Hercules Capital, Inc. · NYSE:HTGC
Hercules Capital — Q1 2019 Earnings Presentation
52 slides from Hercules Capital's earnings presentation, May 2, 2019
Slide 1: First Quarter 2019 Investor Presentation
May 2, 2019 FIRST 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 Retail Notes (Baby Bonds) PAR $25.00 • HCXY (NYSE) 6.25% Notes due 2033 Investment Options • HCXZ (NYSE) 5.25% No
Slide 4: First Quarter 2019 Investor Presentation
FIRST 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: Q1 2019 Highlights
Q1 2019 HIGHLIGHTS • Net Investment Income (“NII”) of $29.0M, up 11.4% Y-Y • Total Investment Income of $58.8M, up 20.7% Y-Y Robust Earnings • NII per share of $0.30, Adj. NII per share of $0.32(5) • 55 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) 160% 140% 120% 100% 80% 60% 40% 20% 14.9% 10.7% 9.7% 36.4% 32.3% 27.2% 34.0% 18.2% 18.6% 89.5% 41.5% 63.0% 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,
Slide 8: Delivering Strong Shareholder Returns
DELIVERING STRONG SHAREHOLDER RETURNS Return on Average Assets % (ROAA) 14% Return on Average Equity % (ROAE) 8% 13.6% 7% 12% 12.8% 12.6% 7.2% 12.0% 11.7% 6.8% 6% 10% 11.0% 6.5% 10.8% 6.3% 6.2% 6.1% 10.1% 6.0% 5% 9.7% 9.6% 9.6% 9.6% 5.7% 5.6% 8% 5.4% 5.4% 5.2% 4% 6% 3% 4% 2% 1% 2% 0% 0% (b) (b) 2014
Slide 9: Available Leverage for Potential Earnings Growth
AVAILABLE LEVERAGE FOR POTENTIAL EARNINGS GROWTH (1) Leverage to Return on Average Equity % (ROAE) 140% 14% 114.9% 120% 12% 102.6% 99.9% 95.5% 100% 10% 85.8% 84.7% 87.0% 98.2% 95.1% 83.7% 72.9% 80% 70.4% 83.4% 8% 66.2% 51.2% 60% 6% 60.6% 60.6% 62.0% 40% 4% 44.5% 43.9% 2% 20% (4) 12.9% 10.1% 11.7% 12
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 Net Asset Value (NAV) 1.23 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” $200 ($ in millions) $100 ($ in millions) $80 $150 $60 $100 $40 $50 $20 $139.7 $143.7 $157.1 $175.1 $190.9 $207.8 $100.3 $108.7 $58.8 $29.0 $79.9 $97.5 $39.6 $48.1 $73.1 $71.8 $73.5 $96.4 $0 $0 2011 2012 2013 201
Slide 12: Portfolio Growth with Underwriting Discipline
PORTFOLIO GROWTH WITH UNDERWRITING DISCIPLINE Cumulative Debt Commitment and Fundings, Since Inception $8.9 $9.0 $8.5 $8.0 $7.3 $6.5 $6.7 $7.0 $6.5 $5.6 $6.0 $ in billions $5.7 $4.9 $4.9 $5.0 $4.0 $4.2 HTGC $4.0 $3.4 $3.5 IPO $2.7 $2.9 $3.0 $2.1 $2.4 $1.5 $1.9 $2.0 $1.4 $1.2 $1.5 $0.9 $1.1 $1.0 $0.7
Slide 13: Portfolio Growth Leads to Dividend Growth Through NII
PORTFOLIO GROWTH LEADS TO DIVIDEND GROWTH THROUGH NII Illustration: A growing debt investment portfolio provides potential for future increased dividend payout(1) $2,300 $2.00 $2,200 $2,100 Debt Investment Balance at Cost ($ in millions) $2,000 $1.90 $2,000 $1,900 $1.80 $1.67 $1.70 $1.60 $1,500 $1.5
Slide 14: Company & Strategic Overview
COMPANY & STRATEGIC OVERVIEW
Slide 15: Hercules At-a-Glance
HERCULES AT-A-GLANCE LARGEST BUSINESS DEVELOPMENT COMPANY (BDC) FOCUSED ON PROVIDING FINANCING TO HIGH-GROWTH VENTURE CAPITAL-BACKED COMPANIES $1.27 $1.91 126 $247.2 BILLION BILLION COMPANIES MILLION MARKET DEBT INVESTMENT WARRANT & EQUITY LIQUIDITY & BALANCE CAPITALIZATION PORTFOLIO PORTFOLIO SHEET
