Hercules Capital, Inc. · NYSE:HTGC
Hercules Capital — Q4 2021 Earnings Presentation
47 slides from Hercules Capital's earnings presentation, Feb 22, 2022
Slide 1: Financing the Growth of Tomorrow's Companies Today
Financing the Growth of Tomorrow’s Companies Today Q4 2021 INVESTOR PRESENTATION February 22, 2022
Slide 2: Important Notice: Forward Looking Statements
Important Notice: Forward Looking Statements This presentation may contain “forward-looking However, by their nature, these forward-looking statements” within the meaning of the Private statements involve numerous assumptions, Securities Litigation Reform Act of 1995. You should uncertainties and ri
Slide 3: Hercules Capital
Hercules Capital Structure Internally Managed Business Development Company (BDC) IPO Date June 9, 2005 – Common Stock Institutional Notes PAR $1000.00/$2000.00 • 2.625% Notes due 2026 • 3.375% Notes due 2027 • 4.28% Notes due 2025 Investment Options • 4.31% Notes due 2025 • 4.50% Notes due 2026 • 4.
Slide 4: Fourth Quarter 2021
Fourth Quarter 2021 Investor Presentation • Key Performance Highlights • Venture Capital Market • Company & Strategic Overview Opportunity • Financial Highlights • Analyst Coverage • Portfolio Highlights • Supplemental Information
Slide 5: Key Performance Highlights
Key Performance Highlights
Slide 6: Q4 2021 Highlights
Q4 2021 Highlights • Net Investment Income (NII) of $40.4M Robust Earnings • Total Investment Income of $72.5M • NII per share of $0.35 • 1YR/3YR/5YR Total Shareholder Returns(1): 24.0%/84.9%/62.4% • ROAE(1,2): 12.4% Strong Shareholder Returns • ROAA(1,2): 6.2% • Net Interest Margin (NIM): 10.0% • T
Slide 7: Total Shareholder Return vs. Select BDC Peer Group
(1) Total Shareholder Return (TSR) vs. Select BDC Peer Group HTGC Peer Group (2) 140% 120% 100% 80% 60% 40% 20% 24.0% 33.4% 84.9% 37.8% 62.4% 20.0% 70.6% 36.1% 0% 1- Year 3-Year 5-Year 7-Year (1) TSR is defined as stock appreciation plus dividend distributions. Source: S&P Capital IQ as of December
Slide 8: Delivering Strong Sustainable Shareholder Returns
Delivering Strong Sustainable Shareholder Returns Return on Average Assets % (ROAA) Return on Average Equity % (ROAE) 18% 8% 16% 7% 14% 15.4% 7.3% 7.2% 6% 12% 13.9% 6.8% 13.6% 6.6% 6.3% 12.6% 6.2% 12.4% 5% 10% 12.0% 4% 8% 3% 6% 10.4% 2% 4% 5.8% 5.7% 5.7% 4.3% 3.7% 4.4% 9.6% 9.7% 8.5% 7.5% 8.9% 1% 2%
Slide 9: Available Leverage for Potential Earnings Growth
Available Leverage for Potential Earnings Growth Leverage to Return on Average Equity % (ROAE) 30% 115.0% 120% 102.6% 101.8% 100.6% 25% 95.5% 95.6% 87.0% 84.7% 96.2% 90% 93.0% 20% 84.7% 72.9% 84.1% 83.4% 77.6% 73.9% 15% 60% 60.6% 62.0% 10% 30% 5% 12.6% 12.0% 13.6% 15.4% 13.8% 12.4% 0% 0% 2016 2017 2
Slide 10: Hercules Has Consistently Maintained a Premium to NAV
Hercules Has Consistently Maintained a Premium to NAV Creates a strong capital raising position to support growth 1.47 1.43 1.5 $16 1.33 1.4 1.32 1.28 1.3 $14 1.2 Price to NAV Multiple (x) 1.11 Net Asset Value (NAV) 1.1 0.96 0.94 1 $12 0.96 0.86 0.86 0.84 0.9 0.8 $10 0.7 0.6 $9.90 $9.96 $9.90 $10.55
Slide 11: Hercules Key Performance Highlights
Hercules Key Performance Highlights Total Investment Income Net Investment Income “NII” ($ in millions) ($ in millions) $300 $160 $140 $250 $120 $200 $100 $150 $80 $60 $100 $40 $150.0 $281.0 $100.3 $108.7 $143.3 $157.1 $139.7 $143.7 $157.1 $175.1 $190.9 $207.8 $267.9 $287.3 $39.6 $48.1 $73.1 $71.8 $
Slide 12: Portfolio Growth with Underwriting Discipline
Portfolio Growth with Underwriting Discipline Cumulative Net Debt Commitment and Fundings, $15 $14 Since Inception $13.4 $13 $12 $11.1 $11 $9.9 $9.6 $ in billions $10 $9 $8.5 $8.3 $7.6 $8 $7.3 $6.5 $6.5 $7 HTGC $5.6 $6 $5.7 $4.9 IPO $4.9 $4.2 $5 $4.0 $3.4 $3.5 $4 $2.7 $2.9 $3 $2.1 $1.9 $2.4 $1.4 $1.
