Good day, and thank you for standing by. Welcome to the Hercules Capital Third Quarter 2024 Financial Results and Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, Brianna. Good afternoon, everyone, and welcome to Hercules’ conference call for the third quarter 2024. With us on the call today from Hercules is Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today’s market close and can be accessed from Hercules’ Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC’s website. Any forward-looking statements made during this call are made only as of today’s date and Hercules assumes no obligation to update any such statements in the future. And with that, I’ll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2024 earnings call. Our strong operating results for the third quarter and year-to-date through Q3 2024 reflect our leadership position in the venture and growth stage lending market, as well as the benefits of operating at scale with an institutional lending platform and a seasoned best-in-class investment team. In Q3 2024, the Company delivered record total investment income of $125.2 million an increase of 7.3% year-over-year. Year-to-date, the Company has delivered record total investment income of $371.8 million an increase of 10% year-over-year as well as record NII of $244.7 million or $1.52 per share, an increase of 12.2% year-over-year. As of the end of Q3, Hercules Capital is managing approximately $4.6 billion of assets, an increase of 10.9% from where we were a year ago. Hercules has delivered record year-to-date ending Q3 2024 total gross fundings of $1.34 billion despite intentionally slowing down new originations in Q3. Q3 is typically a slower quarter in terms of equity capital investments and overall activity across the venture ecosystem, and this year was no different. The venture and growth stage markets slowed considerably in Q3, particularly with respect to venture capital investment activity and venture capital M&A exit activity. This slowdown combined with many quality scaled borrowers putting off debt decisions until after the upcoming presidential election and waiting for the recent Fed interest rate action resulted in a new business environment that our investment teams did not believe was favorable for disciplined and prudent capital deployment, particularly early in the quarter. Every decision that we make as a Company is centered around what we believe is in the best long term interest of our shareholders, stakeholders and borrowers, and this time was no different. As we continue to…

Thank you, Scott, and good afternoon, ladies and gentlemen. Q3 marked another solid quarter of income generation and balance sheet strengthening. Record total investment income of $125.2 million was based on a solid core income of $116.1 million or core net investment income of $0.45 per share. Early repayments of approximately $230 million were within the guidance range, generating a 4% acceleration rate in non-core income. Our cost of debt ticked up slightly to 5.1% and our SG&A expenses were just below my guidance. The net result was a solid $0.51 net investment income per share of earnings. On the balance sheet side, we increased available liquidity by $70 million in July when we concurrently retired $105 million of institutional notes and received approval for our fourth SBIC license, unlocking another $175 million of liquidity. We ended the quarter with more than $570 million of available liquidity and more than $930 million across the platform, including the advisor funds managed by our wholly-owned subsidiary, Hercules Advisor LLC. With all of this in mind, I’d like to review the following areas; income statement performance and highlights NAV, unrealized and realized activity, leverage and liquidity and finally, the financial outlook. Turning first to income statement performance and highlights. As mentioned previously, total investment income in Q3 was a record $125.2 million driven primarily by our record first half growth in the debt portfolio. Core investment income, a non-GAAP measure, was a solid $116.1 million. Core investment income excludes the benefit of income recognized as a result of loan prepayments. Net investment income increased to $83.2 million or $0.51 per share in Q3, a 1% quarter-over-quarter increase. Our effective and core yields decreased modestly in the third quarter to 14.4% and 13.3%, respectively, compared to 14.7% and 13.7% in the prior quarter. The…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Crispin Love of Piper Sandler. Your line is now open.

Thank you, and good afternoon, everyone. Scott, some things were lighter in the quarter as you discussed and you’ve been vocal in the past that you don’t need to grow for growth sake. But, as you look out a little further beyond the election and even in next year, can you discuss just some of your expectations for deal activity in BDC broadly and what that could mean for Hercules? Would you expect a big wave of deal activity in 2025? Just curious on how you’re thinking about the intermediate to longer-term here? Thank you.