Slide 16: Why Is Hercules Different Than Other BDCs
WHY IS HERCULES DIFFERENT THAN OTHER BDCs WE INVEST IN INNOVATIVE VENTURE GROWTH-STAGE COMPANIES What We Don’t Do and What We Are Not No oil and gas exposure No CLO exposure No CMBS or RMBS exposure No metals or minerals exposure What We Do We focus primarily on pre-IPO and M&A, innovative
Slide 17: Strategic Access to Equity and Debt Capital Markets
STRATEGIC ACCESS TO EQUITY AND DEBT CAPITAL MARKETS HERCULES’ SUCCESSFUL ATM DISTRIBUTION PROGRAM Hercules’ At-the-Market “ATM” Equity Distribution Agreement Equity Distribution Agreement: Up to a total of 12 million shares of common stock The Benefits and Competitive Advantages “Just-in-Time” a
Slide 18: We Are at Center Stage of the Innovation Economy
WE ARE AT CENTER STAGE OF THE INNOVATION ECONOMY HERCULES HAS DOMAIN EXPERTISE IN FIVE SPECIALIZED LENDING GROUPS “WE ARE NOT GENERALISTS” Technology Life SaaS Sustainable Special Sciences Financing and Renewable Situations Technology We Invest at the Expansion “Venture Growth” and Established Stage
Slide 19: Financial Highlights
FINANCIAL HIGHLIGHTS }ercules. Cc A PITAL
Slide 20: Income Statement: Q1 2019 vs. Q1 2018 Summary Results
INCOME STATEMENT: Q1 2019 VS. Q1 2018 SUMMARY RESULTS Three Months Ended March 31, 2019 2018 Year/Year ($ in 000's, except per share amounts) (unaudited) (unaudited) Change Interest Income $ 55,473 $ 42,981 29% Fee Income 3,322 5,719 -42% Total Investment Income 58,795 48,700 21% Interest and Loan F
Slide 21: Current & Historical Income Statements
CURRENT & HISTORICAL INCOME STATEMENTS Three Months Twelve Months Ended March 31, Ended December 31, ($ in 000's, except per share amounts) 2019 2018 Interest Income $ 55,473 $ 190,636 Fee Income 3,322 17,117 Total Investment Income 58,795 207,753 Interest and Loan Fees 15,564 46,695 General and Adm
Slide 22: Current & Historical Balance Sheet
CURRENT & HISTORICAL BALANCE SHEET March 31, December 31, ($ in 000's, except per share amounts) 2019 2018 ASSETS Debt Investments $ 1,897,064 $ 1,733,492 Equity Investments $ 157,045 $ 120,212 Warrant Investments $ 26,933 $ 26,669 Cash and cash equivalents 16,465 34,212 Restricted cash 10,149 11,64
Slide 23: 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 Q1 2019: 12.7% 18% 16% 14.9% 14.4% 14.6% 14.4% 14.1% 14.2% 14.3% 14% 13.4% 13.5% 13.5% 13.5% 13.2% 13.0% Effective Yield 13.4% 13.2% 12% 12.9% 12.9% 12.7% 12.7% 12.9% 12.7% 12.6% 12.5% 12.2% 12.1% 11.9% 10% 1
Slide 24: High-Yield Portfolio of Earning Assets
HIGH-YIELD PORTFOLIO OF EARNING ASSETS MEDIAN EFFECTIVE YIELD FROM Q1 2016 TO Q1 2019 OF 14.1% 18% $1,800 16% 14.6% 14.4% 14.9% $1,600 14.4% 14.1% 14.2% 14.3% 13.5% 13.5% 13.4% Total Debt Investments, at value (millions) 13.2% 13.5% 13.0% 14% 14.1% $1,400 12% $1,200 Effective Yield (%) 10% $1,000 8%
Slide 25: Strong, Consistent Net Interest Margin - NIM
STRONG, CONSISTENT NET INTEREST MARGIN - NIM MEDIAN NET INTEREST MARGIN FROM Q1 2016 TO Q1 2019 OF 10.5% $50,000 18% $45,000 16% $40,000 Net Interest Margin (in thousands) 14% $35,000 11.8% 11.0% 11.1% 11.1% 11.0% 12% 10.8% 10.3% 10.4% 10.5% 10.3% $30,000 10.1% 10.1% 9.5% 10.5% 10% $25,000 Net Inter
