TriplePoint Venture Growth BDC Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to the TriplePoint Venture Growth BDC Corp. 2nd 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. This conference is being recorded and a replay of the call will be available in the audio webcast on the TriplePoint Venture Growth website.

Operator

Company management is pleased to share with you that the company's results for the Q2 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. LeVay, 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 could 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 the 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.

Speaker 1

Good afternoon, everyone, and welcome to TPVG's 2nd quarter earnings call. I'll start by talking about the venture market. The data speaks for itself. As the National Venture Capital Association pitch book data shows, In the first half of twenty twenty three, the venture capital ecosystem has struggled to adapt to market dynamics that we haven't seen in years. PitchBook further states that this shift in the landscape has impacted all the sectors in all the stages of the venture ecosystem.

Speaker 1

They're all well below the high watermark set in the past few years. Deal value, it's down 46%. Exit values, 77% and fundraising is down 73%. That's all over the first half of twenty twenty three compared to last year. Investment activity by the Funds into private companies continues to be really volatile.

Speaker 1

During this period, evaluation resets that we've been talking about in these calls, Investors have pulled back in the amount of capital they're deploying, primarily driven by the uncertainty in the broader economy and financial markets. We believe the continued disconnects out there between public market multiples and valuations and private market valuations, Combined with the lack of IPO and M and A exits these days and the withdrawal of the non traditional growth investors has made it very difficult for many later and growth stage companies to raise capital. As we've been discussing during these past several quarters and we'll get Further, Venture Lending has been impacted by these conditions as well, most notably by this reduced level of equity investing. Leveraging the power of the TriplePoint Capital platform and in our experience gained over the past 18 years, Our focus in the Q2 year to date continues to be 3 priorities that we believe will enable us to navigate through the current market and position TPVG to benefit as conditions improve through time. Having been through many of these venture capital market cycles, We believe it's appeared to demonstrating patience and taking timely advantage of lending opportunities with this market backdrop.

Speaker 1

Specifically, our priorities are focused on maintaining our earnings power and our strong liquidity, managing the portfolio And positioning TPVG for the future. Regarding our earnings power, with a portfolio of almost $940,000,000 We generated net investment income or NII of $18,800,000 or $0.53 per share as we once again over earned our regular quarterly dividend of $0.40 per share. TPVG also achieved a weighted average portfolio yield for the 2nd quarter of 14.7%. We're also focused on maintaining strong liquidity and a diversified capital structure adding to TPVG's stable foundation. Based on current liquidity exceeding our unfunded commitments and cash flows from our existing portfolio, we believe we have ample liquidity well into 2024.

Speaker 1

Another priority continues to be to manage and monitor the portfolio. It starts with frequent contact we're having with our portfolio companies and their investors on an active basis. In addition, our teams are out there. They're monitoring portfolio company plans and business progress. We're regularly assessing their financial condition and capital structure matters and there's always an active review of capital needs and financing strategies.

Speaker 1

We're very proactive these days given today's volatile market. As Sajal is going We're working our way through some exciting credit excuse me, existing credit issues created by these macroeconomic and venture market changes. Last quarter, almost 90% of the portfolio on a fair value basis was performing at our 2 best credit scores And we believe are adapting well to these current market conditions. This includes 14 companies that raise capital year to date. 10 of them last quarter raised more than $326,000,000 alone.

Speaker 1

Several of our portfolio companies are growing, they're expanding and they're executing according to their individual financial plans and also operating ahead of plan, as well as a few who were achieving positive EBITDA. We upgraded credit ratings on 3 of the portfolio companies, which had strong performance and they had This loan was assumed in conjunction with the sale of the company. This quarter, for a few portfolio companies, Primarily those which we have been previously talking about and identified, we lowered their credit ratings due to some ongoing challenges and developments Given the broader market in current challenging times, we will continue to proactively work through the issues which can arise in this environment and we remain engaged with the rest of the portfolio. We've been through many of these cycles in the past and we believe an upturn in the market is dependent on the return of stability in the public markets and technology company multiples specifically, as well as technology companies digesting and adapting to today's new environment. As venture investors remain gain confidence in valuations and valuation metrics, we believe it will enable companies to obtain values based In the interim, many companies will remain on their path of bringing down operating burn to conserve cash and to extend their runways.

