Earnings Call Transcript - TPVG Q4 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to the Triplepoint Venture Growth BDC Corp. Fourth Quarter 2023 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speaker's 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 fourth quarter and full fiscal year of 2023. Today, representing the company is Jim Lebe, 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. Lebe, 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. Lebe. Please go ahead.

Jim Lebe, CEO

Thanks. Good afternoon, everyone, and welcome to TPVG's fourth quarter earnings call. As expected, venture capital markets continued to be challenging during the fourth quarter. Consistent with what we have seen and been discussing over the last year, the venture industry continues to be affected by macroeconomic uncertainties, restrictive monetary policies, inflationary supply chain issues, public versus private market valuation disconnects, a changing investment landscape, geopolitical factors, and other issues. These market challenges, which are impacting venture growth-stage companies especially hard, contributed to our NAV decline. We'll cover the contributing factors including the effects certain industry sectors have had on a number of our companies, some realized losses, and the unrealized quarterly markdowns on the debt portfolio, as well as unrealized markdowns on the warrant and equity portfolios, given current market headwinds. Against this backdrop, we remain focused on our established and in-place priorities, which we believe will enable us to navigate through these current market conditions, including maintaining our earnings power and our strong liquidity, managing the portfolio, and positioning TPVG for the future. Turning to our earnings power, we generated Q4 net investment income of $17.3 million, or $0.47 per share, enabling us once again to over-earn our $0.40 per share regular quarterly dividend. The cumulative dividends distributed to shareholders since going public almost 10 years ago now total $15.05 per share. During this time, we've exceeded our distributions cumulatively and continue to maintain sizable spillover income. For the fourth quarter, TPVG once again maintained a strong weighted average portfolio yield as we generated a 15.6% weighted average annualized yield that was largely driven by favorable interest rates and supplemented by additional income from loan prepayments. During the quarter, we enhanced our liquidity as we continued to experience repayment activity and modestly utilized our ATM program. Notably, TPVG's liquidity now exceeds our unfunded commitment, providing us with the capacity to capitalize on new investment opportunities, especially when the market begins to recover. While we've been allocating limited capital to TPVG, we expect to increase our allocations in the second half of this year. Turning to the venture markets, 2023 proved to be a very challenging year. Pick up almost any venture industry research publication, and you'll find headers covering 2023, such as U.S. venture capital deal volume being at 10-year lows, late-stage deal sizes declining more than half since 2021, and venture unicorn investing being at 10-year lows. VC down rounds last year were at their highest level since 2017. Total 2023 U.S. deal value was a staggering $175 billion less than 2021. Venture capital-backed company shutdowns and bankruptcies increased. 2023 also had the fewest annual VC-backed IPOs since 2013, a prime vehicle for exits for venture growth stage companies. Last quarter saw a 50% decline in quarterly deal value for VC company acquisitions. To quote a prominent venture capitalist, 'It's been a venture winter.' We believe the dramatic drop in deal investment activity and the public-private market valuation disconnect has affected the growth stages and its investors the most. Non-traditional investors and other investors in the growth market have paused or remain on the sidelines. This change has also impacted our growth stage companies, many of which had planned for either an IPO or potential acquisition in the one to three-year timeframe after their last financing rounds. Given the market downturn, our priority remains on closely managing our portfolio. Our teams maintain close contact with our companies and their venture investors, while remaining