TriplePoint Venture Growth BDC Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. 3rd Quarter 2023 Earnings Conference Call. At this time, all lines have been placed in a listen only mode. After the speakers' remarks, there will be an opportunity to ask questions and instructions will follow at that time.

Operator

This conference is being recorded and a replay of the call will be available in an audio webcast of the TriplePoint Venture Growth website. Company management is pleased to share with you the company's results for the Q3 of 2023. Today, representing the company is Jim Labe, Chief Executive Officer and Chairman of the Board Sajal Srivastava, President and Chief Investment Officer and Chris Matthew, Chief Financial Officer. Before I turn the call over to Mr. Labbe, I'd like to direct your attention to the customary Safe harbor disclosure in the company's press release regarding forward looking statements and remind you that during this call, Management will make certain statements that relate to future events or the company's future performance or financial condition, which are considered forward looking statements under federal securities law.

Operator

You're asked to refer to the company's most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements. The company does not undertake any obligation to update any forward looking statements or projections unless required by law. Investors are cautioned not to place undue reliance on any forward looking statements made during the call, which reflect To obtain copies of our latest SEC filings, please visit the company's website at www.tpvg.com. Now, I'd like to turn the conference over to Mr. Lappe.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, everyone, and welcome to TPVG's 3rd quarter earnings call. Turning to the results for the quarter, Our focus continued to be on the priorities we believe will enable us to navigate through the current challenging markets. Specifically, our focus is maintaining our earnings power and our strong liquidity, Managing the portfolio and positioning TPVG for the future. Regarding our earnings power, TPVG generated net investment income or NII of $19,100,000 during the quarter or $0.54 per share. We once again over earned the regular quarterly distribution of $0.40 per share.

Speaker 1

Since our IPO, We have provided shareholders cumulative distributions of $14.65 per share And our focus remains on producing NII that covers the distribution over the long term. As of quarter's end, we have an estimated 1 point 3 per share of spillover income. TPVG also achieved a weighted average portfolio yield for the Q3 of 15.1 percent, benefiting from both prepayment income as well as the favorable interest rate increase during May July. We ended the quarter with increased liquidity as we experienced both higher repayment activity and successfully reduced unfunded commitments. TPVG liquidity now exceeds unfunded commitments and provides us with the capacity to capitalize on new investment opportunities heading into 2024.

Speaker 1

As we've shared for the last several quarters, venture capital markets remain challenging Given the backdrop of macroeconomic uncertainties, restricted monetary policies, inflationary, supply chain, geopolitical and other issues. According to the NVCA, National Venture Capital Association pitch book 3rd quarter data, overall venture capital investment activity decreased relative to the prior quarter amounting to the lowest quarterly total

Speaker 2

in the

Speaker 1

past 6 years. These numbers are well below the highs we experienced in the 2021 2022 period. They are more comparable to activity levels in the 2018 through 2020 periods. Having said that and relevant to TPVG, aggregate investment into late stage Venture Growth Stage Companies was actually up quarter over quarter some $25,000,000,000 versus $21,600,000,000 according to PitchBook. This activity included a very prominent transaction, Amazon's $4,000,000,000 investment into Anthropic.

Speaker 1

Pitch also points out a pickup in exit activity, dollars 35,800,000,000 in the 3rd quarter versus only $6,600,000,000 in the 2nd quarter. This includes a number of IPOs featuring venture and PE backed companies ARM, Clavio and Instacart. These transactions were sizable and created significant exit opportunities. While we expect conditions to remain the same as we close out 2023, We do see glimmers and are witnessing a pickup in the venture capital investment momentum. There are some early signs which Point to the potential for a more active investment outlook for 2024 in venture capital and in venture lending.

Speaker 1

This includes recent conversations we've had with VCs in the last few weeks citing investment activity within their funds expectation that next year will be a more active year for investing. This is further supported by the significant amount of capital raised by venture funds In the last 2 years, that has been sitting on the sidelines waiting to be deployed. We believe that a more robust return to growth in the VC market however will not materialize until public market multiples stabilize. The overall investor sentiment continues on its path to improve and investors begin to actively deploy their dry powder. There is a new market reality in ventures that is emerging, one with a more conservative investment approach.

Speaker 1

For the deals getting done in today's market, the operational investment principles have changed. The emphasis is now on managing cash burn in Demonstrating a projected path to profitability as opposed to the guiding principle just 2 or 3 years ago where venture investors sought growth at all costs. While we don't expect any overnight changes, as I will get into, We continue to find pockets of opportunity for new growth stage investments reflecting this new market reality And we expect to be able to increase our allocation of investments to TPVG in the quarters ahead. Turning to the portfolio and credit quality. As Sajid will cover in more detail, during the quarter, our teams brought some existing credit situations To conclusion, continue to proactively work through others and manage smaller dollar size ones, which developed during the quarter.

