Earnings Call Transcript - TPVG Q3 2020

Operator, Operator

Good afternoon, ladies and gentlemen. And welcome to the TriplePoint Venture Growth BDC Third Quarter 2020 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 call is being recorded and a replay of the call will be available and an audio webcast on the TriplePoint Venture Growth BDC website. Company management is pleased to share with you the company’s results for the third quarter 2020. 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.

Jim Labe, CEO

Thank you, Operator, and good afternoon, everyone. We hope that our shareholders and their families are healthy and are staying that way during this pandemic. Our priority is protecting the health of our employees and, together with our Venture Capital Partners and entrepreneurs, supporting our portfolio companies during this uncertain time. We’re now eight months into the pandemic and our advisor continues to operate and conduct business remotely to source and close transactions. In this environment, our portfolio companies have all adapted COVID-adjusted plans, and a number are outperforming these plans. More than 86% of our portfolio companies have also raised capital here in 2020. After the initial pause earlier in the year, new deals are getting done in our venture capital markets, and these investments, as well as our new originations, are in sectors that are geared for success in the COVID environment. So with this pandemic as a backdrop, we remain cautious but are experiencing the signs of continued growth, not only through the doubling of signed term sheets and five times the amount of customer fundings this past quarter versus the previous quarter but also with the growth activity well underway here in the fourth quarter. We believe this positive trend will continue in our business and serve as a basis for meaningful growth in 2021. This is due to several reasons. The first is our focus on technology. We are living in a different world with uneven consequences. The technology sector is one of the more sustainable parts of the economy today and is an area for investment for the foreseeable future.

Sajal Srivastava, President and Chief Investment Officer

Thank you, Jim, and good afternoon. During the third quarter, TriplePoint Capital signed $146 million of term sheets with venture growth stage companies, up from $93 million of signed term sheets during the second quarter and almost doubled the $80 million of term sheets signed during the first quarter, reflecting continued strong demand for debt financing. During the third quarter, TPVG closed $87 million of debt commitments with nine companies, up five times from the $14 million of closed debt commitments during the second quarter. The industry-leading position of the TriplePoint Capital platform not only has resulted in significant deal flow for TPVG from our select VCs and their venture growth stage portfolio companies, but also enables us to co-invest across the platform's many investment vehicles, so we do not miss out on deal flow due to transaction size, while also optimizing the hold size for us at TPVG.

