gain on our equity from our Q3 closing value, generating a total of $6.5 million or 13x our initial cost. We expect our $30 million outstanding loan to prepay at closing, which should generate close to $2 million of additional income.

Moving on to credit quality. As Jim mentioned, our portfolio companies not only raised almost $300 million in new capital last quarter and $2 billion since the start of the year, but have also reduced operating spend to extend runway. Consistent with last quarter, 90% of our portfolio is ranked at our 2 best credit scores, which means that they are performing at or above expectations.

During the quarter, 1 company with $14 million of principal balance was upgraded from category 2 and to category 1; and 1 portfolio company with $25 million of principal balance was upgraded from category 3 to category 2 due to improved performance. I should note that ForgeRock's announcement was after quarter end, so we expect to upgrade the loan to category 1 here in Q4.

We downgraded 1 portfolio company, Medly Health in online digital pharmacy with a total principal balance of $34.3 million from category 2 to category 3 due to reductions in its operating plan, changes in its senior team and the overall liquidity position. On November 1, we were made aware of recent preliminary negative development at Medly, which we believe may result in a future downgrade of their outstanding loans here in Q4.

Regarding other category 3 companies, all demonstrated stable performance during the third quarter. Our only category 4 portfolio company, Luminary Roli, raised additional capital in Q3. It represents 1% of our total investment portfolio on a fair value basis.

During the quarter, we also removed portfolio company, Pencil and Pixel, from category 5 as a result of selling its assets consistent with our Q2 valuation mark on loans.

Turning now to the topic of alignment with our shareholders. During the quarter, we successfully raised common stock at a premium to NAV and quickly put the proceeds to work with no drag on NII. Given our best-in-class fee structure with a look-back feature of our incentive fee measured from our IPO in 2014, our incentive fees were reduced by $3.3 million due to unrealized changes in our portfolio value. This resulted in an additional $0.10 of NII for the benefit of shareholders.

During the quarter, we put in place a $50 million ATM program in order to balance and bring down our blended cost of equity capital as well as supplement and potentially smooth out our equity capital raising activity. Of note, the ATM program can only operate when we trade above net asset value.

Our Board also increased our regular dividend from $0.36 to $0.37, bringing our annualized dividend yield based on NAV to 11.7% and 13.6% based on our 9/30 closing price. This represents our first dividend increase since Q4 2014. We and our Board will continue to monitor performance and outlook over the next couple of quarters as we consider potential additional increases.

Finally, as Chris will cover in more detail, we're also mindful of the fact that we have $0.52 of spillover income as of the end of Q3 and we'll continue to work with our Board to determine how to thoughtfully and efficiently use those proceeds as we approach year-end. Nevertheless, we continue to be heads down, focused on growing and managing our portfolio in a patient and disciplined manner, maintaining our target leverage and increasing our NII and NAV all while working with some of the most exciting venture growth stage companies backed by some of the industry's best venture capital funds.

With that, I'll now turn the call over to Chris.

Great. Thank you, Sajal, and hello, everybody. During the third quarter, we continued to experience growing core interest income from our loan portfolio and once again saw efficient and stable utilization rates on new debt commitments. We deployed capital using our attractive sources of leverage, which consisted of our fixed rate long-term investment-grade notes and a revolving credit facility and resulting in an increased diversification within the portfolio. We successfully completed an overnight common stock equity offering and put in place our first at-the-market equity purchase program.

I'd like to take you through our detailed financial results for the third quarter. Total investment income was $29.7 million, with a portfolio yield of 13.8% on total debt investments for the third quarter as compared to $21.2 million and 12.3% for the prior year period. Total investment income reflects a higher average debt investment balance as well as increased yields. So far this year, we have seen prime rate increase from 3.25% to 6.25% as of September quarter end. And further, given the news today from the Federal Reserve, we expect to see revenue expansion from higher yields on our existing floating rate loan portfolio.

Operating expenses were $12.8 million as compared to $11.3 million for the third quarter of 2021. Operating expenses for the quarter consisted of $7 million of interest expense, $3.9 million of management fees, $100,000 of incentive fees and $1.6 million of G&A expenses. The increase in overall operating expense is primarily driven by an increase in the use of attractive leverage as we increase total portfolio assets while offset by lower incentive fees.

