TriplePoint Venture Growth BDC Corp. (TPVG) Q2 2024 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the TriplePoint Venture Growth BDC Corporation Second Quarter of 2024 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speakers' prepared remarks, there will be an opportunity to ask questions and instructions will follow at that time. This conference is being recorded and a replay of the call will be available in an audio webcast on the TriplePoint Venture Growth website. Company management is pleased to share with you the company's results for the second quarter of 2024. Today, representing the company is 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'd like to direct your attention to the customary safe harbor disclosure in the company's press release regarding forward-looking statements, and remind you that during this call, management will make certain statements that relate to future events or the company's future performance or financial condition, which are considered forward-looking statements under federal securities law. You are asked to refer to the company's most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. The company does not undertake any obligation to update any forward-looking statements or projections 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 obtain 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.

Thank you, and good afternoon, everyone, and welcome to TPVG's second quarter earnings call. During the second quarter, our focus continued to remain on navigating through what the NVCA labels as a generational market shift in the venture capital markets. Given the continued volatility and challenges in the venture capital market, as well as the public markets for technology companies, we stayed on our path of selectively increasing our investment activity to capture growing investment opportunities coming to market, proactively managing our existing investment portfolio, maintaining strong liquidity and taking the steps that we believe will enable us to position TPVG for the future. While we're seeing a modest increase in investment activity, we do not believe this marks an inflection point. The imbalance continues between the levels of venture capital investment activity and the continuing limited exit opportunities through IPOs and merger acquisitions for venture capital-backed private technology companies. Private company valuations have not fully reset, and we expect the valuation overhang in venture growth stage companies to continue to be worked through over the coming quarters. VCs continue to be patient with their investment activity, balancing the need to preserve their dry powder and also growing mindful of the need to generate distributions for the limited partner investors through exit activity while also taking advantage of new investment opportunities they are seeing at investor-friendly terms in today's market. Turning to the market for debt financing, the demand for venture lending continues, particularly from companies that have raised capital in the current market environment or have a meaningful existing cash runway and are looking to complement that capital with debt financing given their continued operational success. Combining this continued increase in demand and our previously stated expectation of an increased new investment activity in 2024, signed term sheets for venture growth stage companies at TriplePoint Capital increased 44% over the previous quarter, with new debt commitments rising by 420% and fundings by 186% at TPVG. In terms of the current portfolio, our team continues to monitor and maintain close contact with all of our portfolio companies and their venture investors, and we remain heads down managing through existing credit situations. At the same time, we're encouraged by the strengthening operating performance and improved fundraising activity from several of our portfolio companies, which are spread across multiple industry sectors. An aggregate of almost $1 billion was raised by our debt portfolio companies in the first half of this year. That's more than double what was raised in the previous year, and it includes, excuse me, excludes Metropolis, which in itself raised $1 billion in Q2 as part of its acquisition of SP Plus. This increased fundraising activity we are seeing continues across multiple sectors including software, fintech, robotics, cybersecurity, and others that we have been discussing and citing in these calls. Touching on our warrant and equity positions in our portfolio, we have outstanding warrant positions in 94 portfolio companies and equity positions in 46. We believe these positions bode well for our ability to improve NAV over the long term. I'm also pleased to report that we've made notable progress over the past year and a half in reducing our unfunded commitments, boosting our total liquidity, and reducing our leverage ratio to fall within our target range. Unfunded commitments went from a high of $205 million one year ago to $71 million as of the second quarter. More importantly, we reduced our gross leverage ratio from as high as 1.76x at the end of last year to 1.15x as of quarter's end. We also announced earlier today the renewal of our revolving credit facility, which provides us a meaningful source of capital and financial flexibility for our go-forward plans. These efforts have provided us with substantial liquidity and will play key roles in positioning TPVG here in the short term and over the long term. The Board took another step on this path forward by reducing our regular distribution this quarter to $0.30 per share. This was not an easy decision and reflects a number of considerations including our higher-than-expected repayment and prepayment activity during the first quarter, and once again, our higher-than-expected repayment and prepayments last quarter, but also given the impact of reduced fundings, measured investment allocations, the lower level of funding activity relative to prior years, again reducing our leverage to our target leverage range and factoring in what we think will be expected federal interest rate cuts. The dividend is now much better aligned with the earnings power of our portfolio, our core portfolio yield, and other targeted leverage, while still providing sizable distributions to shareholders. Complementing these efforts is our continued progress on diversifying the portfolio, including the industry sector and geographic rotation we have been discussing over the last few quarters. Our focus remains on investing in companies operating in what we believe are attractive investment sectors and ones that have recently raised capital, have ample cash runways, have backing from select venture investors, have prudent management teams, and whose business models have attractive unit economics and high retention rates. We'll also continue to evaluate hold sizes, debt to equity ratios, deal structures, and other key metrics. We're encouraged by the progress to-date and the recent investments we've made, which continue to reflect these goals and parameters. Further, we're evaluating the potential for broadened investment strategies for TPVG, particularly given our sponsor TriplePoint Capital, a multi-billion-dollar platform-wide venture lending business, and potential increased ways in which TPVG could benefit. TriplePoint Capital manages multiple vehicles and has been underwriting venture loans for almost 20 years, having committed more than $13 billion to over 1,000 venture-backed companies during that period. As a leader in the venture lending market with an exceptional brand name and reputation, TriplePoint Capital continues to grow and capitalize on investment opportunities in today's market, including actively expanding its bench and ongoing increases in originations and investment staffing nationwide. We believe the sum of all these efforts positions TPVG well for when the venture capital markets recover and we believe it could result in tangible benefits to our stakeholders both in the short and long term. Finally, I'd like to take a moment to thank Chris Mathieu for his efforts over the past five years, not only at TPVG, but also at our TriplePoint Capital platform. We wish him the best in his upcoming retirement and appreciate not only his dedication but the friendship over the many years. As we continue with our search for a CFO, we would like to welcome Matt Galiani, whom we announced earlier this week, to serve as our Interim CFO. Matt takes over the reins this Friday and joined the company back in 2019. He has served as the company's Controller since December 2022. With that, I'll now turn the call over to Sajal to cover our activity and outlook in more detail.