Speaker 1

Our teams remain closely engaged with our stressed portfolio companies in this environment. There were some notable developments in the quarter. In a significant transaction, our portfolio company Metropolis announced an agreement to acquire publicly traded SP Plus for $1,500,000,000 Tempus ex machina whose proprietary video and data sync technology serves as an operating system for sports, rebranded as Infinite Athlete and acquired injury analytics Portfolio companies such as Corelight, Earnin, Flash, Calderis, Overtime, Monzo and others continue to make notable progress in achieving their plans and they are well positioned in this challenging environment. Another priority is remaining focused on TPVG's long term positioning and leadership in the venture lending market in the wake of the Silicon Valley Bank crisis earlier this year. Heading into next year, we are both Setting the groundwork to be ready when market conditions improve and there is a broader and sustained recovery in overall venture capital activity.

Speaker 1

This includes continued diversification and sector rotation investments for TPVG in fields such as artificial intelligence, Enterprise SaaS, transformative technologies, robotics, health tech and other sectors. This includes preferences for companies with attributes such as recently raised fresh capital, having long cash runways, Having backing from our select venture investors, prudent management teams and whose business models have proven unit economics And high retention rates or even those companies with strong customer bases generally with large enterprise customers. We will also continue to evaluate hold sizes, debt to equity coverage and other key metrics in these investment opportunities. In summary, while we expect conditions to remain the same as we close out 2023 and while sites are set on our portfolio and maintaining credit quality, we are preparing for the future. Given our existing scale and strong portfolio yield, We expect to continue to deliver strong investment income while positioning the company to further benefit when these markets improve.

Speaker 1

This includes building on our strong liquidity position and maintaining the financial strength of TPVG. Returning to our targeted balance sheet leverage range, capitalizing on the change in the competitive landscape And building our pipeline of lending opportunities from our select sponsors. Adding new borrowers to our portfolio with the goal of further diversifying the portfolio, maintaining a strong yield profile, Continuing to over earn our dividend and stabilizing net asset value and growing it over time. I'll wrap up these remarks with the same message that has sustained TriplePoint throughout many years and many market cycles. Venture lending is about investing for the long term and we will continue to focus on the priorities we have discussed here as well as the core tenants of TriplePoint philosophy, relationships, reputation, references and returns in order to continue to capitalize on market opportunities over the long term.

Speaker 1

With that, Let me call over to Sajal.

Speaker 2

Thank you, Jim, and good afternoon. During the Q3, TriplePoint Capital, our global investment and the advisor to TPVG signed $58,000,000 of term sheets with venture growth stage companies compared to 114,000,000 Term sheets in Q2, which continues to reflect our approach to originations across our platform in light of current market conditions. With regards to new investment allocation to TPVG during the quarter, given both current market conditions And TPVG's elevated leverage ratio, we allocated a prudent $5,600,000 in new commitments with 3 companies to TPVG. This included one new portfolio company, K Health, a company backed by Primary Venture Partners, Leira Ventures, Cedar Sinai Hospital and other investors, which provides patients remote access to healthcare services through their smartphones using AI technology. During the Q3, TBVG funded $12,700,000 in debt investments to 5 portfolio companies.

Speaker 2

This funding level came in below our guided range for the quarter, reflecting a lower utilization of expiring unfunded commitments and continued disciplined use of debt capital by our portfolio companies. These funded investments carried a weighted average annualized portfolio yield of 14.2 percent at origination. Of the $12,700,000 funded during the quarter, dollars 7,100,000 was related to existing unfunded commitments And the remaining $5,600,000 was from new commitments made during the quarter. As we look to the 4th quarter, We continue to expect fundings in the $25,000,000 to $50,000,000 range and are off to a good start with $10,000,000 funded so far. During Q3, we made significant progress boosting our liquidity, reducing our net leverage ratio and reducing our unfunded commitments.

Speaker 2

In fact, as of today, our total liquidity is almost double our unfunded commitments, enhancing our investment capacity as market conditions improve. During Q3, our $37,300,000 of loan prepayments helped increase our weighted average annualized portfolio yield on total debt investments 15.1% for the quarter. Excluding prepayment related income, core portfolio yield was 14.1%. We expect the increase in the prime rate in Q3 to benefit our core investment yield here in Q4 and into 2024. We are expecting lower levels of loan prepayments in the 4th quarter and expect our $28,000,000 loan with Metropolis to prepay upon completion of its announced transaction likely in the second half of twenty twenty four.

