An archived webcast replay will be available on the Investor Relations webpage for at least thirty 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 Capital, Inc. 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. Thank you all for joining the Hercules Capital, Inc. Q4 and full year 2024 earnings call. 2024 was another year of record operating performance and solid controlled growth for Hercules Capital, Inc. We were able to set several new financial and performance records and demonstrate strong platform growth while managing the business and balance sheet conservatively. Our performance in 2024 was highlighted by a record total investment income, record net investment income, and record total gross fundings, all of which put us in position to once again declare a new supplemental distribution program for our shareholders. Driven by the growth of both the BDC and our private credit funds business, Hercules Capital, Inc. is now managing an increase of more than 14% from where we were at year-end 2023. Hercules Capital, Inc. achieved a significant milestone in 2024 as we celebrated twenty years of investment activity, with our investment platform reaching and surpassing the $20 billion mark in cumulative debt commitments since inception. This achievement underscores our commitment to serving the capital needs of the venture and growth stage ecosystems. Our success since inception has been made possible by the tremendous work and dedication of our talented employees and the trust that our borrowers and their investors have placed with us. Our unwavering commitment to venture and growth stage companies and our continuous focus on always doing what we believe is in the best interest of our shareholders and stakeholders has served us incredibly well for the last twenty years and will help guide us going forward. Let me recap some of the highlights and achievements for 2024. Record full year 2024 total gross fundings of $1.81 billion, an increase of 13% year over year. Record full year 2024 total investment income of $493.6 million, an increase…

Let me now recap some of the key highlights of our performance for Q4.

In Q4, we originated total gross debt and equity commitments of over $619 million and gross fundings of over $468 million. For the year, we committed nearly $2.7 billion of capital and delivered record funding performance of approximately $1.81 billion. As a result, we generated total investment income of $121.8 million and net investment income of $81.1 million, or $0.49 per share. We were able to achieve 123% coverage of our quarterly base distribution of $0.40 per share, despite ending the quarter with very conservative GAAP leverage of 89.6%. We expect to slowly bring leverage up throughout 2025, which we believe will help partially offset further potential declines in base rates and some of the spread compression that we have seen over the last several quarters on new originations. Having an abundance of available liquidity to drive net debt portfolio growth near term while utilizing lower than normal leverage provides us with a distinct competitive advantage in this regard. This is our seventh consecutive quarter of over $100 million of quarterly core income, excluding the benefit of prepayment fees or fee accelerations from early repayments. This puts us in a very solid position to be able to continue to comfortably cover our quarterly base distribution in the current rate environment. We generated a return on equity in Q4 of 17%, and our portfolio generated a GAAP effective yield of 13.7% in Q4 and a core yield of 12.9%. Core yields declined from 13.3% in Q3, largely coming from declining base rates and some spread compression on new originations. As of the end of the year, approximately 50% of our portfolio has already reached the contractual floor on rates. Our balance sheet with conservative leverage and low cost of leverage remains very well-positioned to support our continued growth objectives and provides…

Thank you, Scott, and good afternoon, ladies and gentlemen. As Scott mentioned, the fourth quarter capped off our twenty-year anniversary with a number of records for Hercules Capital, Inc. In addition to record funding activity in 2024, Hercules broke quarterly and annual records in many dimensions, including total investment income and net investment income, all while managing the balance sheet conservatively with low leverage and strong liquidity. 2024 was another year of validating the benefits of operating at scale by growing our platform AUM by approximately 14% to approximately $4.8 billion, while our non-interest operating expenses grew less than 5% year over year. Our return on average equity ended the year at 17%, and our Q4 net investment income provided a 123% coverage of our base dividend despite the 100 basis points of prime rate reduction in the second half of 2024, putting us in a very strong position heading into 2025. During 2024, our weighted average cost of debt was approximately 5%, and the leverage remained conservatively low, putting us in a position to be able to take advantage of what we expect to be a more favorable new business environment in 2025. During the year, we added a new SBIC license, providing us with $175 million of favorably priced debt. In addition, we upsized and renewed our $300 million credit facility led by SMBC, and subsequent to year-end, we extended our $175 million letter of credit facility with SMBC by two years, now available until February 2028, to cover a good portion of our available unfunded commitment in a more cost-effective manner. In 2024, we continued to supplement liquidity by raising net of fees approximately $218 million throughout the year via our ATM program. We ended the year with approximately $660 million in available liquidity in the BDC.…