Thank you, Jim, and good afternoon. Investment pipeline activity increased for the fourth consecutive quarter as TriplePoint Capital signed $188 million of term sheets with venture growth stage companies compared to $130 million in Q1, reflecting continued increases in originations by our investment team, referrals from our select venture capital funds, and demand from high-quality companies seeking debt financing. Although our investment pipeline activity is increasing, TriplePoint Capital and TPVG continue to be very measured in our approach to new originations in light of market conditions. With regards to new investment allocations to TPVG during the second quarter, in light of our progress in reducing leverage and mindful of our objectives for portfolio diversification, TriplePoint Capital allocated $52 million in new commitments to five companies to TPVG, including two new portfolio companies, our highest commitment amount over the past six quarters. Commitments to new portfolio companies during Q2 included Affinity, a software-based relationship intelligence platform built to expand and evolve traditional CRM, backed by Menlo Ventures, Careventures, and other investors, and Cresta Intelligence, a software company that leverages artificial intelligence to help sales and service agents improve their customer service, backed by Sequoia Capital, Greylock Partners, Andreessen Horowitz, and other investors. During the quarter, we also made follow-on commitments to two recent portfolio companies, as well as refinancing of an existing portfolio company in conjunction with an upsize. Thus far in Q3, TPVG has closed a total of $11 million in new commitments to one new portfolio company in the software industry and one existing portfolio company. During the quarter, TPVG funded $38.7 million in debt investments to five portfolio companies, which is up from $13.5 million in debt investments to three portfolio companies in Q1 and is our highest funding amount over the past five quarters. We have funded $52.2 million year-to-date and $89.3 million over the past 12 months, which supports our efforts to increase newer portfolio vintages. The investments funded this quarter carried a weighted average annualized yield of 15.5% at origination, up from 14.3% in Q1. Our quarterly gross funding target continues to be in the $25 million to $50 million range. As a reminder, new fundings typically occur at the end of the quarter and don't materially contribute to income in the quarter in which they are made. During Q2, we had $51 million of loan prepayments due primarily to large equity capital raises and acquisitions, up from $31 million of loan prepayments in Q1, representing a total of $82 million in prepayments to date and $153 million over the past 12 months. Prepayment-related income this quarter contributed to an overall weighted average portfolio yield of 15.8%, in line with last quarter's portfolio. Excluding prepayments, the core portfolio yield was 39%, down from 14.7% in Q1. During Q2, we had $28 million of scheduled principal repayments and $15 million of proceeds from the disposition of loans for a total of $43 million, up from $7 million of scheduled principal repayments and $1 million of proceeds from the disposition of loans for a total of $8 million in Q1. Year-to-date, we've had $51 million in total scheduled principal repayments and proceeds from the dispositions of loans and $110 million over the past 12 months. So, in summary, over the past 12 months, we’ve had over $260 million of cash received from prepayments, principal repayments, and dispositions of loans, and in light of market conditions over that same time period, we have had investment fundings of only $89 million, contributing to net portfolio contraction of approximately $170 million. As we look to the rest of this year, given how the portfolio has contracted, we expect the pace of prepay and amortization to slow down over the remainder of 2024, but do expect the pace of principal repayments to increase in 2025 given contractual amortization requirements. With regards to fundraising activity, nine portfolio companies with debt outstanding as of quarter's end raised $442 million during the quarter compared with eight portfolio companies raising $584 million in Q1, five portfolio companies raising $157 million in Q4, and three portfolio companies raising $47 million in Q3. Year-to-date, 16 portfolio companies with debt outstanding have raised over $1 billion of capital compared to 14 portfolio companies raising $390 million over the same period last year. As Jim mentioned, we continue to see capital raising activity within our portfolio picking up, and we continue to have several portfolio companies either in active fundraising discussions or expecting to launch a fundraising process shortly. Last week, Flo Health, a consumer-focused portfolio company with $25 million outstanding, announced raising over $200 million at a $1 billion valuation from General Atlantic. We believe this fundraising