Hercules Capital, Inc. · NYSE:HTGC
Hercules Capital — Q3 2020 Earnings Presentation
48 slides from Hercules Capital's earnings presentation, Oct 29, 2020
Slide 1: Third Quarter 2020 Investor Presentation
October 29, 2020 THIRD QUARTER 2020 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 • 4.31% Notes due 2025 Retail Notes (Baby Bonds) PAR $25.00 Investm
Slide 4: Third Quarter 2020 Investor Presentation
THIRD QUARTER 2020 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 Kercules. Cc A PIT A OL
Slide 6: Q3 2020 Highlights
Q3 2020 HIGHLIGHTS • Net Investment Income (“NII”) of $38.7M Robust Earnings • Total Investment Income of $70.3M • NII per share of $0.34 and 106% distribution coverage • 1YR/3Yr/5YR Total Shareholder Returns(1): -3.9%/16.5%/73.2% • ROAE(1,2,): 13.7% Strong Shareholder Returns • ROAA(1,2,): 6.4% • N
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% 16.5% 73.2% 17.9% 16.5% 31.1% 4.2% 0% -3.9% -19.6% -21.5% -12.4% -12.9% -1.4% -20% -40% 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,
Slide 8: Delivering Strong Sustainable Shareholder Returns
DELIVERING STRONG SUSTAINABLE SHAREHOLDER RETURNS Return on Average Assets % (ROAA) 18% Return on Average Equity % (ROAE) 8% 16% 7% 14% 15.4% 7.3% 7.2% 13.7% 6% 6.8% 13.6% 12% 6.4% 6.3% 12.6% 6.1% 6.1% 12.0% 11.7% 5% 5.8% 10% 5.7% 5.7% 11.3% 10.4% 10.2% 4% 9.6% 8% 4.4% 4.3% 8.5% 8.2% 3% 6% 2% 4% 1%
Slide 9: Available Leverage for Potential Earnings Growth
AVAILABLE LEVERAGE FOR POTENTIAL EARNINGS GROWTH (1) Leverage to Return on Average Equity % (ROAE) 16% 140% 14% 115.0% 120% 111.4% 102.6% 12% 101.8% 102.9% 95.5% 100% 87.0% 100.6% 10% 84.7% 96.2% 84.7% 80% 83.4% 8% 72.9% 60% 60.6% 62.0% 6% 40% 4% 2% 20% 12.6% 12.0% 13.6% 15.4% 13.6% 0% 0% 2016 2017
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 1.43 1.5 $16 1.32 1.33 1.4 1.23 1.3 Price to NAV Multiple (x) $14 1.13 1.2 Net Asset Value (NAV) 1.11 1.1 0.96 0.96 1 $12 0.86 0.86 0.9 0.92 0.75 0.8 $10 0.7 0.6 $9.94 $9.90 $9.96 $9.90 $10.5
Slide 11: Hercules Key Performance Highlights
HERCULES KEY PERFORMANCE HIGHLIGHTS Total Investment Income Net Investment Income “NII” ($ in millions) $140 ($ in millions) $250 $120 $200 $100 $150 $80 $60 $100 $40 $115.0 $267.9 $211.9 $50 $100.3 $108.7 $143.3 $139.7 $143.7 $157.1 $175.1 $190.9 $207.8 $39.6 $48.1 $73.1 $71.8 $73.5 $96.4 $20 $79.9
Slide 12: Portfolio Growth with Underwriting Discipline
PORTFOLIO GROWTH WITH UNDERWRITING DISCIPLINE Cumulative Debt Commitment and Fundings, Since Inception $12 $11.0 $11 $9.9 $10 $9 $8.5 $8.2 $7.6 $8 $7.3 $ in billions $7 $6.5 $6.5 $5.6 $6 HTGC $4.9 $5.7 $4.9 $5 IPO $4.0 $4.2 $4 $3.4 $3.5 $2.7 $2.9 $3 $2.1 $2.4 $1.4 $1.5 $1.9 $2 $1.2 $1.5 $0.9 $1.1 $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 $1.52 $2.28 108 $465.1 BILLION BILLION COMPANIES MILLION MARKET DEBT INVESTMENT WARRANT & EQUITY LIQUIDITY & BALANCE CAPITALIZATION PORTFOLIO PORTFOLIO SHEET FOUNDED DECEMBER 2003 DEBT INV
