Hercules Capital NYSE: HTGC reported record second-quarter investment income and net investment income, supported by strong originations, elevated early loan repayments and stable portfolio credit performance.
Chief Executive Officer and Chief Investment Officer Scott Bluestein said the business continued to operate with conservative underwriting, a flexible balance sheet and enhanced credit monitoring amid market volatility that improved from the first quarter. Net investment income covered the company’s base shareholder distribution by 125% and its full distribution, including a $0.07 supplemental distribution, by 106%.
Record originations and investment income
For the first half of 2026, Hercules originated a record $2.74 billion in new debt and equity commitments, up 35.6% from a year earlier, while gross fundings reached a record $1.35 billion, up 8.5%. The firm managed approximately $6.1 billion of assets at quarter-end, an increase of 14.4% year over year.
During the second quarter, Hercules made more than $927 million of new commitments and funded more than $647 million. The company funded 39 businesses, including nine new borrower relationships. Life sciences companies represented approximately 59% of commitments and 45% of fundings, while technology companies accounted for 41% of commitments and 55% of fundings.
Chief Financial Officer Andrew Olson said total investment income rose to a quarterly record of $149.1 million, up 5.4% from the first quarter and 8.5% from a year earlier. Core investment income, excluding accelerated prepayment revenue, was $134.4 million, compared with $134.9 million in the prior quarter.
Net investment income was a record $92.9 million, or $0.50 per share, up 5.5% sequentially and 4.7% year over year. The company’s effective yield was 13.4%, compared with 12.8% in the first quarter, while core yield declined to 12% from 12.2%, reflecting the impact of prior interest-rate reductions and portfolio turnover.
Prepayments boost results, expected to normalize
Early loan repayments totaled $572.1 million during the quarter, exceeding Hercules’ guidance range. Bluestein said about 60% of repayments came from mergers and acquisitions or borrowers using balance-sheet cash, with most cash repayments tied to companies that had recently raised equity financing and elected to retire debt.
Hercules expects third-quarter prepayments to normalize to between $200 million and $300 million. The company also expects originations to be seasonally lower during the third quarter and weighted toward the latter part of the period, though Bluestein said the pipeline remains robust.
“Our team is evaluating, looking at screening a record number of companies,” Bluestein said. “Our pipeline is as strong as I can recall seeing it.” He added that the company is maintaining underwriting discipline because some opportunities do not meet its desired quality standards.
As of July 27, Hercules had closed $149.3 million of new commitments and funded $112.5 million since quarter-end, with another $70 million in signed, non-binding term sheets.
Credit quality remained stable
The company said its portfolio remained evenly split between life sciences and technology assets, with no individual subsector accounting for more than 25% of the investment portfolio. Debt investments were spread across 136 companies and had a combined fair value of $4.4 billion.
Approximately 98% of debt investments were floating-rate loans with contractual floors, and 75% of prime-based loans had reached those floors at the end of the second quarter. The average debt portfolio duration was about 21 months.
Payment-in-kind income declined to 8.3% of total revenue from 9.1% in the first quarter. About 87% of second-quarter PIK income was part of original underwriting terms, according to Bluestein. The company collected approximately $12 million of cash payments on accrued PIK during the quarter and another $12.6 million through July 27.
The weighted average internal credit rating was 2.17, compared with 2.11 in the first quarter. Grade 4 and 5 credits represented less than 2% of portfolio fair value. The number of companies with non-accrual loans increased by one to two loans; the non-accrual investments had a cost of about $16 million and fair value of $5.5 million. Hercules subsequently resolved the new second-quarter non-accrual loan, generating a cash recovery about $1 million above its quarter-end fair-value mark and a positive realized internal rate of return, Bluestein said.
Balance sheet and adviser business
Net asset value per share increased $0.25 during the quarter to $12.15, driven by net realized and unrealized appreciation. Hercules reported $29.6 million of net unrealized appreciation and $7.7 million of net realized gains.
GAAP leverage declined to 103.9% from 115.4% in the first quarter, while regulatory leverage fell to 88.5% from 99.7%. Hercules ended the quarter with $652.9 million of available liquidity in the business development company and more than $1 billion of available liquidity across the broader platform, including capital raised by funds managed by its registered investment adviser subsidiary.
After quarter-end, the company issued $325 million of 6.3% unsecured institutional notes due in 2031. Olson said proceeds will be used to repay upcoming secured and unsecured debt, fund originations and support general corporate purposes.
Hercules Adviser, the company’s private-credit fund business, manages nearly $2 billion in committed debt and equity capital. During the quarter, the subsidiary paid a $2.1 million dividend to the public BDC and provided $4.9 million in expense reimbursement, contributing $7 million to net investment income.
Looking ahead, management expects third-quarter core yield of 11.8% to 12%, gross SG&A expenses of $25 million to $26 million, and quarterly dividends from Hercules Adviser of roughly $2 million to $2.5 million.
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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