Slide 13: Company & Strategic Overview
Company & Strategic Overview
Slide 14: Hercules At-a-Glance
Hercules At-a-Glance Largest BDC Focused on Providing Financing to High-Growth Venture Capital-Backed Companies $2.06 $2.22 97 $627.7 BILLION BILLION COMPANIES MILLION MARKET DEBT INVESTMENT WARRANT & EQUITY LIQUIDITY & BALANCE CAPITALIZATION PORTFOLIO PORTFOLIO SHEET FOUNDED DECEMBER 2003 DEBT INVE
Slide 15: Why Hercules is Different from Other BDCs
Why Hercules is Different from Other BDCs We invest in innovative venture growth-stage companies What We Don’t Do What We Do • No direct oil and gas exposure • We focus primarily on pre-IPO and M&A, innovative high-growth venture capital backed companies at their • No CLO exposure expansion (venture
Slide 16: We are at Center Stage of the Innovation Economy
We are at Center Stage of the Innovation Economy Hercules has domain expertise in five specialized lending groups “We are not generalists” Technology Life SaaS Sustainable Special Sciences Financing and Renewable Situations Technology • We Invest at the Expansion “Venture Growth” • Offices in key ve
Slide 17: Financial Highlights
Financial Highlights
Slide 18: Income Statement: Q4 2021 vs. Q4 2020 Summary Results
Income Statement: Q4 2021 vs. Q4 2020 Summary Results Three Months Ended December 31, 2021 2020 Year/Year ($ in 000's, except per share amounts) (unaudited) (unaudited) Change Interest Income $ 64,960 $ 68,245 -5% Fee Income 7,505 7,087 6% Total Investment Income 72,465 75,332 -4% Interest and Loan
Slide 19: Current and Historical Income Statements
Current and Historical Income Statements Twelve Months Ended December 31, 2021 2020 Year/Year ($ in 000's, except per share amounts) Change Interest Income $ 253,360 $ 263,379 -4% Fee Income 27,616 23,879 16% Total Investment Income 280,976 287,258 -2% Interest and Loan Fees 63,104 66,874 -6% Genera
Slide 20: Current and Historical Balance Sheet
Current and Historical Balance Sheet December 31, December 31, ($ in 000's, except per share amounts) 2021 2020 ASSETS Total Investments $ 2,434,522 $ 2,354,078 Cash and cash equivalents 133,115 198,282 Restricted cash 3,150 39,340 Interest receivable 17,365 19,077 Right of use asset 6,761 9,278 Oth
Slide 21: Effective Yield vs. Core Yield – Leads to Strong Earnings
Effective Yield vs. Core Yield – Leads to Strong Earnings Median Core Yield of 11.8% (Q1 2018 – Q4 2021) 16% 14.3% 14.3% 13.5% 13.5% 13.5% 13.6% 14% 13.4% 13.3% 13.2% 13.0% 13.0% 13.0% 12.6% 12.7% 12.7% 12.2% 12.9% Effective Yield 12% 12.7% 12.7% 12.7% 12.7% 12.4% 12.3% 11.9% 11.8% 11.8% 11.5% 11.6%
Slide 22: High-Yield Portfolio of Earning Assets
High-Yield Portfolio of Earning Assets Median Effective Yield of 13.3% (Q1 2018 to Q4 2021) $3,000 18% 16% $2,500 14.3% 14.3% 13.5% 13.5% 13.5% 13.6% Total Debt Investments, at value (millions) 13.4% 12.6% 13.3% 13.0% 13.2% 12.7% 12.7% 13.0% 14% 13.0% 12.2% 13.3% $2,000 12% Effective Yield (%) 10% $
Slide 23: Strong, Consistent Net Interest Margin
Strong, Consistent Net Interest Margin - NIM Median NIM of 10.3% (Q1 2018 to Q4 2021) $80,000 14% $70,000 11.8% 11.6% 12% 10.8% 11.0% 11.0% 11.1% 10.5% Net Interest Margin (in thousands) 10.3% 10.3% $60,000 10.0% 9.5% 9.5% 9.7% 10.3% 9.2% 10% 9.3% 9.4% Net Interest Margin (%) $50,000 8% $40,000 6% $
Slide 24: Impact of Early Payoffs on Effective Yields