Slide 15: Why Is Hercules Different Than Other BDCs
WHY IS HERCULES DIFFERENT THAN OTHER BDCs WE INVEST IN INNOVATIVE VENTURE GROWTH-STAGE COMPANIES What We Don’t Do No direct oil and gas exposure No CLO exposure No CMBS or RMBS exposure No metals or minerals exposure What We Do We focus primarily on pre-IPO and M&A, innovative high-growth
Slide 16: Strategic Access to Equity and Debt Capital Markets
STRATEGIC ACCESS TO EQUITY AND DEBT CAPITAL MARKETS HERCULES’ SUCCESSFUL ATM DISTRIBUTION PROGRAM Hercules’ At-the-Market “ATM” Equity Distribution Agreement Equity Distribution Agreement: Up to a total of 16.5 million shares of common stock The Benefits and Competitive Advantages “Just-in-Time”
Slide 17: We Are at Center Stage of the Innovation Economy
WE ARE AT CENTER STAGE OF THE INNOVATION ECONOMY HERCULES HAS DOMAIN EXPERTISE IN FIVE SPECIALIZED LENDING GROUPS “WE ARE NOT GENERALISTS” Technology Life SaaS Sustainable Special Sciences Financing and Renewable Situations Technology We Invest at the Expansion “Venture Growth” and Established Stage
Slide 18: Financial Highlights
FINANCIAL HIGHLIGHTS Kercules. Cc A PIT A OL
Slide 19: Income Statement: Q3 2020 vs. Q3 2019 Summary Results
INCOME STATEMENT: Q3 2020 VS. Q3 2019 SUMMARY RESULTS Three Months Ended September 30, 2020 2019 Year/Year ($ in 000's, except per share amounts) (unaudited) (unaudited) Change Interest Income $ 65,375 $ 64,244 2% Fee Income 4,964 4,994 -1% Total Investment Income 70,339 69,238 2% Interest and Loan
Slide 20: Current & Historical Income Statements
CURRENT & HISTORICAL INCOME STATEMENTS Nine Months Twelve Months Ended September 30, Ended December 31, ($ in 000's, except per share amounts) 2020 2019 Interest Income $ 195,134 $ 247,513 Fee Income 16,792 20,361 Total Investment Income 211,926 267,874 Interest and Loan Fees 49,683 61,674 General a
Slide 21: Current & Historical Balance Sheet
CURRENT & HISTORICAL BALANCE SHEET September 30, December 31, ($ in 000's, except per share amounts) 2020 2019 ASSETS Total Investments $ 2,420,827 $ 2,314,526 Cash and cash equivalents 27,554 64,393 Restricted cash 20,507 50,603 Interest receivable 19,506 20,207 Other assets 15,607 12,239 Total Ass
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 2017 TO Q3 2020: 12.4% 18% 16% 14.9% 14.1% 14.2% 14.3% 14.3% 13.4% 13.5% 13.5% 13.5% 13.4% 13.6% 14% Effective Yield 13.0% 13.0% 12.6% 12.2% 12% 12.7% 12.7% 12.9% 12.7% 12.7% 12.6% 12.5% 12.4% 12.2% 12.1% 12.3% 11.9%
Slide 23: High-Yield Portfolio of Earning Assets
HIGH-YIELD PORTFOLIO OF EARNING ASSETS MEDIAN EFFECTIVE YIELD FROM Q1 2017 TO Q3 2020 OF 13.5% $2,500 18% 16% 14.9% 14.3% 14.3% 14.1% 14.2% $2,000 Total Debt Investments, at value (millions) 13.4% 13.5% 13.5% 13.5% 13.4% 13.6% 14% 13.0% 13.0% 12.2% 12.6% 13.5% 12% Effective Yield (%) $1,500 10% 8% $
