TriplePoint Venture Growth BDC Corp. (TPVG) Q3 2023 Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. Third Quarter 2023 Earnings Conference Call. This conference is being recorded, and a replay will be available in an audio webcast on the TriplePoint Venture Growth website. Company management is pleased to share the results for the third quarter of 2023. Today, we have Jim Labe, Chief Executive Officer and Chairman of the Board; Sajal Srivastava, President and Chief Investment Officer; and Chris Mathieu, Chief Financial Officer. Before I turn the call over to Mr. Labe, I would like to direct your attention to the customary safe harbor disclosure in the company's press release regarding forward-looking statements. Please note that during this call, management will make statements relating to future events or the company's future performance or financial condition, which are considered forward-looking statements under federal securities law. The company does not undertake any obligation to update any forward-looking statements unless required by law. Investors are cautioned not to place undue reliance on any forward-looking statements made during the call, which reflect management's opinions only as of today. To find copies of our latest SEC filings, please visit the company's website at www.tpvg.com. Now I'd like to turn the conference over to Mr. Labe. Please go ahead, sir.

Good afternoon, everyone, and welcome to TPVG's third quarter earnings call. Turning to the results for the quarter. Our focus continued to be on the priorities we believe will enable us to navigate through the current challenging markets. Specifically, our focus is maintaining our earnings power and our strong liquidity, managing the portfolio and positioning TPVG for the future. Regarding our earnings power, TPVG generated net investment income, or NII, of $19.1 million during the quarter or $0.54 per share. We once again over-earned the regular quarterly distribution of $0.40 per share. Since our IPO, we have provided shareholders cumulative distributions of $14.65 per share, and our focus remains on producing NII that covers the distribution over the long term. As of quarter's end, we have an estimated $1.03 per share of spillover income. TPVG also achieved a weighted average portfolio yield for the third quarter of 15.1%, benefiting from both prepayment income as well as the favorable interest rate increase during May and July. We ended the quarter with increased liquidity as we experienced both higher repayment activity and successfully reduced unfunded commitments. TPVG liquidity now exceeds unfunded commitments and provides us with the capacity to capitalize on new investment opportunities heading into 2024. As we've shared for the last several quarters, venture capital markets remain challenging given the backdrop of macroeconomic uncertainties, restricted monetary policies, inflationary supply chain, geopolitical and other issues. According to the NVCA, National Venture Capital Association PitchBook third quarter data, overall venture capital investment activity decreased relative to the prior quarter, amounting to the lowest quarterly total in the past 6 years. These numbers are well below the highs we experienced in the '21 and '22 period. They're more comparable to activity levels in the 2018 through 2020 period. Having said that, and relevant to TPVG, aggregate investment into late-stage and venture growth stage companies was actually up quarter-over-quarter, some $25 billion versus $21.6 billion according to PitchBook. This activity included a very prominent transaction, Amazon's $4 billion investment into Anthropic. PitchBook also points out a pickup in exit activity, $35.8 billion in the third quarter versus only $6.6 billion in the second quarter. This includes a number of IPOs featuring venture and PE-backed companies, ARM, Clavo and Instacart. These transactions were sizable and created significant exit opportunities. While we expect conditions to remain the same as we close out 2023, we do see glimmers and are witnessing a pickup in the venture capital investment momentum. There are some early signs, which point to the potential for a more active investment outlook for 2024 in venture capital and in venture lending. This includes recent conversations we've had with VCs in the last few weeks, citing investment activity within their funds on a gradual rise and the general sentiment among many investors and entrepreneurs seems to be the expectation that next year will be a more active year for investing. This is further supported by the significant amount of capital raised by venture funds in the last 2 years that has been sitting on the sidelines waiting to be deployed. We believe that a more robust return to growth in the VC market, however, will not materialize until public market multiples stabilize. The overall investor sentiment continues on its path to improve, and investors begin to actively deploy their dry powder. There is a new market reality in venture that is emerging, one with a more conservative investment approach. For the deals getting done in today's market, the operational investment principles have changed. The emphasis is now on managing cash burn and demonstrating a projected path to profitability. As opposed to the guiding principle just 2 or 3 years ago, where venture investors sought growth at all costs. While we don't expect any finite changes, as I will get into, we continue to find pockets of opportunity for new growth stage investments reflecting this new market reality. And we expect to be able to increase our allocation of investments to TPVG in the quarters ahead. Turning to the portfolio and credit quality. As Sajal will cover in more detail, during the quarter, our teams brought some existing credit situations to conclusion and continue to proactively work through others and manage smaller dollar-sized ones, which developed during the quarter. Our teams remain closely engaged with our stressed portfolio companies in this environment. There were some notable developments in the quarter and a significant transaction; our portfolio company, Metropolis, announced an agreement to acquire publicly traded SP Plus for $1.5 billion. TempesxMachina, whose proprietary video and data sync technology serves as an operating system for sports, rebranded as infinite athlete and acquired injury analytics from BioCore. Portfolio companies such as Core Lite, Erni, Flash, Caldera, Overtime, Monzo and others continue to make notable progress in achieving their plans and they're well positioned in this challenging environment. Another priority is remaining focused on TPVG's long-term positioning and leadership in the venture lending market in the wake of the Silicon Valley Bank crisis earlier this year. Heading into next year, we are both setting the groundwork to be ready when market conditions improve and there is a broader and sustained recovery in overall venture capital activity. This includes continued diversification and sector rotation investments for TPVG in fields such as artificial intelligence, enterprise SaaS, transformative technologies, robotics, health tech and other sectors. This includes preferences for companies without tribute such as recently raised fresh capital, having long cash runways, having backing from our select venture investors, prudent management teams and whose business models have proven unit economics and high retention rates or even those companies with strong customer bases generally with large enterprise customers. We'll also continue to evaluate hold sizes, debt-to-equity coverage and other key metrics in these investment opportunities. In summary, while we expect conditions to remain the same as we close out 2023, and while sights are set on our portfolio and maintaining credit quality, we are preparing for the future. Given our existing scale and strong portfolio yield, we expect to continue to deliver strong investment income while positioning the company to further benefit when these markets improve. This includes building on our strong liquidity position and maintaining the financial strength of TPVG. Returning to our targeted balance sheet leverage range. Capitalizing on the change in the competitive landscape and building our pipeline of lending opportunities from our select sponsors. Adding new borrowers to our portfolio with the goal of further diversifying the portfolio, maintaining a strong yield profile, continuing to over-earn our dividend and stabilizing net asset value and growing it over time. I'll wrap up these remarks with the same message that has sustained TriplePoint throughout many years in many market cycles. Venture lending is about investing for the long term, and we'll continue to focus on the priorities we discussed here as well as the core tenets of TriplePoint philosophy, relationships, reputation, references and returns in order to continue to capitalize on market opportunities over the long term. With that, let me call the turn over call over to Sajal.