activity should strengthen the credit quality for these companies and bodes well for the value of our warrant and equity investments. As of June 30th, we held warrants in 94 companies and equity investments in 46 companies with a total fair value of $98 million, up from $78 million last quarter. Our warrant and equity portfolio experienced a $12.8 million net unrealized gain in fair value, or $0.33 per share for the quarter, primarily driven by an increase in the fair value of Revolut based on its exceptional financial performance as disclosed in its recently filed financial statements and the news that it obtained a UK banking license, both of which have positive implications for its continued growth and profitability. We believe there is potential for a positive impact to net asset value from not only Revolut, but other companies currently in our warrant and equity portfolio, particularly as market conditions improve over the long term. During the quarter, we sold our publicly held shares in Hims & Hers, resulting in a realized gain of $1.8 million on our warrant and equity investments, representing an over 3 times multiple on our invested capital. In other portfolio activity during the quarter, Mynd Management was acquired by RoofStock, and our loans were paid off in full and our warrants were assumed. Existing credit watch list companies, Outdoor Voices and TFG completed their acquisitions as well. These two companies had previously been marked down by $13 million, and we recognized an additional $800,000 loss from these events. During the quarter, one portfolio company with a principal balance of $25 million was upgraded from category 2 to category 1, one portfolio company with a principal balance of $4.7 million was downgraded from category 1 to category 2, and one portfolio company with a principal balance of $13 million was downgraded from category 2 to 3 primarily due to cash runway for financing events underway. In addition, Good Eggs, which has debt with a fair value of approximately $6.3 million, was downgraded from category 2 to category 4 during Q2 and announced yesterday its sale to GrubMarket. Our recovery is expected to be consistent with our mark as of Q2 and the company will be removed from our watch list in Q3. Mind Candy, with a fair value of $16 million, was downgraded from category 3 to category 4, reflecting year-to-date performance and other near-term challenges for the company, including additional maturity date extensions of our loans. Despite being one of TPVG's oldest investments, Mind Candy continues to receive support from its equity investors as it builds and grows its Moshi Kids app. While our total percentage of watch list investments was relatively flat this quarter, a number of these companies are in the process of completing equity financing or strategic events that are underway as well as improving operational performance, which, if completed or achieved, could result in improved credit outlooks. As we consider developments not only over the past six months but also looking forward over the next one to two quarters, our e-commerce and retail-focused companies continue to face challenges. They generally have made the hard decisions to pull back on growth, cut burn, and focus on achieving profitability as soon as possible as they come to market for follow-on financing or strategic processes, including M&A to enable them to continue the journey; reception continues to be chilly as investors and inquirers generally remain on the sidelines, and these companies, their investors, and, in many cases, we as lender must all decide if they continue to wait out the market or transact at whatever price the market will clear despite the progress they've made. Our teams continue to track these companies as well as other watch list situations. As we take a step back and assess not only market conditions and our recent performance, but also our outlook for the market, our playbook continues to be focused on building a strong foundation for TPVG. We've reduced our net leverage and have access to substantial liquidity that we intend to deploy in a measured fashion to companies in attractive sectors to further diversify the portfolio. Our team is continuing to focus on bringing credit situations to a close or positioning companies for the longer term when market conditions are better. We believe when our market conditions improve, our warrant and equity portfolio will have a positive impact on our net asset value. We are also valuing opportunities to broaden TPVG's investment strategy, as well as its overall size and scale in complementary ways. Finally, we are aligning expectations, including the decision to reduce our distribution, to be more consistent with our current portfolio size and earnings power without creating pressure to deploy assets and with the potential to generate excess earnings to stabilize and grow NAV. In summary, we have a plan, and I'm optimistic for our future. And with that, I will now turn the call over to Chris.

