Hercules Capital NYSE: HTGC reported record first-quarter 2026 originations and total investment income while emphasizing stable credit quality and strong liquidity amid heightened market volatility.
Chief Executive Officer and Chief Investment Officer Scott Bluestein said the company delivered “another strong quarter of record originations, record total investment income, and stable credit performance” despite a backdrop that included equity and credit market volatility, concerns tied to the Middle East conflict, private credit redemptions and questions about artificial intelligence disruption.
The venture and growth-stage lender originated $1.81 billion of new debt and equity commitments in the quarter, with gross fundings of more than $706 million. Net debt investment portfolio growth totaled $298 million. Total investment income reached a record $141.5 million, while net investment income was $88.1 million, or $0.48 per share.
Bluestein said Hercules’ net investment income covered its base shareholder distribution by 120% and its full distribution, including a $0.07 supplemental payout, by 102%. He noted that the company has now paid a supplemental distribution for 23 consecutive quarters. Hercules ended the quarter with undistributed earnings spillover of $149.1 million, or $0.80 per ending share outstanding.
Originations Hit Record as Portfolio Skews Toward Life Sciences
Hercules said first-quarter activity was weighted slightly toward life sciences companies, reflecting what Bluestein described as a more defensive posture. About 56% of commitments and 60% of fundings went to life sciences companies, while roughly 44% of commitments went to technology companies. The company funded 34 companies during the quarter, including 13 new borrower relationships.
The firm’s managed assets increased to approximately $6.1 billion, up 21.8% from a year earlier, driven by growth in both its publicly traded BDC and private credit funds business. Bluestein said the company had 65 investment and credit professionals, more than 25 finance and accounting professionals and 120 full-time employees.
Hercules said it expects originations to moderate in the second quarter and be more back-end weighted. Since quarter-end and as of May 1, the investment team had closed $79.2 million of new commitments and funded $32.3 million. The company also had $506.1 million of pending commitments in signed non-binding term sheets.
Liquidity and Leverage Rise Alongside Growth
Chief Financial Officer Seth Meyer said Hercules ended the quarter with $454.5 million of available liquidity in the BDC and more than $1 billion across the broader platform, including adviser-managed funds. During the quarter, Hercules issued $300 million of 5.35% unsecured notes due in 2029 and raised about $52 million through its at-the-market equity program.
GAAP leverage increased to 115.4% from 104.4% in the prior quarter, while regulatory leverage rose to 99.7% from 88.6%. Bluestein said the GAAP leverage level was at the high end of Hercules’ typical historical range but still below the average of its BDC peers.
Meyer said the company’s weighted average cost of debt remained stable at 5.1%. Net investment income return on average equity increased to 16.9% from 16.4% in the fourth quarter, while return on average assets was 8.1%.
Credit Quality Remains Stable
Bluestein said portfolio credit performance remained stable. Hercules’ weighted average internal credit rating was 2.11, compared with 2.20 in the fourth quarter. Grade 1 and 2 credits increased to 70.5% of the portfolio from 66.6%, while Grade 3 credits declined to 28.6% from 31.7%.
Loans rated 4 and 5 fell to a combined 0.9% of the portfolio, which Bluestein said was the lowest level reported since the second quarter of 2022. Hercules had one loan on non-accrual, with an investment cost of approximately $10.7 million and fair value of $3.7 million, representing 0.2% and 0.1% of the total investment portfolio at cost and value, respectively.
Bluestein said 100% of debt investments on accrual were current on scheduled principal and interest payments based on the company’s most recent reporting.
Prepayments Expected to Increase in Second Quarter
Early loan repayments totaled $225.8 million in the first quarter, at the high end of the company’s guidance. Hercules expects second-quarter prepayments to rise materially to a range of $350 million to $500 million, driven largely by merger-and-acquisition activity.
In response to an analyst question, Bluestein said the higher prepayment outlook reflected known M&A events that had either already occurred or were expected to occur during the quarter. He called the activity a positive indicator of portfolio quality and said it should give Hercules flexibility to redeploy capital.
Bluestein also said the company saw four new M&A events in the portfolio during the first quarter and early second quarter, including one life sciences company and three technology companies. Two portfolio companies filed registration statements for initial public offerings, and one completed an IPO in April.
AI, Software Exposure and PIK Income Discussed
Management addressed investor questions about software exposure and AI-related disruption. Bluestein said underwriting in venture and growth-stage markets differs from traditional lending, noting that Hercules generally targets less than 1x debt to annual recurring revenue, less than 20% loan-to-value and debt-to-invested equity of less than 30% for software loans.
He said Hercules remains active in software but is prioritizing deal structure over incremental yield. “Rather than pushing for an additional 20, 25, 30 basis points of yield, our teams are pushing for tighter structure, stronger covenants, and better overall underwriting,” Bluestein said.
Payment-in-kind income declined to about 9.1% of total revenue from 10.5% in fiscal 2025. Bluestein said roughly 91% of first-quarter PIK income came from terms included in the original underwriting, not credit-related amendments, and more than 98% came from loans rated 1, 2 or 3. He said the company is intentionally deprioritizing PIK on new investments and prefers cash income when possible.
Hercules also announced leadership changes. Effective May 18, Meyer will become president of the company. Andrew Olson, who previously worked at Hercules and most recently at Revelation Partners after prior experience at SVB Capital, will succeed Meyer as CFO.
About Hercules Capital NYSE: HTGC
Hercules Capital, Inc is a specialty finance company organized as a business development company (BDC) that provides tailored debt financing solutions to high‐growth companies. Through its external management structure, Hercules Capital extends senior secured loans, subordinated debt and growth capital designed to support research and development, expansion initiatives and working capital needs. The firm primarily partners with venture capital and private equity sponsors to finance innovative enterprises across various developmental stages.
The company's investment portfolio is concentrated in technology, life sciences and sustainable and renewable technology sectors, reflecting its focus on industries with strong growth prospects and recurring capital requirements.
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