Thank you, Jim, and good afternoon. During the third quarter, TriplePoint Capital, our global investment platform and the adviser to TPVG signed $58 million of term sheets with venture growth stage companies compared to $114 million of term sheets in Q2, which continues to reflect our approach to originations across our platform in light of current market conditions. With regards to new investment allocation to TPVG during the quarter, given both current market conditions and TPVG's elevated leverage ratio, we allocated a prudent $5.6 million in new commitments with 3 companies to TPVG. This included 1 new portfolio company, Kay Health, a company backed by Primary Venture Partners, Lee Ventures, Cedar Sinai Hospital and other investors, which provides patients remote access to health care services through their smartphones using AI technology. During the third quarter, TPVG funded $12.7 million in debt investments to 5 portfolio companies. This funding level came in below our guided range for the quarter, reflecting a lower utilization of expiring unfunded commitments and continued disciplined use of debt capital by our portfolio companies. These funded investments carried a weighted average annualized portfolio yield of 14.2% in origination. Of the $12.7 million funded during the quarter, $7.1 million was related to existing unfunded commitments and the remaining $5.6 million was from new commitments made during the quarter. As we look to the fourth quarter, we continue to expect fundings in the $25 million to $50 million range and are off to a good start with $10 million funded so far. During Q3, we made significant progress, boosting our liquidity, reducing our net leverage ratio and reducing our unfunded commitments. In fact, as of today, our total liquidity is almost double our unfunded commitments, enhancing our investment capacity as market conditions improve. During Q3, our $37.3 million of loan prepayments helped increase our weighted average annualized portfolio yield on total debt investments to 15.1% for the quarter. Excluding prepayment-related income, core portfolio yield was 14.1%. We expect the increase in the prime rate in Q3 to benefit our core investment yield here in Q4 and into 2024. We are expecting lower levels of loan prepayments in the fourth quarter and expect our $28 million loan with Metropolis to prepay upon completion of its announced transaction likely in the second half of 2024. At the end of Q3, our debt investment portfolio company count was 54, representing 19 different subsectors, and our top 10 portfolio companies represented 37% of our total debt investments at cost. We also held 183 warrants in equity investments in 115 companies with a total cost and fair value of $72.6 million and $87.3 million, respectively. In Q3, 3 of our portfolio companies with outstanding debt raised $47 million of capital, bringing our total to 16 portfolio companies with outstanding debt, raising $437 million of capital year-to-date. This level of activity reflects both the challenging fundraising environment as well as the seasonally lower activity associated with the third quarter. As we look to the fourth quarter, we are pleased to see fundraising activity within our portfolio picking up with several portfolio companies making progress towards raising rounds here in Q4 and in Q1 2024 with one portfolio company already raising $26 million of capital and another portfolio expecting to close $30 million of capital imminently. We believe this activity early in the quarter, especially considering market conditions, is a positive reflection on the outlook for our portfolio companies and bodes well for credit quality going into 2024. With regards to credit quality, during the quarter, we upgraded Metropolis with a principal balance of $27.7 million from Category 2 to Category 1 and removed ForRock from Category 1 as a result of its $30 million loan prepayment. We received $1.9 million of proceeds from the liquidation of Rental Run, reducing our exposure to $400,000. We expect Rental Run to remain a Category 3 asset until we are paid off in full, which is expected to occur in 2024 and will represent 100% recovery. During the third quarter, certain of our e-commerce and consumer portfolio companies experienced continued challenges as they manage through ongoing market and sector-specific issues, including negative consumer sentiment, increasing customer acquisition costs, lower-than-expected revenue during the summer, higher than normal levels of inventory and continued impact of inflation on their cost of goods sold, in addition to developments in their runway extension efforts, path to profitability and strategic efforts. During the quarter, we downgraded the credit ratings of 3 e-commerce and consumer companies from Category 2 to Category 3 due to these developments in the quarter, Diastyling, Outdoor Voices and Nakd One World with a combined total principal balance of $19.4 