Speaker 1

As we've mentioned before in these calls, the environment for many venture growth stage companies has changed. From business plans of growth at all costs, Transitioning into plans of conserved cash at all costs. The 3rd priority I mentioned is our focus on TPVG's long term positioning and leadership in the venture lending market. We're looking to capitalize on Changes in the competitive landscape that have occurred in the venture lending market since the Silicon Valley Bank crisis earlier this year. We're continuing to set the groundwork for when market conditions improve as well and we're taking advantage of those opportunities we are seeing in the current We see resilience, for example, in the FinTech, Software, Enterprise, Cybersecurity, Health In some cases, we're helping finance opportunistic acquisitions.

Speaker 1

These are the type of sectors and use cases we'll continue to focus on in the near term And our pipeline today reflects this strategy. While it's a pretty challenging market, for TPVG it's about working through this on the horizon and growing signs of increased investment activity. This includes pockets of technology investments being funded and operating in today's recalibrated and very valuation sensitive environment. The entrepreneurs that we meet with now are Sharply focused on the path to profitability as opposed to top line growth. Many of the venture capitalists we have spoken with have Funds and while it's still early, they continue to expect to see improvement into next year.

Speaker 1

We believe this is a reasonable assessment Given the more than $290,000,000,000 out there of estimated dry powder that venture capital funds raised in 'twenty one and 'twenty two, which is yet to be invested according to pitch book NVCA. While our results will continue to depend upon our ability to deploy Capital and effectively managed credit based on our track record and our success investing more than 13,000,000,000 Our venture loans across the TriplePoint Capital platform and our experienced multi cycle tested team, We believe we're in a position to capitalize on opportunities over the long term. We believe venture lending is about investing for the long term, which includes obtaining warrant and equity investments in the portfolio, which now span across 119 companies at TPVG. As we progress through the remainder of the year, we expect to continue to focus on the priorities we've outlined here as well as draw upon TriplePoint Capital's differentiated strategy in order to continue to capitalize on market opportunities over the long term. With that, let me turn the call over to you, Sajal.

Speaker 2

Thank you, Jim, and good afternoon, everyone. During the Q2, TriplePoint Capital, our global investment platform and the advisor to TPVG signed $114,000,000 of term sheets with venture growth stage companies compared to $199,000,000 of term sheets in Q1, which reflects our approach to originations across our platform in light of current market conditions. Given our continued focus on TPVG's overall leverage position, during the quarter, we allocated $18,000,000 of new commitments with 4 companies to TPVG, Including one new portfolio company, Tempus ex Machina, a company backed by Andreessen Horowitz, Silver Lake and others, which provides analytics and datasets from sporting events using AI and machine learning. During the second quarter, TPVG funded $30,600,000 in debt investments to 8 portfolio companies, which is at the lower end of our guided range for the quarter. These investments carried a weighted average annualized portfolio yield of 16.4% at origination.

Speaker 2

Of the $30,600,000 funded during the quarter, $17,100,000 was related to existing unfunded commitments and the remaining $13,500,000 was from new commitments made during the quarter. As Chris will cover in more detail, our unfunded commitments are at $180,000,000 as of today, with $63,000,000 set to utilization of existing unfunded commitments prior to their expiration and are projecting fundings for both Q3 and Q4 to be in the $25,000,000 to $50,000,000 range per quarter. We also expect loan prepay and contractual amortization activity from the existing portfolio to potentially match or exceed fundings in Q3, similar to our experience in Q2. During Q2, our $34,000,000 of loan prepayments helped increase our weighted average annualized portfolio yield on total debt investments to 14.7 percent for the quarter. Excluding prepayment related income, core portfolio yield was 14.1%.

Speaker 2

We expect the increase in prime rate in Q2 and again last week to benefit yield during the second half of twenty twenty three as well. Our debt investment portfolio company count at the end of Q2 was 56, represented 21 different subsectors And our top 10 portfolio companies represent 34% of our total debt investments. In Q2, 7 portfolio companies raised $304,000,000 of capital and 3 portfolio companies which closed rounds in Q1 raised an additional $22,000,000 during the Q2, bringing our total to 14 portfolio companies, raising $390,000,000 of capital year to date. Our portfolio company saw an increase in aggregate amounts raised in Q2 over Q1. We believe this bodes well for not only the operating runway these portfolio companies will have, but also for their future credit outlook.

