TriplePoint Venture Growth BDC - Earnings Call - Q2 2018

Transcript

Speaker 0

Good afternoon and welcome to the TriplePoint Venture Growth Second Quarter twenty eighteen Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Andrew Olson, Chief Financial Officer of TriplePoint Venture Growth.

Please go ahead.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today. We are pleased to share with you our results for the 2018. Here with me are Jim Labe, Chief Executive Officer Chairman of the Board and Sajal Srivastava, President and Chief Investment Officer. Before I turn the call over to Jim, I would like to direct your attention to the customary Safe Harbor disclosure in our press release regarding forward looking statements and remind you that during this call, we may make certain statements that relate to future events or the company's future performance or financial condition, which may be considered forward looking statements under federal securities law. We ask that you refer to our most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements.

We do not undertake any obligation to update our forward looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit the company's website at tpbg.com. And now with that, I'll turn it over to Jim.

Speaker 2

Thanks, Andrew, and good afternoon, everyone. We're excited to talk to you on the results for the quarter as we continue to lead the venture growth stage lending market and partner with one of some of the most successful venture capital investors and lend to some of the most exciting venture capital backed companies globally. We had a fantastic second quarter. We hit our all time record for total investment income, 16,600,000.0. We matched our record for all time quarterly net investment income or NII, 8,800,000.0.

We achieved our second highest portfolio yield ever of 17.2%. We signed $212,000,000 of new term sheets at venture growth stage companies during the quarter, a 45% increase over the previous quarter, which in itself was a substantial increase over the quarter before that. We closed $140,000,000 worth of new deals with eight venture growth stage companies. We redeployed the proceeds from our largest single obligor, Ring, after the closing of their sale to Amazon, which helped us further diversify our portfolio. We also got back into our target leverage ratio range during the quarter.

And finally, we received approval from our shareholders to lower our asset coverage ratio to 150%. We continue to achieve and in many cases exceed the goals and objectives that we set out for 2018. And we're just as excited going here into the second half of the year and are focused on delivering a super strong finish for the year. This progress is not the result of changes to the venture capital market. It's all been related to our focus, reputation and approach, which has always differentiated us in the market, particularly among the venture lending BDCs.

We continue to market based on the three Rs, reputation, relationships, and references. We continue to target a very specific universe of venture capital backed companies. These are venture growth stage companies, companies that have meaningful enterprise value, differentiated technologies, substantial equity dollars, very high growth rates, and most importantly, backing from one or more of our leading select venture capital investors, which are generally considered among the top venture capital funds in The US. One only has to take a look at some of the progress and the publicly announced fundraising activity, the valuation increases or exit events at some of our current companies in the portfolio. These are names such as Copac, Toast, Cohesity, and Revolut to name just a few as the basis for our belief that we will continue to see more successful exit events in the future.

To summarize, we plan to continue to stick to our knitting and exercise our investment discipline and continue to be what we believe will be the name brand in the venture lending industry among these leading venture capital firms. Our industry leading yield profile, the experience of the management team here, the strong credit quality, our record pipeline, activity and progress among our portfolio companies all speaks for themselves. Once again, we're continuing to forecast that we will have earnings in excess of our dividend this year. We plan to continue to capitalize on this incredible and building 2018 momentum. And with that, I'm going to turn this over to Sajal.

Speaker 3

Thank you, Jim, and good afternoon, everyone. In Q2, we signed approximately $212,000,000 of term sheets and and closed $140,000,000 of debt commitments with eight companies and added five new companies to the portfolio. On a year to date basis, we've signed $358,000,000 of term sheets and closed $255,000,000 of debt and equity investments. The first new company added to the portfolio this quarter was Roly, which is reinventing the experience of music creation with an integrated hardware software platform for the digital age. Roly makes uniquely touch responsive interfaces, keyboards and other modular music creation instruments and tools to compose and play music that can be consumed and engaged using smartphones and other devices.