Thank you, Sajal, and hello, everyone. For the second quarter, total investment income was $27.1 million with a portfolio yield of 15.8% compared to $35 million or a portfolio yield of 14.7% for the prior-year period. The decrease in total investment income was primarily due to a lower weighted average principal amount outstanding on our income-bearing debt investment portfolio. For the second quarter, total operating expenses were $14.5 million, compared to $16.3 million for the prior-year period. These expenses consisted of $8.7 million of interest expense, which included $1.8 million or $0.05 per share of a one-time fee related to the minimum utilization clause on our credit facility; $3.8 million of base management fees; and $2 million of general and administrative expenses. There were no incentive fees this quarter. For the second quarter, net investment income totaled $12.6 million or $0.33 per share, compared to $18.8 million or $0.53 per share for the prior-year period. During the second quarter, the company recognized net realized losses on investments of $18.8 million, consisting primarily of $20.2 million of net realized losses on the investment portfolio from the write-off and restructuring of investments, partially offset by $1.3 million of net warrant and equity gains from the sale and disposition of investments. The net change in unrealized gains on the investment portfolio for the second quarter was $14.9 million, consisting of $12.8 million of net unrealized gains on the warrant and equity portfolio and $10.9 million of net unrealized gains from the reversal of previously recorded unrealized losses from investments realized during the period, offset by $8.8 million of net unrealized losses on the existing debt investment portfolio. As of quarter-end, net asset value, or NAV, was $353 million or $8.83 per share compared to $346.3 million or $9.21 per share as of year-end. The company declared a regular quarterly distribution of $0.30 per share with a record date of September 16th to be paid on September 30. As of June 30, the company had estimated undistributed income or spillover income of $39.3 million or $0.98 per share. Now, just an update on unfunded investment commitments, overall liquidity, and balance sheet leverage. We successfully reduced our unfunded commitments from $118 million at year-end to $71 million as of June 30. Of the $71 million of unfunded commitments, $5 million will expire this year in 2024, and $66 million will expire during 2025. We are pleased to share that subsequent to the end of the quarter, the company fully renewed its revolving credit facility. The company elected to reduce total commitments under the facility to $300 million to align better with the company's anticipated utilization while maintaining an accordion feature that allows the company to increase the size of the credit facility in the future up to $300 million under certain circumstances. After giving effect to the renewal, the company had total liquidity of $340 million, consisting of $50 million in cash and available capacity on the new revolver renewal of $290 million. We continue to maintain a diversified capital structure. As of quarter-end, a total of $405 million of debt was outstanding, consisting of $395 million of fixed-rate investment-grade term notes and $10 million outstanding on our credit facility, which currently has a $300 million aggregate commitment. Given the $97 million in liquidity events from our portfolio this quarter and $18 million in proceeds from the ATM program, we paid down our credit facility and continued to improve our leverage levels during the quarter as we ended the quarter with a leverage ratio of 1.15 times. Given that we have successfully renewed the revolving credit facility, we are comfortable with our current leverage sources and may look at additional sources should they be presented to us. Recall, we have three different maturities of term notes. The first maturity is set to occur early next year. Given the very favorable rates on the existing term notes, we do not currently expect to prepay or refinance these amounts until near their maturity dates. So, this completes our prepared remarks today. And so operator, could you please open the line for questions at this time?

