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Hercules Capital Inc
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Good afternoon, ladies and gentlemen, and welcome to Hercules Capital Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Hara. Please go ahead.
Thank you, Angela. Good afternoon, everyone, and welcome to Hercules conference call for the second quarter of 2019. With us on the call today from Hercules are Scott Bluestein, Chief Executive Officer and Chief Investment Officer; and Seth Meyer, our Chief Financial Officer.
Hercules second quarter 2019 financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at htgc.com. We've arranged for a replay of the call at Hercules web page or by using the telephone number and passcode provided in today's earnings release.
During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation of final audit results.
In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance, and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including and without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence and other factors we've identify from time to time in our filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are -- reasonable, any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also can be incorrect.
You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit our website at hgtc.com.
With that, I will turn the call over to Scott.
Thank you, Michael, and good afternoon, everyone, and thank you all for joining us today. Q2 was an exceptional quarter for Hercules, where we once again delivered multiple records along with strong and consistent operating and credit performance.
The momentum that we experienced coming out of Q1 continued through Q2, which enables us to further strengthen and extend our leadership position in the venture lending and growth stage financing market. Our Q2 performance was attributable to our best-in-class investment team and the strength and diversification of our investment platform.
Scale, experience, access to the capital markets and diversification across our assets and liabilities are key competitive attributes that provide optionality that we believe is unique to Hercules and positions us well at this particular juncture of the credit and economic cycle.
Q2 was highlighted by multiple records, including new commitments, total fundings, total investment income, net investment income and total portfolio investments and assets, all while maintaining our historical strong discipline and underwriting standards.
In Q2, our origination platform, delivered new debt and equity commitments of $534.8 million, our highest in history. For the six months of 2019, we delivered a record $949.7 million in new debt and equity commitments, an increase of over 30% from the same period last year.
During the second quarter, we funded 15 new and 16 existing portfolio companies. The product enhancements that we have made, combined with our unique ability to invest in our companies through multiple value inflection points given our scale and size, has expanded the market opportunity for Hercules. Our results in the first half of 2019 were partially driven by these elements. Specific examples include our ability to finance the life sciences companies from the clinical stage through commercialization and technology companies through the expansion stage and into the established stage where they are more mature businesses.
We have also continued to make progress partnering with like-minded institutions on certain transactions when appropriate. The profile of the 15 new companies that we made commitments to during Q2 reflects our focus on quality, diversification and differentiation. We added a blend of technology and Life Sciences companies to the portfolio in Q2, all of which were expansion and/or established stage companies in each with strong institutional support from some of the leading institutional investors in our core markets.
Our focus remains on delivering an investment portfolio that is intentionally diversified by stage, sector, geography and sponsor. We believe that this positions us best for long-term success and provides the greatest level of resiliency even during a negative credit cycle. After 15 years of operations and being cycle tested, we believe that our venture debt strategy has continually demonstrated its ability to drive long-term sustainable shareholder and franchise value.
With our record Q2 originations performance, we surpassed the $9 billion mark in cumulative debt commitments since inception. This is another major milestone for Hercules. I am incredibly proud of all of our great employees, who have been instrumental in the growth and success of the company, and also thankful to the many portfolio companies, management teams, and VC and sponsor partners that we have worked with over the years. Our success would not be possible were it not for their support and confidence in us.
We funded a record $368.1 million during the quarter, an increase of more than 12% year-over-year and $607.8 million for the first six months of 2019, an increase of nearly 8% from last year. As noted in our earnings release, early pay offs significantly increased quarter-over-quarter.
In Q2, we had $178 million of early payoffs, which was up from $48 million in Q1. Nearly 80% of the Q2 payoffs were attributable to either M&A related events or prudent credit management, where we cycled out of certain credits as part of our ongoing risk mitigation strategies.
Net debt portfolio growth of $163.8 million in Q2 drove our debt investment portfolio to a record level of $2.08 billion at cost. Our total investment portfolio grew by 8% quarter-over-quarter and reached a record $2.32 billion at cost. Credit quality on our debt investment portfolio in Q2 was consistent with Q1 with a weighted average internal credit rating of 2.18 as compared to 2.19 in Q1 2019.