heads down working through credit situations. Given the challenging capital raising environment for venture growth companies, we believe we will see continued pressure on valuations and the potential for down rounds. Some companies are further reducing burn and executing on a path to profitability. Others, however, as Sajal will get into more detail, are raising outside capital rounds. It's about effectively operating in the new market reality given the compressed multiples and reduced exit opportunities I've been outlining. Investors continue to migrate to sectors with more favorable multiples and outlooks than those of the past, given these market conditions. Our select venture capital investors are shifting focus into fields such as AI, cybersecurity, climate, and digital health. There's renewed interest in vertical software, hardware, robotics, semiconductors, applied tech, clean tech, environmental technologies, and aerospace as examples. While we continue our efforts to diversify across sectors and limit our geographic exposure, a number of our portfolio companies are already operating in these favorable investment categories, with some making considerable progress. As an example, portfolio companies such as Core Lite, Loft Orbital, Hover, Arcadia Power, Flash, Kalderos, Overtime, and others are achieving their plans and are reflective of these in-demand industries. We're also pleased to highlight a few notable portfolio company developments. This includes Metropolis, which announced its acquisition of SP Plus and secured $1.7 billion in equity and debt, subject to regulatory approval, expected to close by year's end. Another company, Cohesity, announced its planned acquisition of Veritas' data protection business with a combined value of $7 billion. There are a few other portfolio companies that have received active term sheets for large equity rounds, where we expect to see more developments in this current quarter. Another priority is to focus on enhancing our long-term positioning in the venture lending market. With 2023 behind us, while we believe the industry slowdown will still continue through much of 2024, we're focusing on what we expect to be a more promising year for TPVG. We will continue to position ourselves to capitalize on new investment opportunities that reflect today's market for venture growth stage companies. We're encouraged by the more than 70% increase in signed term sheets last quarter versus the previous quarter. Already this quarter to date, we have more than $70 million of additional signed term sheets. We intend to remain on our path of diversifying the portfolio and sector rotation as we have been describing on these calls and expect to be less active in e-commerce and making investments outside of the U.S. We will further focus on investing in companies that have recently raised fresh capital, ample cash runways, backing from our select venture investors, prudent management teams, and whose business models have attractive unit economics and high retention rates. Ideally, these companies will have large enterprise customers. We'll also continue to evaluate hold sizes, debt-to-equity ratios, deal structures, and other key metrics in this market. In summary, 2023 was a tough year for the venture capital industry. While we expect the venture growth stage will continue to face challenges in the near term, stabilization for many companies continues in this environment, potentially leading to positive developments, recoveries, and outcomes for our portfolio. We remain active in the market and continue to build a pipeline consisting of venture growth companies positioned for strength under the current conditions, which are critical elements for the long term that we believe position us to build NAV and create sustainable shareholder value. We believe that once the IPO markets recover, and M&A activity returns to more average levels, it will mark a change for venture growth stage companies, especially those in our portfolio that are outperforming in this market. This will attract growth stage investors back into the market. As the year progresses, we will concentrate on delivering strong investment income, over earning our dividend, building our pipeline, managing our portfolio and credit quality, and enhancing our strong liquidity. With that, I'll turn the call over to Sajal.

