Earnings Call Transcript - TPVG Q2 2022

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. Second Quarter 2022 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speakers' 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 2022. 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 the 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.

Jim Labe, CEO

Thank you, operator. Good afternoon, everyone, and welcome to TriplePoint Venture’s second quarter 2022 earnings call. Against a backdrop of macroeconomic uncertainty, we continue to make strong progress executing against the plan that we laid out at the beginning of the year. Demand for our debt financing in the quarter was strong, and we maintained our focus working with our select leading venture capital investors and continuing with our disciplined approach of investing in what we believe are the highest quality venture growth deals. During the second quarter, we achieved several key objectives, including growing our portfolio to record levels, over earning the dividend and generating strong portfolio yields. During the past few quarters, we have gradually been bringing up our portfolio leverage and in the second quarter, we are pleased to have hit our target leverage range. We exceeded our funding goals last quarter, funding more than $157 million of debt investments and have maintained strong momentum heading into the second half of 2022. Specifically, we've signed more than $803 million of new term sheets at venture growth stage companies at TPC, our sponsor. This is the highest for any quarter since our IPO. We also entered into new debt commitments of $260 million during the quarter, and additionally, our pipeline has now grown to more than $2 billion for venture growth stage companies at quarter’s end. Turning to the portfolio. Our earnings power remains strong. We generated NII of $0.41 per share in the quarter and exceeded our $0.36 dividend. A third of our portfolio companies have raised an aggregate of more than $1.7 billion of capital in the first half of this year. In terms of the overall venture capital market, it continues to hold its own. Here are a few stats of the fundamentals. Private venture markets have remained highly active even amid this public equity volatility, and venture capital investment levels remain well above pre-COVID averages for any quarter. U.S. venture capital firms invested more than $62 billion last quarter across nearly 4,500 transactions. Despite this challenging market environment, year-to-date venture capital funds have raised $122 billion, according to the NVCA and PitchBook and venture capital funds have now increased their dry powder to a record $290 billion since 2019. All this dry powder that’s looking to be deployed in the near-term bodes well for our portfolio companies and the equity available to them. For quality companies, there really couldn't be a stronger pool of capital to access. Having stated all this, we can't ignore the recent shifts and the impact in the venture markets due to this tech selloff that has created disconnects between public and private company valuations. We continue to expect private market valuations of late-stage growth companies to plateau or even reset as valuations have been leveling off. The venture capital IPOs last quarter were almost non-existent. Investors are prioritizing their existing portfolio companies with the goal of supporting them through profitability, particularly at this venture growth stage, which is a market in which we operate. Given the market choppiness, many companies have revised their plans for this year, but it's important to note, they're all still growing. For example, companies that previously had ambitious yearly growth plans of maybe 100% or so have now revised their growth expectations to somewhere more like 40%, 50%, or 60%. All of this has resulted in more moderate cash burn rates and extended cash runways. Many venture investors have guided their portfolio companies towards revamped plans to maintain two or more years of cash on hand and a goal of achieving profitability sooner. We view this as a positive and favorable trend when it comes to debt repayment, as well as for our portfolio's credit quality. As we look forward, several of these market conditions serve as positive drivers behind both the increased demand for venture lending and opportunities for TPVG that we believe will continue to play out during the remainder of the year. Companies are turning towards debt and layering it into their forward plans. Following a record year for venture capital activity, many of the companies that raised equity recently at attractive valuations are now looking to add debt in this valuation-sensitive market. Companies are increasingly evaluating debt financing solutions as a result of the longer timelines for public listings. Other companies are seeking additional runway in the form of debt because they plan out their timetable for future equity rounds, augmenting their financing strategy and capitalization plans. We've seen each of these scenarios in the second quarter and we expect the trend to continue in 2022 and beyond. These trends have helped create a sustained demand for venture lending, providing continuing advantages for us with our deal structures and opportunistic pricing. We also continue to be more selective in our underwriting with a focus on lower total leverage and slightly higher pricing, which reflects the brand reputation and track record of the TriplePoint platform and our 100% direct originations business. High-quality prospective portfolio companies are also being more selective and they're seeking a dependable and proven debt financing partner. When it comes to debt, they are not solving for rate or the largest deal but rather the best long-term partner, and that is where TriplePoint outperforms. While seeking to capitalize on the strong deal flow, we will continue to be mindful of the times and maintain our strict credit discipline; as we say in almost every earnings call, we stick to our knitting. Maintaining discipline in the current market is especially important. Sajal and I have worked together for 23 years and we are poised to further draw on our track record of operating through diverse market environments, along with TriplePoint’s cycle-tested team to best position the company. Based on our success managing through multiple cycles, we've learned that if you have the experience and the know-how, dynamic markets can be some of the most productive and advantageous times for capitalizing on venture lending opportunities. We believe the market could have a positive effect on the venture lending business and yield over the long-term. We are also poised to benefit from TPC's differentiated platform that has invested now in more than $14 billion in venture lending transactions. TPC's investment team is the largest in our history. Our pipeline is at record levels, and we are servicing more geographies. As a global platform with multiple vehicles, we are able to serve high-quality portfolio companies, regardless of transaction size or location. To recap, we are very pleased with our strong second quarter performance and our progress executing against our plan. We expect the second half to be driven by continued patience, execution, and performance. With our credit discipline remaining stringent, we continue to be excited about the opportunities ahead and anticipate some active quarters throughout the balance of the year, given the strong pipeline and backlog. In seeking to capitalize on compelling opportunities, we have a cycle-tested team and will remain disciplined, applying our tried-and-true underwriting standard to select the best deals and deliver strong returns to our shareholders. With that, I'll turn this over to Sajal.

