Hercules Capital, Inc. · NYSE:HTGC
Hercules Capital — Q4 2019 Earnings Presentation
49 slides from Hercules Capital's earnings presentation, Feb 20, 2020
Slide 1: Fourth Quarter 2019 Investor Presentation
February 20, 2020 FOURTH QUARTER 2019 INVESTOR PRESENTATION Financing the Growth of Tomorrow’s Companies TodayTM
Slide 2: Important Notice: Forward Looking Statements
IMPORTANT NOTICE: FORWARD LOOKING STATEMENTS This presentation may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You should understand that under Section 27A(b)(2)(B) of the Securities Act of 1933, as amended, and Section 21E(b)(2)(B
Slide 3: Hercules Capital
HERCULES CAPITAL Structure Internally Managed Business Development Company (BDC) IPO Date June 9, 2005 HTGC (NYSE) – Common Stock Institutional Notes PAR $1000.00 • 4.625% Notes due 2022 • 4.77% Notes due 2024 • 4.28% Notes due 2025 Retail Notes (Baby Bonds) PAR $25.00 Investment Options • HCXY (NYS
Slide 4: Fourth Quarter 2019 Investor Presentation
FOURTH QUARTER 2019 INVESTOR PRESENTATION Key Performance Highlights Company & Strategic Overview Financial Highlights Portfolio Highlights Venture Capital Market Opportunity Analyst Coverage Supplemental Information
Slide 5: Key Performance Highlights
KEY PERFORMANCE HIGHLIGHTS }ercules. Cc A PITAL
Slide 6: Q4 2019 Highlights
Q4 2019 HIGHLIGHTS • Net Investment Income (“NII”) of $40.1M, up 31.1% Y-Y • Total Investment Income of $70.6M, up 24.1% Y-Y Robust Earnings • NII per share of $0.38 and 119% distribution coverage • 58 consecutive quarters of distributions since June 2005 IPO • 1YR/3Yr/7YR Total Shareholder Returns(
Slide 7: Total Shareholder Return vs. BDCs & Wells Fargo Index
TOTAL SHAREHOLDER RETURN (TSR)vs. BDCs & WELLS FARGO INDEX (b) 100% 80% 60% 40% 20% 38.4% 19.7% 31.7% 25.9% 20.0% 19.1% 36.1% 29.7% 42.0% 103.1% 26.9% 52.4% 0% 1- Year 3-Year 5-Year 7-Year HTGC Peer Group(a) Wells Fargo BDCS Index (a) Peer Group: AINV, ARCC, BKCC, OCSL, FSK, GBDC, GSBD, MAIN, NMFC,
Slide 8: Delivering Strong Shareholder Returns
DELIVERING STRONG SHAREHOLDER RETURNS Return on Average Assets % (ROAA) 18% Return on Average Equity % (ROAE) 8% 16% 7% 14% 15.4% 7.3% 7.2% 6.8% 6% 13.6% 12% 6.3% 12.6% 6.1% 6.1% 12.0% 11.7% 5.8% 5% 10% 5.7% 5.7% 11.3% 10.4% 10.2% 4% 9.6% 8% 4.3% 8.5% 3% 6% 2% 4% 1% 2% 0% 0% 2015 2016 2017 2018 Q4 2
Slide 9: Available Leverage for Potential Earnings Growth
AVAILABLE LEVERAGE FOR POTENTIAL EARNINGS GROWTH (1) Leverage to Return on Average Equity % (ROAE) 18% 140% 16% 115.0% 120% 14% 102.6% 101.8% 95.5% 100% 12% 84.7% 87.0% 83.7% 96.2% 10% 84.7% 72.9% 80% 70.4% 83.4% 8% 60% 60.6% 62.0% 6% 40% 43.9% 4% 20% 2% 11.7% 12.6% 12.0% 13.6% 15.4% 0% 0% 2015 2016
Slide 10: Hercules Consistently Maintains a Premium to NAV
HERCULES CONSISTENTLY MAINTAINS A PREMIUM TO NAV CREATES A STRONG CAPITAL RAISING POSITION TO SUPPORT GROWTH $16 1.7 1.56 1.46 1.43 1.5 Price to NAV Multiple (x) $14 1.32 1.33 Net Asset Value (NAV) 1.23 1.3 1.14 1.11 1.07 $12 1.1 1.07 0.96 0.96 0.92 0.92 0.86 0.86 0.9 $10 0.7 $9.75 $10.51 $10.18 $9.
