Hercules Capital Q3 Earnings Call Highlights

Key Points

• Record growth: Hercules Capital originated a record $3.44 billion in debt and equity commitments during the first nine months of 2026, up 20% year over year, while assets under management rose 17.7% to approximately $6.5 billion.
• Stable credit quality: Net investment income totaled $87.3 million, or $0.47 per share, covering 118% of the base shareholder distribution. Non-accrual loans remained limited to two, representing just 0.3% of the portfolio at fair value, while credit ratings improved modestly.
• Positive fourth-quarter outlook: Management expects investment income and net investment income to increase as loan prepayments normalize, forecasting $200 million to $300 million in prepayments and a core yield of 11.8% to 12%.

Hercules Capital NYSE: HTGC reported third-quarter 2026 results marked by record year-to-date originations, portfolio growth and stable credit quality, while management said it expects higher investment income and net investment income in the fourth quarter as loan prepayments normalize.

Chief Executive Officer and Chief Investment Officer Scott Bluestein said the company’s net investment income covered its base shareholder distribution by 118% during the quarter. He also said Hercules has now delivered a supplemental distribution alongside its regular quarterly base distribution for 25 consecutive quarters.

For the first nine months of 2026, Hercules originated a record $3.44 billion of debt and equity commitments, up 20% from a year earlier, and funded $1.93 billion, up 9.9%. The company ended the quarter managing approximately $6.5 billion of assets across its public business development company and private credit funds, an increase of 17.7% year over year.

Quarterly results and portfolio activity

Chief Financial Officer Andrew Olson said third-quarter total investment income was $140.1 million, up 1.5% from a year earlier, while net investment income totaled $87.3 million, or $0.47 per share. For the first nine months, total investment income was $430.8 million and net investment income was $268.4 million.

Core investment income, which excludes accelerated prepayment revenue, reached a record $135.7 million, compared with $134.4 million in the second quarter and up 6.1% year over year. The company’s core yield was 11.9% in the third quarter, while its GAAP effective yield was 12.3%.

Hercules recorded $701 million in new debt and equity commitments and more than $572 million in gross fundings during the third quarter. Life sciences companies accounted for 54% of commitments and 48% of fundings, while technology companies represented 46% of commitments and 52% of fundings. The company funded 32 businesses during the period, including seven new borrower relationships.

Early loan repayments totaled $148.3 million in the quarter, below management’s guided range. About 44% of the repayments came from mergers and acquisitions or balance-sheet cash, according to Bluestein. Through Sept. 30, early repayments totaled more than $946 million, and management expects 2026 to be a record year for early loan repayments.

Since the end of the third quarter through Oct. 26, Hercules closed $219.6 million of new commitments and funded $89.2 million. It also had $571.7 million in pending commitments represented by signed nonbinding term sheets. Bluestein said the company expects strong, more back-end-weighted originations in the fourth quarter and believes 2026 is on pace to exceed its 2025 records for commitments and fundings.

Credit metrics remain stable

Management said the investment portfolio remained balanced between life sciences and technology, with each representing approximately half of assets. No individual subsector accounted for more than 25% of the investment portfolio. Debt investments were spread across 137 companies and had a combined fair value of $4.65 billion.

Approximately 98% of Hercules’ debt investments were floating rate and included a floor. Nearly 60% of prime-based loans were at their contractual rate floor at quarter-end. The average duration of the debt portfolio was approximately 22 months.

The weighted average internal credit rating improved to 2.12 in the third quarter from 2.17 in the prior quarter. Grade 1 and 2 credits increased to 68.6% of the portfolio, while grade 3 credits declined to 30%. Grade 4 and 5 credits together represented less than 2% of the portfolio.

Hercules had two loans on non-accrual at quarter-end, unchanged from the prior quarter. Their investment cost was approximately $18.8 million and fair value was approximately $13.2 million, representing 0.4% and 0.3% of the total investment portfolio at cost and fair value, respectively. Bluestein said all debt investments on accrual were current on scheduled principal and interest payments.

Payment-in-kind income declined to about 7.5% of total revenue from 8.3% in the second quarter. About 85% of third-quarter PIK income came from loans where PIK was included in the original underwriting and the loans were rated 1, 2 or 3. Hercules collected $18.5 million in cash payments on accrued PIK during the quarter.

Balance sheet, NAV and fourth-quarter outlook

Net debt investment portfolio growth was $252.9 million in the third quarter and $380.7 million for the first nine months. Hercules raised $325 million of five-year, 6.3% unsecured notes during the quarter and used proceeds to repay $325 million of notes that matured in September. After quarter-end, it issued an additional $400 million of 6.7% unsecured notes due in 2029.

The company’s NAV per share increased $0.11 during the quarter to $12.26, driven primarily by net unrealized appreciation in investments and accretion from its at-the-market equity program. Hercules reported $8.2 million of net unrealized appreciation and $1.9 million of net realized losses in the quarter.

GAAP leverage increased to 111.1% from 103.9% in the prior quarter, while regulatory leverage rose to 96.1% from 88.5%, reflecting portfolio growth funded with borrowings amid lower prepayment activity. Hercules ended the quarter with $506.6 million of available BDC liquidity and more than $1 billion of available liquidity across the broader platform, including capital raised by funds managed through its registered investment adviser subsidiary.

For the fourth quarter, management expects core yield of 11.8% to 12% and prepayments of $200 million to $300 million. Olson said total investment income and net investment income are expected to rise from third-quarter levels, partly due to increased expected prepayment activity. The company expects fourth-quarter gross SG&A expenses of $27.5 million to $28.5 million, RIA expense allocation of about $4.5 million, and a quarterly dividend from the RIA of approximately $2 million to $2.5 million.

In response to analyst questions, Olson said management does not expect further material core-yield compression and believes yields should stabilize within the guided range. Bluestein also said Hercules is not investing in pure-play AI companies or direct GPU financing facilities, instead focusing on areas it believes can drive or benefit from AI adoption, including power, energy, networks, communications, defense technology and space technology.

About Hercules Capital (NYSE:HTGC)

Hercules Capital, Inc is a business development company and specialty finance firm that provides debt financing to innovative, growth-oriented companies. The company focuses primarily on venture capital-backed businesses in the technology, life sciences, and sustainable and specialty technology sectors.

Hercules Capital offers secured loans and other forms of growth capital designed to support companies through various stages of development, including expansion, acquisitions, recapitalizations, and initial public offerings.

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