Sajal Srivastava, President and CIO

Thank you, Jim, and good afternoon. We remain disciplined during the second quarter, generating strong results despite volatile markets and continue executing against our 2022 plan to grow and diversify the portfolio while increasing our use of leverage. Regarding second quarter investment portfolio activity, TriplePoint Capital signed a record $803.6 million of term sheets with venture growth stage companies, and we closed a record $259.9 million of debt commitments to 17 companies at TPVG. Signed term sheets and closed commitments were up from Q2 2021 levels of approximately $251 million and $103 million, respectively. We also received warrants valued at $2.1 million in 16 portfolio companies and made $700,000 of direct equity investments in four companies. Of the 17 companies we committed debt capital during the quarter, 13 were new portfolio companies and four were existing ones. During the second quarter, we funded $157.6 million in debt investments to 20 portfolio companies, which was well above our $50 million to $100 million guidance range for Q2. Q2 fundings represented an increase from $76 million in debt investments to seven companies in Q2 2021. The increase in fundings was related to the strong origination activity during the quarter, where approximately two-thirds of our fundings came from new debt commitments that closed in Q2, which reflects our efforts to drive utilization of our new commitments more efficiently. To be clear, we funded companies with strong existing equity and cash reserves in many cases, topping off recent financings and extending their runway well into 2023 and 2024. We expect to see 50% to 75% of our existing unfunded commitments to be drawn given the strong existing cash balances and continued fundraising activities typically at the end of the draw periods, if utilized. The debt investments we funded during the quarter carried a weighted average annualized portfolio yield of 13.6% at origination, which is up from 13.2% in Q2 2021. Our core portfolio yield during the quarter was 12.8%, an increase for the fifth consecutive quarter and up from 12% in Q2 2021, as a result of both increases in the base prime rate and the increased spread of new investments. In addition, as a result of prepayment activity during the quarter, our overall weighted average annualized portfolio yield on total debt investments was 14.5%. Our success growing our portfolio and increasing portfolio yield enabled us to generate earnings in excess of our dividend and once again, demonstrate the strong return potential of our business, both on an NII and ROE basis as we scale. As Chris will cover, approximately a third of the fundings for Q2 occurred during the last two weeks of the quarter and will contribute materially to income in Q3. In addition, our performance during the second quarter doesn't include the full impact of the prime rate change on June 16, which will contribute more significantly in Q3, along with the additional prime rate increase in July. Regarding leverage, one of our major objectives for the year is to run at a higher leverage ratio on a more consistent basis. We are pleased to have increased our leverage ratio during the quarter, which we expect will result in continued strong net investment income in excess of our dividend in the third quarter and over the course of the rest of the year, as well as provide a buffer from the impact of prepay activity. For Q3 and Q4, we continue to expect quarterly fundings in the range of $100 million to $200 million on a gross basis. Since our portfolio companies continue to raise equity capital, we expect to have on average one prepay a quarter through year-end in addition to the scheduled principal amortization of the portfolio. As I mentioned earlier, we demonstrated strong progress on diversifying the TPVG portfolio while scaling. In addition to achieving a record portfolio size at the end of Q2, we had 56 funded obligors as compared to 34 as of Q2 2021. Additionally, our top 10 obligors represented approximately 35% of our total debt investments as compared to 51% as of one year ago. Our equity and warrant portfolio continues to grow well with 140 warrants in equity investments as of Q2 2022, as compared to 110 investments one year ago, representing $107.9 million on a fair value basis, an increase of 71% from Q2 2021. During the quarter, our public warrant and equity holdings experienced $4.6 million of unrealized losses, ending the quarter with a fair value of approximately $11 million. Investments in three of the nine companies are still subject to