Thank you so much, Seth. And as a reminder, to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself, simply press star one one again. Our first question is from the line of Brian McKenna with Citizens JMP. Please proceed.

Thanks. Good evening, everyone. It was great to see another record year of origination activity. You know, two years in a row now, you've set records on this front. I know it's a little early here, but you know, based on the pipeline today and everything you could see across the business, you know, could 2025 end up being another record year? And I guess what I'm getting at, is it reasonable to expect another year of double-digit growth, you know, within the investment portfolio?

Sure. Thanks, Brian. I think the short answer is if credit quality is there, we're certainly hopeful that this will be another record year for us. I think we've proven over the years that we're not gonna chase the market and just book deals for the sake of showing growth. Right now, we're off to a great start. I provided some color in terms of our closed commitments quarter to date, which are $250 million and an additional $578 million of signed pending commitments. That puts us arguably off to the best start we've had in the last five years in terms of early Q1 activity. We're very optimistic about the new business environment for 2025. And if the credit quality is there to support it, our balance sheet is incredibly well-positioned to allow us to take advantage of it, and the result of that could be yet another record year for us on the new business front.

Okay. Great. That's helpful. And then on the RIA, you know, I believe you're gonna be in the market fundraising to your next fund this year. Can you talk about the potential size of this, how quick you think you can raise this capital, and ultimately, you know, how long it takes to get that capital invested? And then just as this AUM, you know, begins to, you know, earn fees, etcetera, you know, how should we think about the earnings attribution to HTGC, you know, from the RIA in 2025 and really longer term as well?

Yeah. Thanks, Brian. The private credit fund business continues to be a really exciting and growing part of the overall Hercules platform. We have publicly disclosed that we currently are managing three distinct institutional private credit funds. We don't have any disclosure to make on this call in terms of the next fund, but as we've sort of consistently said, we would expect to be in the market at some point over the next year or so trying to raise an additional fund given how well those first three funds have performed and how aggressively we've been able to deploy capital. We'll obviously make some public disclosure when it's appropriate to do so in terms of how that's going. I think pretty consistent in terms of how we've approached the market historically, our goal is never to raise as much money as we can and invest it as quickly as possible. Our goal has always been, whether it's in the BDC or in the private fund business, to raise enough capital that allows us to appropriately go after quality credits in the market without being forced into a position where we have to deploy capital just for the sake of overall capital. So we're gonna continue to manage both the BDC and the private fund business with more of a controlled managed growth mentality, but I would expect for our investors, shareholders, and stakeholders to see growth in both the BDC and continued growth in the private fund business in 2025. With respect to the earnings power generated from the private funds business, I'll have Seth address that.

Yeah. Just in my guidance, we continue to update the dividend expectations coming out of the RIA, and that's reflective of that earnings growth that's occurring off the funds. I wouldn't expect it to be beyond what I guided as a quarterly distribution for the current year. And the timing of when we launch the next fund and close it would certainly change that, but I wouldn't foresee that impacting 2025.

Okay. Great. That's helpful. I'll leave it there.

Thank you. One moment for our next question, please. It comes from the line of Crispin Love with Piper Sandler. Please proceed.

Thank you. Good afternoon. On credit quality, just one non-accrual now, but you had $54 million in realized losses from a couple of debt investments and a pickup in the grade four bucket. So can you detail what drove both of those, which companies, and your views on credit going forward? And also, how much of the $54 million was in unrealized previously?

