Earnings Call Transcript - TPVG Q4 2020

Operator, Operator

Good afternoon ladies and gentlemen and welcome to the TriplePoint Venture Growth BDC Fourth 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 fourth quarter and full fiscal year 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. Before I turn the call over to Mr. Labe, I would like to direct your attention to the customary Safe Harbor disclosure in the company’s release regarding forward-looking statements and remind you that during this call, management may 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 filing 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 would like to turn the call over to Mr. Labe.

Jim Labe, CEO

Thank you, operator. Good afternoon and thanks for joining us for our fourth-quarter and year-end 2020 earnings call. 2020 was clearly an unprecedented year, and we would like to acknowledge our dedicated professionals for their unrelenting commitment last year, as well as take this opportunity to thank our venture capital partners and entrepreneurs for their ongoing support and collaboration, which remains a core differentiator for us and also a critical driver in our success. Before we review the quarter and talk about 2020, I'd like to mention that the TriplePoint team is off to the races in a big way in 2021 already. This past Monday, we closed $200 million in our private notes offering; in January, we upsized our revolving credit facilities, and we continue to see liquidity events in the portfolio this year. The pipeline and deals under evaluation are also continuing to grow significantly, and our strategic financing expansion plans are underway. This is the power of the TriplePoint platform at work, and we are demonstrating our experience and leadership in the venture lending market, bar none. The great start to this year is all part of the continuing story coming off a very successful 2020. The strong results in 2020, in fact, amid the global pandemic, highlights further our unique TriplePoint Venture lending platform, the quality and resilience of our portfolio, and our long-standing relationships with our select venture capital investors. We're pleased with the performance of the portfolio and the significant progress we have made advancing our playbook quarter by quarter for all of last year, including deploying capital strategically and taking steps to position TPVG for growth. While Chris and Sajal will go into greater detail in the quarter and year-end results, I wanted to share just a few of the key 2020 performance highlights. We realized almost $30 million of gross capital gains last year, not only offsetting our credit losses, but more importantly, it served as a basis for making another special distribution to our shareholders, while also allowing for significant spillover income generating into this year. This was the third time in fact that we have made a special distribution to shareholders over the last six years. We also over-earned our dividend for the year, and the amount over-earned increased each successive quarter as the year unfolded. This was the fourth year in a row that TPVG has over-earned its distributions for the year. Cumulatively, in fact, we have also over-earned our distribution since the date of our IPO and achieved this important objective. During the year, our portfolio continued to generate strong yield and we continued our focus to diversify it and further strengthen its credit quality. Finally, we enhanced our liquidity position markedly through a number of capital financing transactions during the year, which Chris and Sajal will get a lot more into. The significant progress we made last year has now set the stage as I mentioned for 2021 and beyond. Given the power of our differentiated platform, our long-standing relationships and reputation with our select venture capital investors and the most experienced and best-in-class management team in venture lending, we are well-positioned to capitalize on the strong demand we're seeing from the venture growth stage companies for all of our debt financing solutions. Today's market conditions, as folks probably know, remain highly favorable as well. The venture capital market is coming off its strongest year ever on record. New investment activity is robust. According to the NVCA, our National Venture Capital Association, venture capital investment in the United States broke another record in 2020, topping $150 billion for the first time. Further venture capital firms raised approximately $74 billion last year, which includes several of our select venture capital investors, whose funds collectively raised more than $20 billion of that. For our venture growth stage companies, which operate in the late-stage venture capital market segment, the total deal count was estimated at more than 3,400 deals covering more than $100 billion that was invested last year. And the spike in exit and liquidity events for VC-backed companies in the last half, particularly of 2020, including the emergence of SPACs as IPO exits, have further fueled the favorable venture market conditions. The market strength from 2020 has continued so far unabated here into 2021. We expect demand for venture lending to remain strong. Most companies have adapted to the new environment, and 2020 is behind them. Our companies remain bullish on their plans and the opportunities this year and what soon may seem to be the emerging post-COVID stages. As we survey the landscape, we are identifying new investment opportunities that have risen over the last year due to changes in how people live, work, and use technology. As highlighted throughout the pandemic, the technology sector is extremely resilient, and we expect to benefit from the continued investment in this space. As we provide loans and invest primarily in technology-driven companies and industries. Many of our companies are in direct-to-consumer goods and services, virtual collaboration businesses, cloud-based enterprise solutions, internet security, real estate technology, and several other sectors experiencing outside growth in this environment. We believe that these will continue to be major drivers for us going forward and when combined with our sponsors' exceptional reputation, our experienced team, and the power of the TriplePoint platform, all of these factors translate into exciting new opportunities. I'd like to wrap up with some closing comments and observations. We are proud of the steps we took during the past year that enabled us to post strong results in these uncertain times and also to advance important objectives that will drive our future success. Specifically, as we look to the year ahead, you've heard we are advantageously positioned to accelerate our growth and continue to provide shareholders with exceptional long-term returns. Our teams are active in today's venture market, the strong prospects for venture lending business model, our reputation-driven industry-leading platform and some new use cases and expanded financing products with our enhanceability to scale the business to take advantage of the strong fundamentals of the venture ecosystem have made us more excited today than we've ever been. We look forward to continuing to work closely with our portfolio companies and our select venture capital investors and entrepreneurs, many of whom have emerged from a very challenging year and are now in a very strong position and extremely promising 2021 in front of them. While we are pleased with our progress, we also remain disciplined during these times and will continue to abide by the principles of TriplePoint's good old four R's: reputation, relationships, references, and returns. I will now turn the call over to Sajal.