Musician Pharrell Williams recently joined Rolly as Chief Creative Officer as well. The company has raised over 40,000,000 of equity capital from Bulletin Capital, Foundry Group, FirstMark Capital, Index Ventures, Founders Fund, and recently announced a strategic investment from Sony. The second was OneSource Virtual, which is a pioneer of the business process as a service sector and supports the automated delivery of solutions exclusively for Workday, one of the leading providers of financial management and human capital management software. OneSource virtual services empower organizations of all sizes through Workday deployment, consulting, training and in application payroll administration, benefit administration and application management services. OneSource Virtual has raised over 165,000,000 of equity capital from TCV and others.

The third was Grove Collaborative, which is a branded direct to consumer e commerce platform for natural home and personal care products with a flexible reoccurring shipment model. Every product Grove offers both from their flagship Grove Collaborative brand and from exceptional third party brands has been thoroughly vetted for health, sustainability and efficacy. Grove has raised over $60,000,000 of equity capital from Norwest Venture Partners, Mayfield Fund and others. The fourth was Untuck It, which is a leading omnichannel direct to consumer apparel brand, which started out in men's casual dressing by offering an untucked shirt that fit and looked good and has expanded its product line to include men's sweaters, jackets and more. Untucked has raised more than $30,000,000 of equity capital from others.

The fifth is Fiverr, which is a freelance services platform and offers a marketplace for creative and professional services. Fiverr gives entrepreneurs, freelancers, small businesses and even enterprises the resources they need to get things done quickly and flexibly. Fiverr has raised over $111,000,000 of equity capital from Accel Partners, Bessemer Venture Partners, Lightbank and others. Overall, during Q2, we funded $53,000,000 of debt investments to nine companies, $05,000,000 of equity in one company and acquired warrants valued at $1,200,000 in eight companies. On a year to date basis, we have funded $91,000,000 of debt and equity investments to 12 companies.

We also had a $50,000,000 prepayment from Ring after it closed its acquisition by Amazon during the quarter. As a result of this prepayment, our portfolio yield was 17.2%. Without customer prepayments, our portfolio yield was 13.9%, which was up from 13.6% last quarter. Moving on to credit quality. As of June 30, the weighted average internal credit rating of the debt investment portfolio was 1.92 as compared to 2.03 at the end of the prior quarter.

As a reminder, under our rating system, loans are rated from one to five, with one being the strongest credit rating and new loans are initially generally rated two. During the quarter, we removed $50,000,000 of loans from category two due to prepays. We added $53,000,000 of new loans to category two, upgraded two customers, PillPack and BlueVine, with a combined principal balance of 45,000,000 customer, Munchery, with a principal balance of $3,000,000 from category three to category four. During the quarter, six portfolio companies closed new rounds of equity financing. BlueVine raised $60,000,000 in a round led by Menlo Ventures.

Cohesity raised $250,000,000 of equity in a round led by SoftBank. CrowdStrike raised another $200,000,000 at a reported $3,000,000,000 valuation co led by Accel and General Atlantic. Fuze raised 150,000,000 in a round led by Summit Partners. Revolut raised $250,000,000 at a reported 1,500,000,000.0 valuation led by DST, and Toast raised 115,000,000 at a reported $1,400,000,000 valuation led by T Rowe. On top of that, as Jim mentioned, Amazon announced its acquisition of PillPack for $1,000,000,000 These are all great developments and we congratulate our portfolio We hold warrant investments and or equity investments in all of these companies.

With regards to strategic objectives, our highest priority in 2018 remains to capitalize on the strong demand for venture growth stage lending and grow the company from an exceptional but small cap BDC to a larger and more diversified BDC. I'm pleased to say that we are ahead of our plan for 2018 and our brand reputation and relationships continue to differentiate us in the market with prospective portfolio companies. As Jim mentioned, in Q2, our shareholders approved the lower asset coverage requirement. We thank our shareholders again for their support. And as we described in our proxy, we do not plan to change our investment strategy, product mix, security profile or the targeted yield profile of the investments we will make as a result of the availability of additional leverage.