Our rated one credits as a percentage of our overall investment portfolio went down slightly to 12.4% in Q2 from 15.8% in Q1, largely driven by payoffs of several rated one credits that we were anticipating. Our rated two credits as a percentage of our overall investment portfolio increased to 63.9% in Q2 from 55.7% in Q1. And our rated four and rated five credits continue to make up less than 4% of our investment portfolio at fair value.
Non-accruals remained low with four debt investments on non-accrual with a cumulative investment cost and fair value of approximately $8.8 million and $4.8 million respectively, or 0.38% and 0.21% as a percentage of the company's total investment portfolio at cost and value respectively. We will continue to be vigilant and focused on credit, both from a macro and portfolio perspective, as we move into the second half of 2019.
Despite our strong capital deployment in Q2, and in the first half of 2019, we are continuing to manage leverage below our stated feeling of 125% on a GAAP basis, with Q2 coming in at 107.5% and regulatory leverage, excluding our SBA debentures, coming in at 94%.
In delivering on our stated commitment to use leverage prudently, we completed an equity offering in the second quarter, which gives us more balance sheet flexibility going forward. We believe that scale, platform strength and diversification, track record and proven access to capital are increasingly important to companies and their investors in the current market. Simply put, companies and their investors want to work with and partner with lenders that they know will be in a position to support them going forward.
Our diverse and well-structured balance sheet is designed to provide a long-term focused and sustainable investment platform and give us the flexibility to drive growth when we feel prudent. We ended Q2 with nearly $200 million of liquidity, and we further strengthen this position by completing a $105 million private placement of unsecured bonds at a fixed rate of 4.77% in July.
With our total investment portfolio now at $2.3 billion at cost, and our debt investment portfolio at $2.1 billion at cost, we generated net investment income per share in Q2 that exceeded our quarterly base distribution of $0.32 per share. In addition to our quarterly base distribution, we have also announced a supplemental distribution of $0.02 per share. In the aggregate, this brings our total distribution to shareholders to $0.98 year-to-date, representing an increase of approximately 5.4% from the same period a year ago. As a reminder, our Board maintains a variable distribution policy, so we will continue to evaluate the distribution as we move further into 2019.
Q3 is typically our slowest quarter due to seasonality, and accordingly we expect a normalization of origination activity from the record levels that we saw in Q2. Since the close of Q2 and as of July 29, 2019, Hercules has pending commitments of $160 million in signed non-binding term sheets, which is in line with our past seasonal third quarter levels. Year-to-date, through July 29, 2019, our closed and pending new debt and equity commitments are now at $1.1 billion, and our current pipeline is over $900 million in potential transactions.
We also anticipate that the fundings in Q3 are likely to be weighted towards the latter half of the quarter. Given our growth in the first half of the year, we have the luxury of not needing to chase the many aggressively structured deals or sharply price deals that we are seeing right now in the market.
We are a credit-driven organization and we continue to pass on the vast majority of the opportunities that we evaluate. Having said that, we remain on pace to deliver a new record level of annual commitments for 2019. And assuming favorable market conditions and the normal level of prepayments, we may possibly exceed the high end of the range of our guidance for debt portfolio growth in FY 2019.
With the growth that we achieved in the first half of 2019, and with our investment portfolio now north of $2.3 billion, we have begun to focus on investing in our infrastructure and team to ensure that we are best positioned for the long-term and for any market environment. On that note, we have recently added to or are in the process of adding to each of our core functional areas, including our investment team, finance team, legal team and credit team.
In 2015, we made human capital and infrastructure investments that would help support our growth to the $1.5 billion to $2 billion investment portfolio level. Now that we've exceeded that level, we feel that it is prudent to begin evaluating our corporate investments to support our next level of sustainable growth. I will as such provide more insight into our expectations for operating expenses moving forward in his section.
We continue to see loan demand and transactional volume driven by the continued strong pace of the U.S. venture capital investment activities, which invested $31.6 billion and raised $12.4 billion during the second quarter of 2019 according to Dow Jones Q2 2019 Venture Capital Report.
In addition, with many of the high profile unicorn IPOs taking place, it allows VCs to eventually monetize their investments in these companies, and provide another influx of future funding for investments over the next several years. Year-to-date, in 2019, we have already set a new annual record with nine of our own portfolio companies completing their IPOs. We saw four of our companies complete IPOs and Q2, including Pinterest, TransMedics, Fastly and BridgeBio.