Sajal Srivastava, President and Chief Investment Officer

Thank you, Jim, and good afternoon. Looking back at 2020, we were satisfied with our performance during a very difficult time. Our strong results were due to the over 21-year collaboration between Jim and me, the strategy we developed in response to the pandemic, our experience with volatility, the resilience and dedication of our team, and the backing of a well-established global investment platform, TriplePoint Capital. Our approach for 2020 was a quarter-by-quarter strategy. In Q1, after a particularly robust 2019, we took steps to prepare TPVG to navigate challenges and focused on our team, portfolio companies, and relationships with venture capitalists while strategically raising equity and launching our first investment-grade debt offering for significant liquidity. In Q2, investors recognized the advantages of our unique venture growth-stage lending approach, our strong portfolio, and especially our supportive sponsor relationship, as we had a $50 million backstop facility to bolster TPVG’s financial strength, although we never had to use it. Q3 mirrored Q2, and based on input from our venture capital partners and active planning, we started to shift our strategy towards offense. This strategic shift bore fruit in Q4, culminating in a strong finish for 2020 that positioned us for growth in 2021. Throughout 2020, we consistently generated income exceeding our distributions and enhanced our portfolio yield. Importantly, we proved the fundamental strengths of venture growth-stage lending related to credit quality and equity gains. In Q4, TriplePoint Capital signed $172 million in term sheets with venture growth-stage companies and completed $73 million in debt commitments to six companies at TPVG. We received $2 million in warrants from 11 portfolio companies and invested $500,000 in three others. For the entire year, TPC signed $490 million in term sheets with venture growth-stage companies, and we closed $277 million in debt commitments with 23 companies at TPVG. We made one investment worth $3.8 million and invested $2.3 million in equity. In Q4 alone, we funded $67 million in debt investments to nine companies, which marked a 77% increase from Q3, with a weighted average annualized portfolio yield of 14.3% at origination. Over the year, we funded $205 million in debt investments to 24 companies at a 13.5% average yield. In Q4, we received loan repayments totaling $74 million, resulting in an overall weighted average portfolio yield of 15.2%, while the core portfolio yield was 12.2% excluding pre-payments. For 2020, we had $203.4 million in pre-payments, leading to a 13.8% overall portfolio yield for the year, with a core portfolio yield of 12.5%. By year-end, our 69 portfolio companies covered 31 sub-sectors, with the largest share in business application software, accounting for almost 12% of our portfolio. As Jim noted, we observed strong fundraising activity in our portfolio reflecting its quality. During the quarter, five portfolio companies collectively raised over $200 million. This brought our total for 2020 to 27 portfolio companies raising more than $3 billion, with over 70% of our portfolio companies having at least a year’s worth of cash runway. Concerning credit quality, the weighted average investment ranking of our debt portfolio remained steady at a rating of 2.1. Under our rating system, loans are rated from one to five, where one indicates the best credit quality and new loans typically start at rating two. During the quarter, one company was upgraded from category two to one; another from three to two due to financing; and one was removed from category three after being acquired and fully repaying our loan. We downgraded one company from category two to three due to ongoing COVID-related challenges, and Knotel was downgraded from category three to five after unsuccessful fundraising and strategic sale attempts, leading to bankruptcy in January 2021. However, before that, we sold our loans to a third party recovering 50% cash and leaving us with a potential equity component to finalize post-bankruptcy proceedings. The credit issue is now behind us. It's important to mention that our Q4 mark only reflects cash recovery from the loan sale, excluding any future equity value. Unrealized losses on Knotel were offset by gains from other portfolio performance, upgrades, and successful equity investments. In Q4, we liquidated our holdings in CrowdStrike