We see this as providing us with greater flexibility in our ability to meet to continue to meet the strong demand and pipeline we have today and expect to continue to see. We intend to use the additional leverage in a focused and balanced way and in particular expanded our target leverage ratio range to 0.6 to one point zero. We believe that with this approach, we are not materially changing the risk profile for our shareholders while increasing the potential to drive higher returns on equity through higher net investment income. On a year to date basis, we have made substantial progress on diversifying our portfolio and some of our larger customer concentrations. During Q2, we completed our first co investment with our sponsor and have several more opportunities in the works.

We also rotated out of our largest loan exposure with the acquisition of and prepayment from Ring, which was a $50,000,000 exposure. And as we announced today here in Q3, we rotated out of another top five obligor resulting in $3,000,000 of additional investment income this quarter as a result. And we again expect to put all these prepayment proceeds back to work this quarter and have put $18,000,000 to work so far. Given this progress to date, our taxable earnings are on track for the second year in a row to exceed our distributions. We continue to be thoughtful about the impact of our continued portfolio growth as well as prepays and our exceptional portfolio yield as well as the benefits of higher leverage that have kept our quarterly distribution at zero three six dollars and we'll continue to reevaluate based on our outlook and progress.

I'll now turn the call over to Andrew to highlight some of the key financial metrics achieved during the quarter.

Speaker 1

Thank you, Sajal. I'm pleased to report another exceptional quarter performance. Some of the highlights included record investment income, net investment income in excess of our dividend, stable credit performance, positive portfolio exit activity driving net realized gains and NAV appreciation. Total investment and other income was up 31% to $16,600,000 or $0.93 per share for the 2018 compared to $12,600,000 or $0.71 per share for the first quarter. Our investment portfolio generated a weighted average yield of 17.2%, including prepayments and other activity.

The increase in total investment income and yield relative to the prior quarter was primarily due to higher prepayment and other income related to portfolio turnover. Portfolio yield, excluding the impact of prepayments, was up 30 basis points to 13.9% from 13.6% in the prior quarter, resulting in an increase in investment income when excluding the impact of prepayment and other activity. Net investment income for the quarter was up 48% to $8,400,000 or $0.50 per share compared to $5,900,000 or $0.34 per share in the first quarter of twenty eighteen. Expenses during the quarter were $7,700,000 consisting of interest and fee expense of $2,500,000 base management fee of $1,800,000 income incentive fee of $2,200,000 and administrative and general expenses of 1,200,000.0 The increase of total expenses from $6,600,000 in the 2018 is primarily due to higher base management fees and income incentive fees due to portfolio growth and strong fund performance. We recognized net realized gains of 800,000 or $04 per share in the 2018 from the disposition of investments in three portfolio companies.

In addition, we had a net change in unrealized depreciation during the quarter of $1,200,000 or $07 per share consisting of the reversal of previously recognized net unrealized depreciation into net realized gains of $2,900,000 primarily from Ring, offset by mark to market appreciation of $1,700,000 on the investment portfolio. The above activity resulted in a net increase in net asset for the quarter of 8,300,000.0 compared to $7,900,000 or $0.45 per share in the prior quarter, bringing year to date net income to $16,300,000 or $0.92 per share. On an annualized return basis, we generated return on equity of 14.2% in the quarter. Now turning to the balance sheet. We funded $53,400,000 of debt and equity investments in nine companies during the quarter and had one company repay its outstanding obligations in full in the amount of $50,000,000 All told, we ended the quarter with long term investments of $398,000,000 or generally flat from the prior quarter.

At quarter end, we held 124 investments in 45 companies with a cost and fair value of approximately $399,000,000 The company's debt portfolio ended the quarter with a cost of $381,000,000 of which 57% carry floating rates. We continue to see strong demand and have a robust pipeline for near term opportunities. Our unfunded commitments totaled two zero three million dollars to 16 companies, of which $87,000,000 is dependent on upon the companies reaching milestones. Of those total commitments, dollars 58,000,000 will expire in 2018, dollars 76,000,000 will expire in 2019, and $70,000,000 will expire in 2020 if not previously drawn. We ended the quarter with total liquidity of $134,000,000 consisting of cash of $11,000,000 and $123,000,000 of undrawn availability under our revolving credit facility.

