Trinity Capital Inc (TRIN) 2020 Q4 法說會逐字稿

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinity Capital Fourth Quarter 2020 Earnings Conference Call.

Our host for today's call are Steve Brown, Chairman and Chief Executive Officer; David Lund, Chief Financial Officer; and Sarah Stanton, General Counsel. Kyle Brown, President and Chief Investment Officer; Gerry Harder, Chief Credit Officer; and Michael Testa, Chief Accounting Officer, are also present.

Today's call is being recorded and will be available for replay beginning at 8:00 p.m. Eastern Standard Time. The replay dial-in number is (404) 537-3406, and the pin number is 4939607. (Operator Instructions)

It is now my pleasure to turn the call over to Sarah Stanton.

Thank you, Erica, and welcome, everyone, to Trinity Capital's earnings conference call for the fourth quarter and full year 2020.

Trinity's fourth quarter and full year 2020 financial results were released today after market close and can be accessed from Trinity's Investor Relations website at ir.trincapinvestment.com. We have arranged for a replay of this call on Trinity's website or by using the telephone number and passcode provided in today's earnings release and by the operator.

Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Trinity Capital assumes no obligation or responsibility to update any forward-looking statements.

Please note that information reported on this call speaks only as of today, March 4, 2021. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

With that, allow me to introduce Trinity Capital's Chairman and CEO, Steve Brown.

Thank you, Sarah, and thank you to all of those who are joining us today. I hope that you all are healthy and doing well.

2020 brought an unprecedented wave of challenges to our world, and we are proud of the resilience that our business showed during its formative year. I will summarize a few accomplishments, briefly address our results, and then David will expand on the details later in the presentation.

During the year, we executed our company formation and election to become a BDC. We successfully raised capital through both debt and equity vehicles, including becoming a publicly traded company shortly after year-end.

We finished with a strong liquidity position of $87 million, which includes $45 million of cash. We had a record year in terms of opportunities reviewed with over $5.5 billion. We had a record year of funding of $240 million. We maintained a growing high-quality portfolio that performed throughout the downturn. And we continue to grow our team with the addition of 9 new employees in 2020 and having added 5 new team members to date in 2021 to our originations, due diligence and portfolio management teams.

I'd like to thank my dedicated colleagues at Trinity as well as our business partners and investors for their continued support throughout the year. Our strong performance was another example of how the venture debt models performed within broader down markets, and it further exemplifies the fundamental underpinning the venture capital industry that we serve.

During the year where the sector was expected to struggle, venture capital markets aggregated $156 billion in new deal funding, $290 billion in exits and $73 billion in total fundraising for future investment, according to Pitchbook.

Having generated over $5.5 billion in investment opportunities for review during 2020, we see tremendous opportunity heading into 2021. There continues to be an unfulfilled demand for debt and equipment financing to growth-stage companies due to the complexity of evaluating risk in these investments. We believe that we are among the few who can properly support this demand, and we have been deploying growth capital accordingly.

Specifically, we estimate that the serviceable available U.S. venture debt and equipment finance market was approximately $23 billion in 2020. Under that context, before turning the call over to Dave, let me briefly address our full year results.

Net investment income for the year was $23.4 million or $1.29 per share. NAV increased by $0.02 from Q3, finished the year at $13.03 and by $0.59 compared to Q1 of 2020. It's important to note that NAV would have ended Q4 at $13.30, but for the second $0.27 dividend we paid in Q4, in accordance with our decision to now declare our dividend just prior to the end of the quarter and pay the dividend shortly after the end of the quarter. Additionally, as of December 31, 2020, our portfolio had an aggregate fair value of approximately $494 million.

We made 36 portfolio company investments in 2020, 6 of which originated during the fourth quarter, totaling a record $240.2 million in gross deployments. We ended 2020 with $116,000 in contractual unfunded commitments. However, we have approximately $150 million of commitments to existing portfolio companies that are subject to certain milestones or borrowing conditions that must be met prior to borrowing these commitments, and we could potentially fund those during 2021.