Impact of Early Payoffs on Effective Yields Early Payoffs Lead to Higher Effective Yields and Earnings Effective Yields 15% 14.3% 13.5% 13.5% 13.5% 14.3% 13.4% 13.6% 13.3% 13.2% 13.0% 13.0% 12.6% 12.7% 12.7% 13.0% 12.2% 12.9% 12.7% 12.7% 12.7% 12.7% 12.4% 12.3% 11.9% 11.8% 11.3% 11.8% 11.6% 11.5% 11
Slide 25: Non-Interest and Fee Expense to Average Total Assets
Non-Interest and Fee Expense to Average Total Assets Median adjusted OPEX to average total assets of 2.4% (Q1 2018 to Q4 2021) $20,000 4% $18,000 3.2% $16,000 2.8% 3% 2.7% $14,000 2.6% 2.5% 2.4% 2.4% 2.4% 2.4% 2.4% 2.3% 2.4% OPEX (in thousands) 2.3% $12,000 2.2% 2.2% 2.2% 2.4% OPEX as a % of Total A
Slide 26: Unfunded Commitments as a Percentage of Total Assets
Unfunded Commitments as a Percentage of Total Assets $360 16% Available Unfunded Commitments as % Total Assets $330 Available Unfunded Commitments (in millions) 14% $300 12.7% $270 11.1% 11.0% 12% $240 10.0% 9.7% 9.4% 10% $210 7.7% $180 7.1% 7.2% 8% 7.2% 7.2% 6.7% $150 5.4% 5.6% 6.9% 6% $120 $90 3.2
Slide 27: Consistent and Disciplined Underwriting Standards
Consistent and Disciplined Underwriting Standards Our disciplined credit underwriting standards have delivered consistent long-term results $3,000 1.0 High Quality Debt Portfolio Value $2,500 2.01 1.93 1.92 2.21 2.23 2.18 2.19 2.18 2.17 2.15 2.34 2.22 2.16 2.10 2.30 ($ in millions) 2.43 2.0 Credit R
Slide 28: Diversified Sources of Funding: Q4 2021
Diversified Sources of Funding: Q4 2021 Capital Sources as of 12/31/21 $ in Millions % of Total Equity $1,308.5 51.1% SBA Debentures $150.5 5.9% 2022 Convertible Notes $230.0 9.0% 2022 Notes (Institutional) $150.0 5.9% Entity 2024 Notes (Institutional) $105.0 4.1% Capitalization September 2026 Notes
Slide 29: Diversified Sources of Funding: Q4 2021
Diversified Sources of Funding: Q4 2021 Notes SBA Debenture SMBC Union Bank January 2022 October 2022 Sept. 2026 October 2033 July 2024 February 2025 June 2025 March 2026 License 3 Credit Facility Credit Facility Conv. Notes Inst. Notes Inst. Notes Notes Inst. Notes Inst. Notes Inst. Notes Inst. Not
Slide 30: Interest Rates & Asset Sensitivity
Interest Rates & Asset Sensitivity Basis Point Movement in Prime Rate $39,500 $0.36 $0.32 $34,500 $0.32 Net Income ($ in thousands) $0.28 $29,500 Earning per Share $0.24 $24,500 $0.20 $19,500 $0.16 $0.16 $14,500 $0.12 $0.12 $0.08 $9,500 $0.08 $0.04 $4,500 $0.04 $0.00 $0.00 $0.00 -$500 $0.00 -75 -50
Slide 31: Portfolio Highlights
Portfolio Highlights
Slide 32: Hercules' Investment Portfolio: Q4 2021
Hercules’ Investment Portfolio: Q4 2021 Floating vs. Fixed Rate Investment Type Breakout 6.0% 1.6% 7.6% Debt Investments Floating Equity Investments Fixed Warrant Positions 94.0% 90.8% Industry Breakout Percentage of Portfolio Companies by Region (Portfolio Companies as of December 31, 2021) Communi
Slide 33: Hercules' Warrant & Equity Portfolio
Hercules' Warrant & Equity Portfolio: Potential Future Upside for Shareholder’s Total Return 16 Portfolio Companies completed Current Warrant & Equity Portfolio – Q4 2021 Initial Public Offerings – 2021 • 97 warrant holdings • Sprinklr, Privia Health, Proterra, 23andMe, • GAAP fair value: $38.4 mill
Slide 34: Select List of Warrant and Equity Portfolio Holdings
Select List of Warrant and Equity Portfolio Holdings Technology Life Sciences 34
Slide 35: A Broadly Diversified Portfolio Re-Balanced to Market Conditions