and Medallia and realized gains from the sale of Freshly to Nestlé, totaling $4.2 million from these transactions. Since our IPO nearly seven years ago, TPVG has experienced net credit losses of $11.4 million, which is 0.4% of our cumulative commitments and 0.7% of total fundings, averaging around 10 basis points per year. As of December 31, 2020, we held warrants in 64 companies and equity investments in 24 companies, with total costs of $49.1 million and fair values of $50.4 million. Unprecedented gains were realized from our warrant equity portfolio in 2020, and with favorable market conditions in 2021, we are optimistic about further significant value realization from these assets. Recently, key events include Hims Inc.'s successful SPAC merger and forthcoming mergers with Group Internets, known as Talkspace. Our equity and warrants in these three companies are valued at $1.9 million as of December 31. Additionally, several portfolio companies are currently engaging in fundraising and strategic discussions. We are looking forward to capitalizing on these promising developments related to our high-yield debt investments. Over the long haul, we anticipate that our warrant and equity investments will yield more realized gains than losses, consistent with TriplePoint Capital's track record showing significant realized gains compared to credit losses, unmatched within the industry. Reflecting on credit conditions for 2021, we noted that venture-backed companies displayed resilience during the pandemic, though some sectors like travel, real estate, and capital market-reliant fintech faced challenges. Working closely with these companies and their VC investors was crucial, and as we concluded last year, we believe we have addressed many of those situations, putting us in a position to focus on new investments in 2021. Looking ahead, we believe our successful execution in 2020 and the ongoing progress in 2021 set a strong foundation for advancing our goals of expanding our investment portfolio and diversifying TPVG, while catering to the needs of our selected venture capital partners and their growth-stage companies. As Jim mentioned, our sponsors' exceptional reputation and relationships became even more advantageous during the tumultuous market of 2020, alongside robust venture capital fundraising efforts, creating a strong pipeline for us. Additionally, leveraging our extensive relationships with select VC investors, we are developing innovative financing solutions for their fintech, e-commerce, and software portfolios, with some expected initiatives rolling out this year. For 2021, we anticipate quarterly funding starting between $50 million and $75 million for Q1 and Q2, increasing to the $100 million to $150 million range for Q3 and Q4 gross. While pre-payments remain a part of our operations, they don't aid our aim of maintaining a robustly diversified portfolio, so we are exploring ways to retain investments after large funding rounds. On the liquidity front, following the closing of TPVG's second investment-grade private notes offering and the successful extension of our revolving credit facility, we have reduced our capital costs, enhanced liquidity, and broadened our funding sources. We are pleased with the support from over 30 investors in the notes offering and the addition of eight banks to our revolving loan facility. We intend to leverage this capital for portfolio growth in 2021 while continuing to utilize our exemptive relief order allowing co-investments with other TriplePoint entities and exploring joint ventures and syndication opportunities with our sponsor and strategic partners. Regarding the dividend, we are proud to announce our third special dividend since our IPO, primarily sourced from realized warrant equity gains, and we have continued to generate net investment income exceeding our distributions throughout the year despite low leverage. We have significant spillover income and, as our portfolio stabilizes and we see more frequent realized gains, we will review both our regular and special dividend policies. In closing, we take pride in our achievements in 2020 and are enthusiastic about pursuing this year’s objectives while maintaining strategic growth and adhering to our long-term playbook aimed at delivering strong shareholder returns, fulfilling the needs of venture growth-stage companies, and fostering robust relationships with our venture capital partners. I will now turn it over to Chris.