Speaker 2

Despite the challenging environment, during the quarter, we sold our warrants and equity investments in Toast, which had completed its IPO in 2021 And we recorded a realized gain of $3,000,000 bringing our cumulative gross realized gains from Wharton Equity Investments since TPVG's IPO to $48,000,000 The interesting story on Toast is that they never drew on the venture loan commitment we made to them in 2018 And our $3,000,000 of realized gains represents 100 times multiple on our original fair value of the warrant we received. We continue to hold 184 Warren Equity Investments in 115 Companies with a total cost and fair value of 71,000,000 and $89,000,000 respectively as of Q2. We believe Revolut, World Remit, Monzo, Upgrade, SignifAI, Cohesity And Passport Labs are some of the higher profile portfolio companies that could potentially drive future upside value over time as market conditions improve. Although we saw a slight improvement in our weighted average credit score from Q2, we did see ongoing stress with existing companies on our credit watch list The situations developed either during the quarter or shortly thereafter that warranted further credit downgrades and fair value reduction. We also downgraded 2 new names and upgraded 4 names during the quarter.

Speaker 2

88% of our portfolio on a fair value basis is performing at our 2 best credit scores and we believe are adapting well to current market conditions. During the Q2, we upgraded 3 obligors with a total of $33,000,000 in principal balance, including Monza Bank, Flash Parking and Mockingbird from category 2 to category 1 due to strong performance above expectations and cash runway. In addition, during the quarter, we removed Pill Club with a principal balance of $20,000,000 from Category 3 in conjunction with its acquisition by our portfolio company, 30 Madison. The outstanding principal balance was assumed in full under new loan structure secured by 30 Madison. These loans are current, accruing income and rated Category 2.

Speaker 2

This was a positive outcome and a testament to our team's skills in managing a challenging credit situation. In Q2, we added 1 company to Category 3, Mystery Box with the principal balance of $5,000,000 and 1 company into Category 4 made renovations with a principal balance of $10,000,000 due to developments in its With regards to our other Category 4 rated asset, ROLI, we continue to see improved operating performance. The company increased sales in Q4 'twenty two and has performed to plan in 2023 with new product initiatives targeted for the second half that should be catalysts for growth. With regards to Category 5 assets, Underground Enterprises with a $6,000,000 principal balance was downgraded to Category 5 due to our revised expectations an extended recovery process in conjunction with its bankruptcy filing on May 1. Leuco with a principal balance of $17,400,000 was downgraded to Category 5 as a result of its announced agreement in June to be acquired by Admiral Group, a U.

Speaker 2

K.-based insurance company, as well as its intent to sell certain business units and assets to other parties. The fair value mark for Q2 represents our expected recovery from the sale to Admiral and expectations of value from the disposal of its remaining assets. Health IQ with a principal balance of $25,100,000 was downgraded to Category 5 during the 2nd quarter due to ongoing challenges with the company's execution and strategic efforts. The fair value mark for Q2 represents our revised expectations for an extended restructuring and recovery process and our team is actively engaged with the company and other stakeholders. VanMoof with a principal balance of $22,500,000 was downgraded to Category 5 during the 2nd quarter.

Speaker 2

Subsequent to the end of the Q2, as a result of an unsuccessful M and A process, the company was declared bankrupt in the Netherlands. This was a particularly surprising and disappointing outcome as VanMoof was a 14 year old company that had raised over $180,000,000 of equity capital and was widely regarded as one of the leaders of the e bike market. Despite meaningful historical revenues and launching a new line of e bikes this year, The company was unable to attract additional capital strategic partners. We are early in the process and actively working to maximize our recovery. Although these credit developments impacted NAV this quarter, with VanMoof and Health IQ representing approximately 70% of the NAV reduction, We expect some of these situations such as VanMoof, Floucon Underground to be resolved over the next 3 to 6 months, while the others have time for recovery as our teams manage through these situations.

Speaker 2

As Jim discussed, we believe the increase in stressed assets is directly related to challenging conditions in the venture capital equity fundraising market and in the market for M and A transactions by both public and private companies. Venture capital backed companies that have had success raising capital in the past are having a difficult time in the current environment and will continue to experience such challenges unless market conditions improve or they delay their capital raising efforts until market conditions improve. We believe that once public market multiples stabilize, Overall sentiment and outlook improve and equity investors begin to deploy the significant dry powder they have under management, we will start to see the market recover. While we are pleased to see an increasing number of portfolio companies raise rounds in Q2 And we are making progress on our recoveries. The market is still currently challenging, and we continue to remain proactive and diligent as we manage through this environment.