Sure. Thanks, Crispin. Look, longer-term, we continue to be very optimistic about the health and vibrancy of the venture capital ecosystem. The numbers that we saw in Q3 from an industry perspective were reflective of what we saw within our own portfolio in terms of a slowdown with respect to some of the key metrics that we monitor. We’ve said this very consistently and we’ll continue to say it going forward. Venture debt, growth stage debt is designed to supplement equity. It’s not designed to replace equity. And so, when the equity markets in terms of venture capital investment activity are slow, it’s not the right time in our opinion to be aggressively putting capital to work. Our team is speaking to hundreds of people within the ecosystem on a pretty consistent basis. We had numerous conversations with management teams, with venture capital investors, with Board members throughout the course of Q3. And, what we heard virtually consistently across the Board is that a lot of the better quality later stage companies were hesitant to take action in terms of financing in Q3 and that they wanted to wait it out to see what would happen with the Fed rate action and wait it out to see what would happen with the upcoming presidential election. Subsequent to quarter-end, we’ve seen a very big change in terms of mentality. You can see that in terms of our pending commitments of over $600 million. Based on active dialogue that we’re having now, we expect that number to continue to grow. So, we remain optimistic. I would just caveat that by saying that when we see a period, whether it’s a month or a quarter or a half a year, where the market is not conducive for prudent credit deployment, we’re simply going to hold our dry powder and wait for better opportunities. And, that’s exactly what we did in Q3.

Great. Thank you, Scott. Appreciate that. And then, you mentioned the election a few times during your prepared remarks. So, just with the election less than a week away, can you speak to some of the potential implications for venture capital as a whole, and then Hercules specifically as it relates to different potential outcomes, in the election and then just kind of how those implications could impact the near or longer-term? Thank you.

Sure. Dangerous loaded question, but I’ll certainly do my best to be responsive. Look, I think there are a number of scenarios that could play out next week. I think the scenario that we’re probably most concerned about that would have an impact on Hercules and have an impact I think on the venture capital industry as a whole is we wake up Wednesday morning and we don’t have an outcome, right? And, I think that’s what we are probably most concerned about. There are pluses and minuses in either direction. And, from our perspective, we think the most important thing is that we have clarity in terms of who is the winner of the election come next Tuesday. But, I think the scenario that we’re most concerned about that we keep hearing a lot of anxiety about is the scenario where it’s a disputed election, there is no winner and we’re all in sort of a period of paralysis where you’re just waiting to see what’s going happen. And, that’s what we’re managing right now the business pretty conservatively to navigate around.

Great. Thank you and appreciate you taking my questions.

Thanks, Crispin.

Thank you. Our next question comes from Brian McKenna of Citizens JMP. Your line is now open.

Thanks. Good evening, everyone. I know you’ve got a bunch of questions about this really over the past 18 months, but what are you seeing in the market today from a competitive perspective? You’re clearly in an industry-leading position, and it doesn’t appear that there are a lot of other direct competitors in the market. But at some point, does this change at all? And then also related, have you seen any of the larger private credit players coming into the space or trying to come into the space just to go after the opportunity more broadly?

Sure. Thanks for the question, Brian. Answer this similarly to how I answered it last quarter, which is that the market is competitive. We continue to see competition on the majority of deals that we underwrite and look at. Having said that, there is no real consistent competition that we see on every transaction or in the majority of transactions that we originate and underwrite. Our business on the asset side is very diversified. We have a distinct investment team that focuses on life sciences. We have a distinct investment team that focuses on technology. Within those two verticals, we have sub verticals with teams of experts that focus on particular parts of the market. So, we make sure that we’re touching every company, depending on the vertical, depending on the stage, we will see sporadic competition from a variety of different players. In terms of the larger question about larger asset managers and private equity firms coming into the space, we’ve seen that from time-to-time. It has not been consistent. There will be periods or quarters or certain types of deals where some of the larger asset managers will come in and be a little bit more aggressive. But, what we can say sort of definitively is that none of them have the consistency of being in the venture and growth stage market for the last 20 years. None of them have the track record that our team has in terms of $21 billion of deals over a 20 plus year period, and that’s very hard to replicate and duplicate. So, I think we’re positioned very well from a competitive perspective. When we do compete, we primarily are competing with equity. So, the companies that we’re talking to are either going to do a deal with us or they’re going to raise equity capital. But, competition is something that we watch very closely. If we see changes, we’ll obviously make decisions to react appropriately. But, we have a long-term outlook on this business.

Yes. Super helpful. Thanks, Scott. And, then just a follow-up here. It’s great to see such strong dividend coverage, specifically given where we are in the cycle and what will likely be a number of base rate cuts moving forward. But, how should we think about the base dividend heading into next year? Is the $0.40 quarterly level a good baseline? And, then you’ll continue to pay specials around that based on the level of excess earnings? Just any thoughts there would be helpful.