To underscore how strong the pipeline is, including this expected portfolio funding number, our target for debt and equipment funding in 2021 is $280 million. So with just over 2 months into the year, we have direct visibility to potentially over 50% of our 2021 funding goal, giving us strong confidence in our ability to execute on our origination and portfolio growth targets.

Also, notably, we were equal in our ratio of loans to new and existing borrowers with 18 to each group. This shows our success in identifying new borrower relationships while converting our existing borrowers into repeat customers. It also reflects the growth of our equipment finance business, which has built-in growth in funding to a customer that is growing and has more equipment finance needs.

For the full year 2020, and partially offsetting our gross deployments, we received an aggregate of $161 million in proceeds from our repayments, of which $109 million were from early repayments, for a total net growth to the portfolio of $79 million from our investment activity.

Regarding credit quality, 99.4% of the portfolio was performing with a weighted average score on our proprietary rating scale of 3.2. We currently have 3 positions on nonaccrual totaling $3.4 million at cost and $2.2 million or 0.4% at fair value.

I'll now briefly address our allocations in terms of fair value, all of which remain consistent to finish the year. In sector allocation, manufacturing; professional, scientific and technical services; and retail trade, representing our top 3 sectors, comprised 16%, 21% and 16% of the debt portfolio, respectively.

In portfolio composition, secured loans comprised 2/3 of our portfolio, equipment financing was approximately 25%, 6% was in equity and 3.6% in warrants. We have grown the equipment financing from 15% at formation to 25% at the end of 2020, which reflects our commitment to grow the equipment finance portion of our business.

Geographically, 49% of our portfolio is allocated to the Western region, 26% is based in the Northeast and the remaining regions all ranged below 10%. This dispersion is relatively consistent with the regional investment of the venture community.

We continue to rigorously evaluate the current environment relative to COVID-19. Government responses to the pandemic have led to the reintroduction of restrictions and business shutdowns in certain states, counties and cities. Additionally, as of February, travel restrictions are in place between the U.S. and several countries. While vaccine distribution is widening, it remains unclear when the restrictions that were imposed to slow the spread of the virus will be lifted.

With that said, we believe that extended shutdowns will exacerbate current pent-up demand, setting up potential surge in economic activity once restrictions are lifted. Because our portfolio is VC-focused and driven by tech and innovation, we believe we are well positioned for these scenarios. We have grown because of the current shift to remote and digital environments, which had also experienced increased volume once conditions normalize. Our extensive tenure in the VC space, combined with our disciplined approach to sourcing and underwriting, are one of the key factors which allow us to withstand market cycles.

I'll close with a few enterprise updates. First and foremost, we are thrilled to be a public company listed on NASDAQ. This has been a long-standing personal goal of mine, and I could not think of a better group with whom to share this milestone. Trinity has recorded over $1 billion in originations since the inception of our former funds in 2008, and to be able to share ownership of our company is a special moment for us.

I also thank you all for your patience throughout this process. We recognize that the unprecedented pandemic of 2020 delayed our planned listing timing. Our stockholders granted us an extension on that time frame. And as promised, we were able to get to the public market as quickly and as practically as we could.

We are proud to be 1 of just 4 public companies specializing in the venture debt lending space. We firmly believe that there is a large opportunity ahead of us, and being able to raise capital as effectively as we did through the IPO is an affirmation of that belief. We're also now covered by 6 different well-respected analysts, something Trinity is very proud of coming out of the IPO gate.

We are growing in many ways. As I mentioned previously, we added 9 new staff members in 2020 and have added another 5 team members so far in 2021 to meet our expected growth. We have recently signed a lease agreement to move our headquarters to a larger office space in Downtown Phoenix to accommodate our growing team. We expect to make this move in the second quarter of this year once construction is completed.