Chris Mathieu, CFO

Great. Thanks, Sajal, and hello everybody. Before I get into the quarterly figures, I'd like to again highlight just a few of the milestones reached for the year 2020, as we ended the year on a strong note. For the full year 2020, we had a record high total investment income of $91.2 million and a record high NII of $47.9 million. We enhanced our overall liquidity on both sides of the balance sheet, diversified the portfolio, fully covered our quarterly distributions, and increased spillover income even after the declaration of a special dividend. Let me take you through an update on the financial results for the fourth quarter and full year 2020. Total investment income was $23 million for the fourth quarter of 2020, an increase of 10% as compared to $21 million for the fourth quarter of 2019. Total investment income was $91 million for the full year 2020, an increase of 24% as compared to $73 million in 2019. Total operating expenses were $11.5 million for the fourth quarter of 2020 as compared to $10 million for the fourth quarter of 2019. Total operating expenses for the full year 2020 were $43.3 million as compared to $35.1 million for the full year of 2019. The increase here in overall operating expenses is primarily driven by an increase in the asset base. Net investment income for the fourth quarter was $11.9 million or $0.39 per share, compared to $11.1 million or $0.45 per share in the fourth quarter of 2019. Net investment income for the full year of 2020 was $47.9 million or $1.57 per share compared to $83 million or $1.54 per share for the full year of 2019. NII per share for the quarter and for the year was impacted by a higher share count, given the equity offering we completed in January of 2020. During the fourth quarter, the company recorded $4 million of net unrealized gains on investments, primarily consisting of realized gains from the sale of publicly traded shares held in CrowdStrike and Medallia and realized gains from the acquisition of Freshly Inc. by Nestlé. During the full year of 2020, the company recorded $28.8 million of gross realized gains on investments and $8.6 million on a net basis. Net unrealized losses on investments for the fourth quarter and for the full year resulted primarily from the reversal and recognition of previously recorded unrealized gains and fair value adjustments on the existing portfolio. As of year-end, the company's net asset value was $400 million or $12.97 per share as compared to $332 million or $13.34 per share as of a year ago, 2019. The change in the company's net assets per share in 2020 included the $0.10 per share impact of the special dividend, as well as the higher share count as a result of our $80 million equity offering back in January of 2020. During the fourth quarter, we declared our regular quarterly distribution of $0.36 per share from ordinary income and the additional special dividend of $0.10 per share sourced from the net realized capital gains earned and recorded in 2020. In the fourth quarter, we covered our current regular quarterly distribution by 108%, and for the full year, we covered our current regular distribution by 109% before declaring the special dividend. I'm pleased to announce that for the first quarter of 2021, our Board of Directors has declared another $0.36 per share on February 24th to stockholders of record as of March 15th to be paid on March 31st. After this declaration, we continue to have significant estimated undistributed taxable earnings with spillover income of $16.2 million or $0.53 per share at the end of the year to support additional distributions in the future. We reported unfunded commitments totaling $132 million, of which 92% or $122 million of this total will expire during 2021 if not drawn prior to expiration. In addition, all of our unfunded commitments have a primary floor set to 3.25% or higher. Aggregate outstanding borrowings as of year-end were $263 million and consisted of $75 million of fixed-rate baby bonds, $70 million of private term debt, and $118 million outstanding under our revolving credit facility. With the aggregate borrowings as of year-end, our leverage ratio is 0.66 times or an asset coverage ratio of 252%. As of year-end, the company had total liquidity of $252 million, which was almost double our unfunded commitments, consisting of $45 million in cash and $207 million of availability under our revolving credit facility. We successfully amended the revolving credit facility in December by increasing the commitments from $300 million to $325 million and we extended the revolving periods in November of 2022 and extended the maturity date to May of 2024. We were pleased to announce that we also expanded our lender syndicate just after year-end and in January, further increased our total commitments under the revolver by another $25 million, bringing the total commitment to $350 million, while we continue to have the flexibility to increase the line to $400 million under our existing accordion feature. We have advanced the liquidity of the company, and we have enhanced our funding capacity and flexibility to fund investments with the closing of our $200 million private notes offering that Sajal and Jim mentioned earlier. We fully paid down our revolving credit facility this week by $100 million, and we plan to use some of the proceeds this week from this week's offering to redeem all of our outstanding 5.75% notes due 2022 and these baby bonds, which are listed on the New York Stock Exchange, are expected to be extinguished within the next 60 days. We have again successfully extended the maturity of our borrowing at attractive cost of capital, and importantly, we are refinancing our most expensive term debt to baby bonds with 22% cheaper notes. Concurrently, with the private notes offering this week, DBRS maintains its investment-grade rating on TPVG given the strength and diversity of our portfolio and the reasonable level of leverage we maintain. We continue our journey on the execution of our leverage strategy, where we are migrating from largely a floating rate liability structure to an attractive blend of fixed and floating rate instruments and a more balanced allocation between a revolving credit facility and long-term notes. Our weighted average term to maturity has been extended, and the earliest term debt maturity will be now 2025, followed by 2026 for the most recent offering. So this completes our prepared remarks, and at this time, we would be happy to take any questions that you have. And so operator, could you please open the lines for questions at this time?

Operator, Operator

We will now begin the question-and-answer session. The first question today will come from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan, Analyst

All right, great. Good afternoon, everyone.

Jim Labe, CEO

Hi Devin.

Devin Ryan, Analyst

So, really appreciate all the outlook commentary, but I want to dig in a little bit more on the portfolio and leverage levels right now is still well below the target of one times. And so you've got a lot of capacity and appreciate some of the commentary on investment expectation. But how are you thinking about kind of overall portfolio growth or the potential for that in 2021 just given some of the commentary kind of on the pre-payment side and maybe a little bit elevated exit activity, kind of, how that all plays through? And then tied into that, kind of the impact or how we should be thinking about portfolio yield with that?

Sajal Srivastava, President and Chief Investment Officer

Great. I'll start, and then Chris and Jim can jump in. Devin, we clearly see opportunities for portfolio growth this year. We aim to maintain balance as we prioritize quality and return thresholds. With our current pipeline of term sheets and the outstanding unfunded commitments coming into this year, we feel confident about expanding our investment portfolio. We plan to utilize both the term debt offering and our revolver as the main sources for this growth, and we'll adjust as necessary based on portfolio amortization and pre-payments. As I mentioned earlier, we have strategies to retain high-quality assets from companies that secure significant funding and to reduce pre-payment risks. It's a delicate balance between receiving pre-payments for capital recovery as a lender and maintaining a large, diversified, high-quality portfolio. We acknowledge that pre-payments are an inherent aspect of our industry, but our aim this year is to find smart ways to mitigate them. Chris, do you have anything to add?