Speaker 2

At the end of Q3, our debt investment portfolio company count was 54, representing 19 different subsectors And our top 10 portfolio companies represented 37% of our total debt investments at cost. We also held 100 and equity investments in 115 companies with a total cost and fair value of $72,600,000 $87,300,000 respectively. In Q3, 3 of our portfolio companies with outstanding debt raised $47,000,000 of capital, bringing our total to 16 portfolio companies with outstanding debt, raising $437,000,000 of capital year to date. This level of activity reflects both the challenging fundraising environment as well as the seasonally lower activity associated with the 3rd quarter. As we look to the Q4, we are pleased to see fundraising activity within our portfolio picking up with several portfolio companies making Progress towards raising rounds here in Q4 and in Q1 2024, with one portfolio company already raising $26,000,000 of capital and another portfolio expecting to close $30,000,000 of capital imminently.

Speaker 2

We believe this activity early in the quarter, Especially considering market conditions is a positive reflection on the outlook for our portfolio companies and bodes well for credit quality going into 2024. With regards to credit quality, during the quarter, we upgraded Metropolis with a principal balance of $27,700,000 from category 2 to category 1 and removed ForgeRock from category 1 as a result of its $30,000,000 loan prepayment. We received $1,900,000 of proceeds from the liquidation of Rent A Run, reducing our exposure to 400,000. We expect Runarun to remain a Category 3 asset until we are paid off in full, which is expected to occur in 2024 and will represent 100% During the Q3, certain of our e commerce and consumer portfolio companies experienced continued challenges As they manage through ongoing market and sector specific issues, including negative consumer sentiment, increasing customer acquisition costs, Lower than expected revenue during the summer, higher than normal levels of inventory and continued impact of inflation on their cost of goods sold, In addition to developments in their runway extension efforts, path to profitability and strategic efforts. During the quarter, we downgraded the credit ratings of 3 e commerce and consumer companies from category 2 to category 3 Due to these developments in the quarter, Dia styling, Outdoor Voices and Naked One World with a combined total principal balance of $19,400,000 and a combined total failure value of $19,700,000 for the 3 companies as of Q3.

Speaker 2

We also downgraded the credit rating of 2 e commerce and consumer companies from category 3 to category 4 also due to these developments in the quarter Project 1920, which operates as SENREV And Mystery Tackle Box, which also operates as CatchCo, with a combined total principal balance of $9,000,000 and a combined total fair value of $7,600,000 for the 2 companies as of Q3. Given the upcoming holiday season, Q4 is generally an important quarter for retail, e commerce and consumer companies, And we believe some of our category 34 companies could see a boost if they close out the year with a strong quarter, which could potentially put them in better positions for 2024. Untitled Labs, which operated under the name Made Renovations with a loan fair value of $2,700,000 as of Q3 was downgraded from Category 4 to Category 5. After a pivot in the business and unsuccessful financing and strategic efforts, The company announced in October that it was closing its business and selling off certain of its assets. Our Q3 mark represents our expected recovery amount from that process.

Speaker 2

Health IQ with a loan fair value of $7,200,000 as of Q2 was removed from Category 5 in Q3 as a result of its bankruptcy filing. As mentioned in prior quarters, we had downgraded the company due to ongoing challenges with the company's execution and prior failed capital raising and strategic efforts. As we mentioned during last quarter's call, we had expected to enter into an Extended restructuring and recovery process with the company and its key stakeholders, and we were disappointed to see in Q3 3, that the parties could not come to agreement on that plan, and ultimately, a bankruptcy and full liquidation process was pursued instead. And as a result, we have written off our entire position to put the situation behind us. During the quarter, we also adjusted the fair values for 2 Category 5 loans in the process of sale or liquidation, demand in underground enterprises based on updated recovery estimates.

Speaker 2

On a more positive note, during the quarter, e bike portfolio company VanMoof, the Category 5 loan, was acquired by Lavoy, The electric scooter unit of Formula 1 engineering and technology firm McLaren Applied. We are looking forward to working with their Chairman, Nick Fry, the former CEO of the Mercedes Formula 1 team and their U. K.-based private equity sponsor, Graebel Capital, for the next phase of VanMoof's journey and our recovery. We are currently in the process of closing the transaction, and our scheduled investments will reflect our revised securities as well as any revised recovery estimates for the combined companies at year end. TPVG's recovery will include a combination of Debt and equity in Lavoy as well as continued security positions in the assets of VanMoof not otherwise acquired by Lavoy that we intend to liquidate over the coming quarters.

Speaker 2

We believe the continued stress in certain assets during the quarter and the year are directly related to the ongoing challenging conditions in the venture capital equity fundraising market and in the M and A market for both public and private companies as well as certain sector specific circumstances related to the overall macroeconomic environment. While we expect market conditions to remain the same here in Q4 and as 2024 starts, We have seen many of our portfolio companies over the past couple of quarters respond and adapt favorably To this new market reality, as I will describe shortly, and from what we currently can see, we believe are building momentum to succeed in 2024 and beyond. Our portfolio companies have now had almost a year to adjust to managing growth and driving unit economics with reasonable paths to profitability, Lowering burn rates and having realistic expectations for raising additional capital. A number of companies are also seeing Strong revenue and margin tailwinds in their businesses, having achieved profitability or having significant cash runway to achieve profitability. As we look to 2024, we currently believe we will see new credit stress events decline and that we will begin to see potential Positive developments and outcomes from our portfolio companies due to their adaptation, execution and performance despite market conditions.

