TriplePoint Venture Growth BDC Corp. (TPVG) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to TriplePoint Venture Growth's First Quarter 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, William. And thank you everyone for joining us today. We are pleased to share with you our results for the first quarter. 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 first quarter earnings call. As many of you know this past March marked the second anniversary of our Company's initial public offering and we are proud to share some of the highlights for the past 2 years before getting to this quarter. Specifically, in 2 short years, we've delivered dividends to our shareholders of $3.02 per share. We funded $317 million worth of loan and that was after acquiring our initial $124 million portfolio. We had an average of $30 million to $40 million in customer loan fundings each quarter. We more than doubled our customer base from 16 to 34 customers, and our investments from 41 to 90. We delivered a consistent weighted average portfolio yield of more than 14.3% per quarter. And all of that was without the benefits or inclusion of any customer pre-payment. Speaking of pre-payments, we also had more than $130 million worth of customer pre-payments which nicely boosted the yields above 14.3% in the quarters that they occurred. We are very proud of this 2 year track record and the strategy behind it which made this possible. The strategy is reflected in our first quarters result as well and we continue to focus on a few key areas including adding some very exciting venture growth stage customer and growing and managing the portfolio. Our reputation and approach have always differentiated us in this market and our pipeline is extending with opportunities to finance some totally robust and leading venture growth stage companies. I'd now like to share some highlight to the first quarter. These include some $73 million worth of sign venture growth stage term sheets. That's at the sponsor level TriplePoint Capital. Some $90 million worth of new debt financing commitments. Almost 60 million in customer loan fundings which was our second highest quarter ever and a weighted average portfolio yield of 15.7%. In addition, we also renewed our $200 million credit facility extending both the maturity date as well as reducing the interest rate. From the beginning, our business has been about building and managing a long term portfolio and generating a track of yields and returns to our stakeholders. We just started our third year. So we are only in the very early innings of the very long gain. We believe we will continue to be the champions and the focus on winning the pennant. Let me also stress that we align with shareholders. Our incentives are tied to the performance of our portfolio. We are one the few BDCs with this best-in-class fee structure. During the last quarter, some of our portfolio developments included Jasper which was acquired for more than 1.4 billion by Cisco, Hayneedle which was acquired by Jet.com, ThinkingPhones which is now known as Fuze and raise more than $100 million in a private round of financing and Virtual Instruments which merged with another company and where our loans were soon in full. We also continue to have companies in our portfolio raise follow on capital which is an important indicator for portfolio health. In addition to Fuze, there were four more companies which raised capital back in the first quarter and two more portfolio companies which have already announced raises in the second quarter so far. I'd like to highlight that as we go through the various market stages and conditions in the venture industry, we are the veteran. We believe shareholders can see first-hand benefits of our almost 30 years of experience. The strength in our model of working with only a very few select group of leading venture capital investors and how all this proves out as we grow and manage the portfolio. It’s during these times that we believe our model shines. Overall, we remain bullish on the outlook for venture lending in our business given the strong pipeline and the continued large amounts of near record fundraising by venture firms. This includes a few of our select group of leading venture capital investors which have raised new, multi-billion dollar firms recently. In fact, last quarter, more than $12 billion was raised by the venture funds in the U.S., the largest amount in 10 years. I can't think of a better testimonial to the strength and attractiveness of the venture capital business. Given the first fundraising activity, we expect that we’ll continue to fuel the strong demand globally for debt from high quality venture growth stage companies. In this environment, we will continue to differentiate ourselves in the market with our brand, reputation, focus on venture growth stage companies and our track record. We will continue to work with our select group of leading venture capital investors to indentify debt financing opportunities within their portfolio companies. These are relationships we have developed over many-many years. We will continue to look for companies with proven management teams, strong investor support, large market opportunities and innovative technology or services. As I had mentioned, we take a very long term view on our road to the pennant and are confident of the positive results of our strategy. With that, I'll now turn the call over to Sajal.