Sajal Srivastava, President and CIO

Thank you, Jim, and good afternoon. Let me begin by reviewing our performance in Q4 and full year 2023, as well as highlight key expectations for 2024. Regarding investment portfolio activity during Q4, Triplepoint Capital signed $100 million term sheets with venture growth stage companies, compared to $58 million of term sheets in Q3, reflecting the increase in the strength of our pipeline, which we believe will result in higher investment activity in 2024. For the full year, Triplepoint Capital signed $471 million in term sheets with venture growth stage companies. Regarding new investment allocation to TPVG during the fourth quarter, given both current market conditions and TPVG's leverage ratio, we allocated a modest $4.2 million in new commitments to TPVG compared to $5.6 million to three companies in Q3. The commitments made during the fourth quarter were to existing portfolio companies. For the full year, we closed $31.5 million of debt commitments with 10 companies at TPVG, of which two were new companies and eight were existing portfolio firms. During the fourth quarter, TPVG funded $24.4 million in debt investments to six portfolio companies, up from $12.7 million in Q3. This funding level came in at the lower end of our guided range for the quarter, reflecting a lower utilization of unfunded commitments. These funded investments carried a weighted average annualized portfolio yield of 18.8% at origination, up from 14.2% in Q3. For the full year, we funded $125.3 million to 23 companies with a 15.6% weighted average portfolio yield at origination. During Q4, we had $33.7 million of loan prepayments, resulting in an overall weighted average portfolio yield of 15.6%, up from 15.1% in Q3. Excluding prepayments, core portfolio yield was 14.4%, up from 14.1% in Q3. For the full year, we had $104.7 million of loan prepayments, resulting in an overall weighted average portfolio yield of 15.4%, up from 14.7% in 2022. Core portfolio yield excluding prepayments was 14.7% for the full year, up from 13.4% in 2022. Regarding fundraising activity, five portfolio companies with debt outstanding raised $157 million during the quarter, up materially from $47 million last quarter, bringing our total to 19 companies with outstanding debt, raising $594 million during Q3. This data does not include Metropolis's announced acquisition financing, which is expected to close in 2024. In 2022, 36 portfolio companies raised over $2.4 billion of capital. As we look to 2024, we are beginning to see capital raising activity within our portfolio picking up, with two portfolio companies already having raised over $445 million of capital here in Q1, and a number of portfolio companies are either in active fundraising discussions or expecting to launch a fundraising process shortly. We are seeing round sizes increase, and in a few cases, valuations higher than prior rounds. This fundraising activity should bode well for the long-term credit quality of our portfolio companies, as well as for the potential value of our warrant and equity portfolio. With regards to exit activity, during the quarter, our portfolio company Luko (formerly Alvic) was acquired by existing portfolio company Forum Brands, and our loan to Lola was assumed by Forum Brands in full. Closed M&A events for the full year were flat with 2022 levels, and IPOs within our portfolio were down from 2022. As of December 31, 2023, we held warrants in 97 companies and held equity investments in 46 companies with a total cost of $70 million and fair value of $72 million. Our warrant and equity portfolio experienced a $15.5 million net unrealized reduction in fair value, or $0.43 per share for the quarter, and $23.6 million, or $0.66 per share for the full year, driven primarily by the disparity between private and public market multiples with fair value companies that have not raised new rounds, as well as, in some cases, the impact of down valuations from new capital raises. $12.6 million, or roughly 80% of the reduction in fair value during Q4 was attributable to three of our financial technology companies, Revolut, WorldRemit, and Upgrade, due to the considerable time that has elapsed since their last private rounds of financing. We now generally utilize current market comparables and multiples to value them based on available actual performance, rather than projected performance. Generally speaking, although our marks this quarter value these FinTech companies at significant discounts from their last round valuations, we believe they all have the potential for meaningful upside when they ultimately experience an exit event, particularly when they raise future rounds of financing. It should be noted that yesterday's announcement by Monzo, another financial technology portfolio company, of raising $430 million at a $5 billion post-money valuation will be a helpful data point not only for our fair value mark for Monzo here in Q1, but also for supporting the value of our other private financial technology companies. We continue to have a number of portfolio companies that are growing and executing either in accordance with or in many cases ahead of plan, including some achieving positive EBITDA. These include companies in software, enterprise, cyber, health and wellness, travel, as well as FinTech segments, which is why we continue to anticipate the potential for gains from our warrant and equity investments. Cohesity, Metropolis, and Monzo are all great examples of events occurring or on track to occur in 2024 that could drive value for our portfolio. Turning to realized losses, all of our realized losses during Q4 were from companies that had been on our watch list as