Slide 11: Hercules Key Performance Highlights
HERCULES KEY PERFORMANCE HIGHLIGHTS Total Investment Income Net Investment Income “NII” ($ in millions) $140 ($ in millions) $250 $120 $200 $100 $150 $80 $60 $100 $40 $50 $267.9 $143.3 $139.7 $143.7 $157.1 $175.1 $190.9 $207.8 $100.3 $108.7 $20 $79.9 $97.5 $39.6 $48.1 $73.1 $71.8 $73.5 $96.4 $0 $0 2
Slide 12: Portfolio Growth with Underwriting Discipline
PORTFOLIO GROWTH WITH UNDERWRITING DISCIPLINE Cumulative Debt Commitment and Fundings, Since Inception $11.0 $9.9 $10.0 $9.0 $8.5 $7.6 $8.0 $7.3 $ in billions $6.5 $7.0 $6.5 $5.6 $6.0 $5.7 $4.9 HTGC $4.9 $5.0 $4.0 $4.2 $4.0 IPO $3.4 $3.5 $2.7 $2.9 $3.0 $2.1 $1.9 $2.4 $1.4 $1.5 $2.0 $0.9 $1.1 $1.2 $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 $1.59 $2.17 120 $235.5 BILLION BILLION COMPANIES MILLION MARKET DEBT INVESTMENT WARRANT & EQUITY LIQUIDITY & BALANCE CAPITALIZATION PORTFOLIO PORTFOLIO SHEET FOUNDED DECEMBER 2003 DEBT INV
Slide 15: Why Is Hercules Different Than Other BDCs
WHY IS HERCULES DIFFERENT THAN OTHER BDCs WE INVEST IN INNOVATIVE VENTURE GROWTH-STAGE COMPANIES What We Don’t Do and What We Are Not No direct oil and gas exposure No CLO exposure No CMBS or RMBS exposure No metals or minerals exposure What We Do We focus primarily on pre-IPO and M&A, inn
Slide 16: Strategic Access to Equity and Debt Capital Markets
STRATEGIC ACCESS TO EQUITY AND DEBT CAPITAL MARKETS HERCULES’ SUCCESSFUL ATM DISTRIBUTION PROGRAM Hercules’ At-the-Market “ATM” Equity Distribution Agreement Equity Distribution Agreement: Up to a total of 12 million shares of common stock The Benefits and Competitive Advantages “Just-in-Time” a
Slide 17: We Are at Center Stage of the Innovation Economy
WE ARE AT CENTER STAGE OF THE INNOVATION ECONOMY HERCULES HAS DOMAIN EXPERTISE IN FIVE SPECIALIZED LENDING GROUPS “WE ARE NOT GENERALISTS” Technology Life SaaS Sustainable Special Sciences Financing and Renewable Situations Technology We Invest at the Expansion “Venture Growth” and Established Stage
Slide 18: Financial Highlights
FINANCIAL HIGHLIGHTS }ercules. Cc A PITAL
Slide 19: Income Statement: Q4 2019 vs. Q4 2018 Summary Results