We view this as an important step in our longer-term plan to expand our national presence as well as creating a desired hub for venture and technology innovation activity here in Arizona and throughout the Southwest. It also reflects our deliberate attempt to grow in a way that preserves our culture, which has been a critical part of our success.

In summary, we are thrilled about the important inflection points we reached during 2020 as well as the path ahead. We look forward to updating you further.

With that, I'll now turn the call over to Dave, after which we'll take your questions. Dave?

Thank you, Steve, and good afternoon to everyone. We had a solid first year as a BDC, starting with our formation last January, then navigating through the uncertainties of the COVID-19 pandemic, producing a record year for funded investments and culminating in our IPO in January of this year. Our success is a tribute to the team here at Trinity and the continued support from you, our investors.

With Steve having covered our first full year results, I will primarily focus my discussion on our fourth quarter results in the following key areas: portfolio growth, operating performance, NAV and return performance, credit performance and capital markets activity and liquidity.

Let me begin with our portfolio growth. During the fourth quarter, we entered into $116.5 million of new commitments and deployed $102.5 million across 18 companies, setting a new quarterly funding record. Within that, we funded loans to 6 new companies totaling $26.2 million and funded $76.3 million to 12 existing borrowers, including 1 loan that closed on September 30 and funded on October 1. Of the total amounts funded, $72.6 million was in secured debt, $29.5 million was for equipment financings, and we also funded one small equity investment of $370,000.

We're continuing to shift our portfolio from what was 100% fixed rate portfolio at the beginning of 2020 to more floating rate loans to match our floating rate borrowings. At the end of the fourth quarter, approximately 25% of our portfolio was floating rate as compared to 12% at the end of the third quarter.

Partially offsetting gross deployments was an aggregate of $42.3 million of proceeds received from principal repayment, including $16.4 million from normal amortization and $25.9 million from early repayments. As a result of our net funding and repayment activity, the portfolio grew on a cost basis by approximately $60.2 million.

At quarter end, our portfolio had a fair value of approximately $494 million compared to $425 million at the end of Q3, representing a growth of 16% on a fair value basis. We continue to see strong momentum in the venture space and are optimistic about our deployment and funding outlook. As Steve mentioned, we are entering 2021 with a robust pipeline of outstanding commitments. And while we cannot guarantee that the outstanding commitments will be drawn or our pipeline opportunities will convert, we believe we are well positioned to actively deploy during 2021 the capital raise from our December bond offering and our recently completed IPO.

I will now turn to our operating results. On a GAAP basis, we recorded total investment income of $15.3 million during the fourth quarter, comprised of approximately $14.4 million of interest income and fee income of $900,000. This represents an increase of $1.8 million over Q3 or 13.4%, primarily related to the increased weighted average of our loan portfolio and higher fee income from originations.

Income generated from early repayments was relatively flat at $974,000 as compared to Q3. Our effective yield on the portfolio was 14.5% as compared to 14.1% in Q3. The increase in effective yield was primarily driven by higher fee income received during the quarter.

We incurred a total of $4.3 million of interest and fees under our various debt facilities as compared to $3.9 million in Q3. The increase quarter-over-quarter was driven by the $20 million of additional borrowings under our credit facility and the $50 million of convertible debt we issued in December 2020. Our weighted average cost of debt was 6.6%, including interest and fee amortization, consistent with our cost of debt in Q3.

Other operating expenses, including $4.4 million in employee compensation, an increase from prior quarters, reflecting year-end variable compensation in connection with bonuses. We increased the bonus accrual in the fourth quarter as the team navigated through the COVID-19 pandemic and exceeded its goals for 2020. We expect our quarterly compensation expense to decrease by approximately $600,000 in 2021 to a run rate of approximately $3.8 million per quarter.

G&A expense was $1.2 million during Q4, of which approximately $730,000 was related to professional fees for valuation, legal and accounting services. As a result of the foregoing activity, net investment income for the quarter was $5.3 million or $0.29 per share.