lockup. Our plan is to liquidate all of our public holdings over the course of 2022, as they recover in value. In fact, as of yesterday's close, we are up another million. Moving on to credit quality. The overall health of our portfolio companies remains solid. As Jim mentioned, our portfolio companies have raised $1.7 billion since the start of the year and have also reduced operating burn to extend runway. We are pleased to report that 90% of our portfolio is ranked at our two best credit scores, meaning that they are performing at or above expectations. In fact, during the quarter, one company with $2.5 million of principal balance was upgraded from Category 3 to Category 2 due to improved performance. We downgraded two portfolio companies with a total principal balance of $28.4 million from Category 2 to Category 3 due to performance below expectations. We expect both companies to raise additional capital during the third quarter and to have sufficient runway to enable them to improve performance over time. With regards to our other two existing Category 3 companies, both demonstrated stable performance during the quarter, with one raising additional capital. In total, our Category 3 loans represent 8.4% of our total investment portfolio on a cost basis and 7.9% on a fair value basis. We expect to upgrade these companies as they perform over the course of the rest of the year and/or raise significant additional capital. Our only Category 4 portfolio company, Luminary Roli, raised additional capital in Q2 and is heads down planning for another new product launch. Roli represents 1% of our total investment portfolio on a fair value basis. During the quarter, we downgraded Pencil and Pixel, also known as Modsy, to Category 5 as a result of its formal M&A process falling apart at the last minute and the company selling its assets here in Q3. Our principal balance was $15 million and we marked our loan down to $2.25 million as of the end of Q2, which is our expected recovery amount. This was a sudden and isolated event related to specific facts and circumstances around Modsy and its M&A process. When it was evident that the expected transaction would not happen, we explored the alternatives and concluded this was the best outcome to minimize the loss and put the matter behind us. Our credit quality and performance have been exceptional since TPVG’s IPO. Cumulative net credit losses after factoring realized gains from our warrant and equity investments translate to an accumulative net loss rate of 0.9% based on commitments and 1.4% based on fundings since our IPO eight years ago, or 18 basis points a year. We expect our existing public stock portfolio to more than offset the Modsy loss as and when we sell our holdings. Our outlook for credit over the rest of the year continues to be quite positive given the strong cash positions of our portfolio companies and their extended runway, continued fundraising efforts, continued support from our select VC investors, and the efforts of our elite credit team to manage situations toward good outcomes. I thought it would be helpful to next share some of our thoughts regarding originations and credit in this environment. At our core, we continue to focus on what I would describe as TriplePoint worthy companies: the high-quality companies with the best venture capital investors, not just deals or volume for growth's sake. We have been, and always will be, patient as we look to deploy our capital and grow our portfolio. Our investment criteria have not changed and in most cases are more stringent. We are a financing source for growth. We encourage the prudent use of leverage and expect prospective portfolio companies to have recently raised equity capital, strong support and conviction from our select VCs, and have meaningful existing cash runway. We continue to believe that it is during volatile times when some of the best companies get funded, consistent with our 17-year track record at TriplePoint, as well as the more than 23 years that Jim and I have worked together. In summary, we've made substantial progress against our game plan for the year, despite the market volatility and are excited for what lies ahead over the remainder of the year. But make no mistake, we continue to be heads down focused on growing our portfolio in a patient and disciplined manner, maintaining a solid credit profile, maintaining leverage, growing NII and NAV, all while working with some of the most exciting venture growth stage companies backed by some of the industry's best venture capital funds. With that, I’ll now turn the call over to Chris.

