Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Increased investment pipeline activity for the fourth consecutive quarter, with $188 million in signed term sheets.
- Significant progress in reducing unfunded commitments from $205 million to $71 million over the past year.
- Strong liquidity position with $340 million in total liquidity, including cash and available credit.
- Improved fundraising activity among portfolio companies, with almost $1 billion raised in the first half of the year.
- Notable progress in reducing leverage ratio from 1.76 to 1.15, aligning with target leverage range.
Negative Points
- Continued challenges in the venture capital market, with limited exit opportunities through IPOs or mergers.
- Reduction in regular distribution to $0.30 per share due to higher-than-expected repayment and prepayment activity.
- Decrease in total investment income to $27.1 million from $35 million in the prior-year period.
- Net realized losses on investments of $18.8 million, primarily due to write-offs and restructuring.
- Ongoing challenges for e-commerce and retail-focused portfolio companies, facing difficulties in achieving profitability.
Q & A Highlights
Q: You reset the dividend at $0.30, net investment income here decreased to about $0.33. Can you discuss your outlook for net investment income over the near term, especially with rate cuts coming and your portfolio sitting at around $715 million range at quarter end? When do you think you can get back to an area where you're growing the portfolio again?
A: (Christopher Mathieu, CFO) We have reset the dividend based on our current expectation of the strength of the existing portfolio and maintaining our target leverage ratio. We've also considered the impact of near-term Fed rate changes and other variables such as management fees, incentive fees, and G&A expenses. We assume a consistent portfolio size with the leverage we have, and any NAV appreciation would result in additional ability to grow the portfolio.
Q: We've seen plenty of volatility in broader markets recently. Can you discuss how you feel about your current credits that are performing and new credits you're looking at? Has anything changed in your outlook recently?
A: (Sajal Srivastava, President & CIO) Our credit risk scores reflect our current view on our existing obligors and market conditions. The major impact to our sector is venture capital fundraising and investment activity. While recent volatility may not impact private market investment activity significantly, there is still a fundamental mismatch between public and private valuation multiples that needs to clear. This will take a few more quarters, but we expect investment and exit activity to improve, benefiting both new investment opportunities and our existing portfolio.
Q: Can you give us an idea of the exit rate of NOI after deleveraging? Where would earnings be at next quarter all else equal?
A: (Christopher Mathieu, CFO) We have hit our leverage target, and it's now about turning the portfolio and building it from here. You can model resetting the portfolio size to where we are today and consider the P&L expense items I mentioned earlier to drive your models.
Q: Your payout yield is nearly 14%, which is higher than historically earned. Is there another bridge or lever from here assuming normal incentive fees and interest costs?
A: (James Labe, CEO) It's important to have distributions to our shareholders. Given the $97 million of liquidity events last quarter and the lower core portfolio yield, it boils down to realigning the dividend with the size and yield of the portfolio while still providing sizable distributions to shareholders.
Q: Can you talk about your outlook for portfolio yield, both the base yield and repayments?
A: (Sajal Srivastava, President & CIO) The core portfolio yield without prepayment activity is 13.9%. With 60% of our book being floating rate and 40% fixed rate, changes in Fed rates will impact the portfolio yield. New investments are being onboarded at higher rates, but the overall impact will depend on the balance of the portfolio. Specific information on base rate changes can be found in our Q report.
Q: Did you cut the dividend enough given that it's close to 14% of NAV?
A: (Christopher Mathieu, CFO) We believe we have. Based on our modeling and the revenue variance of the portfolio, we think we are at the right level. One variable to consider is the prepayment rate and the vintage of those prepayments, as earlier prepayments generate more income.
Q: Given that shares are trading below book, should we assume the ATM will not be utilized when the share price is below NAV?
A: (Christopher Mathieu, CFO) Correct. We do not have and have never sought the vote to issue shares below NAV. If the share price is below NAV, we will not be issuing.
Q: What industries are you liking and which areas are you not liking in terms of prospective investments?
A: (James Labe, CEO) We are following the investment categories and favorable sectors of select venture investors we work with. These include AI, cybersecurity, health tech, space and government technology, recurring software companies, robotics, semiconductors, vertical software, environmental sustainability technologies, and space and gov tech. We are deemphasizing consumer-focused plays.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