of Q3. Events have concluded at these companies, with approximately two-thirds of the actual losses realized in the fourth quarter having already been reflected on an unrealized basis in prior quarters. However, given unanticipated developments at a few of these companies during the quarter, additional losses were incurred. The first one, Luko (formerly known as Demand), was previously rated Category 5. Luko announced last year that it was going to be acquired by Admiral Insurance, as well as its intent to sell certain business units and assets to other parties through a bankruptcy process. Unfortunately, Admiral walked from the acquisition days prior to closing. The company, however, quickly found another insurance company, Allianz Direct, to agree to acquire it for a lower price. In a surprise to all the parties involved, the bankruptcy court rejected the agreement, and the company was ultimately liquidated. We realized a loss of $17 million, of which $6 million had been previously recognized on an unrealized basis, and an additional $11 million was recognized during the quarter, given the unanticipated rejection, leading to the removal of the company from our watch list. Mystery Tackle Box was previously rated Category 3. In Q4, we realized the loss including both previously recognized amounts and our remaining $4 million exposure as of Q3, due to a failed M&A process and negative developments during the quarter in their subsequent asset sale to a third party, leading to its removal from our watch list. Untitled Labs, which operated under the name Made Renovations, was previously rated Category 5. In Q4, we reduced our expectation for recovery to $500,000 and realized a loss equal to our remaining exposure of $2.2 million, along with amounts previously recognized on an unrealized basis, due to negative developments during the quarter and their subsequent asset sale to a third party, leading to its removal from our watch list. Finally, during the quarter, VanMoof, a Category 5 loan, completed its sale to MA Micro Holdings. Our investment in the new company included a combination of debt investments and a convertible loan position. We valued these investments consistently with our fair value mark as of Q3 of $5.1 million and realized the loss in Q4 equal to the amounts previously recognized on an unrealized basis. The convertible investment has potential for future upside as the company grows in value over time or in an exit event. Our final recoveries have been lower than what we've experience historically. We believe this is due to conditions in both the M&A and venture capital markets, where the combination of fewer active M&A players and a lack of viable alternatives for companies, such as raising more equity capital, allows acquirers greater negotiating power, resulting in lower recoveries despite the revenue profile, invested capital, customer validation, and even intellectual property of our portfolio companies. With regards to credit watch list activity for the rest of the portfolio, during the quarter we upgraded a company from Category 2 to Category 1 due to closing an equity round. Three companies were downgraded from Category 2 to Category 3, primarily due to sector concerns or a short runway in conjunction with their financing or strategic events, although two of the three have now signed term sheets for those events. The majority of the companies in Category 3 comprise e-commerce and consumer portfolio companies that are experiencing ongoing market-specific issues, as well as difficulty in the fundraising and M&A markets. Two companies were downgraded to Category 4 during the quarter due to developments in their fundraising and/or strategic events. However, both have raised incremental capital and are making progress. The remaining two Category 4 companies include ROLI, which had a strong 2023, including substantial revenue growth and incremental capital raises, and Project 1920, also known as Cenrv, which continues to pursue its strategic and other fundraising efforts. Underground Enterprises, our Category 5 loan, continues through its liquidation process, and we expect to finalize a recovery and remove it from Category 5 over the course of this year. In terms of our objectives and goals in 2024, we believe that venture capital market conditions may improve over the course of the year. Our forecast for quarterly gross investment fundings is in the range of $25 million to $50 million for each quarter. Given our existing significant liquidity position and our expectations for at least one prepayment per quarter, we believe that by returning to portfolio growth and focusing on smaller hold sizes, we continue along our goal of increased portfolio diversification and industry sector rebalancing. As we look to onboarding new loans, we intend to maintain our strong yield profile, not only by holding spreads, but also by continuing to incorporate fixed-rate investments. This, along with anticipated portfolio growth, will bode well for our ability to cover our dividend. Our priority will be to continue monitoring our existing portfolio and managing existing credit situations, and the potential for improving market conditions in the private and public markets should be helpful. In closing, we remain focused on all aspects of our business and will continue to follow our long-term strategy of generating strong returns for our shareholders, growing net asset value, and nurturing strong relationships with our select venture capital partners to build a high-quality and durable portfolio for what we believe could be a developing peak period for venture capital and venture lending returns. With that, I will now turn the call over to Chris.