During the quarter, we recognized approximately $5 million of net realized losses, primarily related to the loss in one portfolio company. We recorded unrealized appreciation of $9 million, which was driven by unrealized appreciation of $4.9 million attributed to the mark-to-market adjustment to our warrant and equity portfolios and reversals of prior unrealized depreciation of $4.1 million in connection with the realized losses we recognized during the quarter.

Net assets of $239 million or $13.03 per share increased slightly as compared to $237 million or $13.01 per share at the end of Q3. Regarding credit quality, our portfolio continues to perform very well with 99.6% of our loans performing, and 3 loans we had on nonaccrual are the same loans we acquired from the legacy portfolio at the beginning of 2020. So we have not had any new additions to the nonaccrual category.

Switching now to liquidity. Our ability to raise capital through various vehicles set a strong foundation for the growth we experienced in 2020. It allowed us to fund our formation transaction in January 2020, where we acquired $417 million portfolio from our 5 legacy funds. In conjunction with formations, we issued $125 million of common stock; we raised $125 million in a private debt offering of 7% notes maturing in 2025, which are callable by us after 3 years; and we assumed a $300 million credit facility with Crédit Suisse.

In December, we raised an additional $50 million with the issuance of 6% convertible notes that mature in 2025. The convertible notes received an investment-grade rating at BBB-. We raised these funds to support our continued funding in Q1 of 2021, given the uncertainty of the capital markets in the fall of 2020.

As a result of these activities, available liquidity as of December 31, 2020, was approximately $87 million, including approximately $45 million in unrestricted cash and cash equivalents, and borrowing capacity of $42 million under our credit facility, subject to existing terms and conditions. End-of-period leverage was 1.3:1, and our asset coverage was 177%.

In January, we completed our IPO, raising net proceeds of approximately $105 million. And in February, we paid down our credit facility by $90 million, thereby reducing our leverage ratio to less than 0.7:1. As a reminder, our leverage target is between 1.2 and 1.3. And we intend to draw down under the credit facility in 2021 to fund our investment activity.

Lastly, in December 2020, our Board declared a second dividend distribution of $0.27 per share, which reflects 107% coverage of our NII for the fourth quarter of 2020. Our Board intends to declare distributions prior to the end of each quarter based on the estimated earnings for that given quarter. This dividend brought total dividends declared in 2020 to $1.03 per share and generated 109% coverage on a distributable net income basis. We anticipate declaring a dividend for Q1 2021 at the end of March, subject to our Board of Directors' approval.

With that, we will now turn the call back to Erica to open the line for questions. Erica?

(Operator Instructions) Your first question is from Ryan Lynch with KBW.

Congratulations on the very successful IPO. First question I had, you mentioned some good commentary about your ability to deploy capital throughout 2021. My question, though, was obviously, there's been a lot of capital raise from the VC equity markets. There's also been a lot of SPAC formed out there. And those seem to play, and those are the similar markets that you're investing in. And so from a competition standpoint, how does the competition field look today when there's so much equity capital out there that could potentially serve as an alternative source of capital from -- compared to a lender?

Yes. Thanks, Ryan. Thanks for calling in. I appreciate the question. The first thing I would say is we always compete with equity. That's the nature of our business. It's probably the biggest competition we have. And so the fact that the SPAC industry has taken off and there's a lot of liquidity, this -- and our estimation is another sort of cycle of liquidity for the VC-backed companies and others. And so we're treating it like that.

Will there be some competitive factors relative to all the capital that is being raised? Perhaps. But we haven't seen that. And I think, Kyle, who's very active on our team in the market with his team, maybe do you have a comment on that, just relative to are we seeing any competitive factors right now relative specifically to the SPAC industry?

Sure. Ryan, to date, we've not seen a significant impact in our ability to deploy dollars based on the SPAC activity. These tend to be more mature companies, later-stage companies, that are benefiting from that SPAC activity. There may be some effects, as we have mentioned, to the portfolio and some liquidity events. But to date, I would say, we are not seeing significance impacts from our ability to deploy dollars based on SPAC activity.