Christopher Mathieu, CFO

Great. Thank you, Sajal, and hello, everyone. During the second quarter, we continued to generate substantial core interest income from our high-quality loan portfolio and continued to see strong and stable utilization rates on new debt commitments. We deployed capital using our attractive sources of leverage, which consisted of $390 million of fixed-rate long-term investment-grade notes and a $350 million revolving credit facility that we renewed in July, while maintaining overall solid credit quality and increasing diversification in the portfolio. I'll now take you through the financial results for the second quarter of 2022. Total investment income was $27 million as compared to $20 million for the second quarter of 2021. This increase of 35% was largely due to the growth in the average portfolio size as well as higher portfolio yields. Our portfolio yield was 14.5% on total debt investments this quarter as compared to 13.9% for the second quarter of last year. Onboarding yields continue to be strong and stable. Loan prepayments contributed 1.7% to the portfolio yield this quarter with a total of $50 million in principal prepayments and $3.1 million of accelerated income. While we were very successful in funding new investments, totaling $157 million, approximately 30% was funded in the closing weeks of the quarter, which bodes well for the strong topline investment income growth in Q3 and beyond. Operating expenses were $14.8 million, as compared to $10.9 million for the second quarter of last year. Operating expenses for the quarter consisted of $6.1 million of interest expense, $3.9 million of management fees, $3.2 million of incentive fees, and $1.6 million of general and administrative expenses. The increase in overall operating expenses was primarily driven by an increase in portfolio assets, an increase in the use of attractive leverage, and growth in pre-incentive fee income. We earned net investment income of $12.7 million or $0.41 per share, compared to $9.4 million or $0.30 per share in the same period of 2021. Total unrealized losses included $16.8 million of mark-to-market adjustments on the loan portfolio, of which $13.2 million directly related to the Pencil and Pixel loans that Sajal just covered, as well as mark-to-market adjustments applied to our portfolio of fixed-rate loans given the rise in the prime rate this quarter. $4.6 million also came from fluctuations in FX rates and $2.7 million from fluctuations in the public equity investments in our portfolio. As of the second quarter's end, the company's total net assets were $404 million or $13.01 per share, compared to $403 million or $13.03 per share as of June 30, 2021. On July 27, our Board of Directors declared a distribution of $0.36 per share from ordinary income to stockholders of record as of September 15, to be paid on September 30. With over earning the dividend again this quarter, we increased spillover income which remains significant and totaled approximately $14.3 million or $0.46 per share at the end of the quarter, supporting additional regular and special supplemental distributions in the future. As we continue to experience strong portfolio activity, we expect to maintain net investment income at levels that cover current, regular quarterly distributions consistent with our long-term track record. I'd also note that NII to dividend coverage was strong at 113% for the second quarter. Now let's move to our unfunded investment commitments. We continue to experience strong and stable utilization of our new commitments during the quarter. Given the robust pipeline mentioned earlier, we ended the quarter with $234 million of unfunded investment commitments with an additional $96 million dependent upon the portfolio company reaching certain milestones. Of these amounts, $100 million of this total will expire during 2022, and 77% of these unfunded commitments have contractual floating rate, interest rates, all of which have a prime rate floor set to 3.25% or higher. This compares favorably to the outstanding loan portfolio at quarter’s end, which had 59% contractual floating interest rates, up from 52% in the prior quarter. Now just a quick update on our term notes, credit facility, and overall liquidity. With the completion of three separate five-year fixed-rate investment-grade loans over the last two and a half years, and against the backdrop of a continued rising interest rate environment, our fixed-rate borrowings account for 79% of our outstanding leverage at the end of the quarter, while 59% of our debt investments are at floating rates and stand to benefit from increasing interest rates over time. With our latest fixed-rate term debt offering completed in Q1, we have three steps to the ladder of term debt maturities with maturities occurring in 2025, 2026, and 2027. As of June 30, there was an aggregate of $500 million of debt outstanding, $395 million outstanding on our fixed-rate investment-grade notes and $105 million outstanding on our revolving credit facility. Earlier in the second quarter, given the strength and diversity of our portfolio and the reasonable level of leverage we maintain, DBRS reaffirmed the company's investment-grade BBB Long-Term Issuer rating in April. In July, we amended our revolving credit facility; the amendment extends the revolving period from November of 2022 to May of 2024 and the scheduled maturity date from May of 2024 to November of 2025. The total commitment remains the same at $350 million. All the syndicate lenders continued their long-term partnership. We appreciate the continued support of our leading and diversified banking group with this attractive revolving facility and our favorable investment-grade notes outstanding. We remain well-positioned to capitalize on the demand for our debt financing solutions. We ended the quarter with a 1.24x gross leverage ratio and a 1.13x leverage ratio net of cash on hand. With the attractive, cost-effective credit facility, we will continue to use the line to grow the portfolio. As of quarter's end, the company had current liquidity of $288 million consisting of $43 million in cash and $245 million available under our revolving credit facility. In addition to this current liquidity, the existing seasoned and diversified portfolio provides stable cash flows which bodes well for sustained liquidity through 2022. For example, during the next two quarters alone, we have more than $25 million in expected cash flows from contractual principal payments in the portfolio, excluding any loan prepayments and proceeds from the sale of public equity securities in our portfolio that may also occur. So this completes our prepared remarks, and we'd be happy to take questions from you on the phone. So operator, could you please open the lines at this time?