Chris Mathieu, CFO

Yes, I would just say I think you're right. It's a constant challenge between portfolio growth, which is a great thing given the spreads that we have in our business, but also pre-payment income with the fee accelerations and pre-payment fees are also nice kickers for enhancing the NII for the year. So, the pre-pays are hard to project; they are built into the portfolio, and with the mature portfolio that we have here, I would expect those to continue, just not sure of the frequency and velocity of when they come.

Devin Ryan, Analyst

Okay, that's great information. I wanted to get your overall thoughts on the implications of what we're seeing in the SPAC market. You have several portfolio companies that are involved in SPAC transactions, and it seems this trend may be currently popular but is likely to remain relevant over time. I'm interested in how you view this as an opportunity, any changes in your approach, and how it affects your underwriting processes and overall investment strategy. It feels like there has been significant acceleration in this area over the past year, and there's a lot more to come in the next year. It seems the interest in SPACs isn't going away anytime soon.

Sajal Srivastava, President and Chief Investment Officer

Yes. Let me start and then Jim, I think you've got some great insights from the sponsor world. So, Devin, great question. I think one of our bankers used the word SPAC factory to refer to our platform since I think we're approaching almost two dozen, both announced and soon to be announced SPAC exits across the global TriplePoint Capital platform. So, I would say again, it's a testament to the quality of the VC sponsors that we work with, again, focusing on the select group of venture capital investors. And so I think, keep in mind, we're a lender. So, as a lender, we look to liquidity for portfolio companies as a great thing. So, if they're raising capital in the private markets or the public markets, we're indifferent and we like more cash, and it helps service our debt. From the other perspective, right, we have that we talked about the football field analogy and playing for the end zone or the touchdown, right. And so a SPAC is an exit event. It's liquidity for equity kickers and our warrants. And so, we view that we're appreciative to have an exit event. And if it means that our portfolio companies can go public faster through a SPAC than they can through a traditional IPO, I think conceptually, we're supportive or we're indifferent. We'll let our select VCs and other Board members determine which exit path they prefer. But I'd say from our perspective, as a lender, we have nothing against them. We're supportive of exit in general, and we're supportive of more liquidity for our portfolio companies. Jim, how about your thoughts?

Jim Labe, CEO

We are not basing our business decisions on the current trend of SPACs or any speculation around their longevity. While SPACs are popular among certain circles and there’s significant interest out there, we choose not to engage in that kind of speculation. There’s a considerable amount of capital available looking for targets, and many companies, including those already mentioned, are in various stages of the process within our platform. This encompasses both innovative technology firms and revenue-generating companies that are performing well. For some businesses, utilizing SPACs allows them to exit more quickly rather than enduring a lengthy IPO process, which can be beneficial. We see this as a positive trend, but it is not the foundation of our business strategy.

Devin Ryan, Analyst

Okay. Thank you, guys. Appreciate you taking the questions, and congrats on a nice end of the year.

Jim Labe, CEO

Thank you.

Operator, Operator

And our next question will come from Finn O'Shea with Wells Fargo Securities. Please go ahead.

Finn O'Shea, Analyst

Hi, everyone. Thank you. Just to continue on that interesting dialogue there. With the SPAC markets, apparently taking, digging farther from pre-IPO down to earlier stage. Then you have, as you mentioned, the high level of VC capital raising you have new venture lenders raising funds. Can you just tie all this together and talk about what the competition is like for a venture growth stage loan right now?

Jim Labe, CEO

Yes. I'll take a first stab at that, Sajal, feel free to add. But having been in this, in my case, over 30 years, and Sajal and I doing this together for 22 plus, this business is not about rates. It's not about interest terms. It's a very specialized market. Yes, there are some very attractive returns in this, and obviously, in good times, it's going to attract various names and entrance. But we've been through the cycles. We've seen folks come and go, and at the end of the day, it's about the experience. It's about the expertise. It's about the reputation, the references, and relationships about the firm. It's not about what's the spread, what's the percentage over this or that or for many cases not even about the name as much as about the party. The reputation, the team, the deal flow, and there's a reason that we believe we're the leader in the segment.

