TriplePoint Venture Growth BDC - Q4 2023

Transcript

Operator (participant)

Welcome to the TriplePoint Venture Growth BDC Corp. Fourth Quarter 2023 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speaker's 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 an audio webcast on the TriplePoint Venture Growth website. Company management is pleased to share with you the company's results for the fourth quarter and full fiscal year 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 Mathieu, Chief Financial Officer. Before I turn the call over to Mr. Labe.

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 to differ materially from these statements.

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 our 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. Please go ahead.

Jim Labe (CEO and Chairman of the Board)

Thanks. Good afternoon, everyone, and welcome to TPVG's Fourth Quarter Earnings Call. As expected, venture capital markets continued to be challenging during the fourth quarter. Consistent to what we have seen and been talking about over the last year, the venture industry continues to be affected by macroeconomic uncertainties, restrictive monetary policies, inflationary supply chain issues, public versus private market valuation disconnects, a changing investment landscape, geopolitical, and other issues. These market challenges, which are impacting venture growth stage companies especially hard, contributed to our NAV decline. We'll cover the contributing factors, including the effects certain industry sectors have had on a number of our companies, some realized losses, and the unrealized quarterly markdowns on the debt portfolio and unrealized markdowns on the warrant and equity portfolios given current market headwinds.

Against this backdrop, we remain focused on our established and in-place priorities, which we believe will enable us to navigate through these current market conditions, including maintaining our earnings power and our strong liquidity, managing the portfolio, and positioning TPVG for the future. Turning to our earnings power, we generated Q4 net investment income of $17.3 million, or $0.47 per share, enabling us once again to over-earn our $0.40 per share regular quarterly dividend, including the first quarter dividend, cumulative dividends to shareholders since going public almost 10 years ago, now total $15.05 per share. During this time, we've exceeded our distributions on a cumulative basis and continue to maintain sizable spillover income.

For the fourth quarter, TPVG once again maintained a strong weighted average portfolio yield as we generated a 15.6% weighted average annualized yield that was largely driven by continued favorable interest rates and supplemented by additional income from loan prepayments. During the quarter, we enhanced our liquidity as we continued to experience repayment activity and modestly utilized our ATM program. Notably, TPVG's liquidity now exceeds our unfunded commitments and provides us with the capacity to capitalize on new investment opportunities, especially when the market begins to recover. While we've been allocating limited capital to TPVG, we expect to increase our allocations in the second half of this year. Turning to the venture markets, 2023 proved to be a very challenging year. Pick up almost any venture industry research publication, such as CB Insights or the PitchBook, and you'll find headers covering 2023, such as U.S.

Venture capital deal volume being at 10-year lows, late-stage deal sizes falling more than half since 2021, and venture unicorn investing being at 10-year lows. VC down rounds last year were at their highest level since 2017. Total 2023 U.S. deal value was a staggering $175 billion less than 2021, and venture capital-backed company shutdowns and bankruptcies increased. 2023 also had the fewest annual VC-backed IPOs since 2013, a prime vehicle for exits for venture growth stage companies, and last quarter saw a 50% decline in quarterly deal value for VC company acquisitions. To quote the words stated recently by a prominent venture capitalist, "It's been a venture winter." We believe the dramatic drop in deal and investment activity and the public-private market valuation disconnects have affected the growth stages and its investors the most.

Non-traditional investors and other investors in the growth market have paused or remain on the sidelines. This change has also affected our growth stage companies, many of which had planned for either an IPO or potential acquisition in the one-to-three year time period or so after their last financing rounds. Given the market downturn, our priority remains on closely managing our portfolio. Our teams maintain close contact with our companies and their venture investors, while remaining heads down working through credit situations. Given the challenging capital-raising environment for venture growth companies, for some companies we believe we will see continued pressure on valuations and the potential for inside rounds. Some companies are further reducing burn and executing on a path to profitability. Still others, however, as Sajal will get into more detail, are raising outside capital rounds.