Also, Dermavant and Opportune and opportunity have publicly filed along with two additional confidential filers. Assuming market conditions remain favorable, we are anticipating a healthy pipeline of portfolio company IPOs for the remainder of 2019 and M&A exit activity in our portfolio to continue at a steady pace.
M&A transactions continue to make up the majority of liquidity events for venture-backed companies. Historically, 90% of exits are M&A related with Q2 2019 being approximately 86%. In Q2, 198 companies were acquired for $34.4 billion in total, versus 31 IPOs, which raised $13.9 billion. Our performance in Q2 and throughout the first half of 2019 truly underscores the amazing depth and level of talent, discipline and diligence that our organization has put forward through our transition and the scale that we have managed to achieve.
I would especially like to acknowledge and thank each and every one of our 74 employees, 99 borrowers and key VC and sponsor partners for their tremendous support, being able to partner with some of the most dynamic companies and with some of the most creative and leading entrepreneurs, while remaining focused on building long-term shareholder value continues to be what will drive this team. Thank you very much, everyone, and I will now turn the call over to Seth.
Thanks, Scott and good afternoon, ladies and gentlemen. As Scott mentioned, this is another very strong quarter for Hercules. In Q2, we achieved several new records including total investment income and net investment income. We delivered net investment income totaling $35.3 million or $0.36 per share, and had significant NAV appreciation per share to $10.59.
Record new debt fundings of $363.6 million helped our debt investments grow by $164 million to a new record of $2.1 billion at cost. This growth was despite the $178.3 million of early payoffs as Scott mentioned.
Today, I want to focus on the following areas, income statement performance and highlights. NAV unrealized realized activity, liquidity and capital and our outlook. But now let's turn our attention to the income statement performance and highlights.
Net investment income per share was $0.36 as I mentioned, an increase of $0.06 from the prior quarter, which included a $0.02 impact from the onetime non-cash acceleration of the repayment of the 2024 notes in Q1.
Total investment increase net – sorry, total investment income increased by 18% to a record of $69.3 million in the second quarter, compared to $58.8 million in the previous quarter. The main drivers were continued growth in the loan portfolio along with increased early payoffs, resulting in non-core income increasing from $1.6 million in the prior quarter to $7.8 million in Q2.
Our effective and core yields in the second quarter were 14.3% and 12.7% respectively, compared to 13% and 12.7% in the first quarter of 2019. The primary driver for the increase in the effective yield was due to the higher early payoffs.
Net income margin increased to 50.9% in the second quarter, compared to 49.4% in the prior quarter. The reason for the change was primarily due to the higher levels of core income due to the portfolio growth and non-core income due to increased early payoffs, slightly offset by higher operating expenses. Our return on average equity was 13.6% for the second quarter compared to 12.8% in the prior quarter.
Turning to expenses, our total operating expenses for the quarter were $34 million, compared to $29.8 million in the first quarter of 2019. Interest expense decreased to $15.2 million from $15.7 million in Q1. As a reminder Q1 included the $1.6 million one-time non-cash charge associated with the early repayment of the 2024 notes that I mentioned.
Excluding this impact, our interest expense increased by approximately $1.1 million, this was largely due to a full quarter of interest expense on our January 2019 securitization along with higher usage of the credit facility during the quarter to support our strong funding activity.
Our SG&A expenses increased from $14.2 million in Q1 to $18.8 million in Q2. The main drivers for this increase were higher variable compensation and increased legal costs. The variable costs compensation accruals are a direct result of the company's strong performance in Q2 and the investment team's continued outperformance year-to-date. The increased legal fees are not expected to repeat at the same level we saw in Q2.
Our weighted average cost of debt was 5.2% for the quarter, comparing favorably with the prior quarter's weighted average cost of debt of 5.8%, which included a one-time non-cash acceleration of the 2024 notes. When excluding this, the weighted average cost of debt remained flat during the year to date.
Let's now switch the focus to the NAV, unrealized and realized activity. We saw an NAV increase by approximately $114 million or $0.33 cents per share to $10.59 per share. The main drivers for the increase were $95.5 million of new equity raised at a premium to our NAV, $12.9 million of unrealized and realized gains and earnings in the quarter, exceeding the dividend that we paid.