million and a combined total fair value of $19.7 million for the 3 companies as of Q3. We also downgraded the credit rating of 2 e-commerce and consumer companies from Category 3 to Category 4, also due to these developments in the quarter. Project 1920, which operates as Cenrv and Mystery Tackle Box, which also operates as Casco, with a combined total principal balance of $9 million and a combined total fair value of $7.6 million for the 2 companies as of Q3. Given the upcoming holiday season, Q4 is generally an important quarter for retail, e-commerce and consumer companies, and we believe some of our Category 3 and 4 companies could see a boost as they close out the year with a strong quarter, which could potentially put them in better positions for 2024. Untitled Labs, which operated under the name Made Renovations, with a loan fair value of $2.7 million as of Q3 was downgraded from Category 4 to Category 5. After a pivot in the business and unsuccessful financing and strategic efforts, the company announced in October that it was closing its business and selling off certain of its assets. Our Q3 mark represents our expected recovery amount from that process. HealthIQ with a loan fair value of $7.2 million as of Q2 was removed from Category 5 in Q3 as a result of its bankruptcy filing. As mentioned in prior quarters, we had downgraded the company due to ongoing challenges with the company’s execution and prior failed capital raising and strategic efforts. As we mentioned during last quarter's call, we had expected to enter into an extended restructuring and recovery process with the company in its key stakeholders, and we were disappointed to see in Q3 that the parties could not come to the agreement on that plan, and ultimately, a bankruptcy and full liquidation process was pursued instead. And as a result, we have written off our entire position to put the situation behind us. During the quarter, we also adjusted the fair values for 2 Category 5 loans in the process of sale or liquidation, Demand and Underground Enterprises based on updated recovery estimates. On a more positive note during the quarter, e-bike portfolio company, VanMoof, the Category 5 loan was acquired by Lavoie, the electric scooter unit of Formula One engineering and technology firm, McLaren applied. We are looking forward to working with their Chairman, Nick Fry, the former CEO of the Mercedes Formula One team, and their U.K.-based private equity sponsor, Gravel Capital, for the next phase of VanMoof's journey and our recovery. We are currently in the process of closing the transaction, and our scheduled investments will reflect our revised securities as well as any revised recovery estimates for the combined companies at year-end. TPVG's recovery will include a combination of debt and equity in Lavoie as well as continued security positions in the assets of VanMoof, not otherwise acquired by Lavoie that we intend to liquidate over the coming quarters. We believe the continued stress in certain assets during the quarter and the year are directly related to the ongoing challenging conditions in the venture capital equity fundraising market and in the M&A market for both public and private companies as well as certain sector-specific circumstances related to the overall macroeconomic environment. While we expect market conditions to remain the same here in Q4 and as 2024 starts, we have seen many of our portfolio companies over the past couple of quarters respond and adapt favorably to this new market reality, as I will describe shortly. And from what we currently can see, we believe are building momentum to succeed in 2024 and beyond. Our portfolio companies have now had almost a year to adjust to managing growth and driving unit economics with a reasonable path to profitability, lowering burn rates and having realistic expectations for raising additional capital. A number of companies are also seeing strong revenue and margin tailwinds in their businesses, having achieved profitability or having significant cash runway to achieve profitability. As we look to 2024, we currently believe we will see new credit stress events decline and that we will begin to see potential positive developments and outcomes from our portfolio companies due to their adaptation, execution and performance despite market conditions. Nevertheless, we will continue to remain proactive and diligent as we navigate these conditions and manage our portfolio. In summary, as Jim said, we are focused on maintaining the financial strength and liquidity position of TPVG, remaining in frequent contact with our portfolio companies, stabilizing credit quality and preparing for returning to portfolio growth in 2024. Given our existing scale and strong portfolio yield, we expect to continue to deliver strong investment income while positioning the company to further benefit when markets improve. With that, I will now turn the call over to Chris.