Speaker 2

Nevertheless, we will continue to remain proactive and diligent as we navigate these conditions and manage our portfolio. In summary, as Jim said, we are focused on maintaining the financial strength and liquidity position of TPVG, remaining in frequent contact with our portfolio companies, Stabilizing credit quality and preparing for returning to portfolio growth in 2024. Given our existing scale and strong portfolio yield, We expect to continue to deliver strong investment income while positioning the company to further benefit when markets improve. With that, I will now turn the call over to Chris.

Speaker 3

Thank you, Sajal, and hello, everyone. During the Q3, we generated substantial core interest income from our high yielding diversified loan portfolio, while successfully reducing our balance sheet leverage on a net basis. We increased our liquidity position in the quarter through the modest use of the ATM program, Loan prepayments and reduction in unfunded loan commitments. The reduction in unfunded loan commitments was accomplished through commitment expirations and fundings in excess of new commitments. Total investment income was $35,700,000 as compared to 29,700,000 for the Q3 of 2022.

Speaker 3

This increase of 20% was due to growth in the average portfolio size as well as higher investment yields. Our portfolio yield was 15.1% on total debt this quarter as compared to 13.8% for the prior year period. On boarding yields continue to be strong and stable. Operating expenses were $16,600,000 as compared to $12,800,000 for the Q3 of 2022. These expenses consisted of $9,300,000 of interest expense, dollars 4,600,000 of management fees and $2,700,000 of G and A expenses.

Speaker 3

We recorded elevated legal expenses of $550,000 and higher excise tax expense of 300 $25,000 compared to the prior quarter due to the sizable increase in spillover income estimated for the full year. With the shareholder friendly total return requirement under our incentive fee structure, the incentive fee expense was reduced by $3,800,000 during the 3rd and $11,300,000 for the 9 months ended September 30. We ended we earned net investment income of $19,100,000 or $0.54 per share compared to $16,900,000 or $0.51 per share in the same period in 2022. The company recognized net realized losses on investments of $25,600,000 resulting primarily from the write off of HiQ, which was rated 5 on our watch list and its removal from our investment portfolio. Net change in unrealized gains on investments for the Q3 of 2023 was $8,600,000 Consisting of the reversal of $17,600,000 of previously recorded unrealized losses that were realized during the period, Net unrealized losses of $6,200,000 on the existing debt investment portfolio and $2,800,000 on the warrant and equity portfolio resulting from fair value adjustments.

Speaker 3

As of quarter end, the company's total net assets were 3

Speaker 4

$4,000,000 or

Speaker 3

$10.37 per share compared to $379,400,000 or 10 point $0.70 per share as of June 30, 2023. Our Board of Directors declared a regular quarterly dividend of $0.40 per share. The dividend is from ordinary income to stockholders of record as of December 15 to be paid on December 29. In addition to over earning the 3rd quarter dividend, we continue to retain undistributed net investment income, which totaled $37,300,000 or $1.03 per share at the end of the period to support additional regular and supplemental dividends in the future. Given the strong yields and size of the loan portfolio, the dividend coverage was strong again this quarter at 133%.

Speaker 3

Coverage for the full year to date was 132%. Now just an update on unfunded investment commitments, overall liquidity and status of balance sheet leverage. We ended the 3rd quarter with $142,000,000 in unfunded investment commitments, down from $205,000,000 in the Quarter with $38,000,000 dependent upon the portfolio company reaching certain milestones. All of these unfunded investment commitments have contractual floating interest rates. Of the total amount, dollars 46,000,000 are set to expire here in Q4.

Speaker 3

We had $37,000,000 of prepayments, dollars 15,000,000 of early repayments under revolving structures and $20,000,000 of Scheduled principal amortization, generating $72,000,000 of liquidity during the quarter. As of quarter end, the company had total liquidity of $262,500,000 consisting of $122,000,000 in cash and $140,000,000 available under the revolving credit facility. Near quarter end, we drew down on our credit facility to enhance our investment flexibility pursuant to certain 1940 Act requirements. After the quarter end, we paid down the credit facility, decreased leverage and increased availability under the credit facility for future draws as appropriate. In addition to this current liquidity, the existing portfolio provides contractual cash flows, which bodes well for sustained liquidity.