Operator, Operator

Thank you. We'll now begin the question-and-answer session. Our first question comes from Finian O'Shea from Wells Fargo. Please go ahead.

Finian O'Shea, Analyst

Hi, everyone. Good afternoon and thanks. First question on portfolio company fundraising numbers sounded very good, I think, $1.7 billion in the first half. I'm seeing if you could unpack that a bit and if it reflects the sort of median venture debt borrower. Was this number – the fundraising number concentrated or fairly well spread out among your key borrowers? And then sort of second part, what did you see in terms of the magnitude of valuation change in these new fundraising rounds?

Sajal Srivastava, President and CIO

Hi, Fin. It’s Sajal here. I'll take the first cut. So just unpacking that, in Q2, we had 13 companies raise about $900 million, so that’s a pretty diverse pool. In terms of concentration, it’s not one or two companies raising the lion's share. I think, again, that's a great data point in terms of capital raise spread across the portfolio. The other interesting statistic is that the majority of the rounds have been at or above upticks in valuations. So I think that’s a testament to the quality of our companies that they can raise and that they're able to raise at either existing valuations or a premium to prior round valuations.

Finian O'Shea, Analyst

Okay. That's helpful. And then, is there any category in venture that VCs are backing away from? I know that's usually how problems start when they do - a certain line of business goes out of vogue. Is this sort of a broad drawdown cost cutting extend the runway type thing? Or are you seeing VCs sort of pivot away from any sub-industry or anything like that?

Sajal Srivastava, President and CIO

Yes. It's an interesting dynamic. I would say we're not seeing any specific sub-sector of tech as toxic or not attracting capital. I mean, I'll pick on crypto again; we don't have portfolio companies in crypto, but while the crypto market is quite challenged, there are a number of investors that see this as an opportunity and are looking at that as a sector to invest in. From our perspective, our goal is to lend to companies in those sectors that are attracting follow-on financing from our select group. Overall, I think the theme is those companies and sectors that are capital-intensive or with burn rates that are higher than necessary or growth rates that are unnecessarily high because of the burn rate are less attractive. So I don't think it's sector-specific. I think it's more of financial discipline.

Finian O'Shea, Analyst

Okay. Very well. Thank you.

Crispin Love, Analyst

Thanks, and good afternoon, everyone. For your new debt investments, they came in a little bit better than I think your initial expectations for the second quarter. And I appreciate the reaffirmed guidance that you gave for the second half. Just as we're looking at the third and fourth quarter, would you expect the third quarter to be closer to the lower end of that $100 million to $200 million guidance, just given that strong activity that we saw at the end of the second quarter, if there was any pull forward there in originations that closed in the second quarter versus the third? Or do you think you could still get to the midpoint for the third quarter? Just any color there would be great.

Sajal Srivastava, President and CIO

Great question, Crispin. I'd say, the third quarter is generally a seasonal quarter, right? Given the summer and vacation schedule, although I think from our perspective, given the backlog, we would expect to come in consistent with that range, probably towards the lower end, while Q4 tends to be the busier quarter and so mid-to-high end of that range from your perspective. As we look at Q2, there is a little bit of pulling from Q3 into Q2. Given the expectation of rates and rate increases, there was motivation on both sides, both lender and obligor, to get deals done faster. We were using that as an opportunity to close. Again, given with floating rates, it was less relevant, but companies were looking to lock in capital. So that's how we look at the Q2 activity.