Thank you, Sajal, and hello, everyone. During the third quarter, we generated significant core interest income from our high-yielding diversified loan portfolio while effectively reducing our balance sheet leverage on a net basis. We enhanced our liquidity position during the quarter by modestly utilizing the ATM program, handling loan prepayments, and reducing unfunded loan commitments. This reduction was achieved through commitment expirations and fundings that exceeded new commitments. Total investment income was $35.7 million, up from $29.7 million in the third quarter of 2022, representing a 20% increase driven by growth in the average portfolio size and higher investment yields. Our portfolio yield was 15.1% on total debt investments this quarter, compared to 13.8% in the same period last year. Onboarding yields remain strong and stable. Operating expenses totaled $16.6 million, up from $12.8 million in the third quarter of 2022, which included $9.3 million in interest expense, $4.6 million in management fees, and $2.7 million in general and administrative expenses. We recorded higher legal expenses of $550,000 and an increased excise tax expense of $325,000 compared to the previous quarter due to a significant rise in spillover income expected for the full year. Under our incentive fee structure designed to be shareholder-friendly, the incentive fee expense was reduced by $3.8 million in the third quarter and $11.3 million for the nine months ended September 30. Our net investment income was $19.1 million or $0.54 per share, compared to $16.9 million or $0.51 per share for the same period in 2022. The company recognized net realized losses on investments of $25.6 million, primarily attributed to the write-off of HiQ, which was rated 5 on our watch list and removed from our investment portfolio. The net change in unrealized gains on investments for the third quarter of 2023 was $8.6 million, consisting of a reversal of $17.6 million in previously recorded unrealized losses that were realized during the period, net unrealized losses of $6.2 million on the existing debt investment portfolio, and $2.8 million on the warrant and equity portfolio from fair value adjustments. As of the end of the quarter, the company's total net assets were $374 million, or $10.37 per share, compared to $379.4 million or $10.70 per share as of June 30, 2023. Our Board of Directors declared a regular quarterly dividend of $0.40 per share, which will be paid from ordinary income to stockholders of record as of December 15, with payment scheduled for December 29. In addition to exceeding the third quarter dividend, we continue to retain undistributed net investment income, which totaled $37.3 million or $1.03 per share at the end of the period to support future regular and supplemental dividends. Given the strong yields and size of our loan portfolio, dividend coverage remained robust this quarter at 133%, with coverage for the full year to date at 132%. Now for an update on unfunded investment commitments, overall liquidity, and balance sheet leverage. We concluded the third quarter with $142 million in unfunded investment commitments, down from $205 million in the previous quarter, with $38 million contingent upon portfolio company milestones. All unfunded commitments carry contractual floating interest rates. Of the total, $46 million are set to expire in Q4. We had $37 million in prepayments, $15 million in early repayments under revolving structures, and $20 million in scheduled principal amortization, generating $72 million in liquidity during the quarter. As of quarter-end, our total liquidity stood at $262.5 million, consisting of $122 million in cash and $140 million available under the revolving credit facility. Near the quarter's end, we drew on our credit facility to enhance our investment flexibility in accordance with certain 1940 Act requirements. After the quarter closed, we repaid the credit facility, reducing leverage and increasing availability for future withdrawals as necessary. Beyond this current liquidity, our existing portfolio provides contractual cash flows, which support sustained liquidity. We maintain a diversified capital structure, and as of September 30, total outstanding fixed-rate investment-grade term notes were $395 million, with $210 million outstanding on the floating-rate revolving credit facility, which has a total commitment of $350 million. Our fixed-rate borrowings represent 65% of our outstanding balance sheet leverage at quarter-end, while 62% of our debt investments were at floating rates, benefiting from rising interest rates over time. We have three tranches for term debt maturities scheduled for 2025, 2026, and 2027. We ended the quarter with a leverage ratio of 1.62x, compared to a net leverage ratio of 1.29x. This is an improvement from the previous quarter, which had a leverage ratio of 1.67x and a net leverage ratio of 1.44x. We anticipate maintaining this level of leverage through the end of the year and expect to reduce the balance sheet leverage in the first half of 2024. Last year, we launched our ATM program, and during the third quarter, we issued common stock resulting in net proceeds of $6.2 million. Given the cost-effective issuance above net asset value, all shares issued positively impacted NAV. As of the end of the quarter, we still had $43.7 million available under that program. This concludes our prepared remarks today, and we are ready to answer your questions. Operator, please open the line.