So as Scott guided, the amount that was in the $54 million was approximately $43 million of that, and that was related to the convoy realization event. Scott, do you wanna cover the other dimensions of that?

Yeah. Sure. Crispin, there were the $53.9 million, about $42 million of that was already in unrealized, so very little impact in terms of net asset value. The single largest driver of the realized loss was just a crystallization in the completion of our convoy workouts. That was an investment that went on non-accrual in 2023. We began our workout efforts in the second half of 2023. The workout efforts culminated in Q4 this year, so we just crystallized that unrealized into a realized position. The only other realized loss of substance was one debt investment to a public biotech company that ended up filing bankruptcy. We worked together with the investors. That company was liquidated. We had a pretty substantial recovery on the debt position, but there was a small realized loss on that investment as well. So those were the two biggest drivers in terms of the realized loss activity. And again, $41.9 million out of the $53.9 million had already been recognized as an unrealized loss in 2023. In terms of overall credit as it relates to grade four, you are correct. There was a small movement in the rated four bucket. In Q3, 2.3% of the portfolio was in grade four credits. In Q4, $159.4 million, so about 4.6%. Still below our norm. We generally want to see grade fours at 5% or below. So at 4.6%, we're certainly closer to the high end of that, but still below the average that we've typically seen. And the biggest change in that was three credits that were having trouble fundraising. We proactively moved those credits down from grade three to grade four in the quarter. Our teams are actively working with each of those three credits, and we would expect to have a more substantive update over the next ninety days that we can speak to on our Q1 call. Outside of that, when you look at the portfolio as a whole, pretty pleased by what we're seeing. Weighted average credit rating of 2.26, so no real change from the 2.24 that we saw in Q3. The one caveat that I would make is the comment that I made in my prepared remarks is that we have seen certain syndicates essentially struggling with raising new capital with high valuations. And so companies that raise money in 2022 and 2023 at relatively high valuations, they're approaching the market right now for new investors to come in, they're getting substantial pushback, and we've seen that from not just our portfolio, but really across the ecosystem. That's something that we're watching pretty closely. We wanna see how that plays out. But nothing material that we see right now in our portfolio outside of what I just said.

Great, Scott. Thank you for that. All very helpful. In recent quarters, you've talked about healthier companies waiting for rates to come down to add debt capital, and you've definitely had a significant pickup in fundings in the fourth quarter. Do you think that was driven by companies waiting post-election efforts slowdown leading into the election? Or are there any other callouts in key drivers of the activities in the fourth quarter, and was that activity back-end loaded?

Yeah. I think the two biggest drivers were just the election and Fed rate uncertainty that we saw in the Q3, Q4 time period. When we did our Q3 call, we spoke about just overall caution across the ecosystem. We saw that in our Q3 funding numbers, but we did guide to an expected uplift post-Fed action and post-election outcome, and that's exactly what we saw. I think once the uncertainty of the election was lifted, once it became clear what the Fed was gonna do in both September and again in December, we've just seen a lot of momentum on the new business side, and we really don't expect that to slow down. I think the other thing that's been a tailwind is the fact that, you know, base rates are now down roughly a hundred basis points over the last two quarters. And so I think a lot of companies are looking to take advantage of that. You're also seeing, I think, companies now sort of come to the recognition that we're likely to stay in the current rate environment for the foreseeable future, and the notion that there will be numerous additional cuts in 2025 is becoming increasingly less likely. So I think companies are just looking at it and saying if we're going to do something, let's do it now. Let's not continue to wait for rates to come down because they frankly may not come down much further.

Great. Thank you. Makes sense. I appreciate you taking my questions.

Thank you. Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please proceed.

Hey, everyone. Good afternoon. I wanted to move over to the core yields, about twelve and a half guidance. First, can you remind us that's a global portfolio number? And if so, what's the sort of new money core yields you're deploying at today? And then what does that imply that they will be at the end of the year with your deployment assumptions? Thank you.