Sajal Srivastava, President and Chief Investment Officer

Yes. Maybe I could add some. Finn, so I think what we're seeing is particularly coming off the resiliency of the pandemic to the venture and the tech ecosystem. And then signs of, hopefully recovery of the global economy, as you talked about, the capital markets are heating up. So I think what that's causing is a catalyst for companies to grow. And so I think that's kind of the fundamental, most important factor, right? Venture-backed companies, tech companies are growing, and if anything, because of the environment they're in, they’re actually turning up a burn, right? So, when we saw in the midst of COVID, companies or portfolio companies, other tech and venture-backed companies were cutting burn, cutting marketing spend, cutting headcount to preserve runway. Now we're seeing again signs of growth, acceleration, increase in burn, which is causing the demand for more capital. So as, right, there are two sides of the equation: there's the equity side and the debt side. So, our thesis has always been to venture-backed companies to get equity from quality sponsors, right? That's important; that's a critical source of capital for your business. There's strategic value associated with certain venture capital firms and private equity funds; you want them in your cap table. And then the role of venture debt is to minimize the dilution of the total raise and to complement the equity capital. So, don't over-raise equity, raise it from the right parties, the right sponsors, the right valuations, and then layer on venture debt. So that you get to the total capital needs of your business, but you, entrepreneur, minimize the total dilution that you take. And at the same time, for the existing VCs and existing sponsors, right, we help boost their returns as well by preserving their ownership and also reducing the check size that they necessarily have to write as well. So, it's going to win-win from the entrepreneur's perspective, from the existing investor's perspective. And again, given the current environment, it's causing the demand for debt. You know, as Jim said, listen, competition, there's always going to be competition. If there wasn't, we'd sort of be scratching our heads. But I think we offer more than just money, which I think is the theme that Jim was coming with, particularly the way that we handled ourselves during not only the last year's volatility but the cycles before that. And I think our VC sponsors recognize and value trusted partnerships, being there in good times and bad long-term track records in the venture world. In particular, in the tech world, it's about pedigree and reputation. Our portfolio companies don't pick certain VCs or certain sponsors because they gave them the highest valuation or they wrote the biggest check, right? It's the track record. It's the value add. And so we think our thesis has always been that the entrepreneurs that value reputation, track record, and long-term partnership are the ones that we want to work with. And that's how we run our business.

Chris Mathieu, CFO

Finn, I can add to your question about competition. As Sajal mentioned, it’s definitely a matter of finding balance in the depth of equity options. In the competitive landscape, particularly at the venture growth stage, equity remains the primary focus. This is not so much about venture lenders, but rather about companies with significant equity available and various alternatives that align well with both triple point debt and equity.

Finn O'Shea, Analyst

Sure. I think it's all very helpful. And just a follow-up, I guess, I think both Jim and Sajal mentioned new financing products, new products. Can you just give us any color on this platform growth? How it relates to the BDC? And actually, let me throw it in there. I think I also see the term life sciences more on your website; correct me if that's not new, but just to make sure you address that as well. Tell us about the new products.

Chris Mathieu, CFO

Yes, I'll start. First, we won't disclose all of our products. Generally speaking, we've leveraged our expertise, track record, and relationships to identify specific sectors where there's a growing demand. We particularly mentioned the consumer, fintech, and software sectors, which have unique needs based on their asset base, burn profile, and exit strategies. For many years, we have been developing financing products tailored for these sectors. With our extensive platform, we have multiple vehicles to allocate capital appropriately. We see a growing opportunity to assist these companies as they focus on their growth, and we aim to target our capital to meet their specific needs. This is an exciting prospect for us, and we have achieved some significant successes. Another important point is that our portfolio companies are experiencing growth; many are generating several hundred million dollars in recurring revenue and aspire to become triple point portfolio companies. The requirements of these larger companies differ significantly from those of firms at the $20 million to $25 million venture growth stage. Therefore, it's crucial for us to offer a diverse range of products that cater to both early and later growth stages, which is what makes this so exciting for us.

Jim Labe, CEO

And I would only add to the extent Life Sciences is a large word, a big sector, and means a lot to different folks. But we're definitely have been active in call it the digital health sector, health and wellness is a number of TPVG portfolio companies in that broader definition. And what we do in that segment is a function of what our select investors do. And that is an area that's starting to grow and certainly platform wide, not just TPVG. Particularly at the early stages, we're seeing a little bit more activity and continuing to work in that market to an extent as well.

Finn O'Shea, Analyst

Very well, thank you.

Operator, Operator

And our next question will come from Casey Alexander with Compass Point. Please go ahead.

Casey Alexander, Analyst

Yes. Hi, good afternoon. And Jim, I think your slip of the tongue competitive nerds was an attempt to describe every single person on this call.

Jim Labe, CEO

Got it. Take it back.

Casey Alexander, Analyst

Congratulations on securing the $200 million financing. It's not surprising that many people will be disappointed to see the baby bonds go. Chris, do you know what the remaining deferred amortization offering costs on the baby bonds will be? I assume that will be charged in the second quarter?

Chris Mathieu, CFO

That will be a charge as a cost from a realized loss from extinguishment of debt, so it will not be part of net interest income and will be below the line at about $600,000.