Christopher Mathieu, CFO

Thank you, Sajal, and hello everyone. During the fourth quarter, we continued to generate strong interest income from our diversified loan portfolio. This was driven by increased yields compared to those at origination as a result of multiple increases in the U.S. prime rate since March of 2022. Leverage increased in the quarter as prepayments totaling $34 million were offset by a decline in net asset value. At the same time, we made further progress reducing unfunded commitment levels in the fourth quarter. As a result, TPVG has significant liquidity ready to support our existing portfolio companies, satisfy our unfunded commitments, and make selective new investments. For the fourth quarter, total investment income was $33 million with a portfolio yield of 15.6%, compared to $35 million with a portfolio yield of 15.3% for the prior year period. Total investment income for the full year of 2023 increased 15% to a record $137 million compared to $119 million for the prior year period. For the fourth quarter, total operating expenses were $15.7 million, compared to $14.5 million for the prior year period. These expenses consisted of $8.3 million of interest expense, $4.5 million of base management fees, $600,000 of administrative expense, and $2.3 million of G&A expense. Due to the shareholder-friendly total return requirement under the incentive fee structure, there were no incentive fees this quarter. Total operating expenses for the full year of 2023 totaled $63.7 million, compared to $55.9 million for the prior year period, marking a 14% increase. For the fourth quarter, net investment income totaled $17.3 million or $0.47 per share compared to $20.5 million or $0.58 per share for the prior year period. Total investment income for the full year of 2023 increased 16%, totaling $73.8 million compared to $63.6 million for the prior year period. For the fourth quarter, net realized losses on investments totaled $52 million, primarily connected to the write-off of investments of four portfolio companies. Of note, $32.5 million or 63% of this amount was previously included in unrealized losses and was reclassified from unrealized to realized. As a result, $32.5 million of the net realized losses in Q4 had no impact on net asset value. For the fourth quarter, net change in unrealized gains on investments was $6 million. This consisted of $34.1 million from the reversal of previously recorded unrealized losses from investments realized during the period, reduced by $12.6 million of net unrealized losses on the existing debt investment portfolio, and $15.5 million of net unrealized losses on the existing warrant and equity portfolio, resulting from fair value adjustments. As of year-end, net asset value was $346.3 million or $9.21 per share. We declared a regular quarterly dividend of $0.40 per share with a record date of March 14th to be paid on March 29th. Based on our success in over-earning the dividend, we have undistributed spillover income of $41.5 million or $1.10 per share as of year-end. Given the ongoing elevated yields and size of the income-producing loan portfolio, dividend coverage remains strong throughout all of 2023. We believe that given the historically strong level of over-earned dividends and substantial level of spillover income, the current level of regular quarterly dividends is expected to remain stable. To update on unfunded investment commitments, the balance sheet leverage and overall liquidity, we ended the year with $118 million of floating rate unfunded investment commitments, of which $29 million was dependent on the portfolio company reaching certain milestones. This level of commitments represents a 64% decline from a year ago, boding well for new investment capacity in 2024. As of December 31, 2023, approximately 60% in principal balance of the debt portfolio in our portfolio was floating-rate interest debt. As of year-end, an aggregate of $610 million of debt was outstanding, consisting of $395 million of fixed-rate investment grade term notes and $215 million outstanding on our floating-rate revolving credit facility. We ended the year with a 1.76 times gross leverage ratio, and our net leverage ratio, which is net of cash on hand, was 1.27 times. Given the reduced unfunded commitment levels, the near-term prepayments already discussed, and selective ongoing use of the ATM program, we expect to de-lever the balance sheet during the first half of 2024. As of year-end, the company had liquidity of $307 million, consisting of $172 million in cash and $135 million available under the revolving credit facility. Similar to prior quarters, near the quarter-end, we drew down on our credit facility to enhance our investment flexibility pursuant to certain 1940 Act requirements. Right after the end of the quarter, we paid down the credit facility, decreased leverage, and increased availability under the credit facility for future draws as appropriate. We continued to access the capital markets using our ATM program and during the quarter, we raised $15.2 million. For the full year, we raised $21.4 million under the ATM program.

Operator, Operator

We will now start the question-and-answer session. Our first question comes from Brian McKenna of Citizens JMP. Please go ahead.

Brian McKenna, Analyst

Okay, great. Thanks. So you had well over $1 per share of net realized and unrealized losses in the quarter. And that drove an 11% decline in NAV, bringing the year-over-year decline at 23%. So I guess, is there a way to think about future losses across the portfolio moving forward? Are we getting near the end of these write downs and losses? And I'm just trying to think through the trajectory of NAV from here and ultimately when you think it will start to inflect higher.

Sajal Srivastava, President and CIO

Yes. Hi, Brian. It’s Sajal here. I'd say again, the reduction in NAV, if you look through it, $0.66 of that is related to fair value marks on our warrant and equity position. So if you look right again, the cost basis and the fair value of our warrant and equity investment portfolio are basically equal. Over the years, historically, fair value has traded significantly higher. So we believe there is room for that to come back and for us to have gains in excess on an unrealized basis and realized basis as market conditions improve. Regarding credit, again, our credit scores reflect our current view on our existing portfolio based on current market conditions. And we're seeing some good data points with the increase in equity raising activity of our existing portfolio companies. We discussed some of the specifics for some of the companies in each of the credit ratings and signed term sheets and positive developments. The market is challenging, but we remain proactive and diligent in managing this environment. As conditions improve, we expect both credit profiles and fair values to improve as well.

Brian McKenna, Analyst

Okay, great. Thanks. And then just on leverage, I appreciate some of the color there and some dynamics post-year-end. But looking at leverage, it remains pretty elevated here as you're still working through write downs and losses, which obviously isn't helping the leverage picture. But would you look to raise some equity capital here or use some of the cash on hand maybe to pay down some of the upcoming maturities? I'm just trying to think through how this ultimately starts to work lower.