Speaker 3

We continue to maintain a diversified capital structure. And as of September 30, an aggregate of $395,000,000 was outstanding Great investment grade term notes and $210,000,000 was outstanding on the floating rate revolving credit facility, which has a total commitment available of 350,000,000 Our fixed rate borrowings account for 65 We have 3 steps to the ladder of term debt maturities and the maturities are set to occur in 2025, 'twenty six and 'twenty seven. We ended the quarter with a leverage ratio of 1.62x compared to a net leverage ratio of 1.29x. This compares favorably to the prior quarter with a leverage ratio was 1.67x compared to a net Leverage ratio of 1.44 times. We expect to maintain this level of leverage through the end of the year And we expect to delever the balance sheet in the first half of twenty twenty four.

Speaker 3

Last year, we announced the launch of our ATM program and during the Q3 we issued common stock with aggregate net proceeds of $6,200,000 Given the cost effective issuance above net asset value, all shares issued were accretive to NAV. And as of the end of the quarter, we still had 43 point $7,000,000 available under that program. This completes our prepared remarks today and we'd be happy to answer your questions. And so operator, could you please open the line at this time?

Operator

And our first question comes from Finian O'Shea with Wells Fargo. Please go ahead.

Speaker 5

Hi, everyone. Good afternoon. First question on the e commerce sector downgrades. Sajal, you gave some color on that. Was part of it related to a Pullback in venture capital commitments to this sector and if so, How does that translate to your portfolio that you downgraded?

Speaker 5

Is there a visible Fundraising issue you see for these companies?

Speaker 2

Yes, Fin, thanks for the question. So again, I think The downgrade was not to all of our e commerce and consumer portfolio companies. This is a sector where we've had some great success As a platform and for TPVG historically, this is really specific to certain set of portfolio companies We're going to be mentioned, but particularly during the summer, saw some negative sentiment. Interesting enough, the strong weather or the favorable weather Impacted a number of these portfolio companies as well. And so that plus, again, negative consumer sentiment, Changes that we saw over the course of the year from folks like Apple, Google and Facebook on their search algorithms and the level of information that Sure.

Speaker 2

Increasing customer acquisition costs. So again, I'd say specific to certain elements of the sector and to specific companies, I'd say with regards to venture financing, it's mixed. We are seeing and we have seen of the portfolio companies that have raised capital this year, A number of them are in e commerce and consumer companies. I would say, again, we're it's a balanced approach to the sector and It doesn't change our overall outlook to e commerce and consumer.

Speaker 5

Helpful. Thank you. And just a follow on the dividend. Jim mentioned you would like to continue to over earn the dividend, but of course there's A bit of deleveraging and you'll have the incentive fee turned back on. Where do you see this sort of run rate Of your earnings power as the BDC portfolio, etcetera, settle Following this deleveraging exercise and what does that mean for the 40% sorry, dollars 0.40 Payout you have currently?

Speaker 3

Yes. Fin, good question. I think we have done some analysis on that and thinking about the impact On the overall coverage, given the strength right now of the consistent coverage we've had, Even if we bring back the incentive fee once the NAV stabilizes, we still see $0.40 as a solid number going forward given The fully scaled up portfolio and the yields that are being generated and the level of fixed rate leverage we have, we think it bodes well for Long term coverage. Right now, as far as maintaining that dividend, that's the strategy given the higher leverage ratio. It doesn't make sense Right now, to start looking at increasing dividend, but rather maintain the NAV.

Speaker 5

That's all for me. Thanks so much.

Operator

Our next question comes from Kristen Love with Piper Sandler, please go ahead.

Speaker 4

Thanks and appreciate you taking my questions. Just first off on the HiQ write off in the quarter, Are there any expectations there for any potential recoveries on that loan? And then just on that loan as well, what was the total write off And the incremental amount in the Q3 that wasn't already unrealized previously?

Speaker 2

Sure. I'll start with the business update and then Chris, you can give the numbers. So I would say, Crisp, no, we're not expecting any additional recovery. Again, we wanted to get this one past So we wrote off the full amount of our loan.

Speaker 3

And the total realized loss was 25 And change $1,000,000 and there was about $7,000,000 in the current quarter that hit that impacted NAV.

Speaker 6

Okay.

Speaker 3

Within the 2020. It's not 25 plus 7. So 7 of the 25 was in the current quarter And the rest had already been previously been an unrealized loss or unrealized depreciation in prior periods.

Speaker 4

Okay. Okay. That makes sense. And then Just a broader question on the industry and the competitive environment. I'm curious if you can just talk about how the competitive environment has shifted recently Or I guess over the last few quarters since the bank turmoil earlier this year, are you seeing any recent activity from banks getting involved or Pickup from private lenders or just or any others in the space where that's impacting the competitive landscape here?

Speaker 2

Yes. I would say, if anything, we continue to see pullback of the nontypical, nontraditional, non long term participants in the market. And then I would add, overall, as you've seen just from most of us reporting that, I'd say deal volume has Slow down. So I wouldn't say anyone is taking necessarily more market share or the competitive dynamic, particularly on the Tech side has materially changed.

