TriplePoint Venture Growth BDC Corp. (TPVG) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to TriplePoint Venture Growth's Fourth Quarter and Fiscal year 2015 Earnings Conference Call. [Operator Instructions] This conference call is being recorded and a replay of the call will be available as an audio webcast on the TriplePoint Venture Growth website. I would now like to turn the call over to Harold Zagunis, Chief Financial Officer of TriplePoint Venture Growth. Mr. Zagunis, please go ahead.

Thank you, Connor [ph]. And thank you everyone for joining us today. We are pleased to share with you our results for the fourth quarter and fiscal year 2015. Here with me are Jim Labe, Chief Executive Officer and Chairman of the Board, and Sajal Srivastava - President and Chief Investment Officer. Before I turn the call over to Jim, I would like to direct your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements, and remind you that during this call we will make certain statements that relate to future events or the Company's future performance or financial condition, which may be considered forward-looking statements under federal securities laws. We ask that you refer to our most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.tpvg.com. With that, I'll turn it over to Jim.

Thanks, Harold, and welcome everyone to our fourth quarter and fiscal yearend earnings call. We had another good quarter and a very strong fiscal year. As in our last earnings call, I'm going to focus on the key topics that are on our minds. Then I'll turn over to Sajal and Harold for a more in-depth review of the portfolio on quarterly results, and then open it up to Q&A. So let me first start with some facts, because I think they really speak for themselves. We are the only venture lending BDC to cover its dividend with net investment income in 2015 and in 2014. This is particularly notable given the fact that we also did a first time follow-on equity offering last year and also didn't have to rely on spillover income from 2014 to cover the dividend. We are the only venture lending BDC to significantly grow net investment income or NII by almost 70%, from $12.8 million in 2014, the period from our IPO through December, to $22 million in fiscal 2015. We are the only venture lending BDC to increase portfolio yield. In fact, it went from 15.4% in 2014 to 17% in 2015. We are the only venture lending BDC that has also not had to ask for or go back to shareholders for approval to raise equity capital below NAV, net asset value. We're also the only venture lending BDC with a true global platform across the venture capital spectrum. TriplePoint Capital, our sponsor, which is behind this platform, benefits us and our shareholders in several ways. First, the relationships our sponsor has with select venture capital investors and the resulting deal flow that we get from it. One hundred percent of our deal flow in 2015 was originated directly from these relationships and their entrepreneurs, not from brokers or agents. In fact, we don't use or rely on brokers or agents for any of our deal flow. Second, it provides us with the ability to allocate venture growth deal flow to our sponsor's private capital when or if it should be necessary. So we're always in the market. Third, the sponsor has enabled us to attract the largest bank-led credit facility of any venture lending BDC, which we just renewed this past January. Based on these facts, we believe our differentiation and performance stands on its own. We also continue to have a very positive outlook on the venture capital market and our business based on a number of data points. First, the industry data shows that in Q4 venture capital fundraising activity across all venture capital firms was $5 billion. That's up almost 10% from the third quarter. VCs continue to have a significant amount of dry powder for investing over the next one to three years. Second, the industry data also shows us that venture investing activity in the fourth quarter