INCOME STATEMENT: Q4 2019 VS. Q4 2018 SUMMARY RESULTS Three Months Ended December 31, 2019 2018 Year/Year ($ in 000's, except per share amounts) (unaudited) (unaudited) Change Interest Income $ 66,086 $ 52,687 25% Fee Income 4,491 4,202 7% Total Investment Income 70,577 56,889 24% Interest and Loan
Slide 20: Current & Historical Income Statements
CURRENT & HISTORICAL INCOME STATEMENTS Twelve Months Twelve Months Ended December 31, Ended December 31, ($ in 000's, except per share amounts) 2019 2018 Interest Income $ 247,513 $ 190,636 Fee Income 20,361 17,117 Total Investment Income 267,874 207,753 Interest and Loan Fees 61,674 46,695 General
Slide 21: Current & Historical Balance Sheet
CURRENT & HISTORICAL BALANCE SHEET December 31, December 31, ($ in 000's, except per share amounts) 2019 2018 ASSETS Total Investments $ 2,314,526 $ 1,880,373 Cash and cash equivalents 64,393 34,212 Restricted cash 50,603 11,645 Interest receivable 20,207 16,959 Other assets 12,239 2,002 Total Asset
Slide 22: Effective Yield vs. Core Yield – Leads to Strong Earnings
EFFECTIVE YIELD VS. CORE YIELD – LEADS TO STRONG EARNINGS MEDIAN CORE YIELD FROM Q1 2016 TO Q4 2019: 12.7% 18% 16% 14.9% 14.4% 14.6% 14.4% 14.1% 14.2% 14.3% 14.3% 14% 13.4% 13.5% 13.5% 13.5% 13.4% 13.2% 13.0% 13.0% Effective Yield 13.4% 13.2% 12% 12.9% 12.9% 12.7% 12.7% 12.9% 12.7% 12.7% 12.6% 12.5%
Slide 23: High-Yield Portfolio of Earning Assets
HIGH-YIELD PORTFOLIO OF EARNING ASSETS MEDIAN EFFECTIVE YIELD FROM Q1 2016 TO Q4 2019 OF 13.8% $2,500 18% 16% 14.9% 14.3% 14.4% 14.6% 14.4% 14.1% 14.2% 14.3% 13.5% 13.5% $2,000 Total Debt Investments, at value (millions) 13.2% 13.4% 13.5% 13.0% 13.4% 14% 13.8% 13.0% 12% Effective Yield (%) $1,500 10
Slide 24: Strong, Consistent Net Interest Margin - NIM
STRONG, CONSISTENT NET INTEREST MARGIN - NIM MEDIAN NIM FROM Q1 2016 TO Q4 2019 OF 10.9% $60,000 14% 11.8% 11.8% 11.6% 12% $50,000 11.0% 11.1% 11.1% 10.8% 11.0% 11.0% 10.3% 10.4% 10.5% 10.9% Net Interest Margin (in thousands) 10.1% 10.1% 10.3% 9.5% 10% $40,000 Net Interest Margin (%) 8% $30,000 6% $
Slide 25: Impact of Early Payoffs on Effective Yields
IMPACT OF EARLY PAYOFFS ON EFFECTIVE YIELDS Early Payoffs Lead to Higher Effective Yields and Earnings 20% 14.4% 14.6% 14.4% 14.9% 14.1% 14.2% 14.3% 14.3% 15% 13.2% 13.4% 13.5% 13.5% 13.5% 13.0% 13.4% 13.0% 12.9% 13.4% 13.2% 12.9% 12.9% 12.2% 12.6% 12.5% 12.7% 12.7% 12.7% 12.7% 12.4% 12.3% 12.1% 11.