Speaker 4

Nice. That's it for me. I appreciate you taking my questions.

Operator

The next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 7

Hey, guys. Given your comments on the leverage, should we assume that the cash levels remained at elevated levels in the 4th quarter?

Speaker 8

Yes. Okay.

Speaker 7

And then the comments in terms Maintain the NAV rather than increasing the dividend. Should we read into that higher excise taxes going forward?

Speaker 3

Yes. Yes. So, we had an additional accrual of about $325,000 this quarter To do, I'll call it, catch up, given that we were over earning consistently so far this year. So we should expect a higher level of excise tax Through the end of the year.

Speaker 7

And final question, a while ago, I believe the journal had an article talking about how the SEC was looking Possibly at applying a fiduciary standard to venture capital investments, Where it would effectively raise the bar in terms of the responsibility of the venture capital investor And new companies. And I don't know whether or not you heard of anything like that. And if you have, if you have any comments on it?

Speaker 2

I have not just looking around the table, not heard about or looked into too deeply. I would only comment, Given the fact that we work with a very select group of venture capital investors whom we've had longstanding relationships, they're generally Very active investors in their portfolio companies as well. And so with their Board seats, with their involvement and with their strong opinions. So I would say, well, I guess, generally, it could be viewed as a good thing. I would say our investors are already Pretty active with our portfolio or their portfolio companies in general.

Speaker 2

Okay. Thanks, Nigel. Thanks, guys.

Operator

The next question comes from Vilas Abraham with UBS. Please go ahead.

Speaker 6

Hi, guys. Thanks for the question. Just on the nature of the repayments that you received in the quarter, the prepayments, There is high as they've been in a couple of quarters. Is any of that pull forward from what you may have expected in Q4?

Speaker 3

No, not really. So ForgeRock was the largest that we had indicated we expected a prepayment, and that's the lion's share of The prepayment that occurred this quarter, and that was not pulled from, say, a Q4 event.

Speaker 6

Okay. And then as we think about deleveraging starting the beginning of next year, is that just really going to be a function here Of what prepayments look like in the first half?

Speaker 3

Yes. I think it's a combination of contractual repayments, Just the normal aging of the portfolio and the schedule of the principal that comes through. We have a couple of loans that are also maturing in that first Half of the year. And usually, we see 1 or 2 loans prepay each quarter. So even if it's a more muted prepayment environment, We still expect to see some of that.

Speaker 3

So it's a combination of all of that.

Speaker 6

All right. And one on expenses, it looked like G and A was up a little bit here. And in Q3, I think you said something about $500,000 in legal expenses, I think, is a part of that. Is that the main item that is going to potentially come out here In Q4?

Speaker 3

Correct. Yes. So the elevated level of legal Will not likely be that high, and excise tax could be similar as I think Chris had mentioned earlier.

Speaker 6

Okay, got it. And then just maybe a bigger picture question. You guys mentioned Investment activity picking up here a bit. And I'm just curious, do you think that's a Function of the VC investors being very comfortable with where valuations And the kind of opportunities they're seeing now or is it more a function of they have to do something With the dry powder that they've had for a little while now and if it is the latter, what do you think that means for the quality Of the deals that we may see over the next 12 to 18 months? Thank you.

Speaker 1

Yes, I can handle that. I can speak only in In terms of the select investors, the smaller universe of what we consider to be the top venture investors that we deal with and Right. It is absolutely not the latter. There is not they are investments are not driven by The pressure to deploy that's certainly in the background, but it's the opportunities that are emerging in what we're calling The new market realities here today, particularly at the very early stages, which is a little less focus of TPVG, But in many sectors and there's just many opportunities, particularly now that There's been a shift and as I mentioned it's more the path to profitability for these new companies managing cash burn As opposed to several years ago where it was growth, we're pretty excited or at least they are in terms of The opportunities here in the future.

Speaker 6

That's it for me. Thank you.

Operator

The next question comes from Ryan Lynch with KBW. Please go ahead.

Speaker 8

Hey, good afternoon. First question I had was, you've mentioned on this call and in the past, your guys' focus is working with really a select What you would call a kind of top tier VC sponsors to source your investments. Given the credit issues that you guys have experienced This most recent venture sort of down cycle, have you guys put any consideration to Modify that strategy and maybe branch out to a wider group of VC sponsors versus focusing on what you guys would call a more Selected top tier or top kind of top group, but much more curated group?

Speaker 2

Yes, Ryan. So, a very interesting question. Listen, I think again from our perspective, we look to our long term track Record. So obviously, we're looking to our relationships and our interactions with these funds and our portfolio companies Over multiple years, multiple cycles. And so again, I'd say our track record continues to be Strong over the 10 year time period since TPVG's inception.