Crispin Love, Analyst

Great. Thank you. I appreciate that color, Sajal. And then just – can you give a little bit more detail on the liquidity among your portfolio companies, then if you have any metrics on hand about how much liquidity some of those companies have to last six months, a year longer, or just any other qualitative info you can share? I think Jim might have said something about two years of cash on hand, but I didn't really catch what that was. So if you could clarify that as well, that'd be awesome.

James Labe, CEO

Yes. No problem. It's a good question and a salient one to ask these days. I don't think I mentioned it in the prepared remarks, but as of last quarter, just over two-thirds of our companies had 12 months or more cash runway. So it's something that we are continuing to monitor and it's a very wise practice these days.

Crispin Love, Analyst

Great. Thank you. I appreciate the color.

Kevin Fultz, Analyst

Hi. Good afternoon, and thank you for taking my questions. Now just a question around loan to value trends in the portfolio. Clearly, there has been a significant pullback in private company valuations. I'm curious if you have a sense of how LTV ratios have changed in the portfolio and where that currently stands and also if you could remind us where you underwrite new deals on the LTV basis?

Sajal Srivastava, President and CIO

Sure. We target LTVs under 25% at the time of origination. As of Q2, as in the 10-Q, I believe we're between 7% and 8% LTV for the portfolio, which is relatively flat to where we were as of Q1. So no material change in terms of portfolio LTV, and as mentioned, the majority of the fundraising of our portfolio companies year-to-date have been at or flat or at upticks in valuations. So I'd say we continue to expect to hold in that range of that 7% to 9% over the next couple of quarters.

Kevin Fultz, Analyst

Got it. That's good to hear, and I'll leave it there. Congratulations on a nice quarter.

Casey Alexander, Analyst

Yes, good afternoon. We've seen the volatility of the equity markets and a lot of things get pushed down in values in the equity markets. Your onboarding yields are going up, which suggests that maybe you have a little bit more leverage in your negotiations with companies coming in. Does that include – are you getting better terms on the equity slices that you're taking alongside the debt investments? Would it be your expectation that the vintage that you're lending to right now would generate higher ROEs than what we've been used to over the past few years?

Sajal Srivastava, President and CIO

Yes. Casey, great question. Absolutely. As we look to the companies that are getting funded in this environment, they're getting benchmarked off of current multiples. The insight we're hearing from VCs is, hey, let's use current multiples as the basis for our entry point. But as we look to exit, we're expecting five-year averages from the 13x to 19x or six-year averages as our exit multiple. So absolutely, we are expecting this class to generate higher returns, given where valuations are and that new round valuations are being set. As we look to how we structure our deals, obviously, it's yield and the yield from the coupon side and the debt side and the balance of the equity kicker side. We are not going to subsidize one - that's not a reason to charge less to get more equity kickers. We're definitely looking to push both yields up. Companies are willing to pay a premium to be with a high-quality trusted dependable partner, and we’re seeing it on both the debt side in pushing the yields up and on the equity kicker percentage of total ownership of these companies.

James Labe, CEO

And I can only add that's historically what we've seen as well, and it’s opportunistic times.

Casey Alexander, Analyst

Okay. Thank you for that. Secondly, just because I have a bad attention span, can you guys review what your guidance is for the third quarter and fourth quarter originations and sort of how you expect prepayments to offset that?

Sajal Srivastava, President and CIO

Yes. Sure, Casey. So we indicated a $100 million to $200 million of gross fundings per quarter for Q3 and Q4 consistent with prior guidance. Again, given seasonality, there's a little bit of pulling of originations from Q3 into Q2. We expect Q3 to be at the lower end of the range and Q4 to be at the higher end of that $100 million to $200 million range from a gross funding perspective. We continue to expect to have one prepay a quarter, and I think those were your questions.

Casey Alexander, Analyst

But did you say also, do you expect in the second half of the year sort of regular amortization totaling around $50 million?

Sajal Srivastava, President and CIO

We always have regular amortization; it’s not unique to the second half of the year. It’s correct that the portfolio cash flows and Chris jump in for the second half of the year are in excess of $60 million.