Slide 26: Non-Interest and Fee Expense to Average Total Assets
NON-INTEREST AND FEE EXPENSE TO AVERAGE TOTAL ASSETS MEDIAN ADJ. OPEX TO AVERAGE TOTAL ASSETS FROM Q1 2016 TO Q4 2019 OF 2.6% $18,000 4% $16,000 3.2% 3.2% $14,000 2.9% 2.8% 2.8% 2.8% 2.8% 3% 2.6% 2.5% 2.6% $12,000 2.5% 2.4% OPEX (in thousands) 2.4% 2.4% 2.4% 2.4% 2.6% OPEX as a % of Total Assets (%)
Slide 27: Consistent and Disciplined Underwriting Standards
CONSISTENT AND DISCIPLINED UNDERWRITING STANDARDS Disciplined credit underwriting standards deliver consistent long-term results $2,500 1.0 High Quality Debt Portfolio Value $2,000 2.17 2.11 2.32 2.24 2.17 2.21 2.23 2.18 2.19 2.18 2.17 2.15 2.41 2.43 2.27 2.43 2.0 ($ in millions) Credit Rating $1,50
Slide 28: Diversified Sources of Funding: Q4 2019
DIVERSIFIED SOURCES OF FUNDING: Q4 2019 Capital Sources as of 12/31/19 $ in Millions % of Total Entity Capitalization Equity $1,133.0 46.5% SBA Debentures $149.0 6.1% 2027 Asset-Backed Notes $200.0 8.2% 2028 Asset-Backed Notes $250.0 10.3% 2022 Convertible Notes $230.0 9.4% 2022 Notes (Institutional
Slide 29: Diversified Sources of Funding (as of 12/31/19)
DIVERSIFIED SOURCES OF FUNDING (AS OF 12/31/19) Notes SBA Debentures Wells Fargo Union Bank January 2022 October 2022 April 2025 October 2033 July 2024 License 2 Securitizations Credit Facility Credit Facility Conv. Notes Inst. Notes Notes Notes Notes HTIII DATE ENTERED Aug. 2008 Feb. 2010 Jan. 2017
Slide 30: Portfolio Highlights
PORTFOLIO HIGHLIGHTS }ercules. Cc A PITAL
Slide 31: Hercules' Investment Portfolio: Q4 2019
HERCULES’ INVESTMENT PORTFOLIO: Q4 2019 Floating vs. Fixed Rate Investment Type Breakout 2.6% 0.9% 6.3% Debt Investments Floating Equity Investments Warrant Positions Fixed 97.4% 92.8% Industry Breakout Hercules’ Investments by Geography (Portfolio Companies as of December 31, 2019) Communications &
Slide 32: Hercules' Warrant & Equity Portfolio: Potential Future Upside
HERCULES' WARRANT & EQUITY PORTFOLIO: POTENTIAL FUTURE UPSIDE FOR SHAREHOLDER'S TOTAL RETURN 15 Portfolio Companies completed IPOs or in Registration – 2019 Stealth Bio, Avedro, Lightspeed POS, Lyft, X4 Pharmaceuticals, Pinterest, TransMedics, Fastly, BridgeBio, Brickell Biotech, Oportun Financial
Slide 33: Select List of Warrant and Equity Portfolio Holdings
SELECT LIST OF WARRANT AND EQUITY PORTFOLIO HOLDINGS Technology Life Sciences 33 33
Slide 34: A Broadly Diversified Portfolio Re-Balanced to Market Conditions
A BROADLY DIVERSIFIED PORTFOLIO RE-BALANCED ACCORDING TO OUR ASSESSMENT OF ONGOING MARKET CONDITIONS MITIGATES RISK ($M) $910.3 $1,020.7 $1,200.6 $1,423.9 $1,542.2 $1,880.4 $2,314.5 100% 1.3% 2.1% 3.4% 3.0% 4.0% 6.2% 2.0% 4.7% 3.2% 4.5% 1.5% 5.9% Diversified Financial Services 90% 13.3% 3.3% 6.7% 10
Slide 35: Select List of Diversified Portfolio Companies
SELECT LIST OF DIVERSIFIED PORTFOLIO COMPANIES Technology Life Sciences SaaS Financing Sustainable & Special Renewable Situations Technology 35 35
Slide 36: Diversified Investment Approach Mitigates Risk
DIVERSIFIED INVESTMENT APPROACH MITIGATES RISK Four Key Diversification Strategies FINANCIAL INDUSTRY STAGES OF GEOGRAPHIC SPONSORS SECTORS DEVELOPMENT LOCATION Technology Key VC More than SaaS Financing Investment Expansion or 1000 Venture Life Sciences Centers “Venture Growth” Palo Alto Capital Fi
Slide 37: Venture Capital Market Opportunity
VENTURE CAPITAL MARKET OPPORTUNITY
Slide 38: Over $1.0 Trillion in Venture Capital Investments
OVER $1.0 TRILLION IN VENTURE CAPITAL INVESTMENTS Venture Capital Investment Activity 1997 – 2019 $120 6,350 4,995 6,500 4,341 $100 4,649 5,500 4,590 4,379 4,295 4,048 4,278 Dollars Invested (billions) 4,500 $80 3,729 3,906 3,341 3,155 3,123 3,204 2,892 3,500 $60 2,547 2,462 # of Deals 2,484 2,799 2
Slide 39: Why Venture Backed Companies Use Venture Debt?