Chris Mathieu, CFO

Great. Thank you, Sajal, and hello, everyone. Let me take you through an update on the results for the third quarter of 2020. Total investment and other income was $23.1 million for the third quarter of 2020, as compared to $15.7 million for the third quarter of 2019. The weighted average annualized portfolio yield was 14.1% on total debt investments for the third quarter of 2020, as compared to 13% for the prior year. The increase in total investment and other income was primarily driven by an increase in the average debt investment portfolio size and also by fees earned from loan prepayments. Total operating expenses were $10.9 million for the third quarter of 2020, as compared to $8.6 million for the third quarter of 2019. Total operating expenses for the quarter consisted of $3.5 million of interest expense, $3.3 million of management fees, $3.1 million of incentive fees, and $1 million of general and administrative expenses. The increase in overall operating expenses is primarily driven by an increase in the gross assets of the company and overall increase in borrowings, offset by lower administrative and G&A costs associated with significant operating efficiencies in 2020. Net investment income for the third quarter was $12.2 million or $0.40 per share, compared to $7.1 million or $0.29 per share in the third quarter of 2019. Return on average equity based on net investment income for the quarter was a very healthy 11.8%, despite the lower leverage we recorded in the quarter. Net realized gains on investments totaled $4.1 million and net unrealized losses on investments for the third quarter were $1.9 million, resulting in a net increase in net asset value from net gains of $2.2 million or $0.07 per share. Net realized gains are the result of $6 million of gains realized on the sale of CrowdStrike and Medallia stock, offset by $1.9 million of losses associated with the final disposition of the Munchery investment. Net unrealized losses resulted from $4.9 million of the reversal of previously recorded unrealized gains on CrowdStrike and Medallia, offset by $1.4 million of the reversal of previously recorded unrealized losses on Munchery, as well as $1.2 million of unrealized gains from fair value adjustments on the rest of the portfolio. Net asset value or NAV increased from $13.17 per share to $13.28 per share, up 1% from Q2 2020. The net increase in net assets from operations for the third quarter was $14.4 million or $0.47 per share. We reported unfunded commitments totaling $168 million, of which $32 million was dependent upon portfolio companies reaching certain milestones. Of the $168 million of unfunded commitments, $85 million or 51% of this total will expire in 2020, and $83 million will expire during 2021 if not drawn prior to expiration. In addition, all of our unfunded commitments have an index rate of the U.S. prime rate with a floor set to 3.25% or higher. We continue to maintain strong liquidity to fund our new origination activity as we head toward year-end. Some of this strength has come from proactive efforts this year, including the accretive sale of common stock in January, generating $80 million, and the closing of our first investment-grade unsecured debt in March, generating $70 million. We believe our high-quality portfolio continues to have a positive impact on our liquidity position, generating strong loan prepayments and principal loan amortization during the first nine months of the year. In addition to our strong current liquidity, the existing seasoned and diversified portfolio has contractual cash flows over the next five quarters of $274 million, which bodes well for the sustained liquidity well into 2021. The strong liquidity and our modest leverage position give us dependable funding capacity in excess of our existing unfunded commitments to grow the portfolio. As of September 30th, the company had total current liquidity of $214 million, consisting of $26 million in cash and $188 million of availability under our revolving credit facility. We continue to have the flexibility under our existing accordion feature to expand the current $300 million commitment to an additional $100 million. The revolving credit facility, compared to fixed-rate debt, allows us to efficiently manage our interest expense and reduce outstanding balances when prepayments occur within our portfolio. Aggregate outstanding balances as of September 30 were $257 million, consisting of $75 million of exchange-listed fixed-rate baby bonds, which mature in 2022, $70 million of private term debt, which matures in 2025, and $112 million outstanding under our multi-year revolving credit facility. Given our aggregate borrowings as of September 30, we’ve reported a leverage ratio of just 0.63 times leverage, or an asset coverage ratio of 259% at the low end of our leverage target of one times leverage. We've generated NII of $1.18 per share and have paid distributions of $1.08 per share, which is $0.10 per share of income in excess of our distributions with more than a quarter to go, and that is after the impact of issuing 5.7 million new shares in January in connection with the public equity offering. On top of that, we have $7.3 million of spillover income from 2019. Additionally, our NAV as of September 30 of $13.28 per share is only $0.06 per share lower than our NAV pre-COVID as of December 31, 2019. During the third quarter, we distributed $0.36 per share from ordinary income as part of our regular quarterly distribution. Net investment income provided 110% coverage of the quarterly distribution, despite leverage being at the lower end of our target range. Furthermore, we have undistributed earnings spillover from net investment income of approximately $10 million or another $0.33 per share to support additional distributions to shareholders in the future. We are pleased to announce that for the fourth quarter of 2020, our Board of Directors has declared a distribution of $0.36 per share on October 29th to shareholders of record as of November 27th. The payment date for this distribution will be on December 14th. This completes our prepared remarks and now at this time, we’d be happy to take your questions. Operator, could you please queue up the line for questions?

Operator, Operator

The first question comes from Finn O'Shea from Wells Fargo. Please go ahead.

Finn O'Shea, Analyst

Hi, everyone. Good afternoon. Thanks for having me on. I just have a first question, high level, appreciating the robust fund leverage profile and such. This quarter we saw a little bit lower commitments and then you were selling some stock in the market. Is this at all indicative of any near-term desire to generate liquidity, positioning the company for a more conservative outlook in any sense? Or maybe it's a one-off, but any comment you have there to describe that sort of pattern we saw this quarter? Thank you.

