TriplePoint Venture Growth BDC Q3 2024 Earnings Call Transcript

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November 6, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp Third Quarter 2024 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. This conference is being recorded and a replay of the call will be available in an audio webcast on the TriplePoint Venture Growth website.

Operator

Company management is pleased to share with you the company's results for the Q3 of 2024. Today, representing the company is Jim Labe, Chief Executive Officer and Chairman of the Board Sujal Srivastava, President and Chief Investment Officer and Matthew Galiani, Interim Chief Financial Officer. Before I turn the call over to Mr. Labe, 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. You are 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.

Operator

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 management's opinions only as of today. 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. Labe.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to TPVG's 3rd quarter earnings call. During the quarter, we made further progress on the core priorities we have been focused on as we executed on our playbook of managing both the portfolio and positioning TPVG for the future. I'd like to share some of the highlights for the quarter. We increased our NAV by 3% to $9.10 per share.

Speaker 1

We over earned our dividend, generating $13,800,000 in NII or net investment income equaling $0.35 per share. We maintained our strong portfolio yield, achieving a 15.7% weighted average portfolio yield for this quarter and our core yield increased 1% over the previous quarter. We improved our weighted average credit score with 3 upgrades for companies on the watch list and one downgrade from ClearWhite. We maintained our target leverage range of 1.1 times. We renewed our credit facility to $300,000,000 during the quarter with an accordion feature to increase it up to $400,000,000 We enhanced our financial strength and liquidity ending the quarter with $340,000,000 in total liquidity.

Speaker 1

We had a reduction in the number of companies on non accrual status. We had $70,000,000 of additional signed term sheets for venture growth stage companies coming to TriplePoint Capital post the quarter's end. And finally, we reported $8,800,000 in net realized and unrealized gains, including continued increases in fair value in our warrant and equity investment positions. Our warrant and equity positions now constitute warrant positions in 95 portfolio companies and equity investment positions in 48. We believe these positions bode well for our ability to improve NAV over the long term.

Speaker 1

Underscoring this point, we realized an increase in fair value on our Revolut warrant and equity positions, which contributed to the quarterly NAV increase. Moving to credit quality, we're encouraged by the strengthening performance of a number of our portfolio companies, which is reflected in the positive credit migration we experienced during the quarter, as well as the continued success of TPVG's debt portfolio companies that raised capital. For the Q3, 8 debt portfolio companies raised $656,000,000 And for the 9 month period of 2024, 1st 9 months of this year, 23 debt portfolio companies raised $1,700,000,000 That's a 2 85% increase over the 1st 9 months of 2023. In addition, several other companies have raised rounds post this quarter. Going forward, the team will continue to closely manage and monitor the portfolio, while at the same time concentrating on further diversifying the portfolio and investing in today's attractive sectors, which are those in which our select venture capital investors are active.

Speaker 1

The focus will remain on companies that have recently raised capital, have ample cash runways, have backing from these select venture investors, have prudent management teams and whose business models have attractive unit economics and high retention rates. We continue to actively seek companies, which have tailwinds in spaces such as verticalized software, aerospace and defense, health tech and AI. These industries offer some exciting investment opportunities driven by a variety of macroeconomic, technological and geopolitical trends. Portfolio companies such as Cresta Intelligence, Panorama Education and Loft Orbital are some of the many examples. While investment activity is continuing, it's important to note that the venture capital markets have not yet recovered and the road to recovery remains uneven.

Speaker 1

We believe in the widely shared view that it will continue to take time for market conditions to improve. Despite PitchBook citing venture deal value being on track to reach more than $175,000,000,000 and surpassed 2020, they point out that a meaningful market rebound has not yet occurred and the market has just started on its journey on the long road to recovery. Venture capitalists have to balance the need to generate returns for their LP investors, while at the same time taking advantage of new investment opportunities and stay patient. The lack of IPOs and M and A exit opportunities for many venture growth stage companies remains a major obstacle. And venture backed companies are staying private longer as they wait for a better environment.