As announced in June, we completed an equity follow-on offering of 5.75 million shares at a gross offering price of $12.64 per share, resulting in net proceeds of $70.5 million. We also issued 1.95 million shares under our ATM program at an average gross selling price of $13.01 per share for net proceeds of $25.1 million. Our $8.6 million of unrealized gains were driven by improvements in both the technology and life science sectors. The key drivers for unrealized gains were $7.9 million of mark-to-market appreciation in the equity and warrant portfolio and $700,000 of appreciation of the loan portfolio.
The loan portfolio included a $4.3 million appreciation in life sciences debt portfolio caused by movement in the benchmarks yields. The $4.3 million of realized gains are comprised of $4.6 million of gains from the disposal of three of our publicly traded equity positions offset by losses from the expiration of warrants and an earn out from a previously disposed position.
Next, I'd like to discuss our liquidity and capital position. We finished the quarter, as Scott mentioned, with nearly $200 million in available liquidity, down from $247 million in the prior quarter. The second quarter liquidity was composed of $13 million in cash and $182 million of undrawn availability under our revolving credit facilities which are subject to borrowing base, leverage and other restrictions. In July, we mentioned the successful issuance $105 million of five-year dated notes in a private placement with a fixed coupon of 4.77%.
This offering done with institutional investors further strengthens our balance sheet and liquidity position and again demonstrates our ability to attractively tap the capital markets when we feel it prudent to do so. The proceeds will increase our liquidity and fund further portfolio growth. The issuance will modestly reduce our cost of debt of 5.2% in the quarter.
Our strong liquidity position and consistent inflows from amortization and prepayments afford us flexibility in terms of when and how we access the capital markets. At the end of the quarter, our GAAP and regulatory leverage was 107.5% and 94%, respectively, which declined compared to the first quarter due to the equity issuances. We continue to manage the business to ensure that we remain below our communicated leverage sealing of 125% for 2019.
As a reminder, our early payoffs and normal amortization provide us significant monthly inflows that we can use to delever when and as needed. We will closely monitor the macro, political and market conditions in determining future potential debt and equity capital timing.
Finally, let's address our expectations and the outlook. We are widening our core yield guidance for the remainder of 2019 to 12% to 13% due to the uncertainty of further federal funds action in 2019. We will continue to provide updates throughout the year as the Federal Reserve Acts. As a reminder, our loans are issued with a floor which mitigates some of the potential downside due to rate decreases.
As a result, the impact of rate decreases is not linear to our impact of rate increases, as loans as issued since December 20 are at the floor, so wouldn't -- have no adjustment.
For the remainder of the year, we expect our SG&A expenses to decline compared to what we saw in Q2. For the third quarter, we expect SG&A expenses of $16 million to $17 million. This represents a meaningful increase -- decrease from Q2.
The communicated guidance of $16 million to $17 million includes our expectation for reduced legal expenses going forward and lower variable comp and stock compensation due in part to the settlement with our former CEO. These reductions will be partially offset by increased investment in our team and infrastructure as alluded to by Scott in his comments. We believe now is the right time to invest in our platform to ensure that we are best positioned to manage the business successfully moving forward.
We have recently added or are in the process -- and adding to our credit, origination and finance teams and are investing in our systems to improve processes for greater scalability. Should market conditions remain favorable and origination activity exceed our expected Q3 growth, per Scott's earlier remarks, the SG&A expenses would increase based on origination activity.
We expect our borrowing cost to remain reasonably consistent with the prior quarter due to lower expected activity in Q3 and the favorable private placement, compared to our average cost of debt. Finally, although very difficult to predict, we expect $100 million in prepayment activity in each of the remaining quarters of 2019.
In closing, I continue to seek Hercules Capital well position for the remainder of 2019. I will now turn the call over to the operator to begin the Q&A a part of our call. Operator, over to you.
[Operator Instructions] Our first question comes with a line of Tim Hayes. Please go ahead.
Hey, good evening, everyone. Thanks for taking my questions. My first one, you've grown the portfolio by approximately $325 million so far this year, the debt portfolio, it's well within the $300 million to $400 million range. I know you made a comment that you could exceed that level and you just the gave kind of -- or reiterated your guidance for repayments. So I just figured I'd ask, putting that all together, where do you think the portfolio could go by the end of the year?