Slide 26: 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% 14.3% 14.1% 14.2% 15% 13.2% 13.4% 13.5% 13.5% 13.5% 13.0% 12.9% 13.4% 13.2% 12.9% 12.9% 12.2% 12.1% 12.6% 12.5% 12.7% 12.7% 12.7% 11.9% 10% 9.8% 10.1% 10.4% 10.4% 10.3%
Slide 27: Effective Management of Unfunded Commitments
EFFECTIVE MANAGEMENT OF UNFUNDED COMMITMENTS AS A PERCENTAGE OF TOTAL ASSETS $210 16% Available Unfunded Commitments (in millions) Available Unfunded Commitments as % Total Assets 14% $180 12% $150 9.4% 10% $120 7.2% 7.1% 7.2% 8% $90 5.1% 5.2% 6% 4.8% 4.8% 4.4% $60 4.1% 3.6% 3.2% 2.9% 4% $30 2% $129
Slide 28: 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 Q1 2019 OF 2.6% 8% $14,000 7% $12,000 6% $10,000 OPEX as a % of Total Assets OPEX (in thousands) 5% $8,000 4% 3.1% $6,000 2.8% 2.8% 2.9% 2.8% 2.8% 3% 2.6% 2.5% 2.5% 2.6% 2.4% 2.4% 2.4% 2.6%
Slide 29: Credit Discipline and Consistent Portfolio Performance
CREDIT DISCIPLINE AND CONSISTENT PORTFOLIO PERFORMANCE Disciplined credit underwriting standards deliver consistent long-term results $2,000 1.0 High Quality $1,800 Debt Portfolio Value 2.11 2.17 2.21 2.23 $1,600 2.17 2.32 2.27 2.24 2.43 2.18 2.19 2.41 2.0 ($ in millions) $1,400 2.43 Credit Rating $
Slide 30: Diversified Sources of Funding: Q1 2019
DIVERSIFIED SOURCES OF FUNDING: Q1 2019 Entity Capitalization Capital Sources as of 3/31/19 $ in Millions % of Total Equity $990.4 46.5% SBA Debentures $149.0 7.0% 2027 Asset-Backed Notes $200.0 9.4% 2028 Asset-Backed Notes $250.0 11.8% 2022 Convertible Notes $230.0 10.8% 2022 Notes (Institutional)
Slide 31: Diversified Sources of Funding (as of 3/31/19)
DIVERSIFIED SOURCES OF FUNDING (AS OF 3/31/19) SBA Debentures – Notes Total debt of $149.0M Wells Fargo Union Bank January 2022 October 2022 April 2025 October 2033 License 2 Securitizations Credit Facility Credit Facility Conv. Notes Inst. Notes Notes Notes HTIII DATE ENTERED Aug. 2008 Feb. 2010 Ja
Slide 32: Portfolio Highlights
PORTFOLIO HIGHLIGHTS }ercules. Cc A PITAL
Slide 33: Hercules' Investment Portfolio: Q1 2019
HERCULES’ INVESTMENT PORTFOLIO: Q1 2019 Floating vs. Fixed Rate Investment Type Breakout 2.5% 1.3% 7.5% Sr. Secured First Lien 16.4% Sr. Secured Last Out Floating Equity Investments Fixed Warrant Positions 74.8% 97.5% Industry Breakout Hercules Investments by Geography As of December 31, 2018 Commun
Slide 34: Hercules Warrant & Equity Portfolio: Potential Future Upside
HERCULES WARRANT & EQUITY PORTFOLIO: POTENTIAL FUTURE UPSIDE FOR SHAREHOLDER'S TOTAL RETURN 12 Companies completed IPOs or in Registration – YTD 2019 Stealth Bio Therapeutics, Avedro, Lightspeed POS, Lyft, X4 Pharmaceuticals, Pinterest, TransMedics and Fastly completed IPOs Four (4) confidential
Slide 35: Select List of Warrant and Equity Portfolio Holdings
SELECT LIST OF WARRANT AND EQUITY PORTFOLIO HOLDINGS Warrant Holdings in 126 Portfolio Companies Technology Life Sciences 35 35
Slide 36: A Broadly Diversified Portfolio Re-Balanced to Mitigate Risk