Speaker 1

Our select venture investors are opting for quality over quantity, increasing their time on due diligence and carefully structuring deal terms. Likewise, as a venture lender, this is the same prudent approach that we're also employing at TPVG and believe is the right one to follow. Based on many years of experience and throughout numerous venture capital cycles, we don't believe this is a time to open the valves and to grow for the sake of growth or to expand markets. Caution remains a guiding principle our playbook given this market. In summary, this quarter was one of progress and execution.

Speaker 1

We're pleased with the progress made this quarter and continue to focus on executing on our plans given the underlying market conditions. We're well positioned from a liquidity standpoint to take advantage of increased activity as the markets improve. While we'll continue to maintain our careful discipline, we're seeing some signs of gradual improvement in the venture capital markets, in TPVG's portfolio and in new business investment opportunities, and eagerly looking forward to what we expect will be increased investment opportunities in 2025 and the years ahead. With that, I'll turn the call over to Sajal.

Speaker 2

Thank you, Jim, and good afternoon. During the Q3, TriplePoint Capital signed $94,000,000 of term sheets with venture growth stage companies, down from $188,000,000 in Q2. This reflects our continued selectivity given market conditions, as well as an element of seasonality as signed term sheets so far in Q4 are already at $70,000,000 With regards to new investment allocation to TPVG during the quarter, TriplePoint Capital allocated $41,000,000 in new commitments to 4 companies to TPVG, including 2 new portfolio companies compared to $52,000,000 in new commitments and 2 new portfolio companies in Q2. Commitments to new portfolio companies during Q3 included Panorama Education, an education software platform backed by General Atlantic, Emerson Collective, Chan Zuckerberg Initiative and other investors, as well as Aquilas, a fintech infrastructure company backed by Oak Bullpen Capital, Mubadala Capital and other investors. During the quarter, we also had follow on investments in one recent portfolio company, as well as refinancing of another existing portfolio company in conjunction with an upsize.

Speaker 2

During the quarter, TPVG funded $33,000,000 in debt investments to 4 portfolio companies, which is slightly down from $38,700,000 in debt investments to 5 portfolio companies in Q2 as fundings were primarily related to transactions closed during the quarter. Year to date, we have funded $85,200,000 to 10 portfolio companies. The debt investments funded this quarter carried a weighted average annualized portfolio yield of 13.4% at origination, down from 15.5% in Q2, given the combination of lower base rates, lower yields associated with asset based financings as well as more robust enterprises we're lending to. Our quarterly gross funding target continues to be in the $25,000,000 to $50,000,000 range for Q4 and as we head into 2025. As a reminder, new fundings don't materially contribute to income in the quarter in which they fund given they typically occur at the end of the quarter.

Speaker 2

During Q3, we had $36,000,000 of loan prepayments, down from $51,000,000 in Q2, representing $117,800,000 of prepayments year to date. Prepayment related income this quarter contributed to an overall weighted average portfolio yield of 15.7% in line with last quarter's portfolio yield. Excluding prepayments, core portfolio yield was 14.9%, up from 13.9% in Q2, primarily due to the reduction of non accruals. We expect at least one prepay here in Q4 and believe that prepayment activity in 2025 will depend on improving market conditions, continued equity fundraising activity, as well as other factors related to seasoning of our vintages. We do expect the pace of contractual principal amortization and repayments to increase in 2025 given contractual amortization requirements, and we therefore continue to focus on ensuring that we sufficiently grow the portfolio over time in addition to replacing prepaid and repaid loans.

Speaker 2

With regards to fundraising activity, 8 portfolio companies with debt outstanding as of quarter's end raised $656,000,000 during the quarter compared to 9 portfolio companies with debt outstanding raising $443,000,000 in Q2. We are pleased to see not only the level of activity and round sizes increase, but also the expanding number of sub industries of technology, including consumer attracting capital despite market conditions, all of which reflects the quality of these portfolio companies. We expect to continue to see capital raising activity within our portfolio. We believe this fundraising activity should bode well for the outlook for our obligors, their credit quality, as well as for the value of our warrant and equity investments in these companies. As of September 30, we held 90 warrants in 95 companies and equity investments in 48 companies with a total fair value of $116,000,000 Our warrant and equity portfolio experienced a $9,400,000 net unrealized gain in fair value or $0.23 per share for the quarter, primarily driven by an increase in the fair value of Revolut as a result of its announced secondary transaction of shares at a $45,000,000,000 valuation.

