If you’re looking for high-yield venture capital exposure, it’s pretty easy to find – just check out the business development companies, BDC. This industry lends to private companies in various different industries. Most of these private companies have private equity and hedge fund sponsors, and some of them also have sponsors in the venture capital industry.
This is a key point – since these sponsors are serious skin in this game, they are usually willing to offer extra support to private companies when times get tough, like during the Covid pandemic.
TriplePoint Venture Group (New York stock market :TPVG) focuses on companies that are already backed by venture capital firms, with a specific area of focus 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 over $10 billion to more than 900 companies around the world. It generally provides financing over 3 to 4 years, with a loan-to-company value of less than 25%. Portfolio companies typically prepare for an IPO or M&A within the next 1-3 years.
As of 06/30/22, TPVG’s debt portfolio was $856.7 million, with an average yield of 13.8%. It also has a warrant portfolio of $52.6 million and an equity portfolio of $53.2 million. These 2 components have improved the yields of TPVG over the years.
Management has steadily increased the overall portfolio since 2014 – it has grown 11% so far in 2022, to $962 million, as of 9/30/22:
As of 9/30/22, TPVG’s 5 largest industrial holdings, which represent approximately 52% of the portfolio (compared to 59% in Q2 22), were Consumer Products & Services, at 14.6%, Commercial Apparel Electronics, 13.5%, Enterprise Application Software, 10.6%, Financial Institutions & Services, 7.4%, and Healthcare Tech, 5.6%. Financial institutions and services recorded the largest change in Q3 22, rising by 11.6%. Management tends to avoid cyclical industries.
A key concern for investors during the pandemic shutdowns was how well BDC’s industry portfolio companies would weather the economic pressures. BDC’s management usually reviews and evaluates its holdings on a quarterly basis.
Most of BDC’s holdings came through this crisis in fairly good shape.
PVG uses a 1 to 5 level system, with “clear” or 1 being the highest rating and “red” or 5 being the lowest.
As of 9/30/22, TPVG’s overall company score was down slightly to 2.04 from 2.06 in Q2 22. About 90% of its companies were in the upper Tiers 1-2, with only 1% in the lowest levels 4-5. Management reclassified a company with $14 million in primary balance from Tier 2 to Tier 1, and a holding company with $25 million in primary balance from Tier 3 to Tier 2 due to the improvement performs.
They downgraded 1 holding company, Medly Health, an online digital pharmacy with a total main balance of $34.3 million in main balance, from category 2 to category 3, due to reductions in its plan. operations, changes in its management team and overall liquidity position. . There could be further downgrading of Medly’s outstanding loans in the fourth quarter.
Rising rates help the end result of TPVG:
The debt portfolio was 62.3% floating rate as of 9/30/22, compared to 58.6% in Q2 22. With ~62% floating rates, management estimates that TPVG would earn $0.12/share from more in NII for a 100 basis point rise in the prime rate, while a 200 basis point rise would earn $0.25/share and a 300 basis point rise would earn $0.37 per year. (These estimates have increased since TPVG’s Q2 22 earnings report.)
Q3 ’22 earnings have been very strong, due to higher interest rates and a much larger portfolio. Total investment income increased 40%, while NII jumped 70%, with NII/share up 59%. The total value of the portfolio increased by approximately 25%.
So far in 2022, total investment income has increased by 4.4%, with the NII rebounding from 2021 and increasing by 18%. Realized gains, which are lumpy on a quarterly basis, rose 172%, while unrealized gains fell -201%, due to non-cash portfolio writedowns. NII/Share was up about 5% as the number of shares was up about 9%. NAV/Share is down -4.8%. Interest expense increased by 39%, also due to higher rates and a larger portfolio:
New business in the third quarter of 2022:
Management signed $269 million in term sheets with growth-stage companies and closed $103 million in debt commitments to 10 companies. 7 of the 10 companies were new holding companies and 3 were existing holding companies. TPVG also received warrants worth $1.9 million in 16 portfolio companies and made direct equity investments of $26 in six companies.
At its closing price of 11/3/22 at $12.62, TPVG is yielding a very attractive 11.73%. Management increased the regular dividend from $0.36 to $0.37, the first dividend increase since Q4 2014. TPVG becomes ex-dividend on 12/14/22, with a payment date of 12/30 /22:
NII/Dividend coverage was very strong in 2022, rising to 1.25X, vs. 0.92X in 2021. In addition to NII, TPVG also has a solid cushion of $0.52/share in UNII, undistributed NII, giving it a whopping 1.73X hedge factor:
Profitability and leverage:
Both ROE and EBIT margin have seen good year-over-year increases so far in 2022, with ROA increasing slightly. Management has significantly increased debt leverage in order to increase the portfolio.
TPVG’s Asset/Liability ratio remained stable at 1.84X in Q3 22, as did its EBIT/Interest coverage, at 3.42X:
Debt & Liquidity:
TPVG’s debt looks very well phased into the future – its $350 million credit revolver doesn’t mature until November 2025, while its senior bonds don’t mature until 2025, 2026 and 2027:
At its 11/3/22 closing price of $12.62, TPVG was selling at a slight 0.55% discount to NAV/Share. They may not seem so cheap, but that’s in stark contrast to 2021, when TPVG was selling at double-digit NAV premiums of up to 30% and more.
Equally important is the fact that TPVG’s earnings multiple, Price/NII per share, is only 7.13X, 40% lower than BDC’s average valuation of 12.12X. It also looks cheaper on P/Sales and EV/EBIT valuations, in addition to having a more attractive dividend yield.
Although TPVG has slightly outperformed the S&P on a total return basis over the past year, it has lagged it and the BDC industry over the past quarter, and so far into 2022. It however, started to get a bid in the last month, outperforming the industry S&P and BDC.
The TPVG increased by approximately 38% in 2021.
We rate TPVG as a BUY, based on its attractive and very well hedged dividend yield, its much lower earnings multiple compared to the BDC industry, its positive escalating rate business model and its much lower than normal price/net asset value ratio.
If you’re interested in other high-performance vehicles, we’ve got them covered every Friday and Sunday in our items.
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