So, look, I think it's always caveated by deals for the sake of portfolio growth. Our job as a credit manager is to be disciplined and try to make sure that we’re doing the right deals. The market right now continues to be robust, our pipeline continues to be very strong. But our focus is on making sure that we're building long-term sustainable book and that's what we’re trying to do.
Assuming market conditions remain favorable, it would be our expectation that we would exceed the high end of that guidance. Q3, if you look at our business going back to nearly five years, has always been the slowest quarter for us, and we expect that to be the same this year.
We just came up of a quarter where we closed $535 million of commitments, we funded $370 million of deals, approximately $150 million of which were done in the month of June. So it's not surprising to us that Q3 will be a little bit slows and sort of a return to what we would expect from a normal perspective. Assuming market conditions remain favorable, again, we do believe that we will exceed the high end of that range. We're not increasing the number, because we still want to see how the market plays out in Q3 and Q4, but it is not unreasonable to expect us to exceed that $400 million top assuming market conditions remain favorable.
Okay, fair enough. Appreciate the comments there. And I guess just along those same lines, if your expectations now are that you might exceed that high end of the range whereas maybe last quarter, that wasn't exactly your perspective.
You raised the dividend last quarter as you looked out and saw robust pipeline in a supportive operating environment for prevention lending, NII and DNOI are well above the current dividend level now, and again, your comments seem very positive in terms of the market conditions and how you see growth going forward. So just wondering how you think about the dividend level here and why you chose to maintain it at the current level? And against, sorry, to caveat, I know it's a Board decision, but…
Yeah. So I obviously appreciate the question and certainly not surprised that you're asking it. As you correctly noted, the decision with respect to the dividend is ultimately a Board decision, we have always maintained and we will continue to maintain a variable dividend policy which gives us maximum flexibility. We made the decision in Q1 to increase the base distribution from 31 to 32.
Given the current trajectory of the business, we felt that maintaining the 32 base was continue -- continue to be appropriate for the current quarter. You pointed out two things that are obviously a focus for us. NII and DNOI are now significantly above from a trajectory perspective of that base dividend. So it is clearly something that the Board and the management team will evaluate throughout the course of Q3 and Q4.
We are obviously cognizant of the fact that our income does belong to our shareholders, which is why in Q1 we did the supplemental distribution of $0.01 and why in Q2, we just did an additional supplemental distribution of $0.02.
Makes sense. Okay, appreciate those comments. And then one more for me and I'll just hop back in the queue.
Saw you added Solar Spectrum and Metalysis if I'm saying that correctly, your non-accrual this quarter. Can you just update us on what's going on with those two positions?
Sure. So, we're not going to comment with specificity on any individual private investment, but just from a 50,000 foot level, I can tell you that subsequent to quarter-end, we've actually resolved the Metalysis non-accrual. So we have received total consideration that is equivalent to our fair value mark as of the end of Q2. We are also very close to resolving a second loan that is on non-accrual where we expect within the next several days to receive 100% of our principal cash.
Solar Spectrum is a loan that we made the decision to put on non-accrual, that loan continues to be current in its payment obligations to Hercules. But given some things that we were seeing, we felt that the prudent thing to do was to put that loan on non-accrual.
I would remind you and others, as of the end of Q2, our total non-accruals at cost represent 0.4% of our investment book at cost, and on a fair value perspective, represent 0.2% of our fair value. We have always been prudent with respect to our marks and we have always been prudent with respect to when and where we put loans on non-accrual. And if we think it's the appropriate thing to do, that's what we do in the ordinary course. That does not mean that we will not have or that we don't expect to have a recovery. Just that the decision that we've made based on the facts and circumstances that we have as of June 30.
Great. Well, thanks again for taking my questions and congrats on a great quarter.
Thanks, Tim.
Operator
And your next question comes from the line of Chris York. Caller, please go ahead.
Yes, first, I'd like to begin by expressing my congratulations to you, Scott, on being named permanent CEO as I'm sure. Last couple of months have been challenging. And then on the question front, so I know that the uncertainty with Manuel situation is behind the company. Is it reasonable to think that the company can go back on the offensive and maybe consider strategic transactions as the LA heads up and move back up higher in the priority queue is I guess, the question.