And Ryan, I would just finish by saying, we think the SPAC activity is going to be a net positive to our industry, both to Trinity and others that play in this industry. Obviously, you get prepayments at times when SPACs happen. It's not a certainty, but that can happen. You also get the prepayment fees and the early fees that are associated with that and potential warrant upside that happens when those particular transactions would pay off, which will offset the earnings that you might lose when that debt is retired and give us some time to sort of redeploy it. So we think, generally speaking, it's going to be a net positive.

Okay. That's helpful commentary on those market conditions. This quarter -- in the fourth quarter, I should say, about 75% of your new fundings came from existing portfolio companies. From a historical standpoint, is that a fairly high mix that you experienced this quarter? And then you said you have pretty good visibility into, I think, 50% of your funding that could occur in 2021. Should we expect that mix from new to existing portfolio companies? Should that shift at all from what we saw in the fourth quarter?

Good question. I think it's going to depend quarter-to-quarter, and I wouldn't just layer in the mix that you're seeing right now. Part of the reason that we're seeing so much additional funding is the growth in our equipment finance business. That inherently requires additional funding. As companies grow, they have capital equipment needs, and we fill those needs. So as you see the equipment portion, equipment finance portion of our portfolio grow, you're going to see some of that maybe a little disproportionate.

We are having some loans that have additional drawdowns that are happening as well. But I think that's probably more reflective of the growth of our equipment portfolio versus something you would see on an ongoing basis at that ratio. But I will tell you, we love getting customers that grow, and we continue to fund to them. That's something that we like to do. This a relationship business. And we think that's a positive when we can continue to fund the growing portfolio companies and not lose them as they get stronger and perhaps have other opportunities.

Ryan, this is Dave. I would also throw in that one of the loans was classified technically as an existing loan. It was a $20 million funding that actually happened on October 1. So really, there was more of a balance between the existing and new loans that happened. It was more 50-50 than it was as heavily weighted towards the existing.

Okay. Got it. And then just one last one for me. You obviously disclosed some really nice portfolio activity, a lot of it in 2021 regarding some of your portfolios entering mergers with some SPACs. Obviously, one out there that we think would be pretty meaningful is your investment in Atieva or Lucid Motors.

I'm just curious, you guys disclosed 585,000 shares of preferred -- of Series D preferred stock. Is there any way to give us a sense of what those shares would be converted into and how many shares you would own in the new company via where Churchill Capital is trading at today to kind of be able to calculate what that value -- what the market is implying from a fair value in your investment in Atieva or Lucid Motors based on CCIV's price?

Great question, Ryan. First, I would say that we're encouraged by some of the activity we're seeing in the portfolio. The SPAC activity is exuberant. And we do believe that our portfolio is the kind of portfolio that could be attractive to SPAC companies out there.

Relative to that specific position, Ryan, we would prefer not to get into details on -- so I would say, at this point, speculative numbers relative to conversion, we're obviously on top of that. There are a number of things that need to happen at the company level and at the SPAC level for that ultimately to come to fruition, where we'll own shares in that company. And so from our perspective, we know what we have today, and we will get a sense as time moves on here and we get closer to exactly what that may translate into, and we're excited about what that can become.

Your next question is from Christopher Nolan with Ladenburg Thalmann.

I'll echo Ryan on a successful IPO, congratulations. The realized loss, am I correct that's [business]?

That's correct.

Okay. And then, Steve, did you mention in your comments that you expected $280 million in gross fundings in 2021? Or did I mishear you?

No, that's correct. That is our target for fundings in 2021.

Okay. And then going forward, how are you guys looking in terms of the percentage of loans or investments you make as equipment finance? Right now, it's roughly 25%, which is even with what it was in the third quarter. Do you expect that number to go up?