Speaker 2

Having said that, we always review and evaluate The select venture capital funds that we work with based on our interactions with them, our performance with them, Their position in the market, their track record. So, it's not a fixed list forever, right? It's a living, Breathing list that benefits from experienced track record. And so I would say it's fundamentally a combination of both. So yes, it has The folks that we have deep relationships with, but it also adjusts and corrects based on performance and experience and it also Deals with the realities of changes in the venture capital landscape.

Speaker 8

Okay, understood. And then I believe and correct me if I'm wrong, I believe you said that as we move into 2024, you expect Credit stress event to decline in your portfolio. I'm just curious, I guess, what are the assumptions That you guys are using to give you confidence in that statement. Is there any sort of macro changes that it would need to occur In order for you to continue to have that sentiment or what sort of gives you that confidence In that, because it seems like right now, based on the current VC trends, unless there's going to be a big shift in Sort of a recovery in the VC marketplace, whether it's fundraising or investment or exit opportunities, Feels like it could last well into 2024. So I'd just love to have you unpack that statement a little bit more.

Speaker 2

Yes, absolutely. So Again, I think I covered a fair amount of it in our prepared remarks, but I would say, again, we're not expecting overall market conditions to Change materially here in Q4 and then early into 2024, right? The VC market is not going to flip the other direction overnight. But what we're seeing right is that our portfolio companies now have had almost a year to deal with the realities of this economic environment and Change in the venture capital environment to understand what the new standards and the new metrics for success are In the venture capital ecosystem, not only from an operational perspective, but also from a fundraising perspective. We talked about Yes, managing that balance between hyper growth and burn at all costs.

Speaker 2

We talked about driving solid unit economics, Either having a path to profitability, being profitable or convincing investors how you can with an incremental financing. So I would say it's not the market recovery that we're banking on or that we're optimistic as we look to 2024. Candidly, it's the hard work of our entrepreneurs and our portfolio companies of adapting and changing and surviving and making it through. And so, Clearly, we've had some portfolio companies that weren't successful in pivoting and adjusting to the environment changes and that explains the stress that we've seen. But we also have roughly 90%, right, that's sitting in our top two categories where they've responded and they've acted now not all of them are We're going to have success in 2024, but I'd say we feel again we're coming to the end given the adapting and the adjustment.

Speaker 2

But Again, conditions can change, execution, these are startup companies, they can make mistakes and so things could change, but at least as we look today, We look at the response, we look at the game plan, we look at the cash runway of the portfolio companies. And then the last piece is the fundraising activity, Even in this environment that our portfolio companies here in Q4 and Q1 that are on track for, again, I think it's Small amount of light at the end of the tunnel. We're not saying it's over, but some positive data points for us as we go into 2024.

Speaker 8

Okay. Understood. That's all for me this afternoon. Thank you.

Operator

The next question comes from Casey Alexander with Compass Point. Please go ahead.

Speaker 9

Hi. Just a couple of questions. Chris, you said you Pulled cash down from the credit facility at the end of the quarter to meet some regulatory hurdles. Could you tell me how much that was? Because I just want trying to get to a more normalized leverage ratio at the end of the quarter as opposed to the reported 1.62x.

Speaker 9

Yes. So I would say,

Speaker 3

that is a quarterly event that you would expect to see for at least the next 2 or 3 quarters. But that's not the average cash outstanding. So if you're trying to calculate weighted average debt outstanding for interest expense, So there are a number of quarterly tests that all BDCs have. And I would say there's at least a handful that do the same Approach that we're doing, where they have a larger gross asset And some people use it through swaps or treasury bills. We found that it's most efficient to use the existing credit facility we have to Gross up the balance sheet.

Speaker 3

But to answer, I guess, most direct, you should expect for at least another 2 or 3 quarters that the cash balance would be elevated. So kind of gross net leverage would be kind of consistent with what you're seeing for this quarter.

Speaker 9

Okay. Secondly, you mentioned in response to a previous question that there's a couple Companies there where your loans are maturing in the 1st part of next year. And By your admission, you don't expect the environment to change. How confident are you? There's nothing more binary than the maturity date Of a term loan, how confident are you that those companies have a financing Or some type of an event that creates the conditions that will allow them to make timely repayment on those loans?

Speaker 2

Yes. Casey, this is Sajal. I'll take it. So, I would say to the extent that there was concern, those companies would be on our credit watch list today. We wouldn't wait for the future event.

Speaker 2

But I would say again, and Chris, you can correct me if I'm wrong, I mean, I think a fair amount of that is natural amortization that's coming. So these aren't necessarily Bullet payments of the few companies that may or may not have a bullet payment in Q1 or Q2, I think it's on a case by case basis. But I would just say as we look to Q1, it's Sorry, Q4 and Q1, it's mostly natural amortization.

Speaker 3

Meaning monthly principal payments as opposed to a lump sum Final maturity.