A BROADLY DIVERSIFIED PORTFOLIO RE-BALANCED ACCORDING TO OUR ASSESSMENT OF ONGOING MARKET CONDITIONS MITIGATES RISK ($M) $910.3 $1,020.7 $1,200.6 $1,423.9 $1,542.2 $1,880.4 $2,081.0 100% 1.3% 2.1% 2.1% 3.0% 4.0% 6.2% 2.0% 4.7% 3.2% 3.2% 1.5% 5.9% Diversified Financial Services 90% 13.3% 6.2% 6.7% 10
Slide 37: Select List of Diversified Portfolio Companies
SELECT LIST OF DIVERSIFIED PORTFOLIO COMPANIES Technology Life Sciences SaaS Financing Sustainable & Special Equity-only Investments 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 $975.5 Billion Venture Capital Investment
OVER $975.5 BILLION VENTURE CAPITAL INVESTMENT Venture Capital Investment Activity 1997 – Q1 2019 $120 6,350 6,500 4,745 $100 5,500 4,295 4,515 4,590 4,278 4,379 Dollars Invested (billions) 4,048 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 2,500 2
Slide 41: 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 42: Exits of Venture Capital-Backed Companies
EXITS OF VENTURE CAPITAL-BACKED COMPANIES Mergers & Acquisitions $140 900 $120 687 677 722 800 667 652 633 655 700 608 604 Amount Paid (billions) $100 600 $80 456 440 500 # of Deals $60 400 173 300 $40 200 $20 100 $26.5 $22.8 $55.6 $58.2 $76.3 $65.5 $132.0 $93.9 $121.7 $89.4 $130.2 $30.7 $0 0 2008 2
Slide 43: Hercules' Total Commitments vs. VC Dollars Invested
HERCULES’ TOTAL COMMITMENTS VS. VC DOLLARS INVESTED VENTURE CAPITAL INVESTMENT ACTIVITY 2005 – Q1 2019 $120 $1,400 Hercules Debt and Equity Commitments VC Dollars Invested $1,213 VC Dollars Invested (billions) $100 Hercules Debt & Equity Commitments $1,200 Note: Represents VC investments only $905 $
Slide 44: Hercules' Portfolio Company IPOs
HERCULES’ PORTFOLIO COMPANY IPOs PROVIDING INVESTOR ACCESS TO SOME OF AMERICA’S MOST PROMISING COMPANIES 140 9 8 VC-backed IPOs 8 120 7 7 Hercules’ Portfolio Company IPOs Hercules' PoCo IPOs 7 100 6 Venture Backed IPOs 5 80 5 5 60 4 3 3 3 40 2 2 2 1 20 1 53 52 58 87 126 79 41 60 82 10 0 0 2010 2011
Slide 45: 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 46: Analyst Coverage
ANALYST COVERAGE }ercules. Cc A PITAL
Slide 47: 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 48: Supplemental Information
SUPPLEMENTAL INFORMATION }ercules. Cc A PITAL
Slide 49: Rising Interest Rates & High Asset Sensitivity Benefits Hercules
RISING INTEREST RATES & HIGH ASSET SENSITIVITY BENEFITS HERCULES We anticipate each 25 bps, or 0.25%, increase in the Prime Rate to contribute ~$4.4 million to Net Interest Income, or $0.05 per share annually $60,000 +0.58 0.60 Net Income $50,000 EPS 0.50 Net Income ($ in thousands) +0.39 Earning pe
Slide 50: 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 51: Venture Growth Investment Structure Mitigates Capital Risk
VENTURE GROWTH INVESTMENT STRUCTURE MITIGATES CAPITAL RISK Rapidly amortizing principal balance Reduction of Invested Capital at Risk and current cash-pay interest 100% 99% “Security interest” – generally first 94% Nearly 1/3 of security interest in all assets of invested capital % of Remaining
Slide 52: 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