Jim Lebe, CEO

Yes, as we mentioned in some of our prepared remarks, we do have near-term expectations on prepayments based on some broader market updates that we provided. We are also selectively using the ATM program, but we're not currently expecting to engage in an overnight offering or something similar, as this is not something we are looking at right now. Remember that net leverage is 1.27 times, which is quite close to the range where most firms target. Our target is 1.25 times on a net basis, so we are on track, but there's still more work to do as we head into and finish up the first half of 2024.

Brian McKenna, Analyst

All right. I'll leave it there. Thank you very much.

Operator, Operator

The next question comes from Casey Alexander of Compass Point. Please go ahead.

Casey Alexander, Analyst

Yes. I just have one question. How can it be appropriate to sell 1.5 million shares into the market through the ATM program with the knowledge that significant material losses are on the way and a significantly lower NAV is going to be presented to shareholders when you report this quarter.

Sajal Srivastava, President and CIO

Yes, Casey, it’s Sajal. I'll take this. Again, the ATM program operates independently; it's set and operates based on predefined criteria.

Casey Alexander, Analyst

Do you have the ability to shut it down?

Sajal Srivastava, President and CIO

Yes, we do, and as developments are learned or known, we adjust and act accordingly.

Casey Alexander, Analyst

All right. Thank you. That's it.

Operator, Operator

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

Christopher Nolan, Analyst

Hi. In case I missed it, what were the unfunded commitments to date? Have they changed at all since 12/31?

James Labe, CEO

At 12/31, there were $118 million of unfunded, and we didn't report on where they are since then. We had new fundings of $12.4 million since the end of the year, which would go against the $118 million. We also had new commitments of $10 million, resulting in a net decline of $2.4 million.

Christopher Nolan, Analyst

On your comments of deleveraging, is that going to be basically letting investments in the portfolio run off, or using some of the elevated cash liquidity to pay down borrowings?

James Labe, CEO

Actually, both. We've already paid down a substantial amount of cash on the balance sheet as of the end of the year to a much, much lower single-digit million carrying cash balance. That's part of the process, and we are letting the portfolio amortize and prepay naturally. As Sajal mentioned, we've been at the lower end of the funding range, and that's intentional as we look to de-lever below the net target of 1.27 times.

Christopher Nolan, Analyst

Okay, that's it for me. Thank you.

Operator, Operator

The next question comes from Paul Johnson of KBW. Please go ahead.

Paul Johnson, Analyst

Good evening, guys. Thanks for taking my questions. I realize you've already provided some commentary on the watch list movements during the quarter or the internal rating movements. However, if I look at it quarter-over-quarter, investments rated yellow or below was 13.7% last quarter and increased to 21.7% this quarter. There was a significant jump there. It's obviously on fair values accounting for the write downs as well. Given that change and the information you've mentioned, how can we get comfortable and confident that you've stabilized the troubled situations you've identified and that there's a plan moving forward?

Christopher Mathieu, CFO

The way we look at it is it's multifactorial. The first element is the market condition. We are in a downturn in venture capital. The technology subsector of venture capital is particularly affected. A significant amount of the challenge is related to equity investment activity and a weak IPO and M&A market, causing transactions to collapse because, in more robust times, these transactions would have completed at higher values. The last piece is we evaluate the watch list on a specific basis, not generalizing for category outcomes. We remain proactive to manage each specific situation effectively. There are positive events happening, and as those close, we will upgrade them.

Paul Johnson, Analyst

Got it. Thanks and the last question for me on dividend. At this point on this quarter's NAV, it's about a 17% yield on NAV where the current dividend rate is at. You can talk about your plan to deleverage at least in the first half of the year. What can you say about your thoughts around that payout level and your confidence to generate that level of earnings?

James Labe, CEO

When considering the elevated yields in our portfolio, 60% is floating rate while 40% is fixed. There's a substantial portion of our leverage that is fixed rate. Our net interest margin is well protected for a certain period in a declining rate environment. We are safe with our spillover income that has increased, and the ordinary income that's expected to remain stable given the strength of our income-producing portfolio.

Paul Johnson, Analyst

Thanks. That’s all from me.

Operator, Operator

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

Jim Lebe, CEO

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

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.