Sure. Brian, the dividend is ultimately a Board decision and the Board doesn’t make those decisions on a prospective basis. Given the coverage, I can tell you just institutionally, we feel very comfortable with our ability to continue to cover the base distribution. And, as we’ve demonstrated now over the last 17 plus quarters, to the extent that we have excess spillover income, which we continue to have, it is our view and our belief as an organization that we have an obligation to return as much as that as we can to our shareholders. And so, to the extent that spillover remains the same, to the extent that our business continues to perform, we have every intention to continue to deliver supplemental distributions to our shareholders on a go-forward basis.

Okay, great. I’ll leave it there. Thank you.

Thanks, Brian.

Thank you. Our next question comes from John Hecht of Jefferies. Your line is now open.

Hey, guys. Thanks very much. And, if I’m thinking right, you guys have your 20th Anniversary coming up, so congratulations on that. I just want to dive a little bit more into some of the macro factors impacting originations from some of the prior questions. Number 1, from an interest rate uncertainty perspective, I mean, for your portfolio, and I’m sure there’s different cohorts within the portfolio, how much flexibility do they have in terms of waiting to see what’s going to happen? Do they just have a specific window of time to make a decision, or is there a lot of time for them to wait and see and make a decision?

So, couple of things there, John. First, thanks for the remarks regarding the 20th Year Anniversary. That’s a significant milestone for Hercules Capital and our ability to consistently outperform over that period is really a credit to the team that we’ve built. We’ve got the best employees in the business and we certainly appreciate you recognizing that special event for the Company. In terms of the rate question, the challenge here is that as you probably recall, the vast majority of our deals when they’re underwritten have a contractual interest rate floor that’s set at the market yield as of that time. It’s not the case in every transaction, but it is the case in the majority of transactions that we do. So, a lot of the quality companies that we were talking about that we were talking to in the early parts of Q3, they were looking at the rate environment. I think the consensus was pretty clear that the Fed was going to cut. We were in discussions with those companies. We may have had initial indications of interest out, but they simply wanted to wait to receive a term sheet because they knew that the term sheet subsequent to a Fed rate action if it reflected a cut would potentially be more attractive. We didn’t want to force those decisions. We were seeing a slowdown in the market, so we made the decision to wait it out. Subsequent to the Fed taking action, reducing the Fed funds rate by 50 basis points, we’ve seen a significant increase in terms of the number of companies that are now willing to actually pull the trigger on debt financings. And that’s why you’ve seen our pending commitments go up to $630 million in a very short period of time.

Okay. That makes sense. And then I hope this isn’t loaded at all, but assuming that we do have clarity after the day of the election, is there like depending on the outcome, whether it goes either way, are there certain sectors that you think will be impacted or more vibrant or more active relative to others depending on the outcome of the election?

Sure. I mean, there’s definitely an argument that certain sectors, certain verticals will be impacted either positively or negatively depending on who will win. I’m not going to get into that on the call because we’re obviously going to make decisions in terms of sector allocations. I mean, we just don’t want to signal to the market what we’re going to do. But we do believe that there are specific sectors that will respond favorably and then certain sectors that will be more negatively impacted depending on who wins next week.

Okay. That makes sense. And then finally, if I can, I can’t remember if we’ve had a conversation about AI and what you’re thinking in terms of I mean, obviously, the massive development of that industry and what kind of opportunities that might present to you?

Yes. Look, it’s a massive evolution in the technology space. Our team has been doing a lot of work on artificial intelligence, broadly speaking. We’ve been very selective in terms of the companies that we are pursuing within the artificial intelligence space. I would sort of describe our approach to the space right now as wanting to tangentially be exposed. We’re looking for companies that have AI elements to them, but we’ve not been super aggressive with respect to pure play AI companies, because we sort of view the market like we viewed the battery market 15 to 20 years ago. There’s a ton of capital going into the space. There’s a ton of interest in the space. There’s going to be a lot of winners, but there’s also going to be a lot of losers. And when you’re an equity investor, you can afford to make those bets. When you’re a secured lender that focuses on credit, you can’t have a lot of losers. And so we’re playing the space tangentially. We’ve booked transactions with a lot of very strong companies that we’re excited about, but we’ll continue to sort of approach pure play artificial intelligence companies pretty selectively here.

Great. Thanks for the color.

Thanks, John.

Thank you. Our next question comes from Finian O’Shea of WFS. Your line is now open.