Christopher Nolan, Analyst

Hey guys. Pencil and Pixel, given your comments, is that a third quarter realized loss?

Sajal Srivastava, President and CIO

Chris, do you want to take that?

Christopher Mathieu, CFO

Yes, so we fully hit the NAV in Q2, but it'll flip from an unrealized loss to realized loss in Q3. No impact on Q3; just geography.

Christopher Nolan, Analyst

Got it. And given the cautious comments you guys just painted on the market and given your comments that you expect earnings to exceed the dividend, what's your thoughts in terms of leverage? Do you want to take some risk off and decrease leverage? Are you going to increase it? What are the thoughts around that?

Sajal Srivastava, President and CIO

Yes. I think, Chris, our perspective is we've been jumping up and down over the years from a leverage ratio perspective. After getting the investment-grade rating from DBRS, we said to our investors that we wanted to take advantage of that rating and the low cost to fixed-rate debt and run at a higher leverage, just to demonstrate the earnings profile of this business. When you have a 13% yielding portfolio at scale, it should drive great NII and ROEs. As we said, given prepayment activity, that's always what's kind of dropped our leverage down. Our goal is we’d like to run at higher leverage, but the reality is with prepayment activity and portfolio amortization, it’s generally hard to do that. Again, we want to demonstrate our ability to do what we said to run at a slightly higher leverage ratio.

Christopher Nolan, Analyst

Great. And I guess my final question is how many of your companies have bank loans or some sort of bank financing ahead of your debt investments? Given growth capital loans, I'm not sure if that's first lien senior secured on top of banks or…

Sajal Srivastava, President and CIO

We disclose in our 10-Q that companies with term loans from banks or term loans plus revolvers, it's approximately 25% at the end of Q2, which is the same as where it was at Q1.

Ryan Lynch, Analyst

Hey, good afternoon. I'm trying to get a little more clarity on the total nature of the roughly $27 million of total realized and unrealized losses in the quarter. What of that is contributed to markdowns and valuation adjustments versus write-downs related to credit? I know you had the $13 million write-downs from Pencil and Pixel. I'm curious, are there any other credit write-downs that specifically impacted or contributed to that total $27 million?

Christopher Mathieu, CFO

Yes. So there was one other kind of, I'll call it category, that I mentioned where we hit the fixed-rate loans that we have in the portfolio with what we call a market rate adjustment. For those, in aggregate, it was about a $2.5 million unrealized adjustment, given the double increase in prime rate during Q2.

Ryan Lynch, Analyst

That was just spread related versus anything credit?

Christopher Mathieu, CFO

Yes, that's correct. They're performing at or better than expectations; just the fact that they were fixed-rate deals rather than any kind of credit impairment or issue.

Ryan Lynch, Analyst

And the other thing I just want to talk about, I want to make sure I'm understanding this correctly. You said 50% to 75% of your unfunded commitments you expect to be drawn. I was curious to get what the timeframe was around that just because I do the math on that, and it's like $170 million to $250 million of additional funding that you would expect. Your balance sheet today, it looks like you're kind of at your leverage target right around $9 million—those targets potentially fluctuate. And then $60 million of total amortization in the back half of the year, and then you’ll have some prepayments as well, but that's a large number. So it depends on when you expect those to be funded.

Christopher Mathieu, CFO

Yes. The first point is that we do have a kind of a scheduled maturity for the various portfolio companies we have. Generally, we give them six to 12 months to draw down on the availability of the commitment. I think I had mentioned $100 million of our unfunded commitments would expire if not drawn by the end of the year, and then the rest of that is spread out ratably over 2023. It's not a near-term expectation that there would be heavy draws even for those that do draw, but that will be over the next nine to 12 months as well.

Sajal Srivastava, President and CIO

On top of that, about a third of the unfunded commitments are milestone-based. Companies have to achieve those milestones to access that capital and not all of them have actually done that.

Ryan Lynch, Analyst

Okay. All right. I appreciate the time this afternoon.

Operator, Operator

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

James Labe, CEO

Great. Thank you. As always, we'd like to thank everyone here for listening and participating in our call today. We absolutely look forward to talking with you all again next quarter. Thanks again, and have a nice day. Goodbye.

Operator, Operator

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