A Broadly Diversified Portfolio Re-Balanced According to our Assessment of Ongoing Market Conditions Mitigates Risk ($M) $1,200.6 $1,423.9 $1,542.2 $1,880.4 $2,314.5 $2,354.1 $2,434.5 100% 2.7% 2.2% 3.0% 1.3% 2.1% 3.4% 2.1% Diversified Financial Services 2.0% 2.1% 4.7% 2.4% 5.0% 43.2% 4.5% Electroni
Slide 36: Select List of Diversified Portfolio Companies
Select List of Diversified Portfolio Companies Technology Life Sciences SaaS Financing Sustainable & Renewable Technology Special Situations 36
Slide 37: Diversified Investment Approach Mitigates Risk
Diversified Investment Approach Mitigates Risk Four Key Diversification Strategies FINANCIAL INDUSTRY STAGES OF GEOGRAPHIC SPONSORS SECTORS DEVELOPMENT LOCATION More than Technology Expansion or Key VC Investment 1000 Venture SaaS Financing “Venture Growth” Centers Capital Life Sciences & Palo Alto
Slide 38: Venture Capital Market Opportunity
Venture Capital Market Opportunity
Slide 39: Over $1.5 Trillion Venture Capital Investments
Over $1.5 Trillion Venture Capital Investments Venture Capital Investment Activity 1997 – Q4 2021 $350 15,500 16,000 Dollars Invested (billions) $300 12,173 14,000 12,000 $250 10,000 # of Deals $200 4,341 6,350 4,995 8,000 $150 4,379 4,649 4,590 4,048 4,278 4,295 6,000 3,729 3,906 $100 2,211 2,547 2
Slide 40: Exits of Venture Capital–Backed Companies
Exits of Venture Capital–Backed Companies Mergers & Acquisitions $140 1,200 Amount Paid (billions) 1007 $120 1,000 703 759 708 $100 742 730 754 667 675 800 # of Deals 663 632 645 $80 456 440 600 $60 400 $40 $20 200 $26.5 $22.8 $55.6 $56.7 $69.3 $67.8 $133.0 $84.7 $120.5 $89.0 $129.5 $123.4 $68.5 $79
Slide 41: Hercules' Total Commitments vs. VC Dollars Invested
Hercules’ Total Commitments VS. VC Dollars Invested Venture Capital Investment Activity 2005 – Q4 2021 $250 VC Dollars Invested $3,000 Hercules Debt & Equity Commitments $2,639 Hercules Debt & Equity Commitments $2,500 $200 Note: Represents US VC investments only VC Dollars Invested $2,000 $150 $1,1
Slide 42: Investment Highlights
Investment Highlights Large Market Opportunity Attractive Yields and Experienced Upside from Equity and Management Team Warrant Portfolio Strict Focus on Credit Strong Venture Capital and Underwriting Process Private Equity Relationships Platform in Place to Strong Balance Sheet and Grow Portfolio D
Slide 43: Analyst Coverage
Analyst Coverage
Slide 44: Broad Industry Analyst Coverage
Broad Industry Analyst Coverage Finian O’Shea John Hecht Devin Ryan Transferred Coverage Initiated Coverage Re-initiated Coverage 7/13/2018 6/30/2015 11/2/2020 Ryan Lynch Crispin Love Casey Alexander Re-initiated Coverage Re-initiated Coverage Initiated Coverage 2/19/2013 7/20/2020 6/23/15 Mitchel P
Slide 45: Supplemental Information
Supplemental Information
Slide 46: Regulation and Structure
Regulation and Structure Hercules is a Publicly Listed, Internally Managed BDC and RIC Business Development Company (BDC) Regulated Investment Company (RIC) • Regulated by the SEC under the Investment • Distribute taxable income as dividend distributions Company Act of 1940 to shareholders • Leverag
Slide 47: Primarily Invest at Stages of High Growth
Primarily Invest at Stages of High Growth Expansion Stage Established Follow-on Rounds Private Late Stage/ Type of Company of Growth Capital Select Public Companies (Series B-Liquidity Event) Venture Capital/ Public Markets/ Equity Capital Provider Private Equity Private Equity Expectation for Addit