Have you ever wished you could invest like the big boys and get a slice of that high yielding venture capital stock? Well, it’s not just another Walter Mitty daydream – you can do that by investing in some business development company, BDC.
BDCs offer retail investors high-yield exposure to private companies, and some of them, like TriplePoint Venture Growth (NYSE: TPVG) focus on companies that are already backed by other venture capitalists. These other companies do not want to lose their investments and will continue to support these companies. This has been crucial during the pandemic and the post-pandemic era.
TPVG’s specific area of focus is on growth-stage venture capital-backed companies that have not yet gone public:
TPVG is a BDC internally managed, founded in 2005. Its headquarters are located on Sand Hill Road in Silicon Valley, with regional offices in New York, San Francisco and Boston. Since its inception, TPVG has committed more than $10 billion to more than 900 companies around the world. It typically does 3-4 year financings, with a business loan value of less than 25%. Portfolio companies typically prepare for an IPO or M&A within the next 1-3 years.
As of 6/30/22, TPVG’s debt portfolio was $768.8 million, consisting of 129 loans to 56 debtors. His warrant portfolio was valued at $52.7 million, consisting of 110 warrants in 95 companies. The equity portfolio was valued at $55.3 million, with 54 investments in 45 companies. The overall portfolio return was 14.5%.
58.5% of TPVG’s $769m debt portfolio is variable rate, of which 41.4% is fixed rate, secured either by the company as a whole or by specific assets:
Beneficiary at an increasing rate:
With ~59% floating rates, management estimates that TPVG would earn $0.11/share more in NII for a 100 bps hike in the prime rate, while a 200 bps hike would earn $0.23/share. stock, and a 300-point increase would yield $0.35 per year.
Its top 5 industrial holdings, which make up approximately 59% of the portfolio, are e-commerce apparel at 15%, consumer products and services at 14.4% and business applications software at 11.6%. %. Financial Institution & Services, 11.6%, and Healthcare Tech, 6.2%. Management tends to avoid cyclical industries.
A big concern during pandemic shutdowns was how well BDC’s industry portfolio companies would withstand economic pressures. BDC’s management usually reviews and evaluates its holdings on a quarterly basis. The good news is that most of BDC’s holdings weathered the crisis in relatively good shape.
TPVG uses a 1 to 5 level system, with “clear” or 1 being the highest rating and “red” or 5 being the lowest.
As of 6/30/22, TPVG’s overall business rating has improved to 2.06 from 1.87 as of 12/31/22. 89.5% of its businesses were in the upper Tiers 1-2, with only 1.5% in the lower Tiers 4-5.
Management downgraded a company to Category 5 due to the collapse of its formal M&A process at the last minute and the company’s sale of its assets in the third quarter. The principal balance was $15 million and they reduced the loan to $2.25 million.
TPVG signed a record $803.6 million in term sheets with growth-stage businesses in Q2 22, and closed a record $259.9 million in new debt commitments. It funded $157.6 million in leveraged investments from 20 portfolio companies with a weighted average annualized portfolio return of 13.6% at inception.
Total investment and other income was $27.4 million in Q2 2022, up 35% from $20.3 million in Q2 2021, due to higher interest rates and a larger portfolio. Net investment income was $12.7 million, up 35% from $9.4 million in Q2 2021, with NII/share reaching $0.41, up from 0.30 $ in Q2 2021.
For the first 6 months of 2022, total investment and other income increased by approximately 36% compared to Q1-2 ’21, while NII increased by 43% and NII/Share increased by 42% . The net asset value/share was flat at $13.01, but during this period TPVG also paid out $0.72/share in dividends. While realized gains improved by 75%, unrealized gains went from positive to negative, primarily due to fair value adjustments.
This 2Q22 NAV bridge breaks down entries from the 2Q22 NAV/Share decline to $13.01 from $13.84 in 1Q22. Besides the regular dividend of $0.36, the main markdown from the net asset value was due -$0.88/share of realized and unrealized gains.
TPVG received $50.2 million in prepayments of principal, $4.8 million in prepayments and $10.3 million in scheduled amortization of principal in Q2 22. As you can see from this chart, prepayments can be quite lumpy from quarter to quarter, which can affect the NII. For example, there was a record amount of prepayments, ~$116m in Q1 22, but it dropped to $55m in Q2 22:
Compared to $41.1 million in NII in 2021, it looks like TPVG is on course to earn a much higher NII in 2022, possibly over $50 million, which would represent growth of around 22 %.
At its closing price on 08/11/22 at $13.69, TPVG yielded 10.52%. It will then be ex-dividend on 09/14/22, with a payment date of 09/30/22. Management has kept quarterly payouts at $0.36 since Q4 2014, with occasional special distributions of $0.10 in Q4 2018 and Q4 20.
Dividend coverage has been very strong so far in 2022, with the NII/share covering $0.72 dividends of 1.17X, much more than in 2021 and 2020. NII/dividend coverage is 1. 10X.
In addition to NII, TPVG also has a solid cushion of $0.40/share in UNII, undistributed NII, giving it a massive coverage factor of 1.81X:
Profitability and leverage:
ROA fell slightly, while ROE increased, both remaining above BDC’s industry averages. The EBIT margin remained stable and roughly in line with the industry average. Management has increased leverage over the past 4 quarters, in order to increase profits.
As noted earlier, higher leverage in BDC-Land is not unusual, as BDC must pay out 90% of its profits to shareholders. The trick is to find BDCs with a management team that knows how to manage debt and not overleverage.
Like many other BDCs, TPVG management has reduced its leverage during the pandemic, bringing it down to a low of 0.63X. They brought it down to 1X-plus at the end of Q4 21, and it ended Q2 22 at ~1.24X:
The interest coverage ratio improved slightly in Q1-2 22, while the asset-to-debt ratio decreased slightly compared to the year ending 12/31/21:
Debt & Liquidity:
TPVG had total liquidity of $288.1 million, consisting of cash and cash equivalents of $43.1 million, and available capacity under its revolving credit facility of $245 million, as of 06/30/22.
The first maturity is May 31, 2024, when the $350-400 million credit facility matures:
TPVG’s debt is rated BBB by DBRS.
At its closing price of $13.69 on 11/8/22, TPVG is trading at a 5.23% premium to NAV/Share, which is a much lower premium than what we saw at the start. of 2022, and in 2021, which saw premiums in the 30% and higher range. interval.
But since net asset value is affected by distributions, it is often more useful to focus on assessing a BDC’s earnings, Price/NII. TPVG’s P/NII per share of 8.66X is cheap – it’s 38% below BDC’s industry average.
Its P/Sales and EV/EBIT are also below industry averages, while its dividend yield is higher:
Mr. Market gave the cold shoulder to TPVG, probably due to fears of a recession, which could affect companies in his portfolio. He must remember, however, that these companies are backed by venture capitalists, with much larger stakes, which can help cushion them during tough times, as they have done during shutdowns.
We rate TPVG as a BUY, based on its very well-covered dividend, well-below-average price/NII, and strong track record of creating shareholder value.
If you’re interested in other high-performance vehicles, we’ve got them covered every Friday and Sunday in our items. All charts are provided by Hidden Dividend Stocks Plus unless otherwise stated.