Total outstanding borrowings as of quarter end was approximately $160,000,000 consisting of $75,000,000 of long term fixed rate notes at a cost of 5.75% maturing in 2022 and $87,000,000 outstanding under our revolving credit facility, which carries a rate of L plus 300. This put us at a leverage ratio of 0.68x within our target range of 0.6 to one point zero. We ended the quarter with $239,000,000 of equity capital or $13.45 per share, up zero one one dollars from $13.34 per share in the prior quarter.

Speaker 3

At NAV,

Speaker 1

our annualized distributions generate a dividend yield of 11%. As of June 3038, we estimate earnings in excess of our distribution or spillover income to be $4,200,000 or $0.23 per share. And with that, I'm pleased to announce for the 2018, our Board of Directors declared a distribution of $0.36 per share payable on September 14 to stockholders of record as of August 31. This marks the eighteenth consecutive quarter we have increased or maintained our quarterly distribution rate. And now with that, I'll turn the call back over to Jim.

Speaker 2

Thanks again, Andrew. At this point, we'll be happy to take your questions. Operator, can you please open the line?

Speaker 0

We will now begin the question and answer session. And our first question comes from George Bahamadz of Deutsche Bank. Please go ahead.

Speaker 4

Hey guys, good afternoon. Just a few questions following your prepared remarks. You had mentioned there's about $53,000,000 of fundings in the second quarter across companies. Can you guys disclose how much of the $53,000,000 was tied to investments that were closed in the second quarter versus prior commitments that were unfunded and unfunded in the second quarter?

Speaker 3

George, we can get that information. We don't have that breakdown handy, but I would say generally it's it's a break it's some from existing unfunded commitments and then a portion from customers that closed during the quarter. But if I were to guess, I'd say it's probably $50.50, but we'll look through it and come back to you to get that information Great. Yeah.

Speaker 4

We we we can follow-up offline. It's fine. Next one, you you had mentioned there was a co investment in the second quarter. Are you able to provide any additional color?

Speaker 3

You know, we we don't generally disclose who are the co investees. I I think the the good news is, again, along the themes of portfolio diversification, keeping our, maximum transaction size is reasonable with the goal of diversity. So I think it was consistent with that objective.

Speaker 4

Absolutely. Okay. Great. That's fine. I think next one here, know, may have I I missed this.

You mentioned you rotated out of a top five investment. Was that in the second quarter or is that subsequent to 06/30?

Speaker 3

Both. Ring was our largest investment during q two and so Ring prepaid at the beginning of of q two. And then here in q three, we had another top five as we announced in today's earnings releases. Subsequent events, we had another top five rotate out.

Speaker 4

Got it. Okay. And let's see. That was it for me. We'll follow-up offline regarding that first question.

Thank you.

Speaker 0

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

Speaker 5

Thanks for taking my questions. Good quarter. Saj, I'll just confirm, you reiterated the leverage target of 0.6 to one times NAV?

Speaker 3

Correct. Is that correct?

Speaker 5

Great. And then are you guys still need to renegotiate the bank revolver if you wanna take the leverage ratio above one point o?

Speaker 3

No. No. No. We as we mentioned in our proxy, we have our lenders are are are supportive. We we could, and there may be periods where we may take that leverage ratio higher, as we said in the proxy, in between capital raises for short periods of time.

But the target is 0.6 to one point o.

Speaker 5

Got it. Thank you. And then, Andrew, it looks seems to me that most of the prepayments or almost all the prepayments may have come from Ring. Is that fair characterization?

Speaker 1

That's correct.

Speaker 5

And what was the end of term payments in the quarter?

Speaker 1

The the aggregate amount, I I don't have it off hand, but generally, it's about 2% of the total yield.

Speaker 5

Okay. So we have 17.2, and that'd be 2% of so it'd be two percent off that 17?

Speaker 1

Yeah.