was $11 billion. That's slightly down from the third quarter but it was the eighth consecutive quarter that more than $10 billion has been invested in venture capital in a single quarter. Further, for the full year, $59 billion was invested, which was up from the $50 billion invested back in 2014. Third, and probably the most relevant to us here at TriplePoint, is the wide window into the venture capital industry and the tech and life sciences investment environment that we have as our sponsor's in the unique position of providing loans across the entire spectrum of a venture capital backed company's life span, from the very earliest seed stage, a couple of a guys in an apartment maybe in downtown San Francisco, starting a business, right through the growth stages, and beyond. We maintain continual dialogue with our select group of leading venture investors, covering fundraising, investment activity, and the progression of their portfolio companies. These days we have a very balanced outlook on the business. No one's expecting massive changes in investment strategy or the pace. Let me be clear, they're not sitting out of this market. They're sticking to their models that great companies can be started in any market. As many of our select VCs say, there are only two numbers that matter, entry price and exit price. We continue to see strong demand globally for debt from high-quality venture growth stage companies. Many of these are names that we've been tracking for years and watched them grow and perform. We continue to be very selective, invest in only what we believe to be the very best opportunities, companies with substantial revenues, enterprise value, differentiated technologies, and no set of strong equity support, and meaningful cash runway. As we head forward into 2016, there's no changing our strategy on our end. There's no change in what we're doing. We believe our approach of working with a select group of venture capital investors is critical as they're continuing to invest in the best deals and their companies continue to raise additional equity capital. We expect to take advantage of our reputation and relationships to continue to grow our portfolio in a disciplined fashion. We're also encouraged by positive data points with several of our portfolio companies so far this year. Nutanix [ph], they came out in confidentiality and announced the planned public IPO. Jasper announced the pending acquisition by Cisco. Hayneedle announced its acquisition by Jet.com. And ThinkingPhones announced the very large equity raise at a healthy uptick in valuation. All of these happened in the last two months. Having said this, there's going to be bumps in the road, and that is part of the business. We will work to make sure that we have these good outcomes as possible when we come across them. We just have to look at each situation and figure out what's best to do. That's our job as we see it as credit manager and as your management team. All in all we're proud of the accomplishments we've done and made in 2015 and think that our performance speaks for itself. Unfortunately, the stock price hasn't reflected this exceptional performance. The $25 million share repurchase program we put in place last year, an active program where we already bought back 5.6 million of shares in the fourth quarter alone, is another step towards bettering the stock price. And we're going to continue to engage with new and existing shareholders to let them know about our progress and what we believe is the value potential of our stock. To conclude, we're very pleased with our portfolio growth and the yield since our IPO. We plan to continue taking advantage of market conditions in 2016 to add to what we believe are some of the most promising and exciting venture growth stage companies. We will be focused on what is within our control. Our belief is that good things will happen as we continue to differentiate our firm and our approach. With that, let me turn the call over to Sajal.