Thank you, Jim, and good afternoon everyone. We continue to see strong demand for venture growth stage lending, given our large and growing pipeline having signed $73 million of term sheets at TriplePoint Capital in Q1, and having closed $90 million of new commitments at TPVG with 3 new companies including Jet.com which is a very high profile next generation e-commerce marketplace started by Marc Lore, the former Founder and CEO of diapers.com which he successfully sold to amazon.com. Jet has raised more than $0.5 billion of equity capital from investors including Accel Partners, New Enterprise Associates, Bain Capital, Norwest Venture Partners, Google, Alibaba, Fidelity and others. Farfetch which is a global online marketplace for luxury fashion items that enables individual high-end fashion boutiques and high-end luxury brands to sell their products online. The company has raised more than $300 million of equity capital from investors including Index Ventures, Vitruvian Partners, Condé Nast, DST Global, Temasek and others. As you may have seen, Farfetch announced just last week that they raised $110 million of equity capital in addition to our debt financing. ForgeRock which is a next generation identity and access management software company that has developed a unified platforms spending multiple landscapes including the cloud, mobile device and on-premise with over 100 customers including companies such as GEICO, Morningstar and Vodafone as well as the governments of Norway, Canada and Belgium. The company has raised more than $50 million of equity financing from Accel Partners, Foundation Capital and Meritech Capital. During Q1 we funded $56.4 million of debt investments to 7 companies in total and acquired warrants valued at $700,000 in 6 companies. All 3 of our new customers in the quarter drew a portion of their commitments at close. We also had 3 customers prepay a total of $29.8 million with 2 of those prepays due to acquisitions. As a result of the prepays, our portfolio yield was 15.7%. Without prepays, our portfolio yield was 14.3%. Roughly 80% of our prepays this quarter were from loans that had been outstanding for more than two years. So our fair amount of their end of term payments had already been recognized. Also, although we target at least one prepay a quarter even that we have 3 in Q1 we do not expect prepays in Q2 but expect prepay activity to pick up in the second half. At quarter's end, our unfunded commitments totaled $191.3 million to 13 companies, of which $83million is dependent upon the company's reaching certain business or time based milestones before the debt commitments becomes available to them. $121million of the $191 million will expire during 2016. During Q1 we had $32million of unfunded commitments expire. Moving on to credit quality. As of March 31, the weighted average internal credit rating of the debt investment portfolio was 2.09, as compared to 2.23 at the end of the prior quarter. As a reminder, under 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 $56 million of new loans to category White, we upgraded $30 million in loans to one obligor from White to Clear and downgraded $6.2 million in loans to another obligor from White to Yellow. We also downgraded $6.9 million in loans to HouseTrip from Yellow left end of Q4 to Orange and Winter Red during the quarter, as a result of the deterioration in its strategic sale process. HouseTrip is an online European vacation rental business. Despite the terrorist events in Paris in Q4 and Brussels in Q1, we are able to work with the company and its investors to facilitate a sale to TripAdvisor which closed in Q2. As part of the transaction we expect to receive $1. 2 million which is the fair value of that debt investment as of March 31. As Jim mentioned, in Q1 Virtual Instruments one of our category owned portfolio companies, signed a definitive merger agreement with low dynamics and the transaction subsequently closed in April, as part of the merger, the new company has retained the Virtual Instruments brand name and has raised $20 million at equity capital given its significant operating run rate. In conjunction with the merger, all of our loans to Virtual Instruments have been assumed in full including all previously recognized end-of-term payments. The 3 million reduction in fair value of the loans as of March 31, reflected the impact of the merger in April including the new loan structure and lower yields. From our perspective we think this was a great outcome and are optimistic for the outlook for the new company. In Q1 we further marked down our loan and intermodal by $4.7 million and there were no other changes to our credit ratings. As always we remain proactive and engaged with our portfolio companies and their venture investors. Regarding other key performance indicators of our portfolio, as of Q1 the weighted loan to enterprise value at the time of origination for our portfolio excluding at our intermodal was approximately 8.5% as compared to 8.6% in Q4. Approximately 20% of our debt investments consisted of growth capital loans where the borrower has a term loan facility from a bank in priority to our senior lien, which is up slightly from 18% in Q4. We are busy building our franchise, monitoring our customers and growing our portfolio. 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 first quarter.