Sajal Srivastava, President and Chief Investment Officer

Sure, I’ll start and then Jim and Chris can join in. Finn, the reduction in leverage this quarter was largely driven by our portfolio companies, prepayment activities, and scheduled principal amortization. It wasn't an intentional strategy on our part to maintain large cash reserves or actively deleverage. The advantage of using warehouse facilities is that when we experience prepayment activities, we can pay down our credit lines, reduce leverage, or save on interest expenses, which ultimately benefits our shareholders. However, this was primarily influenced by our portfolio companies. It’s also important to note that our number of signed term sheets has remained consistent, if not increased, quarter-over-quarter. The commitment rate of TPVG has gone up as our liquidity has improved, and our unfunded commitments have decreased. So, it's quite the opposite. We’re witnessing strong market conditions, as Jim mentioned regarding the VC equity and venture lending ecosystems. Consequently, we're preparing for ongoing growth and demand, which we're seeing not only in Q4 but also heading into 2021. Jim, Chris, do you have any thoughts?

Jim Labe, CEO

Yeah. I can only add that, I think the word caution and cautious may have been applicable there in the early COVID onset and quarters, but there’s absolutely not a pattern here. If anything, I agree with Sajal. Not only have the commitments been up this past quarter versus the previous one, but we’re pretty much positioning and gearing up, as well as staffing up now for increased originations and the growth activity we see. So there is no pattern that at least we’re aware of.

Finn O'Shea, Analyst

I appreciate the clarification on the balance sheet. I have a small question regarding the GoEuro loan. I understand you made a small convertible follow-on investment. Was that part of a larger fundraising round, or was it a typical follow-on investment for you? Any insights would be appreciated. That's all from my side. Thank you.

Jim Labe, CEO

Good question, Finn. As you noted, GoEuro announced a capital raise during the quarter and part of our strategy is to secure the equity benefits while gaining access to private funding rounds that traditional investors cannot access. By leveraging our lending relationship and previous equity investments in the company, we were able to participate in this round that took place in Q3 and made our pro-rata investments. We see this as a clear advantage of our lending relationship, allowing us to invest in that round.

Operator, Operator

The next question comes from Devin Ryan of JMP Securities. Please go ahead.

Kevin Fultz, Analyst

Hi. This is Kevin Fultz on for Devin. Thank you for taking my questions. So, just a question around portfolio company liquidity, can you provide some insight into the cash runway that existing portfolio companies have?

Sajal Srivastava, President and Chief Investment Officer

Kevin, it's nice to meet you. Sorry, Jim. Let me start, and please feel free to jump in. As I mentioned earlier, we've experienced significant equity raising activity so far this year within the portfolio. The figure is that 22 portfolio companies have raised over $2.8 billion in capital since the start of the year, with 75% of our portfolio companies having at least 12 months of cash runway. Typically, we see between three to six portfolio companies raising equity each quarter, and we expect this number to increase in subsequent quarters.

Kevin Fultz, Analyst

Okay. Great. That’s helpful. And then in terms of finding new ways of performing due diligence over the past seven months of a pandemic, have there been any changes in how you’ve done due diligence or have you found new ways to perform that in a remote work environment?

Sajal Srivastava, President and Chief Investment Officer

Great. Jim, would you want to take that one?

Jim Labe, CEO

Yeah. I was just going to provide the same numbers as previous Sajal did on that question, and nice to meet you as well. Yeah. So at the end of the day, the due diligence process hasn’t changed, and if anything, it’s probably a little more advantageous because everything is remote. We’re able to pretty easily contact investors, customer references, and all the things that we typically do, even more so because the current environment affords those opportunities. The level of work and the level of investment committee details is not only the same, but it’s even more improved and has always been at a very high level.