So we don't know specifically what that number is going to look like. What we can tell you, Christopher, is it's a growing market, it's a disorganized market and it's a market that we are committed to. We've built a team for it, and we're actively pursuing it. We expect that portion of the portfolio to grow. The beauty is it's disorganized, which means we can't tell you exactly what it will look like. Our best guess at this point is sort of a 2:1 ratio of loans to equipment financings is probably a place where we would end up. That's our best guess.

As you know, the structure in those 2 are different. You get a little interest-only. And then amortization with the loans, a little longer term for those. And then rapid amortization, a little shorter term with the leases, which we think is -- with equipment financing, excuse me, which is a nice sort of mix in the portfolio. So 2:1 is probably something you could look for in the future would be our best guess.

Okay. And does that -- that's roughly 1/3 of the portfolio. And given that the secured loans are your profit drivers, is that a mix that you think can go forward and sustain the current dividend, 2:1?

Yes. That's a good comment. But I would say to you, when you look at the loans and you get a little more real dollar profit from those because they're out a little longer, that's good. With the equipment financings, you're off risk quicker and you're able to redeploy that capital quicker. Even though the real dollar is not there, the yield on those is typically a little higher. So you get a little higher IRR, a little lower real dollar on the equipment financing, so a little lower IRR, a little higher real dollar. And we think that mix of 2:1, that's what we're modeling. And we believe that's a very nice mix relative to maintaining our effective yield at a high level to generate the kinds of returns that we're projecting.

Your next question is from Casey Alexander with Compass Point.

I have a couple of questions here. When you -- I'm looking at your investment risk rating scale. When you underwrite a new loan, which -- does it go into the strong performance category or the performing category?

Gerry, do you want to take a crack at that one? Gerry is our Chief Credit Officer.

Sure. Thanks for the question, Casey. So we're going to do an initial rating on that, so it doesn't default to either. But I would say, most typically, it falls into the performing category and is rated near -- sort of near the top of that category, around the 2.9 in our scale.

Okay. And so when I look at these generally, I look at the top 2 categories as being the categories that are most ripe for prepayments to try to get a feel because historically, that's how it's worked in venture debt funds, particularly in the very strong performance category. And when I look at the very strong performance category, how much of that is equipment finance? And just wondering because equipment finance, being kind of a different animal, might not change category nearly as often as term loans do.

Yes, that's actually a great question. So we've got -- one of our highest-rated companies is actually a combo, is a term loan and an equipment finance to one particular portfolio company. Another of our strong performers is in equipment financing. So I think of the 7 financings or 6 companies, 5 of them -- or 4 of them are exclusively term loans and 1 is blended, if that makes sense.

Yes. And you hit it on the head there, Casey. The equipment financings typically don't have prepay options and typically don't prepay, which keeps those on the book. So -- and again, we're -- in all of those really strong performing loans or equipment financings, we're going to do what we can to keep good customers on the books. And of course, as the incumbent, you have the ability to do that when -- if there's refinancing sort of folks out there trying to take a look at it.

Okay. Well, that relates right into my next question, which is the $16.4 million of regular amortization, probably on a comparative basis with some other venture debt BDCs, it's a fairly high number. So I'm assuming that that's in part driven by the fact that equipment finance starts amortizing immediately, whereas term loans generally have a delay before they start to amortize. So do you offset that sort of higher level of regular amortization, hopefully, with a lower level of prepayments because only 75% of your portfolio is term loans?

Yes, I think that's exactly the way to look at it.

I think that's very fair.

Yes, absolutely. And we like that. We like the rapid amortization and getting off risk with little ability or smaller repayments in that category. Yes.

Okay. Great. That's very helpful. Now my last question, and I don't mean to sound combative, but I don't understand your answer to Ryan's question in relation to Atieva or Matterport. If you know where you stand, it seems to be incongruous not to give shareholders a benchmark for where you stand on these very important investments that are out there in the public. I don't understand why you would want your shareholders to be trading your stock in the dark, so to speak.