It's about effectively operating in the new market reality given the compressed multiples and reduced exit opportunities I've been outlining. Investors continue to migrate to sectors with more favorable multiples and outlooks than the sectors of the past given these market conditions. Our select venture capital investors continue to shift into and have increasing investment focus in fields such as AI, cybersecurity, climate, and digital health. There's increased renewed interest in vertical software, hardware and robotics, semiconductors, applied tech, clean tech, environmental or sustainability technologies, and aerospace as examples. While we continue our efforts to diversify across sectors and limit our geographic exposure, there are a number of our portfolio companies that are already operating in these favorable investment categories, with some making considerable progress.

As an example, portfolio companies such as Corelight, Loft Orbital, HOVER, Arcadia Power, Flash, Kalderos, Overtime, and others are making notable progress in achieving their plans, and they're reflective of these in-favor industries. We're also pleased to highlight a few notable portfolio company developments. This includes Metropolis, which announced its acquisition of SP+ and secured $1.7 billion in equity and debt, which is subject to regulatory approval and expected to close by year's end. Another company, Cohesity, announced its planned acquisition of Veritas' data protection business with a combined value of $7 billion. There's a few other portfolio companies which have received active term sheets for very large equity rounds, where we expect to see more developments in this current quarter. Another priority is to focus on enhancing our long-term positioning in the venture lending market.

With 2023 behind us, and while we believe the industry slowdown will still continue through much of 2024, we're focusing on what we expect to be a more promising year for TPVG. We will continue to position ourselves to capitalize on new investment opportunities, those that reflect today's market for venture growth stage companies. We're encouraged by the more than 70% increase in signed term sheets last quarter versus the previous quarter. Already this quarter to date, we have more than $70 million of additional signed term sheets. We intend to remain on our path of diversifying the portfolio and sector rotation we have been describing on these calls, and expect to be less active in e-commerce and making investments outside of the U.S.

We will further focus on investing in companies that have recently raised fresh capital, have ample cash runways, have backing from our select venture investors, have prudent management teams, and whose business models have attractive unit economics and high retention rates, and ideally these companies that have large enterprise customers. We'll also continue to evaluate hold sizes, debt-to-equity ratios, deal structures, and other key metrics in this market. In summary, 2023 was a tough year for the venture capital industry. While we expect the venture growth stage will continue to have challenges in the near term, the path to stabilization for many companies continues in this environment, and we believe it will result in the potential for additional positive developments, recoveries, and outcomes for our portfolio.

We remain active in the market and continue to build a pipeline consisting of venture growth companies positioned for strength under the current conditions, which are all critical elements for the long term that we believe position us to build NAV and create sustainable shareholder value. We believe that once the IPO markets come back and M&A activity picks back up to more average levels, it will be a marked change for venture growth stage companies, especially those companies within our portfolio that are outperforming in this market. It will also attract growth stage investors to come back into the market. As this year progresses, we will concentrate on delivering strong investment income, over-earning our dividend, building our pipeline, managing our portfolio on credit quality, and building on our strong liquidity. With that, I'll turn the call over to Sajal.

Sajal Srivastava (President and Chief Investment Officer)

Thank you, Jim, and good afternoon. Let me begin by reviewing our performance in Q4 and full year 2023, as well as highlight key expectations for 2024. Regarding investment portfolio activity during Q4, TriplePoint Capital signed $100 million of term sheets with venture growth stage companies compared to $58 million of term sheets in Q3, reflecting the increase in the strength of our pipeline, which we believe will result in higher investment activity in 2024. For the full year, TriplePoint Capital signed $471 million of term sheets with venture growth stage companies. With regards to new investment allocation to TPVG during the fourth quarter, given both current market conditions and TPVG's leverage ratio, we allocated a modest $4.2 million in new commitments with two companies to TPVG compared to $5.6 million to three companies in Q3. The commitments made during the fourth quarter were to existing portfolio companies.