Speaker 2

Although we believe that we are in a challenging part of the cycle for venture capital investing, we've effectively managed through cycles before, which is reflected in our long term performance at the TriplePoint Capital Platform and at TBVG. Since TBVG's inception 10 years ago, our cumulative net loss rate has remained under 2% of Cumulative commitments were 20 basis points per annum and 3 percent of fundings or 30 basis points per annum. Our underwriting processes have been refined not only over the past 10 years since DBVG's IPO, but also the 18 years since we started the TriplePoint Capital Platform and the 24 years that Jim and I have been working together. We utilize a rigorous approach to both fundamental credit analysis and qualitative and quantitative assessment of high growth venture capital backed companies, and we regularly review and adjust our decision making based on market conditions and dynamics. Considering current market dynamics and conditions, we're applying our underwriting metrics, Credit standards and credit decisions to reflect the new market realities.

Speaker 2

Although credit losses are an expected part of the venture lending model, As we reexamine our historical losses, they tend to be unique situations as opposed to having common themes for the outcomes that occurred. While they all fundamentally ran out of cash and were either unable to raise a follow on round of financing or successfully complete a sale of their business or assets In excess of our loan balances, they occurred for unique reasons, which we do not believe were foreseeable or expected at the time of underwriting. Keep in mind that an important element of the venture lending model is the impact of the equity kicker in the form of warrants and direct equity investments. These valve investments have the potential to drive meaningful realized gains, offset credit losses and help grow NAV over time. Since TVVG's IPO, we have generated $48,000,000 of gross realized gains, with one name in particular generating $27,000,000 in gross realized gains, which demonstrates the potential of what one successful exit can have.

Speaker 2

As mentioned earlier, we currently hold 184 warrant and equity investments in 115 companies as of quarter's end and believe many have the potential for success in the future. In summary, as Jim said, we are focused and 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 market conditions improve. With that, I'll now turn the call over to Chris.

Speaker 3

Thank you, Sajal, and hello, everyone. During the Q2, the earnings power of the portfolio remained strong as we generated substantial core interest income from our loan portfolio And stable portfolio yields, while TPVG continued to hold a diversified portfolio. As we entered the second half of the year, We believe our current liquidity position and unfunded commitments are well matched and combined with contractual cash flows from our existing seasoned and diversified portfolio positions us well into 2024. Given our outlook on long term liquidity, we expect to reduce overall leverage and capitalize on new investment opportunities in 2024. Total investment income was of $35,200,000 as compared to $27,400,000 for the Q2 of 'twenty 2.

Speaker 3

This increase of 28% was due to growth in the average portfolio size and higher investment yields. Our portfolio yield was 14.7% on total debt investments Portfolio yield was 14.1%, which was down from 14.7% in Q1, primarily due to lower deferred fees associated with Commitments which expired during Q2 compared to Q1. On boarding yields continue to be strong and stable. Loan prepayments contributed less than 1% to the total portfolio yield this quarter with a total of $33,800,000 of principal prepayments and $1,400,000 of accelerated income. Operating expenses were $16,300,000 as compared to $14,800,000 for the Q2 of 2022.

Speaker 3

These expenses consisted of $9,900,000 of interest expense, dollars 4,500,000 of management fees and $1,900,000 of G and A expenses. Due to the shareholder friendly terms of the total return requirement under the incentive fee structure, Our incentive fee expense was reduced by $3,800,000 during the Q2 $7,500,000 for the 6 months ended June 30. We earned net investment income of $18,800,000 or $0.53 per share compared to $12,700,000 or $0.41 per share in

Speaker 2

Same period in 2022.

Speaker 3

Net realized gains on investments for the Q2 were $1,900,000 This primarily included realized gains of $2,900,000 from the sale of publicly listed common stock in Toast Inc. The net change in unrealized losses on investments for the 2nd quarter was $41,600,000 consisting of $37,800,000 of net unrealized losses on the debt investment portfolio, dollars 1,300,000 of net realized losses on the warrant and equity portfolio and $2,500,000 from a reversal of previously recorded unrealized gains from investments we realized during this period. As of quarter end, the company's net assets were $379,400,000 or $10.70 per share compared to $414,000,000 or $11.69 per share as of March 31. Our Board of Directors declared a regular quarterly dividend of $0.40 The dividend is from ordinary income to stockholders of record as of September 15 to be paid on September 29. In addition to over earning the 2nd quarter dividend, we continue to retain undistributed income, which totaled $32,100,000 or $0.90 per share at the end of the period to support additional regular and supplemental dividends in the future.