We earned net investment income of $16.9 million or $0.51 per share compared to just $9.9 million or $0.32 per share in the same period in 2021. During the third quarter, the company recognized net realized losses on investments of $13.2 million, resulting primarily from the sale of Pencil and Pixel. Now recall that this investment was already written down fully in Q2, and so this realized loss had no impact to NAV in the current quarter.

Net change in unrealized loss on investments for the third quarter was $3.2 million, consisting of $4 million of net unrealized losses on our warrant and equity portfolio resulting from fair value and mark-to-market adjustments as well as $5 million of net unrealized losses from foreign currency adjustments, offset favorably by $6 million of net unrealized gains on our debt investment portfolio, of which $13 million was unrealized gains related to the reversal of the previous loss on Pencil and Pixel that Sajal mentioned.

We believe that a portion of this unrealized amount to be temporary in nature and expect that we will see a pull to par for those loans that have a market rate adjustment, such as the fixed rate loans in the portfolio as they prepay and repay under their contractual maturities.

Further, we have already seen some market recovery in the non-U.S. dollar currencies since the end of the quarter. We have seen the pound sterling up over 3% and the euro is up over 1%.

The company's total net asset value was $448 million or $12.69 per share as of the quarter end compared to $404 million or $13.01 per share as of the prior quarter ended June 30. On October 28, the Board of Directors declared and increased the regular quarterly distribution to $0.37 per share. This distribution is from ordinary income to stockholders of record as of December 15, which will be paid on December 30.

We over-earned the distribution again this quarter, increasing spillover income which now totals $18.5 million or $0.52 per share at the end of the quarter, supporting additional regular and special supplemental distributions in the future.

Now let me move to our investment commitments. We continue to experience strong utilization on our new commitments during the quarter. Given our robust pipeline, we ended the quarter with $331 million of unfunded investment commitments, of which $128 million was dependent upon the portfolio company reaching certain milestones. Of these amounts, $50 million of this total will expire in 2022.

79% of these unfunded commitments have contractual floating interest rates, all of which have a prime rate set at least 3.25% or higher. This compares favorably to the outstanding loan portfolio at quarter end which had 62% contractual floating interest rates, again, up from the prior quarter, which was 59%.

Now just a quick update on our term notes, our credit facility and overall liquidity. As of September 30, there was an aggregate of $516 million of debt outstanding, $395 million outstanding under our fixed rate investment-grade notes and $121 million outstanding on our revolving credit facility.

In July, we successfully amended our revolving credit facility, which included extending the revolving period to May of '22 -- I'm sorry, May of '24 and the scheduled maturity date to November of '25. Total commitments under the line are $350 million, and all the syndicate lenders continued with this long-standing relationship. The revolving credit facility allows us to efficiently manage our interest expense by reducing our outstandings when loan prepayments occur.

We ended the quarter at a 1.15x leverage ratio, which is right within our target leverage range. As of quarter end, the company had total liquidity of $244 million, consisting of cash and availability under our credit facility. We expect to draw under the facility when needed to grow the portfolio with accretive debt financing, which will benefit our shareholders.

The company completed an underwritten offering of 4.1 million shares of common stock at a public offering price of $13.75 per share, and we received net proceeds of $55 million from the sale of those shares. This was a NAV accretive offering that added $0.03 per share to NAV as of Q3. The net proceeds were initially used to pay down our revolving credit facility, and we deployed those proceeds during the rest of the quarter into high-yielding debt investments.

Despite having increased our outstanding common shares during the quarter by 13.5% as of the result of the raise, we were able to generate NII in excess of the declared distributions, thanks to a high-yielding portfolio and efficient deployment of the additional equity we raised.

On September 30, we also announced our first ATM or at-the-market stock issuance program. No shares have been issued as of today, but we do look to issue shares over the next year. The total size is just 11% of our current NAV. In addition to this current liquidity, the existing seasoned portfolio and diversified portfolio provides stable cash flows, which bodes well for sustained liquidity throughout 2023 and beyond.