Our first question comes from Finian O'Shea with Wells Fargo.

First question on the e-commerce sector downgrades. Sajal, you gave some color on that. Was part of it related to a pullback in venture capital commitments to this sector? And if so, how does that translate to your portfolio that you downgraded? Is there a visible fundraising issue you see for these companies?

Yes, thanks for the question. So again, I think the downgrade was not to all of our e-commerce and consumer portfolio companies. This is a sector where we've had some great success as a platform and for TPVG historically. This is really specific to a certain set of portfolio companies were going to be mentioned, were particularly during the summer, saw some negative sentiment. Interestingly enough, the strong weather or the favorable weather impacted a number of these portfolio companies as well. And so that plus, again, negative consumer sentiment changes that we saw over the course of the year from folks like Apple, Google and Facebook on their search algorithms and the level of information that they share, increasing customer acquisition costs. So again, I'd say specific to certain elements of the sector and to specific companies, I'd say with regards to venture financing, it's mixed. We are seeing and we have seen of the portfolio companies that have raised capital this year, a number of them are in e-commerce and consumer companies. I would say, again, it's a balanced approach to the sector and doesn't change our overall outlook to e-commerce and consumer.

That's helpful. Regarding the dividend, Jim mentioned that you want to continue exceeding it, but there will be some deleveraging involved, and the incentive fee will be reinstated. How do you anticipate your earnings power will trend as the BDC portfolio stabilizes after this deleveraging? Additionally, what does that imply for the current $0.40 payout?

Yes. Fin, good question. I think we have done some analysis on that and thinking about the impact on the overall coverage. Given the strength right now of the consistent coverage we've had, even if we bring back the incentive fee once the NAV stabilizes, we still see $0.40 as a solid number going forward, given the fully scaled-up portfolio and the yields that are being generated and the level of fixed-rate leverage we have, we think it bodes well for long-term coverage. Right now as far as maintaining that dividend, that's the strategy given the higher leverage ratio, it doesn't make sense right now to start looking at increasing dividend, but rather maintain the NAV.

Our next question comes from Crispin Love with Piper Sandler.

First off, on the HiQ write-off in the quarter, are there any expectations there for any potential recoveries on that loan? And then just on that loan as well, what was the total write-off and the incremental amount in the third quarter that wasn't already unrealized previously?