Speaker 2

Right.

Speaker 1

I think it was 3.2% was the accretion during the quarter.

Speaker 3

From the nonprepayments? Correct. So it was 17.2. 3.3 was related to prepayments, and 2.2 was related to end of term payment or income accrual.

Speaker 5

And then, finally, I guess, Jim and just for anyone. I'm trying to get you guys sound pretty enthusiastic about the conditions. I mean, obviously, the pipeline is starting to grow. The margins are expanding and so forth. What are you seeing in the venture debt lending space?

Are you seeing new entrants come in? If you can give a little characterization of them, that'd be helpful.

Speaker 2

Yeah. And thanks. I I like how you're asking all three members of the team here. I didn't wanna be left out. Yeah.

So I I'd say overall, there there really hasn't been any change. Things still remain the same in the sense of it's all about reputation, references, and relationships, what we call the three r's. And it's a fairly close community here among the leading venture capital investors and experience counts, track record counts, also that that you know what you're doing. So, at the venture growth stage, our biggest competition remains one thing, equity. And and that's it.

We it's just other entrants may float in and out and and do venture lending here and there, but really haven't seen any change in that landscape.

Speaker 5

Great. Thanks for taking my questions.

Speaker 2

It is real high barriers to entry to the the segment.

Speaker 5

Yeah. No. I know that. I just you know, you get money coming in, you know, when it gets, you know, attractive enough regardless of that, and, like, it flows out too. So I was just asking what you're sort of seeing.

Okay. Great. Thank you for taking my questions.

Speaker 0

Our next question comes from Ryan Lynch of KBW. Please go ahead.

Speaker 6

Hey, good afternoon and thanks for taking my questions. The first one clarification and also a question. I believe you guys said you guys had another top five investment prepay in the third quarter. Did you say that there was $3,000,000 of additional income associated with that prepayment? And then also, you guys have about $60,000,000 of prepayments quarter to date in the third quarter.

That's really strong. Can you just give us a sense of so far quarter to date how much accelerated income you guys have already received so far?

Speaker 3

Yes. Let me start and then Andrew will jump in. Correct, Ryan. So $59,300,000 of early principal payments so far in the quarter, offset by roughly $18,000,000 of new loan fundings that we've had. So strong start and we're only one month into the quarter, so redeploying those proceeds.

And yes, I did say from the prepayments over $3,000,000 of additional interest income as interest income as a result. Andrew, any more color on

Speaker 1

on that? No. Think you covered it.

Speaker 6

Okay. Was it 3,000,000 additional interest income? Was that from all of you there, the 59,000,000 prepayments or just from the one top five investment? Correct. All 59,000,000.

Yes. Sorry. Correct. Okay. Well, you know, you guys had quarter to date another strong, you know, quarter of prepayments.

You guys had strong prepayments in the second quarter as well. I mean, you guys are lenders. That's a good thing. It obviously gets your money back and particularly when you guys are getting strong fees associated with that. So there's no doubt that's a good thing.

And maybe that speaks to the quality of the company you guys are underwriting that they're paying back early because they're having that much success. Just the other counterpoint to that though is with those strong prepayments, obviously, it's hard to grow the portfolio in that environment. Can you just give any sort of outlook you know, where we are quarter to date have already been strong prepayments, but do you guys foresee that that continuing? And then if that does, you know, how do you guys grow your portfolio in that environment, which, you know, it's good to get your money back at being a lender, and you guys are getting strong

Speaker 1

teeth on that, but also

Speaker 3

question, Ryan. So maybe to start with, so, like, a customer gets acquired. So you we can't avoid, yeah, getting our money back, and that's the the touchdown to use Jim's favorite analogy. And so we helped our customers score the touchdown and we're appreciative of that. To the extent that customers finance us out because of significant equity capital raises, From those perspective, we use the analogy again that it's half time we're going to sit back on the bench because most of our portfolio companies burn cash.

You know, we expect to call back in the game in a quarter or two. And so those are not lost opportunities. Opportunities. Those are, you know, income generating and return generating events. And then we can come back, see how they perform and come back and provide them more capital.