Slide 24: Strong, Consistent Net Interest Margin - NIM
STRONG, CONSISTENT NET INTEREST MARGIN - NIM MEDIAN NIM FROM Q1 2017 TO Q3 2020 OF 10.5% $70,000 14% 11.8% 11.6% $60,000 12% 11.1% 11.0% 11.0% 11.1% 10.8% 10.5% Net Interest Margin (in thousands) 10.3% 10.4% 10.3% 10.1% 9.5% 10.5% 9.5% 9.7% $50,000 10% Net Interest Margin (%) $40,000 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% 14.9% 14.3% 14.3% 14.1% 14.2% 15% 13.4% 13.5% 13.5% 13.5% 13.0% 13.4% 13.6% 13.0% 12.6% 12.2% 12.6% 12.5% 12.7% 12.7% 12.9% 12.7% 12.7% 12.4% 12.2% 12.1% 11.9% 12.3% 11.8% 11.5% 11.3% 10% 10.1%
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 2017 TO Q3 2020 OF 2.5% $18,000 4% $16,000 3.2% $14,000 2.9% 2.8% 2.8% 3% 2.7% 2.6% 2.6% $12,000 2.5% 2.5% OPEX (in thousands) 2.4% 2.4% 2.4% 2.4% 2.3% 2.2% 2.5% OPEX as a % of Total Assets (%) $10,
Slide 27: Unfunded Commitments as a Percentage of Total Assets
UNFUNDED COMMITMENTS AS A PERCENTAGE OF TOTAL ASSETS $270 16% Available Unfunded Commitments (in millions) $240 Available Unfunded Commitments as % Total Assets 14% $210 12% $180 9.4% 9.7% 10% $150 7.7% 7.2% 7.2% 7.2% 8% 7.1% 6.7% $120 5.6% 5.4% 6% $90 4.8% 4.4% 3.6% 3.2% 2.9% 4% $60 $30 2% $129.7 $
Slide 28: 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 $2,000 2.27 2.24 2.17 2.21 2.23 2.18 2.19 2.17 2.15 2.43 2.43 2.18 2.34 2.30 2.22 2.0 ($ in millions) Credit Rating $1,500 3.0
Slide 29: Diversified Sources of Funding: Q3 2020
DIVERSIFIED SOURCES OF FUNDING: Q3 2020 Capital Sources as of 9/30/20 $ in Millions % of Total Entity Capitalization Equity $1,173.1 47.4% SBA Debentures $99.0 4.0% 2027 Asset-Backed Notes $200.0 8.1% 2028 Asset-Backed Notes $250.0 10.1% 2022 Convertible Notes $230.0 9.3% 2022 Notes (Institutional)
Slide 30: Diversified Sources of Funding (as of 9/30/20)
DIVERSIFIED SOURCES OF FUNDING (AS OF 9/30/20) Notes SBA Debentures Wells Fargo Union Bank January 2022 October 2022 April 2025 October 2033 July 2024 February 2025 June 2025 License 2 Securitizations Credit Facility Credit Facility Conv. Notes Inst. Notes Notes Notes Inst. Notes Inst. Notes Inst. N
Slide 31: Interest Rates & Asset Sensitivity
INTEREST RATES & ASSET SENSITIVITY $0.19 $0.20 Net Income $19,900 EPS $0.16 Net Income ($ in thousands) Earning per Share(1) $14,900 $0.12 $9,900 $0.08 $0.08 $0.06 $0.04 $4,900 $0.04 $0.02 $0.00 $0.00 $0.00 -$100 $0.00 -75 -50 -25 25 50 75 100 200 Basis Point Movement in Prime Rate (1) EPS calculate
Slide 32: Portfolio Highlights
PORTFOLIO HIGHLIGHTS Kercules. Cc A PIT A OL
Slide 33: Hercules' Investment Portfolio: Q3 2020
HERCULES’ INVESTMENT PORTFOLIO: Q3 2020 Floating vs. Fixed Rate Investment Type Breakout 2.1% 0.9% 5.5% Debt Investments Floating Equity Investments Warrant Positions Fixed 97.9% 93.6% Industry Breakout Percentage of Portfolio Companies by Region (Portfolio Companies as of December 31, 2019) 35.6% C
