Hercules Capital, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 16, 2023. Hercules is an internally managed business development company (BDC) and regulated investment company (RIC) specializing in debt financing for venture-backed and institutional-backed technology, life sciences, healthcare, and sustainable technology companies. This summary covers the full year, not Q4 alone.
Key financial and portfolio metrics
| Metric | FY2022 / Dec. 31, 2022 | Comparable period |
|---|---|---|
| Total investment income | $321.7 million | $281.0 million in 2021 |
| Net investment income (NII) | $188.1 million; $1.48 per basic share | $150.0 million; $1.29 per basic share in 2021 |
| Net realized gain (loss) | $(0.9) million | $20.9 million in 2021 |
| Net unrealized appreciation (depreciation) | $(85.1) million | $3.3 million in 2021 |
| Net increase in assets from operations | $102.1 million; $0.80 per basic share | $174.2 million; $1.50 per basic share in 2021 |
| Portfolio yield | Total 11.9%; effective debt yield 12.7%; core debt yield 12.3% | Total 11.9%; effective 12.9%; core 11.4% in 2021 |
| Portfolio fair value | $2.964 billion, including $2.795 billion of debt investments | $2.435 billion total in 2021 |
| Net assets / NAV per share | $1.401 billion / $10.53 | $1.309 billion / $11.22 in 2021 |
| Debt outstanding | $1.594 billion principal; $1.574 billion carrying value | $1.250 billion principal in 2021 |
| Liquidity | $606.8 million reported available, including $15.8 million cash and cash equivalents | — |
| Cash flows | Operating activities used $424.8 million; financing activities provided $314.5 million | Operating activities provided $128.6 million; financing activities used $229.9 million in 2021 |
| Distributions | $1.97 per share declared; $249.1 million total | $1.55 per share; $179.6 million in 2021 |
Changes versus 2021
- Investment income rose 14.5%, primarily from a larger average debt portfolio and higher benchmark rates. Contractual interest income increased, while fee income fell to $14.4 million from $27.6 million, largely because fewer early repayments generated accelerated fees.
- NII increased to $188.1 million, but net assets from operations declined to $102.1 million as $85.1 million of unrealized depreciation replaced modest unrealized appreciation in 2021. Total shareholder return was approximately negative 10.1%, versus positive 25.6% in 2021.
- NAV per share fell 6.2% to $10.53. Net assets increased overall, supported in part by issuing 14.6 million shares through ATM offerings for $229.7 million net proceeds.
- The portfolio expanded, and senior secured debt grew to 92.5% of portfolio fair value from 88.6%. Drug discovery and development, software, and consumer and business services together represented 80.5% of portfolio fair value.
- Credit indicators weakened: weighted average debt investment grade moved to 2.23 from 2.10, and grade 3 investments rose to 36.3% of debt fair value from 26.3%. Grade 4 and 5 investments together were 2.2% of debt fair value. Non-accrual investments were 0.6% of portfolio amortized cost, compared with 1.0% in 2021.
Liquidity, leverage, outlook, and risks
- Available liquidity included borrowing capacity of $153 million under the SMBC facility and $438 million under the MUFG facility, in addition to cash. Restricted cash was $10.1 million. Management stated that liquidity was ample for near-term capital requirements.
- Regulatory asset coverage was 198.5% excluding SBA debentures and 187.7% including them, against a 150% minimum. Debt principal maturities were reported as none within one year, $382 million in one to three years, and $1.212 billion beyond three years.
- After year-end, Hercules amended the MUFG facility, extending its maturity to January 2026 plus a 12-month amortization period, and established a $100 million SMBC letter-of-credit facility. It also reported $34.9 million net proceeds from ATM share sales in January 2023.
- The company’s variable distribution policy targets quarterly distributions approximating 90%–100% of taxable quarterly or potential annual income; future distributions are not assured. In February 2023, the Board declared a $0.39-per-share fourth-quarter distribution and a further $0.32-per-share supplemental distribution payable in four quarterly installments during 2023.
- Management highlighted macroeconomic uncertainty, inflation, market volatility, geopolitical events, and ongoing pressure on some portfolio companies’ liquidity. Fewer IPO and M&A exits could prolong holding periods, constrain portfolio-company financing, and increase valuation pressure or losses. Rising rates may lift income on floating-rate loans but also increase borrowing costs and portfolio-company debt burdens.
- Material risks include industry concentration, borrower defaults, illiquid investments, leverage and covenant compliance, valuation uncertainty, unfunded commitments, and RIC distribution requirements. Available unfunded commitments were $628.9 million, versus $286.8 million in 2021; some commitments require milestones or may not be drawn.
- Most investments are Level 3 and valued using significant unobservable inputs. The auditor identified Level 3 investment valuation as a critical audit matter. PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Review subsequent portfolio performance, especially the grade 3–5 exposures, non-accrual borrowers, and largest positions; confirm the status and recovery prospects of investments written down or written off in 2022.
- Assess whether portfolio fair values and NAV remain supportable given the reliance on Level 3 estimates and the reported unrealized depreciation.
- Reconcile the $628.9 million of available unfunded commitments with liquidity, credit-facility availability, and the timing and conditions for borrower draws.
- Check current debt balances, asset coverage, covenant headroom, refinancing terms, and the cost and maturity profile of floating-rate borrowings.
- Compare NII and taxable income with distributions, and confirm the 2023 distribution amount and tax character; 2022 distributions included ordinary income and long-term capital gains.
- Monitor ATM share issuance and NAV-per-share trends: the company issued 14.6 million shares in 2022 and reported lower year-end NAV per share.