So I'd say, again, overall, very positive events and and and we're very pleased with with with them in general, especially given I I know some of the concern was concentration in our larger exposures, so we wanna be mindful of of some of the that that feedback. And and again, that with the co investment relief and the additional leverage will allow us to optimize the portfolio size. So working hard to address some of the concerns associated with our portfolio. I think to the bigger picture, Jim talked about, the venture equity markets are strong, the venture debt or the demand for venture debt is particularly strong as reflected by the $200,000,000 of signed term sheets. I think that was a record level for a quarter for us for signed term sheets and then a 140,000,000 of closed deals.

The pipeline is the biggest it's been. So so I would say, again, it's, we continue to feel pretty confident in our ability to to grow the portfolio on a year over year basis. And again, we're blocking and tackling on a quarter to quarter basis.

Speaker 6

Okay. That's helpful. Makes sense. And again, getting repayments and prepayments is always a good thing as a lender. Just one last one on Tilpac.

I'm not sure if you can answer this, but obviously, saw you guys talked about that gain repaid in the third quarter. It's a nice 9% end of term payment. I also saw you guys had like a $55,000 equity investment with the cost and fair value both at $55,000 Do you guys expect that to appreciate in the third quarter? And can you give us any sense of what sort of gain you guys are anticipating with that sale?

Speaker 1

Yeah. I I can answer that right. I I think overall, we have written up the position to what the exit value is because it was an announced announced transaction relatively early in the quarter. So this isn't something new to us. So I think, come back to the quarter.

It should If you look

Speaker 3

at the queue that that was just filed, you'll see the the fair value, associated with the markup.

Speaker 1

Yeah. The fair value that I think the fair value of the position was written up to around 850 or 900,000.

Speaker 6

Okay. Yep. Yep. Sorry. I was that makes sense.

I was referring to the old queue because, I guess, your q one or q two hadn't come out, it just come out. So the the fair value in the second quarter should reflect the the asset value. So okay. That's helpful. That's all the questions.

Thanks.

Speaker 3

Thank you.

Speaker 0

Our next question comes from Casey Alexander of Compass Point. Please go ahead.

Speaker 7

Hi, good afternoon. The 59,000,000 of early principal repayments that have occurred in the subsequent events, would those have come from the clear category?

Speaker 1

There is there is a combination. So a number of those positions because of the timing of when those when the prepayments occurred, we'd upgraded them during the quarter. So I would say a larger percentage is just gonna come from the that one.

Speaker 3

Some but not all. Correct.

Speaker 4

Some but not all.

Speaker 7

Okay. Well, as we haven't had a chance to take a look at the at the queue, Can you walk me through what the top five names are in the portfolio as of the end of the second quarter?

Speaker 1

Yes. Yeah. So our and I'll let, if you have any specific questions about the companies themselves. I think Jim and Jim and Sandra can answer for you. But Financial Force is, our number one position.

View is number two. Rent the Runway is number three. World Remit is number four, and Virtual Instruments is number five.

Speaker 7

I'm sorry. I didn't hear number four.

Speaker 1

Number four is World Remit.

Speaker 7

World Remit. Oh, great. Okay. And, on, the the two orange, which I is, Munchery and I assume, still Mind Candy, any update on the, on what you guys are doing to help realize the value of those?

Speaker 3

Yeah. You know, we continue to work actively with the the companies, the investors, and and, you know, help them kinda as they reposition themselves. And so I'd say we continue to be very active, as they optimize the businesses. I don't think we there any public updates specifically to those companies, but they're hard at work.

Speaker 7

Okay. Alright. That's it for me. Thank you.

Speaker 0

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

Speaker 2

Thanks, operator. In short, if you can't tell, we're pretty excited to hear about the remainder of 2018 and what we believe it holds in store for our business. I'll close again by expressing my appreciation to all of you for your continued interest and support in TriplePoint venture growth. Thanks everyone and we'll speak with you again soon. Take care.

Speaker 0

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