Thank you, Sajal. For the first quarter, our total investment and other income was $11.1 million. As noted earlier, this represented a weighted average portfolio yield of 15.7%, of which 10.6% was from coupon payments, 0.7% was from the accretion of upfront facility fees and warrants, 3% was from the accretion of end-of-term payments, and 1.4% was from prepayment. Our yield this quarter excluding prepayments was 14.3%. Our expenses this quarter were $4.4 million. Our base management fee was $1.4 million. Our debt expenses were $1.8 million and our administrative and general expenses were $1.2 million. As Jim mentioned given our best-in-class fee structure, the total requirement under the investment income component provides with no incentive fees payable except to the extent that 20% of the cumulative net increase and net assets resulting from operations since our IPO exceeds the cumulative incentive fees accrued end or paid since our IPO. Given our unrealized losses this quarter, we did not earn any incentive fee which resulted in $1.3 million of additional income or $0.08 per share to our shareholders. Our net investment income and core investment income was $6.7 million. I’ll remind you that core net investment income is a non-GAAP financial measure and is provided in addition too but not as a substitution for net investment income. For a reconciliation of core net investment income to net investment income, please see the press release we issued this afternoon. On an annualized return basis, our net investment income and core net investment income represented an 11.6% return on average net assets. This quarter we had net realized losses on our investment of $651,000 or $0.04 per share which were primarily due to the termination of our warrants in Hayneedle and Jasper as a result of their acquisitions, as all as the exploration of our warrants in [indiscernible] a public traded company. We have net unrealized losses on our investments of $13.3 million or $0.82 per share composed of $13.4 million of net unrealized losses on debt investments, $200,000 of net unrealized gains on warrants and $200,000 of net unrealized losses on equity investments. Overall, we had a net decrease in net assets resulting from operations for the first quarter at $7.3 million or $0.45 per share as unrealized losses were in excess of our net investment income. As of March 31, the Company’s net assets were approximately $219 million or $13.40 per share compared to approximately $232 million or $14.21 per share as of December 31. In January, we amended our $200 million credit facility to reduce the applicable margin above the base rates from 3.5% to 3% and expand both the revolving period and maturity gate by 2 years. As we have in the past, we will continue to use our credit facility, pre-payments, and principle amortization to fund our growth with the goal of approaching our target leverage rate of 0.6 to 0.8 times. As of March 31, we had 90 investments in 34 companies. Our investments included 52 debt investments, 31 warrant investments, and 7 direct equity investments. The total cost from fair value of these investments were approximately $301 million and $283 million respectively. 36% of our debt investments were floating rate, up from 24% as of the end of the fourth quarter. We further note that of our existing $191 million of unfunded commitments, over 90% would result in floating rate loans upon funding. As of March 31, our total cash position was over $15 million. At the end of the quarter, we had $18 million of debt drawn on our $200 million revolving credit facility. Including our baby bonds, we were at approximately 0.3 times leverage. While our leverage ratio did not change from the prior year quarter despite our fundings due to pre-payment activity, we expect our leverage ratio to increase this quarter and remind investors that as in the past, our business covers our dividend at the low end of our target leverage range without needing a benefit of pre-payment. For the second quarter of 2016, our Board of Directors declared a dividend of $0.36 per share, payable on June 16 to stockholders of record as of May 31. This marks the 9th consecutive quarter since our IPO we have maintained or raised our quarterly dividend rate. As a reminder, in October of 2015, our board approved a $25 million share repurchase program. Today, we purchased 466,000 shares at a total cost of $5.6 million. Given the extended black out period for the year-end reporting, we did not make any repurchases during the first quarter but expect to be active in the second quarter. Now, I’ll turn the call back over to Jim.

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

[Operator Instructions] And our first question comes from Joe Mazzoli with Wells Fargo Securities. Your line is open.

Good afternoon and thank you for taking my questions. The first question relates to Virtual Instruments and of course, this seems to be very favorable outcome with the merger and the question relates to, if you can provide some more color on how this loan was originally structured maybe a loan to value. And then also how are you able to influence the merger process even as the company was forced to lay off employees midst to difficult times.