Casey Alexander, Analyst

Okay. That'll be below the line $600,000. Great. Thank you. All right. Seeing as you self-described as the SPAC factory, does the preponderance of SPACs hitting your portfolio companies? Is that going to create some difficulty for you to get to the target leverage ratio? Because generally, when a company is bought by a SPAC, there are additional investors brought in who bring substantial capital. And at the end of the day, the lenders to the non-public company get taken out. So is that going to make it difficult to get to the target leverage ratio or create some difficulty?

Jim Labe, CEO

Casey, the situation varies depending on the type of company we're discussing. If we look back at our historical SPACs, those companies have settled their debts with us quite some time ago. Therefore, the progress of SPACs is influenced by the standards set for them. In fact, we had a portfolio company we initially lent to 11 years ago. To date, we haven't encountered a scenario where a borrower with outstanding loans has opted for a SPAC merger; it typically occurs after our loans have been settled. Consequently, we have not faced any immediate repercussions from current outstanding debts, but it is possible for these companies to attract more affordable capital. However, it's important to note that most of the time these private investment in public equity rounds involve equity rather than debt. There is a clear opportunity to provide capital for a potential de-SPAC company after its IPO, especially if we are familiar with the credit and have a historical relationship.

Casey Alexander, Analyst

Okay, great. Thank you. I'm curious about Prodigy. In that Prodigy came down to the 11th hour before they were able to pay essentially at maturity. And it was clearly a little bit of a dicey situation and one that you had marked down in the credit bucket. So you then extended a new loan at a lower rate than the last loan and picking. And so I'm just curious as to the code because those are sort of an incongruous combination of facts that would result in a new loan at a lower rate, but picking the interest?

Jim Labe, CEO

During the quarter, we restructured our loans with Prodigy, which is an international graduate student lending business. They raised a significant amount of capital during Q3 and Q4 for leverage and other company needs. We restructured a portion of our loans and converted some into a preferred equity tranche in the company. What’s impressive is that, based on the company’s ongoing activities, we are positioned well for long-term success; their portfolio has held up adequately. More importantly, the securitization markets have rebounded and are favorable. Our mark is essentially the same from Q3 to Q4, reflecting some noise and other factors. Overall, we believe the company is set up for long-term success.

Casey Alexander, Analyst

Do you have sort of a timeframe in mind at which you think you might be able to take it off of pick?

Jim Labe, CEO

It actually has a structure. And so I don't think it's an issue, but yes, we do expect it to come off pick in the near future.

Casey Alexander, Analyst

Okay. Next, I'd like to ask if anything, what you guys think you learned from the Knotel experience? And I asked that in light of the fact that I asked about it over several quarters, it was still marked in the mid to high-90s, and ultimately resulted in a 50% payoff. Was there something to be learned? I mean, we all gained from experience and making mistakes, which I certainly make my fair share of them. What possibly could you guys have learned from the Knotel experience?

Chris Mathieu, CFO

Yes, let me start, and then Jim can chime in. Knotel was significantly impacted by COVID and the resulting shelter-in-place orders. The company secured hundreds of millions in equity from top venture capital firms, sovereign wealth funds, and major real estate entities, giving it strong backing from experienced investors along with our leverage support. As we mentioned during the write-up, the company sought additional liquidity and strategic options but was unable to secure them. Our valuation during that time represented our assessment of the situation, including the facts, circumstances, and likelihood of various outcomes. As those probabilities decreased, our valuation adjusted accordingly. We had hoped for a quicker recovery and for events such as equity raises or strategic mergers and acquisitions to materialize, but when they didn't, we realized the need for a swift response. Conditions can change rapidly. We’ve successfully navigated challenging credits in the past, such as Mind Candy and others, where we even received full repayment. The key difference with Knotel was our assessment of its situation and complexity, considering both immediate and long-term needs. Ultimately, we decided it would not be beneficial for us to invest further or have our teams heavily involved in a workout. Instead, we evaluated the situation and seized an opportunity. No credit manager is infallible, and we never claimed to be. Our initial underwriting justified lending to Knotel, but none of us could have anticipated the impact of COVID or the specific challenges Knotel faced, which weren’t widely known. Nonetheless, we are proud of how we managed it and addressed it in a timely manner, leading to a recovery. The company went into bankruptcy, and we achieved a 50% return, plus potential upside. This situation isn't a burden for our team or our capital. Overall, it's behind us, and although we're not pleased about the loss, we're hopeful about recovering with our existing warrants and equity portfolios, as we have in the past. Jim, do you have anything to add?

Jim Labe, CEO

Yes.

Casey Alexander, Analyst

All right. Great. Thank you for that. Okay. Jim, I’m sorry.

Jim Labe, CEO

My comments align closely with what Sajal mentioned, and in terms of potential differences, there will likely be none, as this situation is a result of COVID, which took everyone by surprise. Since it's a privately held company, there are limits to what we can disclose. As Sajal pointed out, there were several equity and debt term sheets involved, but things did not turn out as planned. Overall, we as credit managers have seen a good recovery and there is still more potential ahead. We managed to avoid what could have been years of bankruptcy proceedings and associated costs.