Thanks, Jim, and good afternoon everyone. We continue to see strong demand for venture growth stage lending, having signed $177 million of term sheets at TriplePoint Capital in Q4, and the pipeline continues to grow. During Q4 we closed $70 million of new commitments with seven companies. For the fiscal year, we signed $427 million of term sheets and closed $214 million of new commitments with 15 companies, starting in Q2 after our equity follow-on price in Q1. During Q4 we funded $3.7 million of debt investments to five companies and acquired warrants valued at $300,000 in five companies as well. For the fiscal year, we funded $102 million of debt and equity investments, again beginning in Q2 after our equity follow-on price in Q1. The $30 million of fundings in Q4 were offset by $17 million in prepays. As a result of the pre-pays, our portfolio yield was 17.9%, up from 17.5% in Q3. Without prepays, our portfolio yield was 15.4%. As Jim mentioned, for the fiscal year, our portfolio yield was 17%, compared to 15.4% for fiscal year 2014. For the full year we had six prepays, totaling $73 million. So far in Q1 we have closed $75 million of new deals, funded $31 million, and have had $25 million in prepays. At year's end, our unfunded commitments totaled $190 million to 12 companies, of which $50 million is dependent upon the company's reaching certain business or time-based milestones before the debt commitment becomes available to them. $165 million will expire during 2016, with $100 million actually expiring during the first half of this year. As we have discussed before, unfunded commitments are nothing new to the venture lending industry. We oftentimes enter into debt commitments with an obligor shortly after they closed an equity round, as it shows fresh support by the company's investors and helps deepen the equity cushion below our debt. We believe unfunded commitments provide our stakeholders with insight and visibility into our backlog and future investing activities. They show we're actively engaged in the marketplace, structuring investments with quality companies, and we expect roughly 70% to 70% of them to translate into funded assets, typically 3 to 12 months from when we enter into them. During Q4 we had $20 million of unfunded commitments expire and we had $134 million expire or terminate during 2015. Moving on to credit quality. As of December 31, the weighted average internal credit rating of the debt investment portfolio was 2.23, as compared to 2.1 at the end of the prior quarter. As a reminder, our rating system, loans are rated from 1 to 5, with 1 being the strongest credit rating, and new loans are initially generally rated 2. During the quarter, in addition to adding new loans to category White, we upgraded $5 million in principal balance and loans to one obligor from Light to Clear, downgraded $6.9 million in principal balance of loans to one obligor from White to Yellow, downgraded $25.6 million in principal balance of loans to virtual instruments, and downloaded $10 million in principal balance of loans to Mine Candy from Yellow to Orange. All other loans remain unchanged. In terms of an update, Virtual Instruments is proposing to enter into a transaction, which is subject to satisfaction of conditions to closing, including the approval of its shareholders. The proposed transaction would provide for the assumption of our loans to Virtual Instruments. In addition, Mine Candy hired a new CEO in February to help refocus the company and are in the process of bringing their third product to market. As Jim mentioned, so far we have had one company come out of confidentiality for its IPO, two portfolio companies announced mergers, and there are others in the market fundraising or evaluating strategic alternatives as well. We've remained proactive and engaged with our portfolio companies and their venture investors. I'd like to next cover fair value adjustments to our investment portfolio. For our valuation policy, all of our investments other than particularly small ones, are required to be reviewed and valued by an independent third party at least once a year. During fiscal year 2015, all of our assets were valued at least once, other than six warrant positions where the cost of a third-party valuation didn't make sense versus the fair value of the warrants. During Q4 we had a $6 million unrealized loss on our portfolio, with $4 million related to our debt portfolio and $2 million related to our equity and warrant portfolio. Of the $4 million related to our debt portfolio, $1.2 million was due to a prepayment in Q4 where we had an unrealized markup on the loan in Q3 when the customer provided Notice of Prepay and we then took the entire $1.2 million into interest income this quarter when the prepayment occurred and backed the prior unrelated gain out. The other $2.8 million was related to markdowns due to increased market-related discount rates, with $1.9 million related to Virtual Instruments and the other $900,000 related to obligors rated Yellow or Orange on our credit watch list. Of the $2 million in equity and warrant markdowns, $600,000 was related to marking down our warrants on Virtual Instruments and the rest was related to changes in comparable company multiples or the impact from capital raises. While many of our customers are hitting plan or exceeding plan, market comparables have moved and their follow-on capital raises may dilute ownership percentages, and so our warrants and equity investments are impacted by those changes, even though nothing may have fundamentally changed at these companies. Regarding other key performance indicators of our portfolio, as of Q4 the weighted loan to enterprise value at the time of origination for our portfolio, excluding intermodal, was approximately 8.6%, as compared to 8.3% in Q3. Approximately 18% of our debt investments consisted of growth capital loans where the borrower has a term loan facility from a bank and priority to our senior lien, which is down from 35% in Q3, reflecting prepays and generally the strong revenue and credit profile of our customers. We had two customers close private rounds of financing in Q4. For the year, approximately 15 customers raised additional capital. One customer was acquired and one customer went public. We continue to be busy building our franchise and monitoring and growing a great portfolio. We are in a position to benefit from strong market demand given our selectivity, approach to pricing, and of course, our liquidity. We continue to see great companies with innovative technologies, strong growth trajectories, and top-tier VCs attracted to our reputation, track record and creative approach to lending. With that, I'll now turn the call over to Harold to review the financial highlights for the fourth quarter and fiscal year.