Thanks, Fin. So, yeah, the guidance was 12.25% to 12.75% for Q1. That is a global number. That would be our average core yield over the entire portfolio. And, Scott, you wanna take the second part?

Yeah. Sure. So, you know, Fin, if you look at Q3, 13.3% core yield across the totality of the portfolio. In Q4, 12.9%. The Fed rate cut in Q3 was at the very end of the quarter, so virtually no impact in Q3. The entire impact hit in Q4, which drove that 13.3% to 12.9%. We saw roughly the same thing happen in Q4 where the Fed rate action was towards the back end of the quarter, so very little impact on core yield in Q4. We expect that to flow through to Q1, which is why Seth gave the guidance that we currently gave. Right now, we're originating consistently in that 11.5% to 13% range. So right within our core yield target, our modeling for this year shows that we will be able to deploy up to our stated objectives by holding our core yield guidance in the range that Seth provided. So I think overall, we feel very confident that our core yields are gonna stabilize in that 12% range, and based on everything that we're seeing right now in terms of capital deployment, we think that we can both hit our funding objectives and maintain that core yield target of being in the 12% range.

Okay. That's helpful. And sort of related but longer, our question, there's been a lower grind of the end of term fee embedded in the portfolio as it's grown. Obviously, the market has been, you know, all over the place in recent years as you know better than I. But seeing if this is a secular change in the nature of what you do, is it going up market, or are fees coming out of these structures, or should we anticipate a comeback in more meaningful end of term fees in your origination?

Sure. I think it's really a combination, Fin, of three things. Number one, we've been fairly conservative in our minds in originations over the last two or so years. We've gone significantly up in terms of first lien exposure. Our first lien exposure, if you look at it two years ago, was in the mid-seventies. Today, it's at 91%. We've gone upstream in terms of scale and sophistication, and overall maturity of the companies that we are lending to. Those two things generally come with slightly lower economics, and that's a trade that we've been willing to make because we think that's in the best interest of our shareholders and stakeholders long term. So that's number one. Number two, there is a tremendous amount of liquidity in the ecosystem, and a lot of larger asset managers are looking to deploy capital in every vertical. And so we have, over the last handful of years, seen large asset managers try to do deals in the growth stage part of the market that are just not typically structured or priced for how the market has historically worked. So those are lower economics, lower fees, so far or historically LIBOR-based rates versus prime rates. So we've obviously reacted to that to make sure that we defend market share. We don't think that's sustainable. We don't think that's long-lasting, and that will just take some time to work its way through the system. We are very confident that we're gonna be able to maintain our core yield target for the year. And I think at the end of the day, when you look at how we manage the business, where we manage it to core yield, but we're actually solving for that effective yield, which includes the benefit of the acceleration and the prepays, we are consistently generating somewhere between a 13% and a 15% effective yield on this portfolio, including 13.7% in Q4, despite the fact that base rates have come down by a hundred basis points.

Very helpful. Thanks. And if I can do a bonus for you or perhaps Seth, there's a lot of unsecured in your debt stack that's gonna start to roll. I think it already has. I think you paid one post-quarter, you mentioned, in the release. Should we expect this level of unsecured in the debt mix, or any color you'd provide us on how this might shape up? Well, hard to predict if there's any sort of directions you are leaning. Thank you.

Yeah. That's a good question, Fin. Thanks. Yeah. So we did pay off $50 million of a private placement unsecured on February 5th. In June, we have $120 million that matures. That's all for 2025. You're correct that over the next three years, we do have some others maturing more significant in 2026 and 2027. As far as the mix between secured and unsecured, it will stay more heavily weighted to the unsecured side. But we've always said that we would be opportunistic in the secured side should rates favor such a decision. We just will not go heavy in that market as we're no longer required to do that, meaning the industry itself as well as the size and the scale of the balance sheet of Hercules Capital, Inc. itself doesn't warrant necessitating dipping into that market too heavily. So the vast majority will be unsecured.

Okay. Thanks so much.