For the full year, we closed $31.5 million of debt commitments with 10 companies at TPVG, of which two were new companies and eight were existing portfolio companies. During the fourth quarter, TPVG funded $24.4 million in debt investments to six portfolio companies, up from $12.7 million in Q3. This funding level came in at the lower end of our guided range for the quarter, reflecting a lower utilization of unfunded commitments. These funded investments carried a weighted average annualized portfolio yield of 18.8% at origination, up from 14.2% in Q3. For the full year, we funded $125.3 million to 23 companies with a 15.6% weighted average portfolio yield at origination. During Q4, we had $33.7 million of loan prepayments, resulting in an overall weighted average portfolio yield of 15.6%, up from 15.1% in Q3. Excluding prepayments, core portfolio yield was 14.4%, up from 14.1% in Q3.

For the full year, we had $104.7 million of loan prepayments, resulting in an overall weighted average portfolio yield of 15.4%, up from 14.7% in 2022. Core portfolio yield excluding prepayments was 14.7% for the full year, up from 13.4% in 2022. With regards to fundraising activity, five portfolio companies with debt outstanding raised $157 million during the quarter, up materially from $47 million last quarter, bringing our total to 19 companies with outstanding debt raising $594 million during Q3. This data does not include Metropolis's announced financing acquisition, which is expected to close in 2024. In 2022, 36 portfolio companies raised over $2.4 billion of capital.

As we look to 2024, we are beginning to see capital-raising activity within our portfolio picking up, with 2 portfolio companies already having raised over $445 million of capital here in Q1, and a number of portfolio companies are either in active fundraising discussions or expecting to launch a fundraising process shortly. We are seeing round sizes increase and, in a few cases, valuations higher than prior rounds. This fundraising activity should bode well for the long-term credit quality of our portfolio companies, as well as for the potential value of our warranted equity portfolio. With regards to exit activity, during the quarter, our portfolio company Lola, also known as Lola, was acquired by existing portfolio company Forum Brands, and our loan to Lola was assumed by Forum Brands in full.

Closed M&A events for the full year were flat with 2022 levels, and IPOs within our portfolio were down from 2022. As of December 31, 2023, we held warrants in 97 companies and held equity investments in 46 companies, with a total cost of $70 million and fair value of $72 million. Our warranted equity portfolio experienced a 15.5% net unrealized reduction in fair value, or $0.43 per share for the quarter, and $23.6 million, or $0.66 per share for the full year, driven primarily by the disparity between private and public market multiples when fair valuing companies that have not raised new rounds, as well as, in some cases, the impact of downvaluations from new capital raise.

$12.6 million, or roughly 80% of the reduction in fair value during Q4, was attributable to three of our financial technology companies, Revolut, WorldRemit, and Upgrade, given the considerable time that has elapsed since their last private rounds of financing, which were raised at peak periods for valuation multiples for financial technology companies compared with the current range of valuation multiples for publicly traded financial technology companies. We now generally utilize current market comparables and multiples to value them based on available actual performance rather than projected performance as well. Generally speaking, although our marks this quarter value these fintech companies at significant discounts from their last round valuations, we believe they all have the potential for meaningful upside when they ultimately experience an exit event or as they potentially raise future rounds of financing.

It should be noted that yesterday's announcement by Monzo, another financial technology portfolio company, of raising $430 million at a $5 billion post-money valuation will be a helpful data point not only for our fair value mark for Monzo here in Q1, but also for supporting the value of our other private financial technology companies. We continue to have a number of portfolio companies that are growing and executing either according to or, in many cases, ahead of plan, including some that are achieving positive EBITDA. These include companies in the software, enterprise, cyber, health and wellness, travel, as well as fintech segments, which is why we continue to anticipate the potential for gains from our warranted equity investments. Cohesity, Metropolis, and Monzo are all great examples of events occurring or on track to occur in 2024 that could drive value for our portfolio.

Turning to realized losses, all of our realized losses during Q4 were from companies that had been on our watch list as of Q3. Events now have been concluded at these companies, with approximately two-thirds of the actual losses realized in the fourth quarter having already previously been reflected on an unrealized basis in prior quarters, but given unanticipated developments at a few of these companies during the quarter, additional losses were incurred. The first one, Demain, also known as Luko, was previously rated Category 5. Luko announced last year that it was going to be acquired by Admiral, as well as its intent to sell certain business units and assets to other parties through a bankruptcy process. Unfortunately, Admiral walked from the acquisition days prior to closing.