Sure Joe, this is Sajal. So in general, our approach given the way we work with our select investors is to be collaborative. So I'd sum up that our process with virtual was highly coordinated with not only the venture investors and the board net members but also the exact team as well. So I’d say this was particularly hands on engaged with all those constituents managing through the various options and ultimately the sale to low dynamics which again, we felt was a very positive outcome especially given the outlook for the combined company. I don't have on the top of my hand what our LTD values were at the time of our loan, but we can look back and follow up with you on that.

Okay, great. Thank you for that. And the next in relation to unfunded commitments, of course, certainly some progress in terms of leveraging the book a bit here especially on a net basis. Unfunded commitments still close to about 200 million. As you continue to grow the portfolio and maybe some slower repayments in the coming quarter you mentioned, do you anticipate lowering the unfunded commitments that you have and do you think that will be possible especially as you are originating new loans? Or maybe that’s not needed.

Yes. It’s a good question. So I think our priority is disciplined portfolio growth to be at 0.3 for a couple of quarters. It's little disappointing for us and so our goal is to lever up the business and again to return to our target leverage ratio. We had a great quarter for fundings in Q1 with almost $60 million as Jim mentioned. So I think we are least focused on managing, so to speak, unfunded. We do want to keep the mixture that we have, funding capacity to meet all of our unfunded commitments which we absolutely do. But I think as you’ve seen in the past, we generally have - or generally expect 75% of our unfunded commitments to be utilized and so we had 30 expire in Q1 and generally we expect to have a fair amount expire over the rest of this year. And so we are more focused again on getting the funded assets up and we think Q2 will be a good quarter for net portfolio growth given that we are not contemplating any prepays and we are expecting to continue to be in our fundings of $30 million to $60 million per quarter.

Okay, great. And just one last one from me. What were the three investments that primarily led to the $13 million write-down?

Sure. There were the three names that I mentioned. So it was HouseTrip, Virtual Instruments, and Intermodal.

Great. Thank you, guys.

[Operator Instructions] And we have a question from Jordan Hymowitz with Philadelphia Financial. Your line is now open. And Jordan Hymowitz, your line is open.

Thank you. The Virtual Instrument acquisition happened after the quarter, so does that mean part of the unrealized loss would be marked that because of the acquisition?

No, again, based on the contemplated structure of the merger and of the new loans, we took that into account when valuing it as of the end of Q1. I think as the company performs and its outlooks and time passes, we’d expect the loans to creed up over time.

Okay. I was confused. I missed the first 5 minutes of the call but I thought the acquisition happened with the debt at par.

Correct, the company – sorry, low dynamics assumed our loans in full including the end of term payments. And the marked down in Q1 reflected changes in the loan structure and lower yields on the loans. So more at market discount rates than anything else.

So the last accrued interest results, it basically marking the loan in a bigger discount to fair value, or accrued values what you’re saying?

No, I say the lower yields on the new loans with regard what our overall portfolio yield is results in a higher discount rate for the loan which ends up in the lower fair value.

And then my second question is, how much of that would have been in Orange at the end of the quarter? That's not a longer in Orange because it's assume.

Jordan at the end of Q1 it was still rated Orange. So the entire loan was rated Orange. We have not changed the credit rating of Virtual Instruments.

That’s my question is, how much of it would be in the $41 million that now let's assumed if I look at second quarter will be there?

The fair value of the Virtual Instrument loan as of 331 was $25.4 million.

So it would be about $16 million would be in Orange without that amount.

Correct. There are two other Orange loans which are Mine Candy and Intermodal

Got it. Thank you.

And there are no further questions at this time. I will turn the call now to the presenters.

Thanks. I'll close by again expressing my appreciation to all of you for your continued interest and support in TriplePoint Venture Growth. As I reminder we'll be hosting our Annual Meeting in Washington D.C. on May 17, and we’ll also be in attendance and presenting at the Dodd-Frank BDC Conference in New York City in June. Thanks and will speak with you all again soon.

This concludes today's conference call. You may now disconnect.