Thank you, Sajal. For the fourth quarter, our total investment and other income was $11.4 million. As noted earlier, this represented a weighted average portfolio yield of 17.9%, of which 10.4% was from coupon payments, 0.8% was from the accretion of upfront facility fees and warrants, 4.2% was from the accretion of end-of-term payments, and 2.5% was from prepayments. Our yield this quarter excluding prepayments was 53.5% [ph]. Our expenses this quarter were $5.4 million, which was higher than the $4.6 million in the prior quarter, primarily as pre-incentive fee income resulted in higher incentive fee. Our base management fee was $1.4 million. Our income incentive fee and capital gains incentive fee totaled $1.2 million. Our debt expenses were $1.8 million. And our administrative and general expenses were just under $1 million. For the fourth quarter we recorded net investment income of $6 million or $0.36 per share, and core net investment income of $5.8 million or $0.35 per share. I remind you that core net investment income is a non-GAAP financial measure. We believe core net investment income is an important measure of the investment income that we will be required to distribute each year since capital gains incentive fees are accrued based on unrealized gains but are not earned until realized gains occur. For a reconciliation of core net investment income to net investment income, please see the press release we issued this afternoon. This quarter we had net unrealized losses at our investment of $6 million or $0.36 per share. The net unrealized losses were primarily due to $4 million of net unrealized losses on debt investments due to changes in discount rates used to fair value the investments, $1.7 million of net unrealized losses and warrants, and $300,000 of net unrealized losses on equity investments. Our net increase in net assets resulting from operations for the fourth quarter was $19,000, reflecting the impact of the unrealized losses on our net investment income. On an annualized return basis, our net investment income represented a 10% return on average net assets, and our core net investment income represented a 9.6% return on average net assets. There is no return on net increase in net assets this quarter. I'll remind you again that core net investment income is a non-GAAP measurement and is provided in addition to but not as a substitution for net investment income. For the full year 2015, our total investment and other income was $42.1 million, representing a weighted average portfolio yield of 17% on our investments for the period held. Of that 17% yield, 10.6% was from coupon payments, 0.8% was from the original issue discount of upfront facility fees and warrants, 4% was from the accretion of end-of-term payments, and 1.6% was from prepayment. Our yield for the year excluding prepayments was 15.4%. For the full year 2015, we recorded net investment income of approximately $22 million or $1.46 per share, and core net investment income of $21.7 million or $1.44 per share. For the full year 2015, we had net unrealized losses on our investments of $6.1 million or $0.41 per share. The net unrealized losses were primarily due to the $6 million of net unrealized losses on debt investments due to changes in discount rates used to fair-value the investments and $76,000 of net unrealized losses on warrants and equity investments. Our net investment income in 2015 was approximately 71% higher than that in 2014. Although 2014 represented less than a full year of operations as our IPO price on March 5. The increase in investment income also reflects the growth in our portfolio as we deployed our $96 million in follow-on equity proceeds from the first quarter and our $53 million in net baby bond issuance proceeds from the third quarter, along with the prepayments in principal amortization payments received throughout the year. In January we amended our $200 million credit facility to reduce the applicable margin above the base rates from 3-1/2% to 3%, and to extend both the revolving period and the maturity date by two years. As we have in the past, we will continue to use our credit facility, prepayments and principal amortization, defend our growth with the goal of approaching our target leverage range. As of December 31, about 24% of our debt investments are floating rates. As you know, the prime rate increased by 25 basis points in mid-December, and thus, the coupon rate on these floating rate instruments increased as well. In addition, the interest rate on future [inaudible] are generally set based on what the prime rate is at the time of funding. So, further increases in the prime rate will increase future coupon rates on both new fixed rate fundings at the time of the fundings and floating rate fundings throughout the life of the loan. As of December 31 we had 85 investments in 34 companies. Our investments included 47 debt investments, 31 warrant investments and 7 direct equity investments. The total cost and fair value of these investments was approximately $276.4 million and $271.7 million, respectively. As of December 31, the Company's net assets were approximately $231.6 million or $14.21 per share, compared to $242 million - $242.1 million or $14.52 per share as of September 30. As of December 31, 2014, our net assets totaled $145 million or $14.61 per share. As part of our $25 million share repurchase program approved in October, over 466,000 shares were repurchased during the fourth quarter at a weighted average price of $11.91, including commissions, with a total cost of approximately $5.6 million. As of December 31, our total cash position was $38.5 million. At the end of the quarter we had $18 million of debt drawn on our $200 million credit - revolving credit facility. Including our baby bonds, we are approximately 0.3 times leverage. We continue to make progress on our SBIC application with the goal of filing it in the near term. For the first quarter of 2016, our Board of Directors declared a dividend of $0.36 per share, payable on April 15 to stockholders of record as of March 31. This marks the eighth consecutive quarter since our IPO we have maintained or raised our quarterly dividend rate. With regards to dividends, in 2015 we generated net investment income of $22 million or $1.46 per share, which fully covered our dividend in 2015, as we did in 2014. With regards to taxable income, in 2015 we again generated more taxable income from our operations than we distributed in dividends. We estimate that our spillover income going into 2016 is $1.7 million or $0.10 per share. Now I'll turn the call back over to Jim.