Hey, everyone. Good afternoon. Happy 20th as well. I guess I want to go back to the market or origination topic. There’s a lot to sort of tie together there, between the opening remarks and the Q&A. So, it sounds like, Scott, Q3 is light on volume, but also the quality hasn’t been great. And tying that, does that tie to some of maybe the other comments on competition that maybe you don’t view as long-term consistent? Is that the case? And if so, why would that change? Because it does feel like everybody is raising a lot of money and looking down into new cabinets for yield and so forth. So, just seeing if you can add to that.

Sure. First up, Fin, thanks for the remarks on the 20th anniversary. Again, certainly appreciate that recognition. In terms of the question, I think there’s a lot there as well. I’ll do my best to be responsive. And if you want additional color, obviously happy to continue to engage on it. With respect to our view of the credit market for venture and growth stage lending in Q3, it was both slow and it was soft in terms of quality. There were a lot of companies that we saw, particularly in the early innings of Q3 that were subscale, that were thin on liquidity, that were coming to the debt market because they did not have a lot of other alternatives. That’s certainly not the case in every instance, but that was the majority of what we saw coming to market, particularly in early Q3. We chose to sit that out. We were focused on quality. We saw a lot of opportunities within our own portfolio to put capital to work. We ended up committing in excess of $400 million in the quarter. We ended up funding nearly $275 million in the quarter. Year-to-date, we have funded a record $1.3 billion, year-to-date, we have committed $2 billion. So, our origination efforts have not slowed down year-to-date. We just pulled back in Q3 because we didn’t see the quality to support aggressive capital deployment.

Okay. Thanks. It sounds idiosyncratic more so than a powerful force, I guess. A follow-up, if I may. Seth, can you talk about why the guidance went up on the RIA?

Yes, absolutely, Fin. So, we’re ticking the guidance on the RIA dividend up slightly because of the performance that the portfolio is achieving as well as the growth of that portfolio. As you know, we’ve been allocating pretty consistently maybe around 20%, 22% of the investments that we’ve been making since the inception in 2021. And that portfolio is really now at a mature stage. It’s also achieving that maturity level where it’s receiving prepayments just like the BDC is. And so with that, we could see that the outlook was a little bit more positive than I had guided, and so we wanted to tick it up a little bit.

And is there eventual is there embedded, say, potential upside from performance fees? I know it’s early in the life and maybe those come later upon realizations or whatnot. Is this rate sort of lower than it would be down the line all else equal?

So yes, is the short answer. Of course, there’s the opportunity, but it is the same way that we look at the equity and warrant options that we get in the BDC portfolio. We see those as opportunistic to defray any debt losses that we may incur. And so we don’t look at those as a huge equity home run opportunity for that performance side, Fin. So, I would say that certainly structurally that is there, but it’s not something that we’re betting on.

Okay. Thanks so much.

Thanks, Fin.

Thank you. Our next question comes from Christopher Nolan of Ladenburg Thalmann and Co. Your line is now open.

Hey, guys. Congratulations on the 20. On a broader issue, taxes on unrealized gains is something which has sort of been proposed in all the discussions, in particular in California. And how do you see that impacting your business?

So, we would see that as impacting our business no differently than any other investment business. And so I think that we’re going to be dragged along with the tide with that. And therefore, when you look at the relative performance, Chris, I don’t think that it would impact us any more negatively or positively than others. We do enjoy the fact that we are a pass-through entity. So, keeping in mind that the BDC itself is a RIC. We’re passing on the earnings up into the investors. That profile could be a taxable or tax exempt entity. But we would not see ourselves as disproportionately impacted by that.

Okay. And then I guess the follow-up question is, for 2025, what regulatory change affecting BDCs would you guys be at the top of your wish list?

That’s an open field question. As an industry, we have been hopeful that Congress would take up the AFFE issue for inclusion and basically excluding the expense is when calculating the total returns and disclosure to their companies. So, that’s certainly top of the industry list. It does not impact us directly as much, but Scott has something additional, go ahead.

Yes. I was just going to say, I think the top of the list on the investment side would be the ineligible asset restrictions. That’s something that we’ve been talking about for a long time. We think it disproportionately impacts negatively businesses like Hercules Capital. And if we could have our pick, we would certainly look for that to change going forward.

Yes. The indexing in that would be great.

Okay. Thank you.

I am showing no further questions at this time. I would now like to turn it back to Scott for closing remarks.

Thank you, and thanks to everyone for joining the call today. As a final note, we will be participating in the Citizens JMP Financial Services Conference on November 12 in New York. If you are interested in meeting with us at this event, please contact Citizens JMP directly or Michael Hara. We look forward to reporting our progress on our Q4 2024 earnings call. Thanks, and have a great rest of the day.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.