Yes. At this point, there's public information out there. You guys have the same information that we have. And I don't want to be coy at all because it's a fair question. There is still things that have to happen between now and the time this deal closes to end up with a certain number of shares. And I hear you. And as we move forward, we will know more. And our shareholders, you and the market are going to know more. But we think at this point in time, it doesn't make sense to speculate exactly what we think our ownership in a Matterport and/or an Atieva, Lucid would be. But I hear you.

Okay. All right. Well, listen, congratulations on the IPO. And we look forward to working with you in the future.

Thanks so much. Yes.

Thanks, Casey.

Your next question is from Sarkis Sherbetchyan with B. Riley Securities.

I echo my congratulations on the IPO. Just wanted to come back to the liquidity position. Obviously, the recently raised equity and debt proceeds plus the pipeline give you the ability to deploy some meaningful capital here in '21. I think you mentioned $280 million. Maybe if you can speak to the cadence of the expected investment activity as fiscal '21 progresses. Do you think it will be fairly even from a deployment perspective? Do you think it will depend upon some of the prepayment activity? Just want to get a flavor for the cadence of net originations here.

So it's going to -- it's going to be impacted certainly by prepayments, which we cannot predict. But there's not a lot of seasonality in our business. So you will probably see a sort of an equal cadence. That would be our plan. We -- and as I stated in my remarks and we've stated in writing, we had the largest number of opportunities that we've ever had in a given year. And historically for Trinity, statistically, that translates into growing originations. So we're certainly hopeful, out of the gate here, that will be the case. But generally speaking, across the year, you're going to see more of a regular cadence of deployment against that number.

Fantastic. And in the past 2 quarters, we're seeing the portfolio shift away from the fixed rate loans and more towards floating. I think, David, you commented on this in the prepared remarks. Can you maybe speak specifically towards any target that you may have in mind for fixed versus floating considering your own capital structure and where you're taking the capital structure?

Sure. I think our target is obviously to get all of our fixed rate out as much as possible. So -- but our equipment financing tends to be fixed rate loans. So if we're looking for a target that's a 25% to 30% of our portfolio being in equipment, you can anticipate that those loans will be on a fixed rate. For the balance of the loans, we want to push towards being on a variable rate.

Great. And I think in -- here in the earnings presentation slide, on Slide 20, you've provided a nice illustration on potential warrant upside with kind of the 2x multiple, 3x multiple and 4x multiple. I just want to kind of get a sense for your presentation there and how investors should be thinking about your warrant and equity positions, given what some of the prior questioners asked as well.

Sure. So...

Yes, go ahead, David.

Go ahead.

You get it, and I'll add if I need to.

Yes. Clearly, we're trying to give investors some sense of what the portfolio could do. Based on experience -- my experience, prior to Trinity, with Hercules, we generally saw about 50% of the portfolio would potentially have upside to the warrants, and 50% of it will go away completely. And that's why we try to show that at this point in time, if we invested in the 50% of the portfolio, you could potentially earn $0.47 of a 2x multiple if that portfolio gets invested; $1.43 at 3x; $2.39 at 4x. So we're just trying to give a sense to our investors of what the warrant portfolio could potentially do.

Yes. I would add to it, especially with the SPAC activity happening, there's just lots of euphoria. It would be one word. There's probably a lot of other words we could use right now. There's just a lot of things happening in that. And we want to be very careful to stay very grounded and even talk with our investors about the fact that our base business, which is interest, preservation of principal capital, interest and fees is what we live off of. It's our base business. That alone provides a really good return to investors. And in the end, when we look at these warrant portfolios across different cycles and markets, we should expect warrant [pots] to offset losses in the portfolio. That's our business model.

And I want to be careful that in a market like this, we want to make sure that we're not talking about all of the potential gains that could happen. Clearly, that's the case. But at the end of the day, in our business, if those gains offset your losses and you're really disciplined in your underwriting approach and you get your principal back and you get your interest and you get your fees and you capitalize that properly, it's a very good business that pays great returns to investors. So that's always our focus when we're thinking about this. Liquid markets provide opportunities. We happen to have that, and we're hoping that will play out at Trinity. So...