Speaker 2

And then I would say, just generally speaking, when it comes to extensions, it's on a fact and circumstance basis of Extending maturity dates depending on the credit situation and credit rating and cash runway of the company.

Speaker 9

Okay, great. When I look at this quarter's activity with $20,000,000 of scheduled principal amortization, That seems like a high amount. Were there some bullet payments in there?

Speaker 2

To take a look, I think during the quarter, I mean, it was $70,000,000 of cash we had. We had $30,000,000 of $30,000,000 to $40,000,000 of prepays, right, Chris? We had repays on revolvers, again, is another component Of the cash that we saw and then portfolio amortization, I don't know if you had the detail. Right.

Speaker 9

Well, no, I'm looking at the 20,000,000 Specifically stated as scheduled principal amortization. And that seems like a large amount. So I'm Trying to understand if there was any bullet maturities in that as opposed to There was one. Okay.

Speaker 3

There was one representing 12,000,000

Speaker 9

Right. Okay. That makes that number makes a lot more sense now. Okay.

Speaker 8

Thank you. That's all for me.

Operator

Our next question comes from Brian Nikanna with JMP Securities. Please go ahead.

Speaker 4

Great. Thanks. So I appreciate the outlook commentary heading into next year, but if 2024 doesn't play out as expected and the recovery across the industry is pushed out even further, What's the expectation for portfolio performance, specifically as it relates to non accruals and just underlying credit quality? And then what might that mean for the trajectory of leverage?

Speaker 6

Yes.

Speaker 2

Unfortunately, again, with a crystal ball, I don't want to be joking here. Obviously, we take it quarter to quarter. We take it facts and circumstances. And I would say, The good news is, as we look to our higher rated credit score companies, they have significant amounts of cash runway to make it through 2024 And beyond, so I would say that's one element. I'd say the second so existing cash runway continues to be strong for our top two Rated credit watch list companies.

Speaker 2

I'd say the second element is, despite the depressed market, Again, as we talked about, our portfolio companies are raising new rounds of financing with 1 already here in Q4 $30,000,000 second one happening imminently and more underway. So I think again, we feel our remaining our top 2 rated portfolio companies are attracting follow on capital. They have earlier this year. We believe that they're doing so here in Q4 and Q1. And I do think again it's we're seeing sectors that continue to attract strategic interest, Equity interest, I don't want to say AI, for example, everything and anything with Aon can get funded or acquired today.

Speaker 2

So I'd say that's a more balanced outlook. I can't really comment on 2024 other than, yes, if our goal is to delever by virtue of the scheduled amortization. I think we see upside from portfolio company prepayments. Again, we talked about how challenging Q3 was for the entire venture capital ecosystem, And we had one of our highest levels of portfolio company prepay and liquidity of $70,000,000 of cash generated in the 3rd quarter. So Again, I don't want to say during really tough quarters, we should expect that kind of cash generation.

Speaker 2

But I would say, again, it's not all doom and gloom to the extent that This challenging environment continues to be same conditions for a prolonged period of time.

Speaker 4

Helpful. Thanks. And then just a follow-up, does a higher for longer interest rate environment impact how you're thinking about Just managing the portfolio broadly for the long term and then does this at all impact the sectors you ultimately will invest into over time?

Speaker 2

Interesting question. I would say, as we look to higher yields, right, I do think from our perspective, right, There is a cap on the total return that we can make on an individual loan, right? If we're charging Certain high level or 20% return on the loan from the debt component, I think equity investors will take a second look and say, my gosh, that's approaching equity like returns, particularly when you factor in the warrant. And so Maybe I'll just provide that financing instead of this company taking venture debt. And then it makes you think about the companies who don't raise equity or whose sponsors don't say, Forget it, we'll do it instead.

Speaker 2

And then it means are you getting adversely selected because the new companies that you're talking to with these Really high rates are ones whose investors don't want to give them more capital. That's why our approach has been to hold yields generally In the same level, but take on what we think are companies with stronger credit profiles, as Jim mentioned, lending to companies That have recently raised rounds of equity financing, who have seen the reset in their valuations. So from an LTV perspective, we feel Stronger in terms of using that as a calculation and then have lower cash burn rates, longer cash runway. So I think that's our Perspective on that. But I think on the other hand, we do think of the impact of interest expense on their cash flow.

Speaker 2

And so that obviously impacts burn rates. And so It's something to be mindful of. But again, the majority of our portfolio companies are focused to get to profitability, but they aren't

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Jim for any closing remarks. Please go ahead. Okay.

Speaker 1

Thank you. And as always, I'd like to thank everyone for listening and participating in today's call. I hope you found it helpful. We look forward to talking with you all again next quarter. Thanks again.

Speaker 1

Have a nice day. Bye bye.

Operator

The conference call has now concluded. Thank you for attending today's presentation. You may all now disconnect.

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Earnings Conference Call
TriplePoint Venture Growth BDC Q3 2023
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