Sure. I'll start with the business update and then, Chris, if you can give the numbers. So I would say, Chris, no, we're not expecting any additional recovery. Again, we wanted to get this one past us and move on. So we wrote off the full amount of our loan.

And the total realized loss was $25 million, and there was about $7 million in the current quarter that impacted NAV. It's not $25 million plus $7 million. So $7 million of $25 million was in the current quarter and the rest had already previously been an unrealized loss or unrealized depreciation in prior periods.

Okay. That makes sense. I have a broader question about the industry and the competitive environment. Can you talk about how the competitive landscape has changed recently or over the past few quarters since the bank turmoil earlier this year? Are you noticing any activity from banks becoming more involved, an increase from private lenders, or any other developments in the space that are affecting the competition?

Yes, I would say, if anything, we continue to see the pullback of the nontypical nontraditional non-long-term participants in the market. And then I would add, overall, as you've seen just from most of us reporting that I'd say deal volume has slowed down. And so I wouldn't say anyone is taking necessarily more market share or the competitive dynamic, particularly on the tech side, has materially changed.

The next question comes from Christopher Nolan with Ladenburg Thalmann.

Given your comments on the leverage, should we assume that the cash levels remain at elevated levels in the fourth quarter?

Yes.

And then Jim can comment, and regarding the decision to maintain the NAV instead of increasing the dividend, should we interpret that as a sign of higher excise taxes in the future?

Yes. Yes. So we had an additional accrual of about $325,000 this quarter to do, I'll call it, catch-up given that we were overearning consistently so far this year. So we should expect a higher level of excise tax through the end of the year.

And final question. A while ago, I believe the Journal had an article talking about how the SEC was looking possibly at applying a fiduciary standard to venture capital investments where it would effectively raise the bar in terms of the responsibility of the venture capital investor in new companies. And I don't know whether or not you heard of anything like that and if you have, if you have any comments on it?

I haven't heard much about that, Chris. I can only say that we work with a select group of venture capital investors with whom we have long-standing relationships. They tend to be very active in their portfolio companies, participating in board seats and having strong opinions. While this situation could generally be seen as positive, I think our investors are already quite engaged with their portfolio companies overall.

The next question comes from Vilas Abraham with UBS.

Just on the nature of the repayments that you received in the quarter, the prepayments there as high as they've been in a couple of quarters. Is any of that pull forward from what you may have expected in Q4?

No, not really. So ForgeRock was the largest that we had indicated we expected a prepayment, and that's the lion's share of the prepayment that occurred this quarter, and that was not pulled from, say, a Q4 event.

Okay. And then as we think about deleveraging starting the beginning of next year, is that just really going to be a function here of what prepayments look like in the first half?

Yes. You think it's a combination of contractual repayments, just the normal aging of the portfolio and the schedule of the principal that comes through. We have a couple of loans that are also maturing in the first half of the year. And usually, we see 1 or 2 loans prepay each quarter. So even if it's a more muted prepayment environment, we still expect to see some of that. So it's a combination of all of that.

All right. And one on expenses. It looks like G&A was up a little bit here. And in Q3, I think you said something about $500,000 in legal expenses, I think, is a part of that. Is that the main item that is going to potentially come out here in Q4?

Correct. Yes. So the elevated level of legal will not likely be that high and excise tax could be similar as I think Chris had mentioned earlier.

Okay. Got it. And then just maybe a bigger picture question. You guys mentioned investment activity picking up here a bit. And I'm just curious, do you think that's a function of the VC investors being very comfortable with where valuations are and the kind of opportunities there, they're seeing now? Or is it more a function of they have to do something with the dry powder that they have had for a little while now? And if it is the latter, what do you think that means for the quality of the deals that we may see over the next 12 to 18 months?

Yes, I can address that. I can speak specifically about the select group of top venture investors we interact with, and they are definitely not motivated by pressure to deploy their capital. While that pressure is present, the focus is really on the emerging opportunities in the new market realities we are seeing today, especially at the very early stages, which TPVG has less emphasis on. There are numerous opportunities now that we’ve experienced a shift. As I previously noted, the emphasis has shifted towards achieving profitability for these new companies and managing cash burn, rather than focusing solely on growth, as we did a few years ago. There is a sense of excitement, at least on their part, regarding the potential opportunities moving forward.