Yeah. So, Chris, first thanks for the comment, it's certainly appreciated. We never stopped trying to be strategic and thoughtful. We delivered, the morning of March 13, a very clear and confident message that this was business as usual, and that's exactly how we've operated this business since March 13 and that's how we're going to operate this business on a go forward basis. And I think you've seen proof of that in what we've accomplished over the last 120 days. We raised nearly $95 million of equity capital. In June, we raised $105 million of unsecured debt at 4.77%. In July, we have continued to evaluate several different strategic initiatives over the course of the last 120 days and I absolutely expect that to continue to be the case.
Got it. Fair enough. Message received on that front as well. And then -- well, I mean, maybe expanding on that, is Europe a potential as a new venture lending is growing rapidly there and your portfolio is increasing to the United Kingdom? And then also maybe, is the cannabis industry an area where you guys could go on the strategic front as that would fall potentially under your life sciences group?
Yeah. So, we're not going to provide too much color into sort of some of the strategic things that we're thinking about and contemplating, because obviously, we want to keep that to ourselves. We have talked for a while about product expansion, we've talked about platform expansion, we've certainly done some things over the years on the niche of those two areas. Another natural area for us is geographic expansion and it is something that we are looking very closely at.
As you pointed out, we have done several deals in Europe. The key for us is really making sure that the credit profile of those investments make sense and that we're operating in an environment where we can comfortably exercise rights and remedies if needed. So if you think about sort of where we would potentially consider expansion from a geographic perspective, you can sort of limit the areas to countries where there are perfection systems in place that we would be comfortable with from a secured lender, because that's what we are, we are a credit organization first and foremost, and that's how we're going to continue to be.
Obviously, with respect to the second part of the question, the cannabis industry has gotten a lot of attention. There are several very interesting companies in that space that we've looked at. We have not done anything yet, and to the extent that we did, we would be very cautious and prudent with respect to those investments just given some of the publicity positive and/or negative that could potentially come with those investments.
And when we think about a new investment, it's not just an economic return. We want to make sure that we're doing the right thing for long-term shareholder and franchise value. So we would obviously tread pretty carefully with respect to investments in that industry.
Got it. Very thoughtful answer. Thanks. And then on a portfolio company, I know you typically don't comment specifically on specific borrowers. But I want to talk a little bit about just Impossible Foods. It's a decently large investment to your portfolio. And the reason why I bring it up is obviously it's Peer, Beyond Meat, it's done pretty well in the secondary market and you guys were able to structure a very attractive equity. So I'm just curious, is it reasonable to expect that this loan maybe shorter than the typical duration because it does involve how we look at on modeling.
Yeah. So as you started the question, we don't comment on any specific individual portfolio companies. And as you know, from being with us for many, many years, trying to predict prepayments is virtually and impossibility. We have a great relationship with that company. We are obviously big believers in what they are doing and we're very proud to have them in the portfolio not just as a debt investment, but also as an equity investment. And we look forward to having a long and hopefully mutually beneficial relationship with that company for many quarters to come.
Fair enough. Last quick question here, I know you guys made a couple of investments late last year in non-yielding minority equity positions that were likely to go public. So like Lyft, Doordash, Next Door is still in the portfolio. So just could give us an update on how you're thinking about them? And then is that strategy something that will be replicated again?
Sure. So really no change in terms of how we're thinking about the monetizations. When we made those equity investments, we talked about the fact that when they approached a certain target price ranges that we would look to monetize and exit the positions. Most of those private investments came with lockup provisions, which have either just expired or are in the process of expiring over the next several quarters. And if the stocks appreciate to levels that are within our target price ranges, in the ordinary course, will look to monetize and capture some of the gains that we currently have from an unrealized perspective, if you turn them into realized gains again assuming that the stocks remain where they currently are.
With respect to our overall perspective on equity, we continue to make equity investments in the ordinary course. We made several equity investments in portfolio companies throughout the course of Q2. And if there's an investment opportunity out there that we think adds value for our shareholders and stakeholders, we'll look at it as we would look at any other investment.
Fair enough. That's it for me. Thanks, guys.
And your next question comes from the line of Aaron Deer. Caller, please go ahead.
Hi, good afternoon, guys.
How are you?
I'm doing well. I -- actually, most of my questions have been asked and answered. I just had a question on the leverage. Sounds like you're still sticking with the kind of 125 cap through this year. Any thought as we go into next year on whether you might be looking to raise that along the way.