Speaker 2

Revolut is now reportedly Europe's most valuable private tech company and our total warrant and equity holdings in Revolut currently valued at $37,000,000 So a substantial appreciation on our investment since our initial loan commitment to them in 2018. Europe continues to be an important market for the TriplePoint Capital platform as we've been active in that market and have served as a key financing source in that ecosystem since 2,008. In other portfolio activity during the quarter, Good Eggs was acquired by Grub Market, a privately held company with substantial scale revenues and EBITDA for public sources. We received equity in Grub Market for consideration for our loans and Good Eggs was removed from category 4 on our credit watch list. As Jim mentioned, credit improved within the portfolio during the quarter with 3 upgrades and 1 downgrade.

Speaker 2

Flink with a principal balance of $27,000,000 was upgraded from category 4 to category 3 as a result of closing around and positive performance. 1 portfolio company with a principal balance of 6,000,000 was upgraded from category 3 to category 2. Another portfolio company with a principal balance of 20,000,000 was upgraded from category 2 to category 1 and one company with a principal balance of 10,000,000 was downgraded from category 1 to category 2. During the quarter, we amended our 27,500,000 outstanding loan with Moda Apparanda rated category 3 in our watch list and placed the loans back on accrual in conjunction with the company raising new financing. We remain focused on executing our plan for positioning TPVG for the future.

Speaker 2

In light of our industry leading sponsor TriplePoint Capital, its commitment to TPVG success as well alignment with TPVG shareholders, we announced earlier today that starting with Q1 2025 and through the end of 2025, if payment of the quarterly incentive fee prevents the company from covering the quarterly distribution from NII, the advisor will waive that portion of its quarterly income incentive fee for that quarter necessary to cover the distribution up to the full amount of the quarterly income incentive fee. Although we continue to feel encouraged by the potential for improving market conditions, our pipeline and our ability to increase the pace of new commitments and investment fundings over the course of 2025, we believe that this waiver provides a cushion in the near term if necessary despite our considerable spillover while we execute on our longer term plan to increase TPVG scale, durability, portfolio diversification and income generating assets. With that, I'll now turn the call over to Matt.

Speaker 3

Thank you, Sujal, and hello everyone. For the Q3, total investment income was $26,500,000 with a portfolio yield of 15.7% as compared to $35,700,000 and a portfolio yield of 15.1 for the prior year period. The decrease in total investment income was primarily due to a lower weighted average principal amount outstanding on our income bearing debt investment portfolio. For the 3rd quarter, total operating expenses were $12,700,000 as compared to $16,600,000 for the prior year period. These expenses consisted of $7,100,000 of interest expense, dollars 3,400,000 of base management fees and $2,200,000 of general and administrative expenses, of which $150,000 represents an increase to our excise tax accrual from the prior quarter due to an increase in estimated undistributed income or spillover income for the full fiscal year.

Speaker 3

The company did not incur an incentive fee this quarter. For the Q3, net investment income totaled $13,800,000 or $0.35 per share as compared to 19,100,000 dollars or $0.54 per share for the prior year period and our net increase in net assets resulting from operations for the Q3 totaled $22,600,000 or $0.57 per share compared to $2,100,000 or 0.06 dollars per share for the 3 months ended September 30, 2023. During the quarter, the company recognized net realized losses on investments of $5,000,000 primarily due to the acquisition of 1 portfolio company, whereas a result, we received equity in the acquirer in consideration for our loans. Net change in unrealized gains on investments for the Q3 was $13,900,000 consisting of $9,400,000 of net unrealized gains on the existing warrant and equity portfolio resulting from fair value adjustments, dollars 5,200,000 of net unrealized gains from the reversal of previously recorded unrealized losses on investments that were realized during the period, and $700,000 of net unrealized losses up from fair value adjustments on the debt investment portfolio. As of quarter end, net asset value was $364,300,000 or $9.10 per share.