The next question comes from Ryan Lynch with KBW.

First question I had was, you mentioned on this call and in the past, your guys' focus is working with really a select group of what you would call kind of top-tier VC sponsors to source your investments. Given the credit issues that you guys have experienced in this most recent venture sort of down cycle, have you guys put any consideration to modify that strategy and maybe branch out to a wider group of VC sponsors versus focusing on what you guys would call a more selected top tier or top kind of top group but much more curated group?

Yes, Ryan. So a very interesting question. Listen, I think, again, from our perspective, we look to our long-term track record. So obviously, we're looking to our relationships and our interactions with these funds and our portfolio companies over multiple years, and multiple cycles. And so again, I'd say our track record continues to be strong over the 10-year time period since TPVG's inception. Having said that, we always review and evaluate the selected inter-capital funds that we work with based on our interactions with them, our performance with them, their position in the market, and their track record. So it's not a fixed list forever, right? It's a living, breathing list that benefits from experienced track records. And so I would say it's fundamentally a combination of both. So yes, it has the folks that we have deep relationships with, but it also adjusts and corrects based on performance and experience, and it also deals with the realities of changes in the venture capital landscape.

Okay. Understood. And then I believe, and correct me if I'm wrong, I believe you said that as we move into 2024, you expect credit stress effects to decline in your portfolio. I'm just curious, I guess, what are the assumptions that you guys are using to give you confidence in that statement? Is there any sort of macro changes that would need to occur in order for you to continue to have that sentiment? Or what sort of gives you that confidence in that? Because it seems like right now, based on the current VC trends, unless there's going to be a big shift in sort of recovery in the VC marketplaces, whether it's fundraising or investment or exit opportunities, it feels like it could last well into 2024. So I'd just love to have you unpack that statement a little bit more?

Yes, absolutely. I believe I have addressed a lot of this in our prepared remarks. However, I want to emphasize that we do not anticipate significant changes in overall market conditions for Q4 and early 2024. The venture capital market is not going to suddenly shift overnight. What we're observing is that our portfolio companies have had nearly a year to adapt to the realities of the current economic climate and the evolution of the venture capital landscape. They are learning what the new standards and metrics for success are within the ecosystem, both in terms of operations and fundraising. We have discussed the importance of balancing hyper growth with managing expenses. We also talked about the necessity of achieving solid unit economics, whether that means finding a path to profitability, being profitable, or demonstrating to investors how incremental financing could lead to profitability. Therefore, our optimism for 2024 does not hinge on a market recovery; rather, it is based on the diligent efforts of our entrepreneurs and portfolio companies as they adapt, pivot, and navigate these challenges. While some portfolio companies have struggled to adjust, resulting in stress on our side, about 90% are performing well in our top two categories. They have engaged in the necessary responses and adaptations, and although not all are guaranteed success in 2024, we feel we are nearing the end of this challenging phase. Conditions can change, and execution is critical since these are start-up companies that can make mistakes. However, as we assess the current state, we see promising responses, effective plans, and adequate cash runway among the portfolio companies. Additionally, there is some fundraising activity in this environment, particularly for those portfolio companies that are on track for Q4 and Q1. While we are not claiming that the challenges are over, there are some positive indicators as we approach 2024.

The next question comes from Casey Alexander with Compass Point.

I have a couple of questions. Chris, you mentioned you withdrew cash from the credit facility at the end of the quarter to address some regulatory issues. Can you tell me how much that withdrawal was? I'm trying to understand how that impacts the leverage ratio at the end of the quarter, especially compared to the reported 1.62x.

Yes. I would say that this is a quarterly occurrence that we should expect for at least the next two or three quarters, but that does not reflect the average cash outstanding. If you're looking to calculate the weighted average debt outstanding for interest expense, there are several quarterly tests that all BDCs undertake. I would note that at least a handful of them employ a similar strategy as we are, using a larger gross asset. Some may utilize swaps or treasury bills, but we have found it most effective to use our existing credit facility to enhance the balance sheet. To address your question directly, you should anticipate that the cash balance will remain elevated for at least another two or three quarters, and the gross net leverage will align with what you're seeing for this quarter.