Thanks again, Harold. At this point we'll be happy to take your questions. Operator, can you please open the lines?

[Operator Instructions] Your first question comes from the line of Jon Bock with Wells Fargo. Your line is open.

Thank you very much for taking my questions, and appreciate the commentary guys, particularly in what is a difficult equity market. Let's start first as it relates to liquidity. So I believe there was about $190 million of unfunded commitments as of 12/31. You made $70 million of unfunded commitments or new commitments to portfolio close effectively this quarter. So, right around, I'd imagine, close to the available liquidity that you have. Now, Sajal, I know that you have $100 million coming on the first half, and so that helps, but give us a sense of where you want to run unfunded commitments because, as I also read, I know a majority of those unfunded commitments are not subjected to milestones, and so I'm curious in light of the discussion we had with the commission, you know, you had with the commission, others had with the commission throughout 2015, where you really want to run that given that you wouldn't want to become cash-strapped if everyone realized they wanted to draw in an unforeseen event?

Yeah, Jon, good afternoon. Yeah, I would say there's no fixed number target from our perspective. It's a function of balancing amounts available under our credit lines, near-term cash, as we said, prepays, principal amortizations, as well as the other element as guidance from our portfolio companies in terms of utilization. We mentioned that we have $100 million that expire during the first half of this year, actually $33 million has already expired so far. And so we've also had about $25 million prepays as well, so, extra cash. But I would say there isn't a fixed number. We want to be smart and thoughtful, obviously never get over our ski tips, but also again manage to customer expectations in terms of utilization in their facilities.

Okay. Then the next, and I appreciate the commentary on Virtual Instruments, and this is a name that, you know, we had an opportunity and others I'd say just because there's some public commentary on it, to learn a bit more about. And what I'm interested in, as you move it into a category four, which I think is Orange, as you mentioned, but yet the loan's still at 94. And so when you say that there is assumption of a loan, would that mean that that assumption of the loan comes at that 94 price, are you paid out at par? A bit more of discussion on how that transpires only because we'd heard of layoffs, etcetera, that was out in the public domain. And just because it's a sizable investment, it's not the whole kit and caboodle, but it's one that's important for investors to learn about. More color there on why you can keep it 94 but then downgrade the credit quality of the asset --

Jon, great question. So I think it's an ongoing situation, so, obviously, a little bit limited in terms of what we can say as the situation develops and finalizes, but we feel good. I think to answer your bigger-picture question. So from our perspective, when a company assumes debt, it assumes the loan in full. When it comes to fair-valuing of a loan, you need to take into account market rates, if you were to do a deal today, what the appropriate return associated with those things are. And so you need to, in all -- with regards to fair value. And so that explains a little bit of the difference there. But again, assumption in full of our loan, but again it's subject to closing shareholder approval and other factors and it's an ongoing situation, but then again obviously taking into account market rates and things like that when we fair value alone.

Okay. So then going to the prepayments for a moment and, you know, so about $50 million prepayments for the quarter, great; big boost to portfolio yields, great. But Harold, what was the amount of prepayment fee income that came in this quarter? I understand the 2.5% was the annualized on a cost of debt amount. What was the actual prepayment fee income that came in?

Well, as Sajal mentioned, most of that came, was $1.2 million, from the amount of income we recognized due to, you know, that we reversed the unrealized gain of $1.2 million from prior quarter that was included in our loss, and now is the primary income that we generated from prepayment.

