We’ve covered some business development companies, BDCs, in 2022, big and small, in our latest articles.
BDCs offer retail investors high-yield exposure to private companies, and some of them, such as Triple Point Venture Group (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.
BDCs got some flak at the start of 2020 COVID Crash, but, overall, they’ve been a good place to hang your hat for the past ~2 years. TPVG has made a total return of 174% since rebounding from the crash of 2020.
Of course, investors don’t often get this kind of opportunity, with the market in panic mode, especially when it comes to the sustainability of the private companies in which BDCs invest. It took more than the usual courage to step in or add holdings during this dark time in 2020.
It turns out that most BDC holdings have weathered the lockdown storms. BDCs generally value their holdings quarterly. 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 12/31/22, there are no securities in the lowest category, compared to 2.6% as of 12/31/20. Categories #4 and #3 also improved in 2021, with #4 dropping from 3.7% of the portfolio to 1.5%; and #3 going from 10.2% to 5.5%, at 12/31/21.
The top No. 1 level rose from 12.7% to 21.9% in 2021, while the No. 2 level was flat, ending at 71.1%. TPVG had a holding company in which its investment was in an unrecognized condition (which was generally caused by events unrelated to the COVID-19 pandemic), with an aggregate cost and fair value of $29.5 million. and $11.3 million, respectively.
TPVG has outperformed the BDC industry, the broader financial sector and the S&P 500 over the past year, quarter, month and so far in 2022:
Q4 ’21 saw solid growth in total and net investment income, up 10.5% and 8.7% respectively, while NII/Share increased by 7.7% and NAV/Share increased. increased by 8% compared to Q4 ’20.
2021 was not as impressive, with total investment income down slightly, -4%, and NII down -14%. However NAV/Share rose 8%, thanks to a significant 366% rise in unrealized capital gains. The number of shares remained relatively stable, increasing by 1.2% in 2021.
In Q4 2021, management signed a record $724.9 million in term sheets with growth-stage businesses, and TPVG closed a record $232.3 million in new debt commitments to companies. growth-stage companies. They funded $161.1 million in leveraged investments from 19 portfolio companies, with a weighted average annualized portfolio return of 14.4% at inception.
As of 12/31/21, TPVG held debt securities in 49 portfolio companies, an increase of 22.5% from the previous quarter.
2021 was a banner year for the venture capital market, with a total venture capital deal value of $330 billion, nearly double that of 2020.
TPVG management views the venture capital market as “particularly strong for growth-stage companies in the segment of the late-stage venture capital market in which we operate. So far this year, the momentum continues.
Investment activity in venture capital deals, particularly among our select group of high-profile investors, has continued unabated through early 2022. Second, we are seeing several trends in the current market , which drive additional TPVG demand. Longer lead times for SPAC and IPO transactions are prompting some companies to evaluate debt solutions. This increased exit lag creates and fuels opportunities for our debt financing.
In other cases, many companies that raised capital last year are either looking to get into debt, increase their debt to us, or return to TPVG for additional debt capital to complete and improve their capital increases in light of their future financing strategy. .
TPVG’s portfolio companies raised a staggering $5.8 billion in new equity last year. Another promising factor is that many of these portfolio companies should actually benefit from this inflationary environment, as well as labor shortages in supply chain backups.” (Q4 ’21 call)
As of 12/31/21, TPVG held 246 investments in 91 companies, including 107 investments in debt, 92 investments in warrants and 47 direct investments in equity and similar. The total cost and fair value of these investments were $837.8 million and $865.3 million, respectively. As of December 31, 2021, 10 of its portfolio companies were listed on the stock exchange.
The 4 main sectors of activity of the holdings remain commercial applications, e-commerce, consumer products and services and financial institutions and services, which represent 43.5% of its portfolio as of 12/31/21:
Debt investments were primarily growth capital loans, 99.4% in 2021 from 98.4% in 2020, increasing to $757m from $583m in 2020:
TPVG is an externally managed BDC. However, unlike some BDCs, the income incentive fee has a minimum rate and a retrospective cumulative cap feature.
At its 3/18/22 closing price of $17.11, TPVG was down 8.42%. Management has kept quarterly payouts at $0.36 since Q4 2014, with occasional special distributions of $0.10 in Q4 2018 and Q4 20.
Distributions were slightly lower in 2021, due to a special offer of $0.10 paid in the fourth quarter of 2020.
NII/Distribution coverage was lower in 2021, running at 0.92X, compared to 1.02X in 2020. However, TPVG generally has undistributed “overflowing” EPS, giving it a positive coverage factor. It was 1.2X in 2021 compared to 1.36X in 2020.
The 2021 distributions were mostly ordinary dividends, with no return of capital, and only $0.06 of long-term capital gains/share.
At $17.11, TPVG is selling at a 22% premium to NAV, above BDC’s industry average of 12%. However, its price/NII of 12.86 is below the industry average of 14.77X, as is its EV/EBIT, while its yield of 8.42% is slightly above average.
Profitability and leverage
ROA decreased over the last 2 quarters, while ROA increased slightly compared to Q3 21, and the EBIT margin remained roughly stable. All 3 measures are below BDC averages. Management has increased debt to net asset value leverage in 2021, which we have seen a lot in the BDC industry over the past year as business conditions have improved.
Management increased the asset base by ~36% in 2021, with debt up 79%, to improve results. Thus, the Assets/Liabilities ratio went from 2.62x to 1.98X, while the EBIT/Interest coverage went from 4.09X to 3.37X.
The revolver feature of TPVG’s $350 million credit facility matures in November 2022, but also has an additional 18-month amortization period, if management does not renew it. There are also $270 million in notes, which expire in 2025 to 2026.
He had outstanding loans of $200 million and $51.27 million in cash as of 12/31/22.
In late February 2022, TPVG announced the closing of a private placement of bonds aggregating $125.0 million in aggregate principal amount of 5.00% Notes due February 2027. The Company intends to use the proceeds net of this offer to repay outstanding borrowings under its $350.0 million revolving credit facility. facility, to fund investments in accordance with its investment objectives and for other general corporate purposes.
Judging by the fourth quarter 2021 results and management comments, TPVG looks set to continue its earnings momentum in 2022. Although a 22% premium to NAV looks a little expensive compared to BDC’s industry averages, you may well see a pullback opportunity to buy TPVG a bit cheaper in 2022, given the geopolitical uncertainty and market volatility also caused by the new bullish environment rate.
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