Kevin Fultz, Analyst

Okay. Thank you. That’s helpful. And then lastly, I know in previous calls you mentioned that deal pricing hadn’t materially changed since the onset of the pandemic. Just curious if you’ve seen an improvement in documentation over that period at all?

Jim Labe, CEO

Do you want to grab that, Sajal?

Sajal Srivastava, President and Chief Investment Officer

Sure. I would say that one of the key advantages of our platform is the comprehensive and detailed nature of our loan documents, as consistency is crucial for being a top lender. We have not observed any significant changes in the structure, legal aspects, financial conditions, or covenant profiles of our loans. I believe our portfolio companies and venture capital sponsors appreciate this consistency. Our loans have always been tightly structured, lender-friendly, and balanced, with no notable changes in the last few quarters.

Kevin Fultz, Analyst

Okay. That makes sense and that’s it for me. Congrats on a strong quarter, and nice speaking to you guys as well.

Jim Labe, CEO

Thank you.

Sajal Srivastava, President and Chief Investment Officer

Thank you.

Operator, Operator

The next question comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Christopher Nolan, Analyst

Hey, guys. Ladenburg Thalmann. Sajal did you or Chris, did you guys mention what the prepayment estimate is for the fourth quarter? If you did, I missed it?

Sajal Srivastava, President and Chief Investment Officer

We did not provide the prepayment estimate, but we did announce that we had $32 million in actual prepayments this quarter, which led to approximately $2.4 million in accelerated income. That information has already been shared in the release this evening.

Christopher Nolan, Analyst

Okay. So no guidance, right?

Sajal Srivastava, President and Chief Investment Officer

Correct.

Christopher Nolan, Analyst

Okay. Turning to ROLI, couple questions on ROLI. ROLI non-accrual, fair number of its credit seems to be maturing or matured at 10/31. Were those extended or renewed?

Jim Labe, CEO

Yes. We are working on a global restructuring of our outstanding indebtedness with them. We were waiting for the product launch and positive developments that occurred during the third quarter.

Christopher Nolan, Analyst

Got you. And if I heard you correctly, Sajal, ROLI is a musical products maker?

Sajal Srivastava, President and Chief Investment Officer

Yeah. A musical technology company. They make keyboards, synthesizers, plus software and other technology.

Christopher Nolan, Analyst

Got you. Okay. That’s it for me. Thank you.

Operator, Operator

The next question comes from Ryan Lynch of KBW. Please go ahead.

Ryan Lynch, Analyst

Hey. Good afternoon and thanks for taking my questions. First one, just a higher-level question, as we are still in the middle of this downturn, have you been surprised by how well your overall portfolio has held up? I mean, you mentioned earlier you are now down at just a few pennies since this year, and also how strong the venture ecosystem has really held up during this downturn?

Jim Labe, CEO

Sure, go ahead. You can begin, Sajal.

Sajal Srivastava, President and Chief Investment Officer

Yeah. I was going to say, Ryan, again, Jim and I are now in our 22nd year of working together across two leading platforms. We’ve seen our fair share of cycles. I think it’s too early to become overly confident or excited about the pandemic since it is far from over. There is a second wave and a third wave. So I think we are pleased to see that the thesis we had articulated to our investors about how working with the selected VCs and the better select VCs in their portfolio companies has been our experience and track record. The thesis was that these funds and their portfolio companies at the venture growth stages outperform not only during good times but also during more challenging times. I would say that we’re not surprised in the sense that we’re showing the performance we have, because that was always the thesis — the best deals with the best VCs should yield a better track record. I would say, we are pleased but not surprised to see the rate of equity investment activity for the venture asset class as a whole. There’s no doubt that our experience across cycles, the company started during periods of volatility — Jim and I can go back to Facebook and YouTube and Netflix in past cycles. So we’re not surprised to see premier venture funds deploy capital during periods of volatility to take advantage of dislocations, valuations, and potentially less competition on the VC side. I think it’s playing out, but we’re not overly confident. Part of that’s why we’re keeping substantial liquidity to take advantage of opportunities. The world can change and things can change rapidly, so we just always want to be prepared.