Speaker 3

The NII to Dividend coverage was strong at 133 percent for the 2nd quarter. Now just an update on unfunded investment commitments, overall liquidity and down from $254,000,000 last quarter $54,000,000 dependent upon the portfolio company reaching certain milestones. All of these unfunded investment commitments have contractual floating interest rates. The decline in these balances are primarily due to new fundings and commitment expirations in excess of any new commitments that we closed during the Q2. Of the total amount, dollars 88,000,000 are set to expire in Q3, dollars 32,000,000 in Q4 $57,000,000 in 2024.

Speaker 3

In fact, dollars 25,000,000 of unfunded commitments have already expired or were terminated in Q3 to date. Given these recent Our unfunded commitments are approximately $180,000,000 as of today. Given this activity, total unfunded commitments are well matched against our current liquidity position, which we believe puts TPVG in a favorable position as we look to make new commitments and delever the portfolio. We expect that 25% to 50% of the current unfunded commitments will expire without funding. As of quarter end, the company had current liquidity of $199,000,000 consisting of $89,000,000 in cash and $110,000,000 available under the revolving In addition to this current liquidity, the existing portfolio provides contractual cash flows, which bodes well for sustained liquidity.

Speaker 3

Loan prepayments are a natural part of our venture lending model. And while prepayments are difficult to project and are expected To vary from quarter to quarter, we believe that there will be 1 to 2 portfolio companies with loan prepayments each quarter to occur over time. We currently expect $30,000,000 to $45,000,000 in loan prepayments in Q3. We continue to maintain a diversified capital structure. As of June 30, an aggregate of $395,000,000 was outstanding in fixed rate investment grade term notes and $240,000,000 was outstanding on our floating rate revolving credit facility, which has a total commitment available to TPVG of $350,000,000 DBRS has issued an investment grade credit rating on the company and in April of 'twenty three reaffirmed the investment grade issuer rating of BBB.

Speaker 3

Our fixed rate borrowings account for 62% of our outstanding leverage at quarter end, while 60% of our debt investments are at floating rates and have benefited from increasing interest rates over time. With our latest fixed rate debt offering completed in Q1 of 2022, We have 3 steps to the ladder of debt maturities with the maturities to occur in 2025, 'twenty six and 'twenty seven. We ended the quarter with a gross leverage ratio of 1.67 times and a 1.44 times net leverage ratio, which is net of cash into new investments from funding requests sourced from our existing unfunded commitments. We expect to deleverage the portfolio in the first half 2024 as we receive the contractual amortization and periodic prepayments in the portfolio. During the next four quarters, we expect $180,000,000 in cash flows from contractual principal payments from the portfolio, excluding any prepayments and proceeds from the sale of private or public equity securities in the portfolio that we may receive over time.

Speaker 3

Last year, we announced the launch of an ATM issuance program. No shares have been issued as of today, but we may look to issue shares over the coming year. So this completes our prepared remarks. We'd be happy to take your questions. And so operator, could you please open the line at this time?

Operator

We will now begin the question and answer session. Our first question will come from Crispin Love with Piper Sandler. You may now go ahead.

Speaker 4

Thank you. I appreciate you taking my questions. Did you say that you expect 3rd quarter and 4th quarter new debt fundings to be in the range of $25,000,000 to $50,000,000 per quarter. And if that was the case, was the previous guide there $100,000,000 to $150,000,000 per quarter?

Speaker 2

Hi, Chris. It's Ajal. The previous guidance was $25,000,000 to $75,000,000 That's the guidance we gave last quarter. And so Given that we're just focused on utilizing the existing unfunded commitments and given the market environment, We're taking the target to $25,000,000 to $50,000,000

Speaker 4

Okay. Thanks. That's helpful. And then just on leverage I have 1.67 times right now. I'm curious what the reasons are for maintaining that leverage through the end of the year rather than bringing it down through an equity raise as it's much higher than where you typically run out.

Speaker 4

I think you've said in the past that you Kind of would typically run I think it was 1.25 times or less or 1.4 times or less. So curious about the reasoning there.

Speaker 3

Yes. This is Chris. Yes. So certainly raising equity is an option. We have the ATM program that we can use currently.

Speaker 3

It's a much smaller program, obviously. We do have the option. We have our active shelf to do an overnight offering if that made sense. But right now, what we're focused on is what we can control, which is deployment of capital and managing the portfolio. But certainly, a net overnight equity offering is something that is open to companies that are listed.