Speaker 3

This compares to 346 $300,000 or $9.21 per share at the end of the year and is up $11,300,000 or $0.27 per share from the end of the prior quarter. Last week, the company's Board declared a regular quarterly distribution of $0.30 per share with a record date of December 13 to be paid on December 27. As of September 30, the company had estimated spillover income of $41,500,000 or $1.03 per share. Now just an update on unfunded investment commitments, balance sheet leverage and overall liquidity. Our unfunded commitments decreased from $118,000,000 at year end to $74,000,000 as of September 30.

Speaker 3

Of the $74,000,000 of unfunded commitments, dollars 73,200,000 will expire during 2025 $800,000 will expire during 2026. We

Speaker 2

continue

Speaker 3

to maintain a diversified capital structure and as of the end of the quarter, TPVG had a total of $405,000,000 of debt outstanding consisting of $395,000,000 of fixed rate investment grade term notes and $10,000,000 outstanding on its credit facility. We continue to improve leverage levels as we ended the quarter with a leverage ratio of 1.11 times. In August, the company renewed and extended its revolving credit facility. The company also elected to reduce total commitments under credit facility to $300,000,000 to closer align with anticipated utilization. As of quarter end, the company had total liquidity of $339,000,000 consisting of $49,000,000 in cash and $290,000,000 of available capacity under the revolving credit facility.

Speaker 3

This completes our prepared remarks for today. So operator, could you please open the line for questions at this time?

Operator

We will now begin the question and answer session. Our first question comes from Crispin Love of Piper Sandler. Please go ahead.

Speaker 4

Thank you. Good afternoon, everyone. Just first off, just on the news of the day with Trump winning the presidential election, can you just discuss some of the potential implications, whether it's positives or negatives for TriplePoint deal activity and just the venture eco venture capital ecosystem as a whole? Thank you.

Speaker 2

Hi, Chris. This is Adil. I'll take the question. Listen, I think it's too early for us to opine on the impact to the venture markets or interest rates or inflation. We're far from experts on that.

Speaker 2

I think what we can opine on is we do think that potentially this new administration will see a more favorable M and A market environment. And so we think that our portfolio companies and capital markets will see some benefits. So we think exit activity should improve, which will be potentially positive for capital markets activities, which should could theoretically be beneficial for potential IPO activity as well. But too soon to say and we're far from experts on that.

Speaker 4

Absolutely. No, I appreciate all the color there, Sajal. Makes sense. And then just on credit quality, I was just scanning the 10 Q during the prepared remarks, but it looks like non improvement costs improved to $29,000,000 from $68,000,000 last quarter. Sasha, can you just discuss some of the major changes driving the decrease there?

Speaker 4

Apologies if you hit on that in the prepared remarks, but I just don't think I got them all down.

Speaker 2

Sure. Yes. Kind of 2 obligors associated with the improvement due to 2 obligors. 1 was Good Eggs, which we announced last quarter had been acquired subsequent to quarter end by Grub Market. And so that was the removal of them.

Speaker 2

We did receive equity in Grub Market as a result. And then the second one was we put moda operandi back on accrual as a result of us modifying our loans to them in conjunction with them raising a new round of financing.

Speaker 4

Great. Thank you and appreciate you taking my questions.

Speaker 2

Thanks.

Operator

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

Speaker 5

Hey, guys. Hey, what was the portfolio company that drove the realized loss, please?

Speaker 2

It was Good Eggs. It was as a result of the acquisition and receiving equity for our debt instrument, we took a realized loss.

Speaker 5

And Good Eggs was non accrual last quarter as I recall?

Speaker 2

Correct.

Speaker 5

Okay, great. And then interest expenses declined, helping drive your net investment income up quarter over quarter. What's the catalyst for that decline?