WHY VENTURE BACKED COMPANIES USE VENTURE DEBT? Venture Debt Complements Equity Financing and Optimizes Capital Structure 1 Less dilutive than new VC round 2 Lengthens time before next equity round 3 Provides negotiating leverage for higher valuations 4 Leverages returns of equity investors As Time t
Slide 40: Exits of Venture Capital-Backed Companies
EXITS OF VENTURE CAPITAL-BACKED COMPANIES Mergers & Acquisitions $140 759 900 742 703 730 708 $120 800 667 663 645 675 632 700 Amount Paid (billions) $100 600 $80 456 440 500 # of Deals $60 400 300 $40 200 $20 100 $26.5 $22.8 $55.6 $56.7 $69.3 $67.8 $133.0 $84.7 $120.5 $89.0 $129.5 $123.4 $0 0 2008
Slide 41: Hercules' Total Commitments vs. VC Dollars Invested
HERCULES’ TOTAL COMMITMENTS VS. VC DOLLARS INVESTED VENTURE CAPITAL INVESTMENT ACTIVITY 2005 – 2019 $120 $1,600 Hercules Debt and Equity Commitments $1,475 VC Dollars Invested $1,213 $1,400 VC Dollars Invested (billions) $100 Hercules Debt & Equity Commitments Note: Represents VC investments only $1
Slide 42: Hercules' Portfolio Company IPOs
HERCULES’ PORTFOLIO COMPANY IPOs PROVIDING INVESTOR ACCESS TO SOME OF AMERICA’S MOST PROMISING COMPANIES 140 14 VC-backed IPOs 12 120 Hercules' PoCo IPOs 12 Hercules’ Portfolio Company IPOs 100 10 Venture Backed IPOs 8 80 7 7 8 60 5 6 40 3 3 4 2 2 20 1 2 53 52 57 87 126 78 41 60 82 79 0 0 2010 2011
Slide 43: Investment Highlights
INVESTMENT HIGHLIGHTS Large Market Opportunity Attractive Yields and Experienced Upside from Equity and Management Team Warrant Portfolio Strict Focus on Strong Venture Credit Underwriting Capital and Private Process Equity Relationships Strong Balance Platform in Place Sheet and Diverse to Grow Por
Slide 44: Analyst Coverage
ANALYST COVERAGE }ercules. Cc A PITAL
Slide 45: Broad Industry Analyst Coverage
BROAD INDUSTRY ANALYST COVERAGE – 10 FIRMS Finian O’Shea John Hecht Chris York Ryan Lynch (Transferred Coverage 7/13/2018) (Initiated Coverage 6/30/2015) (Initiated Coverage 10/24/2012) (Re-initiated Coverage 2/19/2013) Tim Hayes Aaron James Deer Casey Alexander (Re-initiated Coverage 10/2/2017) (In
Slide 46: Supplemental Information
SUPPLEMENTAL INFORMATION }ercules. Cc A PITAL
Slide 47: Regulation and Structure
REGULATION AND STRUCTURE Hercules is an Internally Managed BDC under the 1940 Act and a RIC for Tax Purposes Business Development Company (BDC) Regulated by the SEC under the Investment Company Act of 1940 Leverage limited to approximately 2:1 debt/equity, unless an SEC exemptive order exists to
Slide 48: 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) Equity Capital Venture Capital/ Public Markets/ Provider Private Equity Private Equity Expectation for Addit
Slide 49: Interest Rates & Asset Sensitivity
INTEREST RATES & ASSET SENSITIVITY $50,000 $0.50 Net Income EPS $40,000 $0.40 $0.32 Net Income ($ in thousands) Earning per Share(1) $30,000 $0.30 $20,000 $0.20 $0.13 $10,000 $0.08 $0.10 $0.05 $0.02 $0 $0.00 -75 -50 -25 25 50 75 100 200 -$0.05 -$0.03 -$0.02 -$10,000 -$0.10 Basis Point Movement in Pr