Thanks, and good afternoon everyone. Just starting off, you reset the dividend at $0.30; net investment income here decreased to about $0.33. I'm curious if you can discuss your outlook for net investment income over the near term, especially with rate cuts coming and your portfolio sitting at around $715 million range at quarter-end, and when you think you can get back to an area where you're growing the portfolio again?

Yeah. So Crispin, I'll take that. We have reset the dividend based on our current expectation of the strength of the existing portfolio while maintaining our target leverage ratio, which is where we are sitting now. We've also considered the impact of some near-term Fed rate changes that are expected to come in the near future, as well as looking at the first half of 2025. Some of the other things we're also considering are some of the variables we had this quarter. Management fees tend to be quite flat, so we've assumed a pretty flat management fee. No incentive fee is expected to be incurred for the rest of this year and for at least the early part of 2025. Admin fees and G&A are pretty well baked and consistent quarter-to-quarter. So, all that accounted for, we assume a consistent portfolio size with the leverage we have, to the extent Sajal referred to NAV appreciation, which would result in additional capacity to grow the portfolio. I think that covers your question.

Great. Thanks, Chris. That's all helpful. And then, just in the last week or so, we've seen plenty of volatility in broader markets. Credit spreads have widened. There have been kind of more fears of a potential recession. So, can you discuss a little bit how you feel about your current credits that are performing as well as kind of new credits you're looking at? It seems like you're taking a cautious approach here. But just curious if anything has changed in your outlook recently? Or is it pretty stable? Or just has anything gotten worse? Just curious in the current environment and the volatility that we've seen more recently.

Yeah. Crispin, I'll take it. Our credit risk scores reflect our current view on our existing obligors and based on market conditions. And so, I think our perspective as we look to the major impact to our sector and our industry is venture capital fundraising, venture capital investment activity. And I think Jim talked about essentially flat Q2, Q1, but still up from last year. So, I think we would like to see that activity increase. I don't think the current volatility necessarily impacts private market investment activity as long as the volatility is short. I still think there is that more fundamental mismatch that Jim talked about regarding public valuation multiples and private valuation multiples, and we still need that to clear that imbalance. It will take a few more quarters for that to occur along with an improvement in investment activity and exit activity, which are beneficial for both new investment opportunities and our existing portfolio companies.

Hey, everyone. Good afternoon. A follow-up on earnings. Chris, can you give us after deleveraging, which has been going on for a few quarters, what would the exit rate be for NOI? You also said the portfolio and leverage would be stable from here. So, where would earnings be at next quarter, all else equal?