Casey Alexander, Analyst

Okay, great. Thank you for taking my questions. I really appreciate it.

Chris Mathieu, CFO

Yes. Thank you, Casey.

Jim Labe, CEO

Thank you.

Operator, Operator

And our next question will come from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan, Analyst

Hey, Jim, as the company is growing, what investments do you see offering the best operating leverage for your company?

Jim Labe, CEO

Well, by operating leverage, could you elaborate?

Christopher Nolan, Analyst

Sure. Which ones can grow revenues for the net growth expenses?

Jim Labe, CEO

Yes. So from that standpoint, we're talking about growing and scaling. And so across the platform, and again, TPVG is the focus here. But we are in a staff of mode, hiring mode and originations mode to increase subtle talked about how our plans for some financing products, new ones expansions, or I'd say not only underway but well underway. And so we are building and continuing to build the infrastructure. There's just so much we want to say in terms of the expansion in the European markets. And it's always a trade-off between the cost of growing and growth itself. But I think that's how I'd do it.

Sajal Srivastava, President and Chief Investment Officer

As we consider our venture capital fund relationships, it's important to recognize their significance. These relationships are crucial because they support their portfolio companies, which may become potential candidates for us. A key aspect of our platform strategy involves lending to companies at various stages of their growth, including early and later stages. TPVG specifically focuses on the venture growth stage. The advantage for TPVG lies in our sponsors' involvement throughout both the early and later stages, as these portfolio companies evolve and may eventually become part of the TPVG portfolio. This creates a valuable cycle where we can continue to develop and strengthen our relationships with select venture capitalists for growth stage opportunities while also maintaining our engagement in both early and later stage segments. The goal is to help these companies grow and hopefully become TPVG portfolio companies in the future, which is a crucial component of our strategy. Additionally, we aim to increase lifetime value with our existing and potential portfolio companies by offering multiple credit facilities or a variety of financing products. This focus on driving up lifetime value is fundamental to our new strategies and structures. We are enthusiastic about these developments and the potential for growth they present.

Christopher Nolan, Analyst

Okay. That's it for me. Thank you.

Operator, Operator

And our next question will come from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch, Analyst

Hey, good afternoon. I just have two questions. The first one is on Prodigy; your preferred shares, I don't believe that they have any yield component to them. Can you confirm that? And then assuming that they don't, I would assume that the structure of that would then allow you to participate on the upside and potentially gain into value in that investment if that company's performance turns out to perform well?

Sajal Srivastava, President and Chief Investment Officer

Yes. So Ryan, they do have a yield component associated with them. And they do have a senior ranking in the cap table. So they're not traditional equity. We don't have board seats or anything like that. And so I think that's kind of the one of the benefits, it's a very much a hybrid-like structure.

Ryan Lynch, Analyst

What is the yield on the 8-K and 10-K?

Chris Mathieu, CFO

Yes; it's 8% pick consistent with the debt.

Ryan Lynch, Analyst

Okay. And then just the only other one that I had was you talked about quarterly funding going from $50 million to $75 million in Q1 and Q2 to $100 million to $150 million in Q3, and Q4. I guess, what sort of assumptions or changes in the market environment are you making relative to what that market environment looks like today that that gives you the confidence that you'll be able to basically double your fundings in the back half of 2021?

Sajal Srivastava, President and Chief Investment Officer

Yes. If we examine TPVG's track record, excluding 2020, we can see a familiar pattern from 2019. There are a couple of factors involved. One is that it's not just a hope or promise; we need to generate sufficient activity in the latter half of the year, which is why we have over a billion-dollar pipeline. Generally, portfolio companies tend to draw debt towards the end of the year to utilize it before expiration, to strengthen their balance sheets for year-end audits, and in preparation for potential fundraising in the following year. This is why we typically see larger funding in the second half of the year compared to the first half. Additionally, there has been a buildup of fundraising as people waited to see how 2020 unfolded before seeking more debt or equity capital. We are currently witnessing an increase in demand in our portfolio. Therefore, there’s been no change in our methodology, no significant assumptions altered, and we're not hiring extensively to seek out new pipeline opportunities; we have a clear view of what is ahead. This aligns consistently with our previous growth years.

Ryan Lynch, Analyst

Okay, understood. Thanks for taking my questions.

Sajal Srivastava, President and Chief Investment Officer

Great.

Operator, Operator

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Jim Labe for any closing remarks.

Jim Labe, CEO

Okay. Thank you, operator. I’d like to thank as always our stakeholders and all our TriplePoint friends. I’d like to thank there's quite a few on the line and everyone else for listening or participating in our call. And we hope everyone continues to remain healthy and look forward to talking with you next quarter. Thanks, everyone. Goodbye.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.