Speaker 4

All right. Thank you. Appreciate you taking my questions.

Operator

Next question will come from Vilas Abraham with UBS. You may now go ahead.

Speaker 5

Hey, everybody. Thanks for taking the question. With the decline in NAV and the jump in leverage, are you pushing up against Any covenant issues with the revolver? Just how should we think about that?

Speaker 3

No, that's a good question. This is Chris, we look at that on a regular basis, not just at quarter end, but throughout the quarter. And we're comfortable with where we are on existing covenants, Whether it's on the term debt or on the revolvers, we're fine.

Speaker 5

Okay. And talked about in the prepared comments, 14 companies, the portfolio raising capital Year to date, is it fair to assume those are largely all down around still?

Speaker 2

Hi, Vyulis, this is Sajal. So I would say The majority are flat to down, although there are some that were up. I would say the majority tend to be from existing investors with again a few That were led by new external investors.

Speaker 5

Okay. And then the last one. You touched on just taking advantage of opportunities after the SCB collapse. Can you Talk about what that means, what's the timeframe there? And from a personnel perspective, do you feel like you're Well positioned to take advantage or do you need to add headcount in certain areas?

Speaker 5

Thanks.

Speaker 1

Yes, it's a great question, Vilas. So as we mentioned last time as well, There's some very good opportunities in wake of the SCB development, but these are not overnight situations. They're a little bit over the long term. So In the short term, what this means is these are opportunities, I talked about this last time as well, where Banks are the separation between banks for bank, bank services, credit cards, foreign exchange things they do and lending that The market is a little bit more separated and lending now doesn't mean from a commercial bank, it can absolutely mean from a non bank And that's become more important than ever since the days of SCB. So we actively are talking at the platform level and have This is where we've replaced FCB loans, ones where we're currently evaluating these and also ones as we play out the rest of the pipeline This year and next year that will continue to be growing opportunities, but it's not like these companies replaced SVB In a day or overnight.

Speaker 1

And to address this, yes, we absolutely have been and continue to staff up for what we see Improvement in the markets overall, but also in wake of the FCB development.

Speaker 3

Thank you very much.

Operator

Our next question will come from Casey Alexander with Compass Point. You may now go

Speaker 6

ahead. I'm curious why you would carry $78,000,000 in cash and not use some portion of that cash to pay down the revolving credit facility and report A lower leverage ratio. I mean, it seems to me that if you took $40,000,000 of that, it would bring the leverage ratio down to 1.56, Still not within your range, but maybe a little less eye popping. Is there a technical reason Why you're not doing that?

Speaker 3

Yes, Casey, thanks. This is Chris. So, yes, we're more about managing cash to make sure we have the liquidity for funding transactions. And oftentimes, you'll see from month to month or quarter end, we'll have higher cash balances in readiness To fund new transactions that occur kind of within a 5 day notice window. That's all that is.

Speaker 3

And rather than Paying down for optics, we wanted to make sure we were ready to fund transactions. Okay.

Speaker 6

And secondly, I think you mentioned that 10 companies have raised 300 and some 1,000,000. Growth Stage companies, late stage growth companies need a lot more than $30,000,000 and that would be the average of what you mentioned. I mean, so is it is what you're seeing sort of stopgap equity deals to kick the can down the road because these don't sound like the type Funding that's going to last 2 or 3

Speaker 2

years? I'll take that Casey. This is Sajal. So I would say keep in mind So I'd say the what's changed right a year ago or 2 years ago, right, as you said, right, companies would raise equity Every 3 to 6 months versus the more average of 12 to 18 months. And so I would say The other key thing is companies have been bringing their burn rates down.

Speaker 2

So I would say it's a hybrid between raising what they need To have sufficient runway in anticipation of either times getting better or market conditions getting better, for a number of others, it's On the path to get to profitability, for some others, it's to milestones that investors have agreed to that then unlock Future tranches of capital. So, I'd say it's a combination of all those scenarios. But also given where valuations are, No one is motivated necessarily where multiples are to overraise equity in this environment given the debt dilution or impact.

Speaker 6

Lastly, one of the companies that you mentioned that was in the red category, It sounds like you were saying leuco. I can't find that in the schedule of investments. What am I doing wrong?

Speaker 2

Yes. Sorry. It's called Demain, DEMAIN. Demain, Luca is there, sorry, there DEMAIN.

