A good market beating usually creates buying opportunities on high-yielding BDCs. This asset class offers a good hedge against inflation, as it is likely to reap the rewards of economic expansion.
At the same time, BDCs are also tax efficient because they do not have to pay corporate-level taxes as long as they distribute 90% of their taxable income. This can be of particular benefit to the investor if held in an IRA or Roth account.
This brings me to TriplePoint Venture Growth (TPVG), which is becoming attractive as recent price weakness has boosted its dividend yield. This article sheds light on what makes TPVG a valid candidate today.
TPVG: 8.6% return to help you cover inflation
TriplePoint Venture Growth is an externally managed BDC that provides debt financing and equity investments in growth-stage companies in technology and other high-growth sectors backed by private equity firms. risk.
Like its peers Hercules Capital (HTGC) and Horizon Technology Finance (HRZN), TPVG focuses on technology and life sciences companies, and aims for high returns of 10-18% on debt investments from interest and fees.
In addition, TPVG continues to grow through equity “kickers” in its portfolio companies in the form of warrants, which could result in net asset/share value growth and/or special distributions to shareholders. Management believes that loans to portfolio companies in the venture capital growth stage (as opposed to the start-up stage) present an attractive risk/return ratio, as these companies tend to be more established while requiring more expansion capital and time to reach an IPO or M&A.
Currently, TPVG’s portfolio consists of $683 million in loans across 40 companies, offering an attractive weighted average yield of 12.3%, above the BDC average of about 10%. Additionally, as shown below, she has a portfolio of stocks and warrants worth $102 million with $44 million in unrealized gains, which could lead to future increases in value. asset/shares and/or special distributions.
TPVG has also delivered strong returns to shareholders since its inception, having paid out $11.50 in cumulative distributions since 2014. Management has also done a good job of preserving and growing its net asset value/share. As seen below, TPVG’s NAV/share of $13.92 has rebounded solidly since 2020 and is now above where it was in 2017.
Consistent net asset value performance combined with a stable dividend history has produced strong returns. As shown below, TPVG has produced a total return of 116% over the past half-decade, slightly beating the S&P 500 (SPY) TR of 113% over the same period.
Meanwhile, TPVG’s investment activity has been very active, signing $303.5 million in term sheets with growth-stage companies during the third quarter. Its portfolio also remains healthy with a weighted average internal investment rating of 1.94, higher than the previous quarter’s rating of 2.06. He currently holds only one non-computer investment representing 2.2% of the fair value of the portfolio.
Looking forward to Q4 results and beyond, I expect to see continued portfolio growth as TPVG has a large balance sheet capacity, with a leverage ratio of just 0.82x, well in below the regulatory limit of 2.0x.
In addition, TPVG is positioning itself for a rising interest rate environment since 60% of its unfunded commitments are at contractual variable rates, compared to 52% of the existing portfolio. Notably, management highlighted a robust demand environment, as noted on the last conference call:
To further capitalize on this incredibly healthy venture capital market, we believe we have the right team, the right model, selected venture capital partners and an investment strategy. We continue to stick to our knit and exercise investment discipline, focusing on companies backed by our select group of top tier venture capital firms and not growth just for the sake of growth . We continue to have our eyes on high-growth companies that are developing new technologies and redefining the way we live, work and play.
TPVG’s investments in the technology sector are on track to comfortably exceed last year’s total, and we are well positioned to generate strong shareholder returns, continue to grow our net asset value and produce an NII that covers the long-term distribution. We believe TPVG is well positioned for the remainder of this year over the long term. The momentum is already continuing here in the fourth quarter.
We are off to a very good start with a strong pipeline and strong liquidity, which positions us to continue to grow the portfolio and provide funding to companies that meet our highly selective criteria and requirements. Much of the playbook we envisioned earlier in the year is coming to fruition and, central to our game plan, is continuing to execute for the benefit of our shareholders.
Risks for TPVG include the fact that the quarterly dividend of $0.36 was not covered by the NII/share of $0.32 in the last reported quarter. However, coverage has improved and I expect this to continue as TPVG deploys capital with its under-leveraged balance sheet.
Other risks include the potential for yield compression due to increased competition and the external management structure, which could lead to conflicts of interest. This latter risk is mitigated by the fact that all equity bids have been equal to or greater than net asset value.
I see value in TPVG at the current price of $16.70 with a price/NAV ratio of 1.2x. I believe the premium to book value is justified by TPVG’s strong track record of shareholder returns and its growth potential in the current economic expansion. Additionally, as seen below, TPVG is significantly cheaper than its tech and life science counterparts HTGC and HRZN.
Analysts on the sell side have a consensus rating of Buy, with an average price target of $17.86, implying a potential total return of 16% over one year, including dividends.
Key takeaway for investors
TPVG is one of the few technology and life sciences-focused BDCs with a strong track record of shareholder return. It maintains a healthy and growing net asset/share value and is positioned to expand the portfolio with an underleveraged balance sheet.
Over the next few quarters, I expect dividend coverage to improve as TPVG deploys its capital. I consider TPVG to be a valid candidate at the current price point in the midst of inflation and economic expansion.