Yeah. So, without giving you specific numbers, what we did was consider the existing portfolio size in steady state. We have hit our leverage target, which we worked towards over the last six to nine months. So, we're at our targets now. It's really more about turning the portfolio and building it from there. You can base your models on resetting the portfolio size to where we are today along with the comments I made about some of the P&L expense and items should help you drive your models.

Okay. It seems that the earnings potential has been reassessed due to the higher-than-expected repayments bringing you closer to your goals. You mentioned the base rate curve, and while your payout yield is nearly 14%, a normalization of the base rate curve would likely bring you down a bit, yet that figure is still significantly higher than historical earnings. Is there another way to enhance this, assuming typical incentive fees and interest costs? Thanks.

Yeah. Well, I'll grab that one. But I'd say BDC, we think it's pretty important to maintain distributions to our shareholders, and myself, Chris, and Sajal are in that mix, and not in a significant way. But you’ve got to look at the $97 million of liquidity events that we had last quarter. We have been getting back on our targeted leverage range and lower core portfolio yield. I mean, it's all lower earnings power. So I guess, you could factor in the Fed rate cuts that we may expect, and it boils down to, it's not an easy decision, but it's the right decision; it realigns the dividend with the size and the yield of this portfolio while still providing sizable distributions to the shareholders.

Thanks. Can you talk about your outlook for portfolio yield, both kind of the base yield, but also as you think about repayments as well in there?

Yeah, Doug. Sajal, I'll take it. As we reported today, the core portfolio without the benefit of prepayment activity is at 13.9%. Sixty percent of our book is floating rate, while 40% is fixed rate. We are setting floors on base rate indices depending on when the assets are originated. The lowest prime rate floor we have is 3.25%, going up to the current prime rate on more recent loans. I believe this 13.9% is a solid starting point, and as the Fed makes changes and reduces rates, you'll see some impact, although not on a one-for-one basis. We're bringing on new investments at higher rates, but we must consider the balance of the portfolio. There is a chart in our Q that illustrates the impact of base rate changes, providing specific information there.

Hey, guys. To pick up on Fin's discussion, did you cut the dividend enough? Because if you look at it as a percentage of NAV, it's close to 14%.

Yeah. So, we think we have. Based on the modeling we've done and the variance of the revenue that this portfolio generates, we think that we're in the right level. One thing I forgot to mention to Fin was one of the variables now that we're at target leverage is the prepayment rate and the vintage of those prepayments. Earlier prepayments generate more income for us and that will be one of the variables to consider over the coming quarters. Otherwise, we believe we have a good handle on the earnings power of the portfolio and some of the variables beyond just the top-line revenue.

Okay. And Chris, regarding the shares that are now trading below book, should we assume that the ATM will not be utilized when the share price...

Yeah, that's a fair question. We do not have and have never sought the vote to issue below share price. The ATM is at market assuming that we trade above, including any load that we would pay. So yes, that's correct. If it's below NAV, we're not issuing.

Great. My final question is given that you guys are sort of in a portfolio reset mode to a certain degree, what industries are you emphasizing and which ones are you deemphasizing in terms of looking at prospective investments?

Yeah. I’d say we are following the investment categories and favorable sectors of the select venture investors that we work with. No surprise there. AI comes to mind, with numerous definitions. Cybersecurity is another area. We are also interested in health tech and government technology. We like recurring software companies, enterprise software. Interestingly, robotics and semiconductors are making a comeback in our new investment sectors. I would include some vertical software, some environmental sustainability technologies, and space and GovTech, as folks now call it. We are deemphasizing the more consumer-focused plays out there, as there are fewer opportunities.

Great. Finally, I hope, wish you well in your retirement Chris, and I always appreciate working with you and I appreciate your help and your patience. That’s it for me guys. Thank you.

As always, I'd like to thank everyone for listening and also participating in today's call. Excuse me. We look forward to updating and talking with you all again next quarter. Thanks again, and have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You can now disconnect your lines.