The company, however, was able to quickly find another insurance company, Allianz Direct, to agree to acquire the company for a lower price, but in a surprise to all the parties involved, the bankruptcy court rejected the agreement, and the company was ultimately liquidated. We realized a loss of $17 million, of which $6 million had been previously recognized on an unrealized basis, and an additional $11 million was recognized during the quarter given the unanticipated rejection and removed the company from our watch list. Mystery Tackle Box was previously rated Category 3. In Q4, we realized the loss to include both previously recognized amounts and our remaining $4 million exposure as of Q3, given a failed M&A process and negative developments during the quarter in their subsequent asset sale to a third party, and have removed the loan from our watch list.

Untitled Labs, which operated under the name Made Renovations, was previously rated Category 5. In Q4, we reduced our expectation for recovery to $500,000 and realized a loss equal to our remaining exposure of $2.2 million and amounts previously recognized on an unrealized basis, given negative developments during the quarter in their subsequent asset sale to a third party, and have removed the company from our watch list. Finally, during the quarter, VanMoof, a Category 5 loan, closed its sale to MA Micro Holdings. Our investment in the new company includes a combination of debt investments and a convertible loan position. We value these investments consistent with our fair value marks as of Q3 of $5.1 million and realized a loss in Q4 equal to the amounts previously recognized on an unrealized basis.

The convertible investment has the potential for future upside as the company grows in value over time or in an exit event. MA Micro Holdings has been added to Category 4 on the watch list, and VanMoof has been removed. Our final recoveries have been lower than what we have experienced historically. We believe this is due to the conditions in both the M&A and venture capital markets where, given the combination of fewer active M&A players and the lack of viable alternatives for companies such as raising more equity capital, acquirers have had greater negotiating power and have walked away or are willing to walk away from deals, resulting in lower recoveries despite the revenue profile, invested capital, customer validation, and even intellectual property of our portfolio companies.

With regards to credit watch list activity for the rest of the portfolio, during the quarter, we upgraded one name from Category 2 to Category 1 as a result of closing equity rounds. Three companies were downgraded from Category 2 to Category 3 primarily due to sector concern or short runway in conjunction with their financing or strategic events, although two of the three have now signed term sheets for those events. The majority of the companies in Category 3 comprise e-commerce and consumer portfolio companies, which, as we explained last quarter, are experiencing continued challenges as they manage through ongoing market and sector-specific issues, as well as difficulty in the fundraising and M&A markets. Two companies were downgraded to Category 4 during the quarter due to developments in their fundraising and/or strategic events. However, both have raised incremental capital and are making progress.

The remaining two Category 4 companies include Roli, which had a strong 2023, including substantial revenue growth and incremental capital raises, and Project 1920, also known as Senreve, which continues to pursue strategic and other fundraising efforts. Underground Enterprises, our Category 5 loan, continues through its liquidation process, and we expect to finalize a recovery and remove it from Category 5 over the course of this year. With regards to our objectives and goals in 2024, as mentioned earlier, we believe that the venture capital market conditions may improve over the course of the year. In terms of our expectations for portfolio growth, our forecast for quarterly gross investment fundings is in the range of $25 million to $50 million for each quarter.

Given our existing significant liquidity position and our expectations for at least one prepayment per quarter, we believe that by returning to portfolio growth and by focusing on smaller hold sizes, we will continue along our goals of increased portfolio diversification and industry sector rebalancing. As we look to onboarding new loans, we intend to maintain our strong yield profile not only by holding spreads but also by continuing to incorporate fixed-rate investments, which, along with anticipated portfolio growth, will bode well for our ability to continue to cover our dividend. Our priority will be to continue to monitor our existing portfolio and manage existing credit situations, and the potential for improving market conditions in the private and public markets should be helpful.

In closing, we remain focused on all aspects of our business and will continue to follow our long-term playbook of generating strong returns for our shareholders, growing net asset value, and further nurturing strong relationships with our select venture capital partners in order to build a high-quality and durable portfolio for what we believe could be a developing peak period for venture capital and venture lending returns. With that, I will now turn the call over to Chris.