Speaker 6

So it's like domain?

Speaker 2

Domain, correct.

Speaker 6

Yes. Okay. Thank you.

Speaker 2

All right.

Speaker 6

That's all my questions. Appreciate it.

Operator

Next question will come from Ryan Lynch with KBW. You may now go ahead.

Speaker 7

Hey, good afternoon. Just following up on one of Casey's questions regarding the cash balance. I guess I'm still not understanding why the cash balance is Hi. I mean, I think you mentioned you expect fundings in the Q3 of $25,000,000 to $50,000,000 You also expect to receive some prepayments to probably offset that. So I just don't understand The need to have $90,000,000 of cash if you're only expecting to fund $25,000,000 to $50,000,000 in the quarter plus

Speaker 2

Yes, right. Maybe just to add on to what Chris said. So again, part of it is in anticipation liquidity. I think the other point is we collect cash at the end of the month. So that's also cash Coming in from portfolio company payments and so again it's a little bit of you've got to have cash ready for fundings, you collect cash from The monthly payments from customers and then obviously correct post now we pay down our lines Post end of month or end of quarter after the cash freeze up.

Speaker 2

And so again, it's a fundamental timing thing more than anything As the primary reason.

Speaker 3

Yes. A good example is we did pay down the line just recently $65,000,000 So We don't keep that outstanding all the time. It is a revolver where we can draw and pay back.

Speaker 7

Yes, understood. And then the other one, I just wanted to make sure I was kind of understanding the dynamics going on here. So I think you said you That leverage just sort of remain the same throughout 2023 and then deleverage start to deleverage in 2024. I know that's not assuming any sort of like capital raise or anything like that, but I guess to the extent that leverage stays flat and then decreases Throughout 2023 and then decreased in 2024. Is that just the function of the interplay between the level of Fundings you expect from existing borrowers to sort of decline as we roll into 2024 and some of those Unfunded commitments roll off, is that kind of the interplay that's going to drive your expectations right there?

Speaker 3

That's exactly right. So what we're basically doing is looking at the unfunded commitment levels going from the 200 down to 180 and looking at the expected Fundings of those unfunded commitments and then also layering in some level of the unknown, which is the prepayment factor. So we do have some line of sight on Q3 prepayments, but we just don't have that information for Q4. So we do expect some level of prepay, which would help Towards that deleveraging, but right now it's just too early to tell.

Speaker 7

Okay. Understand. That's all for me.

Operator

Next question will come from Christopher Nolan with Ladenburg Thalmann. You may now go

Speaker 8

ahead. Given the status of the or the slowdown in the venture debt market, Who do you expect to take you out on these maturing investments?

Speaker 2

Hi, Chris. Again, On a number of our investments that are amortizing, so it's not a bullet type structure. On other transactions where They're all bullets. We generally see equity capital. So when robust equity comes back, we'd look to equity.

Speaker 2

And then The non bank lenders in venture lending continue to evaluate opportunities. And so I'd say it's a function of all 3. Sorry, equity raises, it's from amortization, normal amortization and then it's a smaller amount is refi. Refis have always generally been a Small percentage of our business.

Speaker 8

Thanks, Nigel. And then I guess as a more general question, I mean, the slowdown in the venture debt market, I mean, Obviously, SVB went away, but were major funds really hobbled By SVB's seizure and that just sort of has thrown a wrench into the works?

Speaker 1

Yes, I would say from a venture capital fund perspective that there's really not been any change. They've all recovered from Their own issues with SCB and their own banking things at the fund level. In terms of their underlying companies, There's definitely been the transition in many cases from SCB to other banks, but what venture lenders are benefiting Again is the fact that newer banks aren't necessarily in the market these days to go out and lend to these companies. They're very Fine preventing the providing the banking services for the lending requirements this has been new opportunities To turn to non banks and recognize the value and importance of them on the lending side. So if you will, There is room for both and opportunities for both.

Speaker 1

But these are things that are taking some time. There is a little pause when you change banks. We also want to continue to be cautious and selective in this environment, but definitely that's one of many Parts of the future opportunities here for non bank. Okay.

Speaker 8

Thanks. Thanks, Jim.

Operator

It appears there are no further questions. This 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

Thank you, operator. As always, I'd like to

Operator

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

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Earnings Conference Call
TriplePoint Venture Growth BDC Q2 2023
00:00 / 00:00
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