Thank you. Our next question, one moment, please. Comes from the line of John Hecht with Jefferies. Please proceed.

Afternoon, guys. Thanks very much for taking my questions. First one is, you know, I know from your you guys run a conservative balance sheet and so forth. But your leverage ratio now, you know, it's kind of I think it's below the midpoint of the target. I guess, what's your desire to increase leverage, especially, you know, that would be an offset to the decline in rates recently?

Yeah. I think, John, that's one of the distinct advantages that we have heading into 2025. You're seeing across the BDC space, across the private credit space, some yield compression, both with respect to base rates coming down and with respect to new onboarding yields on originations. Being under-levered with a lot of liquidity puts us in a distinct competitive advantage to be able to offset some of that by being a little bit more aggressive on leverage. And that's exactly what we intend to do. You are correct that right now when you look at our GAAP leverage at 89.6%, you look at our regulatory leverage of 75.6%. That is well below our historical norms and, frankly, below our targets. We've intentionally been conservative in terms of leverage because we think that by utilizing leverage more aggressively this year, we're gonna be able to deploy capital aggressively, continue to take market share, and offset a good portion of that overall yield compression that we're seeing across the ecosystem.

Okay. And then a nonrelated follow-up is that obviously, people are thinking about the changes in administration, what that might mean to industry. Any thoughts on your side on what the kind of hot sub-sectors that you will maybe, you know, modify your approach to this year, whether it's, you know, increase or decrease allocation, just anything on that front of where you're focused from a technological perspective?

You know, John, great question. And our investment teams, both on the tech side and the life science side, have spent a lot of time thinking about that question. And, you know, frankly and to be honest, we have started some rotation into some sectors more aggressively and out of some sectors more aggressively. And, you know, certainly not going to telegraph to the market where we're being aggressive and where we're being more conservative, but we have absolutely started to react to what we expect the new administration to do in terms of both policy and rhetoric. I would say that overall, we are pretty bullish in terms of the general backdrop for 2025, particularly with respect to new originations. Arguably, we're looking at an environment that we think is gonna be characterized by less regulation, more M&A activity, more capital markets activity, more investment in technology and technology-enabled solutions. So we think that there's a lot of positive overall momentum. The caveat is, I think a lot of this is gonna come with just a lot of volatility, a lot of people waking up every morning to check their Twitter accounts to see what was said and what actually got done. So we are watching that sort of volatility very closely because that could have a real impact on credit. But with respect to the new business market, we're actually pretty bullish in terms of what this year should look like.

Thank you. One moment for our next question, please. It comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed.

Hey, guys. Scott, on a follow-up to the last question on leverage, are you targeting leverage so your EPS is sufficient to cover the dividend plus the supplemental?

So, yeah, thanks, Chris, for the question. We're targeting leverage to make sure that we're giving a good return to our investors. At the moment, we've been keeping our powder dry in anticipation of being opportunistic. We'll continue to evaluate the market, but Scott's been very clear that we plan on driving leverage up as we see opportunities. Our leverage ceiling that we've communicated is 1.25, and we'll stay a fair distance away from that. Historically, no further north than 1.15. So we're a fair distance off of that, and we have a ways that we would go until then.

Yeah. And, Chris, I would just add on that point. When we're managing the business, our view is that the base dividend is sacrosanct. So when we're thinking about how we run the business and where we need to see NII, that $0.40 base distribution is something that we hold very near and dear to our hearts. The supplemental distribution is being paid out of that spillover, which as we noted is $163.6 million or $0.96 per share at the end of the quarter. So that just puts us in a really strong position to be able to make sure that we continue to cover comfortably that base distribution with NII irrespective of the rate environment and that we continue to do the right things to make sure we're returning as much of that spillover as we can to our shareholders, which ultimately we think is the right thing to do.

Great. Follow-up question. AFFE, given all the moving pieces going on with the new administration, are you getting any twings out there of possible reconsideration by the SEC for the AFFE rule?