Chris Mathieu (CFO)

Thank you, Sajal, and hello, everyone. During the fourth quarter, we continued to generate strong interest income from our diversified loan portfolio. This was driven by increased yields compared to those at origination as a result of multiple increases in the U.S. prime rate since March of 2022. Leverage increased in the quarter as prepayments totaling $34 million were offset by a decline in net asset value.

At the same time, we made further progress reducing unfunded commitment levels in the fourth quarter, and as a result, TPVG has significant liquidity at the ready to support our existing portfolio companies, satisfy our unfunded commitments, and make selective new investments. For the fourth quarter, total investment income was $33 million, with a portfolio yield of 15.6% as compared to $35 million, with a portfolio yield of 15.3% for the prior year period. Total investment income for the full year of 2023 increased 15% to a record $137 million, this compared to $119 million for the prior year period. For the fourth quarter, total operating expenses were $15.7 million as compared to $14.5 million for the prior year period. These expenses consisted of $8.3 million of interest expense, $4.5 million of base management fees, $600,000 of administrative expense, and $2.3 million of G&A expense.

Due to the shareholder-friendly total return requirement under the incentive fee structure, there were no incentive fees this quarter. Total operating expenses for the full year of 2023 totaled $63.7 million as compared to $55.9 million for the prior year period, a 14% increase. For the fourth quarter, net investment income totaled $17.3 million or $0.47 per share compared to $20.5 million or $0.58 per share for the prior year period. Total investment income for the full year of 2023 increased 16%, totaling $73.8 million as compared to $63.6 million for the prior year period. For the fourth quarter, net realized losses on investments totaled $52 million. This was primarily in connection with the write-off of investments of four portfolio companies. Of note, $32.5 million or 63% of this amount was previously included in unrealized losses and was reclassified from unrealized to realized.

As such, $32.5 million of the net realized losses in Q4 had no impact on net asset value. For the fourth quarter, net change in unrealized gains on investments was $6 million, consisting of $34.1 million from the reversal of previously recorded unrealized losses from investments realized during the period, reduced by $12.6 million of net unrealized losses on the existing debt investment portfolio, and $15.5 million of net unrealized losses on the existing warrant and equity portfolio, resulting all from fair value adjustments. As of year-end, net asset value was $346.3 million or $9.21 per share. We declared a regular quarterly dividend of $0.40 per share with a record date of March 14th to be paid on March 29th. Based on our success over-earning the dividend, we have undistributed spillover income of $41.5 million or $1.10 per share as of year-end.

Given the ongoing elevated yields and size of the income-producing loan portfolio, dividend coverage remains strong throughout all of 2023. We believe that given the historically strong level of over-earned dividends and substantial level of spillover income, the current level of regular quarterly dividends are expected to be stable. Now, just an update on unfunded investment commitments, the balance sheet leverage, and overall liquidity. We ended the year with $118 million of floating-rate unfunded investment commitments, of which $29 million was dependent upon the portfolio company reaching certain milestones. This level of commitments represents a 64% decline from a year ago and bodes well for new investment capacity in 2024. As of December 31st, 2023, approximately 60% in principal balance of the debt portfolio in our portfolio bore interest at floating rates.

As of year-end, an aggregate of $610 million of debt was outstanding, consisting of $395 million of fixed-rate investment-grade term notes and $215 million outstanding on our floating-rate revolving credit facility. We ended the year with a 1.76 gross leverage ratio, and our net leverage ratio, which is net of cash on hand, was 1.27x. Given the reduced unfunded commitment levels, the near-term prepayments already discussed, and selective ongoing use of the ATM program, we expect to delever the balance sheet during the first half of 2024. As of year-end, the company had liquidity of $307 million, consisting of $172 million in cash and $135 million available under the revolving credit facility. Similar to prior quarters, near quarter-end, we drew down on our credit facility to enhance our investment flexibility pursuant to the certain 1940 Act requirements.

Right after the end of the quarter, we paid down the credit facility, decreased leverage, and increased availability under the credit facility for future draws as appropriate. We continue to access the capital markets by using our ATM program, and during the quarter, we raised $15.2 million and for the full year raised $21.4 million under the ATM program. At this point, this completes our prepared remarks. Operator, could you please open the line for questions at this time?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one, on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. Our first question comes from Brian McKenna of Citizens JMP.