Your next question is from Finian O'Shea with Wells Fargo Securities.

First, another question on the nature of the portfolio. This looks pretty distinct versus your venture lending peers where you don't really have unfunded commitments. Can you sort of, I guess, explain that? Is there -- do you consider -- not consider some form of delay drawn, unfunded? Or is there something in the nature of what you're doing different from the venture BDCs that we know?

Yes. Great question, Fin. Thanks for that. Since I started in this business many years ago, I sort of took a path where legally, we don't have unfunded commitments across the bulk of the portfolio. It's not a legal obligation. But certainly, there's expectation and hope that our companies will grow and then we have the opportunity to fund. And so we state it like that.

Now -- and there is a very small, $116,000, I think we reported, where we have a legal obligation to fund. But the typical unfunded commitments that you may think about or hear about that have specific legal obligation, that doesn't exist in our portfolio presently. It's not to say we won't have some of that in the future. But presently, we have, as I stated, close to $150 million or so. And what we would believe is expected, hopeful deployments inside of our portfolio. But today, they are not legal obligations. So I hope that distinction is helpful.

Yes. Maybe 2 questions -- go ahead.

No, I was just going to say, I mean, we've entered into commitments, but we've borrowed a certain amount of that. We don't have an obligation, and it's not a true commitment to fund. So we've entered into commitments of over $150 million, but we don't have to contractually actually spend those dollars. And that's the distinction.

Okay, makes sense. And then just a follow-on for Dave, perhaps. Appreciate your guidance on G&A. Just, I guess, a 2-part question. First, does your $3.8 million number include a potential or impending stock comp plan? And then next, is the -- you touched on the professional fee, but is that level normal as well? Or is that sort of IPO stuff? What can we expect on that one as well?

Sure. So with regards to the comp, that's just the comp and bonus accruals that we were looking for in 2021. It doesn't include any RSUs because at this point in time, we haven't had the plan approved by the SEC or shareholders or, in fact, had anything granted by our Board. So that's not in that number.

And with regards to the professional fees, I think that will come down a little bit. I think there are some initial expenses that happened with the IPO that were not capitalized. So -- but our run rate will only come down a small amount in terms of the G&A -- general G&A.

Okay. That's helpful. That's all for me. And I'd like to congratulate you as well on the successful IPO.

Thanks, Fin.

(Operator Instructions) Your next question is from Manu Srivareerat with UBS.

Congratulations, guys. I wanted to echo that as well. Most of my questions have been answered, but I guess I have one question on rates. Well, we don't really think that you're very exposed to rates or very rate sensitive. I just wonder how you think of the world with a rising rate environment.

Right. Well, that's the one reason why we're looking to switch over to variable rate loans. I think what's important is in our portfolio, our average life is anywhere from 28 to 30 months. So our portfolio will wind down before we think there's any significant impact from the rising rates. And then we do have $175 million that's fixed rate. So I think we're in a good position to weather any kind of interest rate changes as our portfolio changes over.

Okay. I guess my other question is on credit. I mean, obviously, Trinity has been able to hold credit losses to a very nominal rate over the years. Are there any signs of stress emerging? Are there any particular vertical or a business line? Any color there?

Gerry, do you want to touch on that?

Sure. We -- as we reported, we see the -- our weighted average risk rating is very consistent at Q4 with where it sat at Q3. And I think if you look back even further to Q2, you'd see pretty good consistency there. So no, there's no pending vulnerabilities that we're seeing at this time.

Well, that's all for me, guys. Congratulations again.

Thank so much.

Thank you.

And there are no further questions at this time. I'll now turn the call back over to Steve Brown for closing remarks.

Thanks again. Guys, I just want to just say thank you for being investors. Thank you for your commitment to Trinity. We're excited to be listed on NASDAQ and to continue to build out the platform that we have to be just the very best venture debt and equipment finance company we can be so that we can drive returns for you. So thank you, and we look forward to reporting to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.