So nothing directly from the SEC, but, you know, we participate in different groups in supporting them to the extent that legislation can be put forward to address that issue. At the moment, I know it feels like we're three months into the administration already, but at the moment, it has not been something that has been pushed forward yet, and we are waiting to see who would sponsor a bill this time. So, there's no progress to report at this time other than, yes, we remain interested in that topic.

Sounds good. Okay. Good quarter. Good year.

Thanks, Chris.

Thank you. We have a question from the line of Paul Johnson with KBW. Please proceed.

Yeah. Good evening. Thank you for taking my questions. Scott, so when you reference a certain syndicate of companies that you're referring to with sensitivity to valuations here, just trace it. Maybe what exactly you're referencing here. Are we talking about certain VC investors in the markets that are becoming much more sensitive to companies that were raised at much higher valuations, or is this more like a cohort of companies that are essentially held by, you know, maybe a certain syndicate of VCs that are struggling to raise capital?

Yeah. No. I think it's a pretty broad-based comment, Paul. What we have seen over the last handful of quarters is that new investors looking at new investments are much more focused on valuation than we have seen over the last handful of years. So to the extent that you have a company that raised a large round of financing at what arguably now is an inflated valuation in 2021 or in 2022, and that company is coming to market looking for a new investor, the new investor, what we are seeing, not in every case, but certainly in some cases, is much more sensitive to that valuation discussion. And so that puts more pressure on that company's current existing syndicate to essentially fund the company on its own without new investor money coming in. And what we have started to see is that there is some stress in existing syndicates in terms of their ability and willingness to continue to fund some of those legacy companies. So it's something that we're watching closely. We've seen it take place in a small handful of situations, but it is something that we're watching, and we want to see how it plays out over the next several quarters.

Got it. Thank you. That's helpful. And then I was wondering maybe just a little bit more broadly on, you know, in terms of maybe getting an update on, you know, unfunded commitments, looks like they were pretty stable on the year. Looks like they also went down just a little bit quarter over.

Yeah. So overall, our unfunded commitments declined in the quarter. So unfunded commitments at the end of Q4, $448.5 million. That's down slightly from $489 million in Q3. That number, if you look at it over the last sort of several quarters, has been relatively consistent, although it is starting to trend down. We're not seeing any noticeable trends in terms of companies choosing to draw or not draw. The one caveat to that would be we are seeing some instances where existing portfolio companies that we had booked maybe two or three years ago that had unfunded commitments where the rates are much higher on those deals because of where the base rates were at the time, those companies are a lot less likely to draw. So we've seen a lot of companies let those unfunded commitments expire, and that's just a trend that has partly contributed to that decline in unfunded commitments over the last couple of quarters.

Got it. Thanks again. That's helpful. Last one, just on Palantir this quarter, that's obviously been a very successful investment for you guys. Looks like you fully closed that position out in the fourth quarter. I was wondering, do you have a way to quantify how much that drove any of the unrealized portion of the gains this quarter?

That was the biggest driver of the realized gains on the equity front. Roughly in the $15 million range in terms of realized gains in the quarter on that investment.

Got it. And I actually also meant to ask kind of if there was any additional appreciation during the quarter from that investment and if there is a way to that. From the 9/30 mark.

So the investment was exited in Q4, there wouldn't be anything on the balance sheet as of the end of Q4. If you look at the realized gains on the equity positions for the entire quarter, roughly $22 million, so $21.9 million, during the quarter. The biggest driver of that was Palantir. We also exited partially several other public equity positions where we had some meaningful appreciation during the quarter.

Okay. Got it. Thanks for that. That's all the questions for me.

Thank you so much. And as I see no further questions in queue, I will turn the call back to Scott Bluestein for final comments.

Thank you, Carmen. Thanks to everyone for joining our call today. We look forward to reporting our progress on our Q1 2025 earnings call. Thanks, everybody.

Thank you. And with that, we conclude today's conference. You may now disconnect.