Jim Labe, CEO

Yeah. It’s very hard to add anything. After 22 years, we think alike, and absolutely, VC is not always good times. It’s the quality of our companies and the VCs we continue to work with that's part of managing through whatever we want to call it—this new norm—and adjusting the plans to profitability, which results in performance. We’ve talked earlier about the uptick in growth and new investments and some of the COVID area investments. We’ve been through cycles before. If you stick to the better venture capital-backed companies, you’ll make it through these periods and then some.

Ryan Lynch, Analyst

Okay. That’s helpful commentary. In your press release, you mentioned that Hims is going public through a merger with SPAC. I just wanted to hear your opinion on this. Obviously, there’s been a huge increase in SPAC formation over the last year. Do you think that the increased formation of these is large enough that it could potentially have a meaningful impact on VC-backed companies' exit strategies? Or is it simply another structure that companies would likely be taken out via a different structure, whether it’s an IPO or an acquisition or something like that? Do you think that the increased formation of SPACs will have a meaningful impact on the availability of exit opportunities for venture capital companies?

Sajal Srivastava, President and Chief Investment Officer

Yeah. It’s a really good question, Ryan. So I’d say at a high level, we’re pleased and welcome the emergence of SPACs. I think it’s still very early as an asset class or an exit class, I guess it’s better phrased. There have been some initial transactions within our TriplePoint platform; I think we’re up to four or five portfolio companies that have either completed or have announced these merger events. It’s still early in terms of — well, let’s wear multiple hats. As a lender, we’re pleased because usually these events are takeout events for our debt, providing us the opportunity to recover our capital. It’s an exit. It’s the touchdown we aim for, so we get our loans back and benefit from acceleration of income. It would be a fantastic outcome. I think as we look to our equity kickers, it’s a little bit balanced; yes, these are some great valuations occurring with the SPAC liquidity events. However, they do require longer roll-forward or lock-up periods for existing investors than a traditional IPO. We’ve generally seen nine months to 12 months versus the typical 180 days for a standard IPO. Then regarding your other comment about whether these companies would have gone public anyway, I think it’s still too early to tell. I definitely think SPACs are an interesting form of exit, but you still have to be IPO-ready. You can’t just decide tomorrow that you don’t want to go public as a SPAC, so there’s a fair amount of prep work companies must do to be ready. So, the question really is whether you go public on your own, go for the SPAC, or take an all-cash deal. It’s still early, and our VC partners are actively observing the data points and the track records from existing events, so we’ll learn more as we progress. But generally speaking, it’s a positive thing because it drives growth and acceleration, theoretically creating a need for more debt for companies to support growth in preparations for a SPAC exit.

Jim Labe, CEO

Okay. I would only add that SPACs have emerged during COVID, and I would agree with Sajal. It’s a bit speculative to see what the long-term or even near-term effects on venture capital exits overall will be. The majority of exits from making the rounds or continue to be IPOs and M&As, but this is now a factor, and there will be some SPAC consequences. Currently, we just don’t see it as a hugely significant exit event compared to others. It’s speculative, and we'll see where it goes; it does require companies to be IPO-ready.

Ryan Lynch, Analyst

Okay. Yeah. I appreciate your color and commentary. You guys have a great insight into that market. So thank you for that. Those are all my questions. I appreciate the time. Have a great afternoon.

Jim Labe, CEO

Thanks, Ryan.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Labe for closing remarks.

Jim Labe, CEO

Thank you, Operator. We’d like to thank our stakeholders, all our TriplePoint friends, and everyone on the line for listening or participating in our call. We hope everyone continues to remain healthy, and we look forward to talking with you next quarter. Thanks a lot. Good-bye.

Operator, Operator

That concludes today’s call. You may now disconnect.