Brian McKenna (Director of Equity Research)

Please go ahead. Okay, great. Thanks. So you had well over $1 per share of net realized and unrealized losses in the quarter. Net drove an 11% decline in NAV, bringing the year-over-year decline to 23%. So I guess, is there a way to think about future losses across the portfolio moving forward? Are we getting near the end of these write-downs and losses? And I'm just trying to think through the trajectory of NAV from here and ultimately when you think it will start to inflect higher.

Sajal Srivastava (President and Chief Investment Officer)

Yeah, hi, Brian. It's Sajal here. So I mean, I'd say, again, the reduction in NAV, if you look through it, there's also $0.66 of that is related to fair value marks on our warrant and equity positions. So as you look right, again, the cost basis and the fair value of our warrant and equity investment portfolio are basically equal. If you look over the years, historically, fair value has traded significantly higher. We believe there is room for that to come back and for us to have gains in excess on an unrealized basis and realized basis on a fair value basis as market conditions improve.

With regards to credit, again, I think our credit scores reflect our current view on our existing obligors based on current market conditions. So, again, we're seeing some good data points with the increase in equity raising activity of our existing portfolio companies. We discussed some of the specifics for some of the companies in each of the credit ratings of signed term sheets and positive developments. Again, the market is challenging. We continue to remain proactive and diligent and manage through this environment.

But again, as conditions improve, we expect both credit profile and fair values to improve as well.

Brian McKenna (Director of Equity Research)

Okay, great. Thanks. And then just on leverage, I appreciate some of the color there and some of the dynamics kind of post-year-end here. But kind of just looking at leverage, it remains pretty elevated here. So you're still working through some of these write-downs and losses, which obviously isn't helping the leverage picture. But I mean, I know you have the ATM, but would you look to raise some equity capital here or use some of the cash on hand maybe to pay down some of the upcoming maturities? I mean, I'm just trying to think through how this ultimately starts to work lower.

Sajal Srivastava (President and Chief Investment Officer)

So I think, as we mentioned in some of our prepared remarks, we do have some near-term expectations on prepayments given some of the broader market updates that we gave. We also are selectively using the ATM program, but we're not currently expecting, given the overall cost, to do an overnight or something in that vein. That's not something we're looking at right now. Again, remember that net leverage is 1.27. I think that's pretty close to the range where most firms, as well as us, are targeting. Our target is 1.25 on a net basis. So I think we're on track, but there's still more work to do as we head into the first kind of finish up the first half of 2024.

Brian McKenna (Director of Equity Research)

All right. I'll leave it there. Thank you very much.

Operator (participant)

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

Casey Alexander (SVP and Research Analyst)

Yeah, I just have one question. How can it be appropriate to sell 1.5 million shares into the market through the ATM program with the knowledge that significant material losses are on the way and a significantly lower NAV is going to be presented to shareholders when you report this quarter?

Sajal Srivastava (President and Chief Investment Officer)

Yeah, Casey and Sajal, I'll take this. So again, the ATM is a program that acts on its own. So it's set and it operates on our. You have the ability to shut it down. Yeah. And then, as we said, as developments are learned or known, then we adjust and act accordingly.

Casey Alexander (SVP and Research Analyst)

All right. Thank you. That's it.

Operator (participant)

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

Christopher Nolan (Managing Director and Senior Equity Research Analyst)

In case I missed it, what were the unfunded commitments to date? Have they changed at all since 12/31? At 12/31, there were $118 million of unfunded, and we didn't report on kind of where they are since then as far as new fundings. Yeah, let me actually so we had new fundings of $12.4 million since the end of the year, and that would go against the $118 million. Then we had new commitments of $10 million. So kind of net decline of $2.4 million. On your comments of deleveraging, is that going to be basically letting investments in the portfolio run off or to use some of the elevated cash liquidity to pay down borrowings?