So this completes our prepared remarks. And operator, we'd be happy to take questions at this time. So if you could please open the line.

(Operator Instructions) Our first question comes from Finian O'Shea of Wells Fargo.

First, sort of a high-level market question. Jim, I was interested in some of your earlier comments on how robust the venture capital fundraising environment continues to be seemingly in the face of private markets or alternative asset markets broadly in a very challenged environment. How do you think that is holding up so well? And do you think it is sustainable?

Well, it's hard to predict the future in terms of sustainability, but certainly, it's been something over a number of years, and I attribute it to the attractiveness of the asset class. In the long term, these are 10-year funds that are raising. And typically returns have been pretty attractive with the select group of venture investors and hasn't been an exact function of macroeconomic cycles. So at least for the better VCs and the 6% that I mentioned that we're able to raise, it's track record and the long-term outlook, and it's -- the valuations in 3 and 5 and 7 years as the target's not next quarter kind of thing.

Helpful. And just a follow-up on the dividend. I know I have to calibrate my words here a bit because it seems like the Fed may have just pushed the dot plot up further. But I wanted to ask what if the base rates go back down, are you comfortable with earning $0.37? It looks like 11.5% to 12% of NAV ROE.

Yes. Fin, this is Sajal, I'll take it. So I think you bring up a very great point of, listen, I think when it comes to the dividend, we're always mindful of not just current short-term market conditions, but longer-term outlook. And so I would say the factors that give us confidence with regards to our ability to cover and potentially more is the fact that we look at the core asset yield without the benefit of prepayment activity being particularly strong and then setting our floors, our prime rate floors on new transactions at the current prime rate. So protecting ourselves in an environment where rates -- base rates would come down.

I think the second element of it is locking in low-cost fixed-rate debt was also another benefit to us and to give us confidence in terms of coverage. And then I'd say the third piece is running at and maintaining target leverage. And so I think that's, from our perspective, something of most important but we have the least control over.

And I think we're pleased to -- although we had only a small prepay in Q3, obviously, they have 3 already in Q4. As you know, those generate nice gains, as we mentioned, in the quarter they occur, but they also delevered the business. And so for us, continuing to have line of sight on fundings is important as we look to long-term dividend distribution coverage.

(Operator Instructions) Our next question will come from Paul Johnson of KBW.

As far as where companies have raised equity more recently or through the summer, in the middle of the year, I'm just curious how those conversations have gone. I mean have you noticed any change, I guess, in the source of where those raises are coming from? Any sort of commentary, I guess, on support for companies from your sponsors? I'm just curious where -- again, where companies have raised equity? What has kind of been the nature of those fundraising events?

Yes. Given -- I'll take a first stab. But given some of the uncertainties out there in the market, there has been some -- a lot of attention being paid to valuations. There's some resetting and probably, I would call it, a little bit more return to reasonableness as part of it.

And what in large part is happening is, at least with most of our deals and our select investors, is that they continue to remain supportive and demonstrate their support. Some round sizes tend to be a little bit more convertibles, capital to support the debt. Some of the round size is a little smaller. But definitely, there's investors' support on a go-forward basis.

Yes. I would -- Sajal here. I would only add that we're -- I think one of the benefits of partnering up with such top tier VCs is seeing continued strong support from them and other existing investors. And so I think that shows commitment to their existing portfolio companies. As Jim mentioned, there is a fair amount of dry powder. It sort of feels like a lot of the new money is sitting on the sidelines right now waiting for early next year, which is kind of consistent with what we're expecting with continued demand growing next year as new money kind of comes back to market early next year, while existing investors are really leaning into supporting their existing portfolio companies here in '22.

Great. Appreciate that. That's helpful answer there. I guess on your -- just talking about your leverage capacity and your target leverage for the BDC a little bit. I'm just curious, so you're kind of, I guess, more or less your range of 1.0, 1.2x or so. How comfortable are you, I guess, running it up towards the upper end of that? Do you have any level, in your mind, I guess, where there would be kind of a hard stop at where you would probably prefer to limit, I guess, leverage growth within the BDC? I guess I'm taking all this into account to what your comments were as far as seeing a fairly active market, more attractive deals in the market. Obviously, a lot of fundraising out there as well.