Okay. Secondly, you mentioned earlier that there are a few companies with loans maturing in the early part of next year. Based on your assessment, you do not anticipate any changes in the environment. How confident are you that these companies will have access to financing or experience some event that enables them to make timely repayments on those loans?

Yes, Casey, this is Sage. I'll address that. If there were concerns, those companies would currently be on our credit watch list; we wouldn’t wait for a future event. However, I believe a significant portion of this is related to natural amortization that is occurring. These aren't necessarily lump sum payments from the few companies that might have a large payment due in Q1 or Q2; it varies from case to case. Looking ahead to Q4 and Q1, most of it will be natural amortization.

Meaning monthly principal payments as opposed to a lump sum final maturity.

And then I would say, just generally speaking, when it comes to extensions, it's on a fact and circumstance basis of extending maturity dates depending on the credit situation and credit rating and cash runway of the company.

Okay. Great. Now when I look at this quarter's activity with $20 million of scheduled principal amortization, that seems like a high amount, were there some bullet payments in there?

During the quarter, we utilized $70 million of cash, which included $30 million to $40 million from prepays. We also made repayments on revolvers, contributing to the cash we observed. Additionally, there was portfolio amortization, and I'm not sure if you have the specifics on that.

I'm looking at the $20 million specified as scheduled principal amortization, and that seems like a significant amount. I'm trying to understand if there were any bullet maturities included in that.

There was one representing $12 million.

Our next question comes from Brian McCann with JMP Securities.

So I appreciate the outlook commentary heading into next year. But if 2024 doesn't play out as expected and the recovery across the industry has pushed out even further. What's the expectation for portfolio performance, specifically as it relates to nonaccruals and just underlying credit quality? And then what might that mean for the trajectory of leverage?

Yes, it's unfortunate that I can't predict the future. We evaluate things on a quarterly basis, considering the facts and circumstances at hand. The good news is that our higher-rated credit score companies have a substantial amount of cash runway to get through 2024 and beyond. This is an important factor. Additionally, we see that our top two rated credit watch list companies continue to maintain a strong cash runway. Despite the depressed market, our portfolio companies are securing new rounds of financing, with one already raising $30 million in Q4 and another round happening soon, with more on the way. We believe that our top two rated portfolio companies are successfully attracting follow-on capital in Q4 and into Q1, and certain sectors are still drawing strategic interest. For instance, anything related to AI is getting funded or acquired. This paints a more balanced outlook. I can't provide details about 2024, except to say that our goal is to reduce leverage through scheduled amortization, and we anticipate some upside from portfolio company prepayments. Although Q3 was quite challenging for the venture capital sector, we had one of our highest levels of liquidity generation from portfolio companies, totaling $70 million in cash. While I don't expect such cash generation during tough quarters to be the norm, it shows that it's not all negative as we navigate this difficult environment.

Helpful. And then just a follow-up, does a higher for longer interest rate environment impact how you're thinking about just managing the portfolio broadly for the long term? And then does this at all impact the sectors you ultimately will invest into over time?

Interesting question. As we consider the implications of higher yields, I believe there is a limit to the total return we can achieve on an individual loan. If we offer a high level, say a 20% return on the loan from the debt component, equity investors might reconsider and think it approaches equity-like returns, especially when the warrant is taken into account. This leads to the possibility that they might prefer providing financing themselves instead of the company seeking venture debt. It raises concerns about companies that don't secure equity or whose backers decide to forgo it. Consequently, this could lead to adverse selection where the new companies we're engaging with at these elevated rates may be those whose investors are reluctant to provide additional capital. Our strategy has been to maintain yields at a consistent level while targeting companies with stronger credit profiles, as Jim mentioned, focusing on those that have recently secured equity financing. We have observed a reset in their valuations, which strengthens our confidence in using loan-to-value as a metric, alongside lower cash burn rates and longer cash runway. While we are mindful of how interest expenses affect cash flow and subsequently burn rates, most of our portfolio companies are striving for profitability, although they haven't achieved it yet.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim for any closing remarks. Please go ahead.

Okay. Thank you. And as always, I'd like to thank everyone for listening and participating in today's call. I hope you found it helpful. We look forward to talking with you all again next quarter. Thanks, again. Have a nice day. Bye-bye.

The conference call has now concluded. Thank you for attending today's presentation. You may all now disconnect.