We'd leave that open until we get to year end. We want to look at the market, look at the environment overall, what types -- rates are possible for us to obtain. So it's a holistic view that we'll take a look at year-end, and then consider any revision to that.
And I would look at, just adding to what Seth said, I mean look at how we've managed leverage historically. We've always taken a pretty conservative, prudent cautious view on leverage and I would expect us to use that sort of same philosophy on a go forward basis.
Okay. I guess, so relatively then I would expect that given the capital raising that you accomplished during the quarter, and then given what -- probably pretty slower growth coming off this strong second quarter, it's still pretty well positioned on the capital front then?
I would agree. So we have a very solid balance sheet, thanks to the private placement that we just did in the equity raise. And so we can never say never, and the markets are very attractive right now. I'm really focused on thinking about the long term of the balance sheet. So, at the moment, I consider us well capitalized and don't have any activity planned at the moment.
Okay, good. So thanks for taking my questions.
Thanks, Aaron.
And your next question comes from the line of John Hecht. Please go ahead.
Thanks very much, guys. Congratulations and good quarter. Scott, we've seen pretty large origination flow for several quarters now. And it's clear you guys have built some market share. But is there something more than that going on? I mean are -- is this segment just larger more recently than it has been, because there's more willingness to stay private longer and hold more debt as opposed to equity in terms of the capital structure? Is -- are there fee changes that we're observing?
So, great questions, John. I think the answer is yes and yes to the two points that you raised. Right, there are absolutely some fundamental changes that we've seen over the last several quarters. You look at the volume of equity capital that's flown into venture-backed businesses, if you exclude strategic investment north of $100 billion of venture equity capital came into the market in 2018, $25 billion in Q1, another $25 billion to $30 billion in Q2.
So you're continuing to see tremendous momentum and liquidity flow into the space which obviously increases the potential addressable market for us. The other piece that I alluded to in my comments, I think, is more specific to Hercules. We've advocated for a long time that this is a very difficult business to scale given the market and given the velocity of capital, given that we have our loans are amortizing.
We've got $20 million $50 million per quarter of normal course amortization which comes in, that's great from a risk mitigation perspective, it's great from a credit perspective, but it makes the business difficult to scale. We've managed to do that. And over 15 years, we've now done $9.4 billion of commitments, our debt portfolio right now is $2.1 billion, our investment portfolios $2.3 billion.
So we've matured virtual points from a scale perspective where we now have some different levers and tools that are available to us that allow us to do something that two, three, four, five years ago, we couldn't do, because we were in a different place and we're taking advantage of those things in the market and allows us to stay with companies longer, it allows us to finance them through a couple of different value inflection points. And I think you are starting to now see some of the real tangible benefits of having a platform in this industry that is at scale.
Okay, that’s very helpful. And then second question, you guys discussed investing in resources. I mean you are expanding the team, but this seems to be more of a corporate resource to account for the incremental growth you guys had. I guess the question is, so we expect to step up and kind core expenses. At what point do you need another one. How long does that last from an asset perspective?
Yeah. So I think the way we're thinking about it now, when we did our last sort of larger investment in the team and in infrastructure, we were at little bit north of $1 billion then we sort of targeted the $2 billion mark. The investments that we're currently in a process of making, we think, comfortably get us to sort of the next point which, for us, is approximately $3 billion from an investment perspective. So it gives us sort of plenty of room to grow. And what I would say in terms of the expense side, this is a credit-driven organization and this is a credit business.
So we want to make sure that as we've grown the book, which is now $2.1 billion, 99 borrowers that we have a team and infrastructure in place across all functional aspects of the business, credit, legal, finance, investment team that can support that growth. We're also making some investments in our infrastructure. We want to make sure that from an institutionalization perspective, we are in a position to handle the portfolio where it is now, but also into the future up until that probably next $3 billion mark.
Perfect. Thanks very much, guys.
Sure.
And your next question comes from the line of Henry Coffey. Please go ahead.
This would be an interesting point for my question. How does that $3 billion business look different than what we'll call a current sort of 2-ish, $2 plus billion business? Is it just more of the same or is it -- are there products that will show up that are different from we could all speculate around asset bank lending and things like that. But how does it look? How does the $3 billion business look compared to the current business?
