TriplePoint Venture Growth BDC Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. TriplePoint is an externally managed business development company investing primarily in venture growth-stage businesses through loans, warrants and equity.
Financial performance and position
- Q3 investment and other income: $35.7 million, versus $29.7 million in Q3 2022. Net investment income was $19.1 million ($0.54 per share), versus $16.9 million ($0.51 per share).
- Q3 result from operations: Net increase of $2.1 million ($0.06 per share), compared with $0.4 million ($0.01 per share) a year earlier. This included $17.0 million of net realized and unrealized investment losses.
- Nine-month performance: Investment and other income was $104.5 million, versus $84.5 million in 2022. Net investment income rose to $56.5 million ($1.59 per share) from $43.1 million ($1.35 per share), but the company recorded an $11.0 million decrease in net assets from operations, versus an $8.3 million decrease. Net realized and unrealized losses were $67.5 million.
- Expenses and yields: Nine-month operating expenses increased to $48.0 million from $41.4 million; interest expense and fee amortization rose to $28.5 million from $18.4 million. The annualized debt-portfolio yield was 15.1% for Q3 and 14.8% for the nine months, compared with 13.8% and 14.5%, respectively, in 2022.
- Cash flow: Nine-month operating cash flow was positive $63.0 million, versus negative $107.3 million in 2022. Financing cash flow was positive $0.2 million. Cash, cash equivalents and restricted cash totaled $122.5 million at quarter-end.
- Portfolio and NAV: Investments had $924.1 million cost and $870.2 million fair value, down from $949.3 million fair value at December 31, 2022. NAV was $374.1 million, or $10.37 per share, versus $419.9 million, or $11.88 per share, at year-end.
- Debt and liquidity: Gross borrowings were $605.0 million: $210.0 million under the revolving facility and $395.0 million of notes. The facility had $140.0 million unused commitment; the company reported 162% asset coverage and compliance with debt covenants. The revolving period ends May 31, 2024, with facility maturity November 30, 2025.
- Distributions: $0.40 per share was declared and paid for Q3; $1.20 per share was declared and paid over nine months. The board subsequently declared another $0.40 per share, payable December 29, 2023. Estimated undistributed taxable earnings from net investment income were $37.3 million, or $1.03 per share, at September 30.
Material changes versus comparable periods
- Higher investment income and net investment income reflected a larger average income-bearing debt portfolio and higher yields. Increased borrowing balances and rates also drove materially higher interest expense.
- Nine-month net investment income improved, but larger investment losses resulted in a greater decline in net assets from operations than in 2022. NAV per share fell $1.51 from December 2022.
- Realized investment losses were $25.6 million in Q3, primarily from writing off Hi.Q. Nine-month unrealized losses were $43.8 million, although Q3 unrealized gains were $8.6 million, partly reflecting reversals of previously recorded losses on investments realized during the quarter.
- Credit quality weakened: eight companies, with $94.8 million cost and $39.2 million fair value, were on non-accrual at September 30, compared with one company and $9.1 million fair value at year-end. Four debt positions were rated Red, totaling $21.2 million fair value; none were Red at year-end.
- Unfunded commitments declined to $141.9 million across 17 companies from $324.0 million across 37 companies. The company reported $100.9 million in nine-month debt fundings, versus $322.0 million in 2022, and $107.1 million of commitments expired or were terminated.
Outlook, risks and unusual items
- Management said available cash, borrowing capacity and anticipated portfolio cash flows should be adequate for operating needs, including unfunded commitments. It provided no specific earnings or portfolio-growth guidance.
- At September 30, 62.1% of debt principal, or $523.7 million, bore floating rates. The company estimated that an immediate, sustained 100-basis-point rate increase would raise annual net investment income by $2.7 million; a 100-basis-point decrease would reduce it by $2.6 million. No interest-rate or foreign-currency hedges were in place.
- Valuation risk is significant: nearly all investments were Level 3, relying on unobservable inputs. Non-accrual investments and holdings subject to sale restrictions heighten uncertainty around realizable portfolio values.
- Management cited risks from economic and market volatility, higher rates, portfolio-company access to financing, lender and capital-market availability, foreign-exchange exposure, geopolitical conflicts, and possible covenant or asset-coverage pressure. BDC asset coverage was above the stated minimum at quarter-end.
- A shareholder securities class action filed in June 2023 names the company and certain directors and officers; damages are unspecified, and an amended complaint was due December 5, 2023. Management reported no other subsequent events requiring disclosure; October activity included $10.0 million of new investment fundings.
- The company recorded $1.0 million of excise-tax accruals for the first nine months of 2023. It also reported a $3.8 million Q3 reduction in income incentive fees under the fee agreement’s total-return requirement; no income incentive fee was recorded for the period.
Important facts for investors to verify
- Whether portfolio-company performance, recoveries and collateral support the reported fair values, particularly for the $39.2 million fair value of non-accrual investments and other impaired loans.
- Whether elevated realized and unrealized investment losses continue, and how credit-watch downgrades affect future income and distributions.
- Whether cash resources and the $140.0 million of unused facility commitment can cover expected draws on unfunded commitments, debt maturities and distributions.
- How higher floating-rate borrowing costs, refinancing needs and the 162% asset-coverage ratio evolve; confirm ongoing covenant compliance.
- The status and potential financial impact of the securities class action, and the source and tax character of future distributions.