The other loan was a more mature loan, so there was only incremental amounts for that prepay that -- for the other loan that prepaid in the quarter.

Okay. So we shouldn't look at that 2.5 as necessarily indicative on the 16 that prepaid this quarter, which I was kind of wondering --

Yes. As we've talked before, you know, prepayments are very specific to the terms of the loan, the kind of tenure of the loan. So, a loan that prepays early in its life will generally earn us a higher return than a loan that's close to maturity date. So there's no specific number you can apply to the current number of prepayments, may or may not be consistent with last quarter.

Okay, okay. And then, Sajal, in terms of the need, obviously venture capitalists are going to be looking for more and more debt dollars to help bridge investments. Of course you also mentioned that high-quality investments are still receiving funding. How do you balance kind of the opportunity set between TPC and TPVG? I know there's a line of demarcation, but I also noticed that you outlined $177 million done at TriplePoint Capital as opposed to what's actually been done on the BDC, which is low, understandably, because you have lower capacity for the moment. But just --

Jon, just to clarify that, that's -- the term sheets are signed by TriplePoint Capital and then they're allocated during the process. So that did not go to TPC. Those are all the venture growth deals that we as a platform signed in Q4, the majority of which should go to TPVG, if not went to TPVG, based on TPVG's funding capacity at the time of allocation which again we're allocating venture growth deals to TPVG.

I got it. So when it comes to looking at that 177 number, because the BDC has capacity, should we always read that that was basically what went in to TriplePoint Venture Growth? Like what would be the --

Right. That's -- did go, will go, or is going. Because obviously not all of it closes in a quarter, and so there's some element that spills over into the next year. There's always a small percentage that during the process you may -- the transaction size may reduce or there may be some other reasons for the numbers to change a bit. But yes, you're correct, that amount generally includes amounts that has been closed by TPVG or will be closed, unless it's otherwise reduced or adjusted during the diligence and documentation process.

Okay, got it. And then, Jim, just a comment over also on the need for capital for venture firms. Where would you describe the opportunity set is, I'd say, the most attractive for new capital, for venture growth stage, be it life science, be it later-stage technology, or -- and so that's one. And then the second part of the question would be, where are the areas that you find the most over-exposed to loss, right? When valuations compressed, it's inevitable and no one expects anyone here to bat a thousand, but what we do expect is that there's some amount of transparency as to where the trouble spots lie. And that's my last question. Thank you.

Yeah. I thought I was going to escape the questions, Jonathan, you were leaving me out, although I probably could have tackled some of the earlier ones. So I think you correctly see, and hopefully I made it clear, that the demand is very strong, the pipeline is strong, particularly in the tech sector these days. And during -- the business has never been about this quarter, that quarter, what sector is in, what sector is out. Last quarter I could have talked about perhaps storage and virtual reality and certain areas. This time I could talk about other various sectors. But, you know, a lot of times that's driven is what's happening in the public comps, and basically that's what's going to drive a particular, you know, sector, a certain investment area that folks are focused on. But at the end of the day, we try not to manage this on a quarter-to-quarter basis sector by sector. It's more long-term trends. And it gets back to what the better venture capitalists are investing in, in the tech sector these days, and we're following them on a more passive basis. So I hate to get into specific tech areas quarter to quarter. I just think it's not --

I'd only add that, you know, historically, life sciences hasn't been a big part of our business. We aren't seeing as much life science investment activity by our select sponsors. And so we will generally say, for our sponsors, they're not particularly active in life sciences, but continue to be particularly active in tech as they've always been, as indicated by again the amount of fresh capital that they've raised.

Thank you.

[Operator Instructions] That concludes this afternoon's question-and-answer session. I'll turn the call back over to Jim Labe for some concluding remarks.

Okay. I'll close again by expressing my appreciation to all of you for your continued interest and support in TriplePoint Venture Growth BDC. Thanks and we look forward to speaking with you again soon.

That concludes today's call. You may now disconnect.