Slide 34: Hercules' Warrant & Equity Portfolio: Potential Future Upside
HERCULES' WARRANT & EQUITY PORTFOLIO: POTENTIAL FUTURE UPSIDE FOR SHAREHOLDER'S TOTAL RETURN 9 Portfolio Companies completed IPOs or in Registration – YTD 2020 Oak Street Health, Outset Medical, Palantir, and Codiak completed Metuchen Pharma and Yumanity Therapeutics (reverse mergers) and 3 conf
Slide 35: Select List of Warrant and Equity Portfolio Holdings
SELECT LIST OF WARRANT AND EQUITY PORTFOLIO HOLDINGS Technology Life Sciences 35 35
Slide 36: A Broadly Diversified Portfolio Re-Balanced to Mitigate Risk
A BROADLY DIVERSIFIED PORTFOLIO RE-BALANCED ACCORDING TO OUR ASSESSMENT OF ONGOING MARKET CONDITIONS MITIGATES RISK ($M) $1,020.7 $1,200.6 $1,423.9 $1,542.2 $1,880.4 $2,314.5 $2,420.8 100% 2.2% 1.3% 2.1% 1.9% 3.0% 3.4% 6.2% 2.0% 2.5% 2.1% 4.7% 3.2% 4.5% 1.5% Diversified Financial Services 90% 5.9% 3
Slide 37: Select List of Diversified Portfolio Companies
SELECT LIST OF DIVERSIFIED PORTFOLIO COMPANIES Technology Life Sciences SaaS Financing Sustainable & Special Renewable Situations Technology 37 37
Slide 38: 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 39: Venture Capital Market Opportunity
VENTURE CAPITAL MARKET OPPORTUNITY
Slide 40: Over $1.0 Trillion in Venture Capital Investments
OVER $1.0 TRILLION IN VENTURE CAPITAL INVESTMENTS Venture Capital Investment Activity 1997 – Q3 2020 $120 7,891 9,000 8,000 $100 7,000 Dollars Invested (billions) 4,995 6,350 4,341 $80 6,000 4,649 4,590 4,048 4,278 4,379 4,295 5,000 $60 3,729 3,906 # of Deals 3,341 3,155 3,123 3,204 4,000 2,892 $40
Slide 41: Exits of Venture Capital-Backed Companies
EXITS OF VENTURE CAPITAL-BACKED COMPANIES Mergers & Acquisitions $140 759 900 742 703 708 730 800 Amount Paid (billions) $120 667 675 663 632 645 700 $100 600 # of Deals $80 456 440 426 500 $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 $28.1
Slide 42: Hercules' Total Commitments vs. VC Dollars Invested
HERCULES’ TOTAL COMMITMENTS VS. VC DOLLARS INVESTED VENTURE CAPITAL INVESTMENT ACTIVITY 2005 – 2020 $120 $1,475 $1,037 $1,600 Hercules Debt and Equity Commitments VC Dollars Invested $1,213 $1,400 VC Dollars Invested (billions) $100 Hercules Debt & Equity Commitments Note: Represents VC investments
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 Kercules. Cc A PIT A OL
Slide 45: Broad Industry Analyst Coverage
BROAD INDUSTRY ANALYST COVERAGE – 9 FIRMS Finian O’Shea John Hecht Ryan Lynch (Transferred Coverage 7/13/2018) (Initiated Coverage 6/30/2015) (Re-initiated Coverage 2/19/2013) Michael Smyth Crispin Love Casey Alexander (Re-initiated Coverage 10/27/2020) (Re-initiated Coverage 7/20/2020) (Initiated C
Slide 46: Supplemental Information
SUPPLEMENTAL INFORMATION Kercules. Cc A PIT A OL
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