Yes, I'll start, and then, Chris, please jump in. So again, I'd just clarify, Paul, our target range is 1 to 1.3. And so I would say that -- so we're comfortable going up a little bit higher, and I think we have in prior quarters. And then based on the sustainability of -- again, the good news is our portfolio is amortizing. Our portfolio companies prepay us, repay us. I mean you -- we already have visibility on the -- we already have $34 million back here in Q4 and then another $30 million with visibility when ForgeRock closes its take private. So it's part of the balance of -- I think one of the great aspects of our portfolio is that they do prepay, they do repay us.

So that allows us to have peak periods where we may be at the higher end or exceed our higher end, but we're not yet ready to pull the trigger on a public offering because of that visibility on liquidity. I also think that the ATM again also helps complementing, maintaining leverage and not getting over our ski tips on the higher end of it.

So I think the takeaway is we have lots of levers to maintain healthy leverage both at the base level with our fixed rate debt and then at the higher level with prepays and repays. But I think to the other point of, yes, ensuring we have -- our thesis right now is the deals are just getting better every quarter. So we're in no rush necessarily to deploy our capital here in Q4. Our core thesis, without revealing too much of our strategy to our competitors is, listen, there's a benefit of being patient and disciplined because just as we see some of that equity capital coming off the sidelines next year, that's when we really want to lean in. And so as we see that growth and so I'd say, preserving firepower for next year in anticipation of that is important for us.

Got it. Appreciate it, Sajal. Last question just on Medly Health, obviously, because of the mention of negative events post quarter end. I haven't seen where it was marked for this quarter, if it potentially reflected any of that or if it's been marked down from 2Q. But I was wondering if you could provide any other details on the company, size of the company, nature of the just decline in the performance. If it was something more exogenous to the company or if it was driven internally with the management change that you mentioned. Any information there would be helpful.

Yes. I'll start. So I'd say this was a company we did downgrade in Q3 for the criteria that I mentioned in terms of kind of the business pivot and focus, the change in team and kind of liquidity. And so roughly $30 million loan position that we have marked down here in Q3.

The developments that we mentioned today, this is something we just recently learned. So our team is actively monitoring the situation. And so given that we're just only recently made aware of this information, we're actively monitoring it for any further developments. But I would say that it's still in development.

Our next question comes from Christopher Nolan of Ladenburg Thalmann.

Sajal, when you mentioned the leverage target of 1 to 1.3, is the thinking to keep it -- keep leverage on the low side just because of the unpredictability of the direction of this economy?

I think the -- keeping it on the lower end is really for the anticipated kind of continued growth in demand. So I would say it's more of a focus of having that dry powder. I think the other practical element too is, again, given the prepays and repays that are already locked in, both from portfolio amortization, maturity dates, and again, the prepayment activity, we're naturally delevering a bit each quarter. So I'd say it's more of being disciplined, Chris, in timing when we go back in a meaningful way to take advantage of market conditions, but we want to make sure it's timed appropriately with kind of strong equity conviction.

Great. And I guess my only follow-up would be sort of a general question. Would you consider -- I mean, Andreessen Horowitz, I think did a major real estate investment with the guy who did WeWork. And if real estate -- commercial real estate turns out to be a place for entrepreneurs like that, is that an area that you would go in? Or is that just sort of outside your reservation?

Yes. I would just say, again, our model is to work with some of the brightest and best venture capital funds. And so to the extent that they're excited and deploying capital in promising sectors, we want to be thoughtful and mindful and obviously do our own sanity check as well. So I can't necessarily comment today on real estate per se, but I would say, fundamentally, our model is to go in those sectors that are attracting equity capital investment from premier venture capital sponsors that we think are sustainable for the long term.

There are no further questions at this time. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jim Labe for any closing remarks. Please go ahead.

Thanks. As always, I'd like to thank everyone for listening and participating in today's call. We look forward to talking with you all again next quarter. And thanks, again. Have a nice day. Goodbye.

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