Speaker 2

Yes, I think in particular lower utilization on the credit facility just given where we had lower fundings and prepay activities. So we didn't have to use utilize the revolver and so benefited from it. And then, of course, we have the lower expense, the term loan at I think under 5%.

Speaker 5

Great. And then finally, I appreciate the comments as always on terms of the condition of the venture market. Are you seeing any changes in the industry sectors within the venture capital markets, which are seeing more capital inflows?

Speaker 2

Yes. Jim, do you want to take that one?

Speaker 1

Yes. We are starting to see signals, slow but gradual signals of, I guess I'd call it continued investor sector rotation, but also increased investment activity and deployment of it's now over 300,000,000,000 dollars which venture capitalists are sitting on the sideline to deploy here. But in terms of sectors, a little bit more space economy, defense economy, we're seeing robotics, cybersecurity, insurtech and these are all in addition of course to AI. So there is, I guess, starting to hear more and more about disruptive technologies and innovative technologies and investment opportunities for us. It's on the increase.

Speaker 5

Great. Thank you. That's it for me. Thank you.

Operator

Our next question comes from Paul Johnson of KBW. Please go ahead.

Speaker 6

Yes. Thanks for taking my questions. Just on your comments around not being as a favorable time to invest, being a little bit more cautious, not time to quite open the spigot for deployment. Can you just kind of expand on that a little bit and just describe, I guess, why you're a little bit more cautious now? Is it holding back and waiting for more M and A activity or what's kind of the reasoning there?

Speaker 2

Yes. Let me take that question. Sorry, go ahead, Jim.

Speaker 1

No, that's all right. Go ahead, Sajal.

Speaker 2

I was going to say, I think it's an important thing just to see where the venture capital equity investors are deploying their capital and their pace of investment. So I think, Paul, it's important for us. We want to make sure that we're lending to those companies that are attracting follow on capital from those investors. And so while we have a strong pipeline and companies reach out, new companies every quarter, in some quarters, there are companies in sectors that can attract capital and so that's why they're calling lenders or reaching out. So for us, we don't want to be pressured to put we're not pressured to put capital out the door.

Speaker 2

So we want to be very selective to ensure that we're lending to companies as Jim described that have recently raised financings that have validated their last rounds or in industry sectors that are experiencing growth or businesses that are growing. And so you've got to manage the timing of when they come to market versus when companies that may not have those favorable characteristics come to market and choose not to work with them even though it's low hanging fruit.

Speaker 6

Got it. That makes sense. I mean, where are we, I mean, at this point in terms of valuations? I mean, are the down rounds and such? Is that behind us at this point?

Speaker 6

I mean, are the companies that are raising doing so higher valuations kind of where are we, I guess, relative to where venture valuations were at pre rate hike 2022?

Speaker 2

Yes. And again, I know PitchBook has a fair amount of data on this. So I would say the 2 answers to this question. One, very high level, I think for PitchBook, the good or the bad is a number of the unicorns that have raised large rounds of financing during the peak periods, not all of them have come back to market yet. And so I would say we're still in a period generally of recalibration and reality check for certain companies.

Speaker 2

I would say more closer to home as we look to our portfolio, particularly from the activity in during Q3, again record level of activity, record level of amount raised, year to date, so to speak, or improving that record, but also increasing round sizes, increasing diversification of industry sectors and more importantly improving valuations. And that's why we saw it in the more than equity portfolio beyond just Revolut, we saw improvement. So we're pleased to see that. So there's definitely a class of companies that still need that kind of valuation check. But I think more importantly within our portfolio, we are seeing a balance of both flat rounds, down rounds and up rounds.

Speaker 6

Rounds. This

Operator

concludes our question and answer session. I would like to turn the conference back over to Mr. Jim Labe for any closing remarks.

Speaker 1

As always, I'd like to thank everyone for listening and participating in today's call. We look forward to updating and talking with you all again next quarter. Thanks again and everyone have a nice day. Goodbye.

Operator

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

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Earnings Conference Call
TriplePoint Venture Growth BDC Q3 2024
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