Jim Labe (CEO and Chairman of the Board)

Actually, both. So we've already done the paydown of a substantial amount of the cash that was on balance sheet as of the end of the year to a much, much lower single-digit million carrying cash balance. So that's temporary. Then we are just letting the portfolio amortize and prepay naturally. As Sajal mentioned during his prepared remarks, we've had kind of low end of the funding range, and that's intentional as we look to delever below the net 1.27x or 1.27x leverage.

Christopher Nolan (Managing Director and Senior Equity Research Analyst)

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

Operator (participant)

The next question comes from Paul Johnson of KBW. Please go ahead.

Paul Johnson (Equity Research Analyst)

Yeah, good evening, guys. Thanks for taking my questions. I realize you've already provided some good commentary on the watchlist movements during the quarter or the internal rating movements. If I kind of look at it quarter-over-quarter, investments rated yellow or below, last quarter were 13.7%. This quarter was 21.7% of the total portfolio. Big jump there. It's obviously on fair values that you're counting for the write-downs as well. I guess, given that change and the stuff that you've mentioned, I mean, how can you get comfortable and get the market confident that you guys have stabilized the situations you identified as troubled and that there's a plan forward from here?

Sajal Srivastava (President and Chief Investment Officer)

Yeah. The way I think we look at it is multifactored, right? So the first element is, as Jim described in detail, the market conditions. So we are in the winter of all things venture capital. So I think a critical element is, in particular, the technology subsector of venture capital and the venture growth stage in particular of these companies that raised large rounds at high valuations during peak periods. So we're seeing these companies are getting more impacted than companies at other stages of the venture capital lifespan. So I'd say a significant amount is related to the venture capital and the equity investment activity.

And so as we see data points of promising activity of capital raises and increasing capital raises, that gives us confidence in terms of the overall outlook for the industry, the sector, and the portfolio. I think the second element of what we talked about is one of the reasons why we've seen a fair amount of challenge too has been the weak IPO and M&A markets, in particular the M&A markets. And we described a number of scenarios of transactions essentially collapsing because of the dynamics of these acquisitions where at times, in more robust times, these transactions would have closed or would have closed at higher values. I think the last piece is we look at the watchlist itself. To be very candid, we look at it on a specific name basis and facts and circumstances from our perspective.

So very much, it's hard to generalize for a category to say if it's in a certain category, it naturally implies where directionally it's going to end up. I would say very much we look at for each of our reds, oranges, and yellows, each specific name, what the outlook is for those companies market appropriately from a credit rating and from a fair value perspective, and then make sure our teams are as proactive as they can be to manage those situations. I think, as I described during the call, I think the good news or some positive outlook is that some positive events are happening within those companies in those ratings, term sheets, and events happening. But until they happen and close, given this environment, we need to remain cautious and proactive. And then when those events close, then move them up and upgrade them.

Paul Johnson (Equity Research Analyst)

Got it. Thanks for that. Then last question from me on dividends. At this point, on this quarter's NAV, it's about a 17% yield on NAV where the current dividend rate is at. You talked about you're probably going to be deleveraging at least in the first half of this year. I guess, what can you say kind of thoughts around that level and your confidence to generate that level of earnings?

Jim Labe (CEO and Chairman of the Board)

Yeah. So I would say two things. One is when you think about the elevation of the yields in 60% of our portfolio is floating rate, 40% is fixed. There's also a substantial portion of our leverage that is fixed rate. So the net interest margin is pretty well protected for at least some period of time in a declining rate environment. So we're pretty comfortable with that. Also, with the declining leverage, there is some room.

So one of the things to think about is in 2022 and 2023, when yields were going up, the dividend was increased, but it was not excessively increased during those periods. And as a result, you've seen the spillover income continue for almost two years to increase. So I think there's substantial ordinary income that's stored to maintain a stable dividend. But the ordinary income or NII is expected to be pretty stable as well given the strength of the income-producing portfolio.

Paul Johnson (Equity Research Analyst)

Thanks. That's all from me.

Operator (participant)

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

Jim Labe (CEO and Chairman of the Board)

Thank you, operator. As always, I'd like to thank everyone for listening and participating in today's call. We look forward to talking with you all again next quarter. Thanks again, and have a nice day.

Operator (participant)

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