Yeah. Henry, it’s a combination of the two things that you mentioned. The market opportunity in our base business continues to be very strong and robust and we think there's a lot of additional room for growth in the core base business. We’ve also talked over the last couple of quarters now about some of the product enhancements that we're making and those things are now starting to drive some of that growth.
So having the ability to finance a life science's company, once it's through the clinical stage, having the ability to finance the technology company once it's sort of crossed through the expansion stage and has become more of an established business where the product looks a little bit differently, the business is a little bit more mature.
Some of that growth between the $2.1 billion where we are now and the $3 billion sort of next inflection point will come from some of those product enhancements and product initiatives that we're currently rolling out into the market and that we expect to roll out into the market over the next several quarters.
So it's expanding across the cycle and being able to be a lender to essentially large very mature companies as well as early stage development companies. Is that the way we should understand it?
That's correct.
And then is that going to be something where maybe the yield is lower, but the leverage is higher and the ROE is the same is -- or is it, or the rates are going to be similar and it's just a lower risk credit?
So based on what we're seeing now, we feel pretty confident that the yield threshold will remain similar to what we've given from a guidance perspective, which is that 12% to 13% core yield. We've always managed the business based on core yield, the effective yield fluctuates and various quarter-to-quarter based on the level of prepayments as you saw in Q1, where we had $47 million of prepayments and as you just saw in Q2, where we have $175 million of prepayments.
So we're confident based on what we're seeing now that we can continue to grow both our existing market, but also expand the market from a product perspective and still target comfortably that 12% to 13% core yield range on a portfolio level.
I think, if you had asked me when you went public back in the 2000s what the effective of yield on the portfolio would be, I'd say, 12%, 13%, maybe 14%. So it doesn't really seem like that's a guide down on range as much as just kind of that where the business seems to yield excluding prepayments and alike. Is that a good way to think about it or…
I think it's a fair observation. If you look at it over the last five years, we've been very comfortably in that range of 12% to 13% core yield. And that's what we are certainly comfortable with that range on a go forward basis based on what we're currently seeing in the market.
And then the last question is, you've been in a growth mode, and you've been through tough times as a company. And you've got Board members that have gone through -- went through the '08, '07 period, you've got probably staff members that went through that, and it's kind of be part of your bones right now.
So what are the thoughts about "the big recession"? I mean, is there one on the horizon? How do you plan for it? What metrics do you use to kind of keep your wins about as we go into "a potential business slowdown"? I don't think anybody quite knows where we're going to go right now?
So, great questions. And having followed the Hercules story for a number of years, you'll know this, right? We have always been a credit first organization. When we were in sort of growth mode and when we were in sort of cautious mode, we always had the same methodical, disciplined credit first, underwriting disciplined focus that we have today. That is not going to change for us.
When we think about making investments, whether we're in a strong bull market, as we've been in over the last several years or whether we're in a market where we are concerned, every deal that we are doing, we are trying to take a disciplined credit first underwriting approach with respect to the profile of the company that we are lending to, from a yield perspective and certainly from a structural perspective.
We have been saying now for a couple of quarters that we think we're at sort of the later innings of the cycle. Very difficult for us to tell you if we think there will be a recession, when we think there will be a recession, but it is certainly something that we're thinking about, that we're planning for and that's why we're starting to do some of the things that we've talked about.
Reinvesting in the team, making sure that we have the infrastructure to support it. This business and the majority of this team has been through a cycle and we're very confident that we have the infrastructure, the team and the personnel and the portfolio to be able to weather any storm should it come.
If I lined up your 2007 balance sheet with your current balance sheet and just looked at relative concentrations, is it fair to say that you've changed, you've radically changed the capital structure as well?
Yes. I'd have to look at it, Henry, if I don't -- I don't have it in front of me given that it's 10 years ago, but what I would tell you is the business today is certainly much more sophisticated and much more diverse from a balance sheet perspective, both on the asset side and the liability side.
If you think about this on the asset side, we've got no single sector concentration above 25% or approximately 25%, roughly 50% of our book is technology focused, roughly 50% of our book is life sciences focused. So we're very well diversified from an asset perspective and we are extremely well diversified from a liability perspective.
You've seen us now be able to do, over the last five or six years, several different things on the liability side. We have access to a variety of different instruments that we can use to fund the business. We've done several things that are long term in nature from a duration perspective, we obviously just closed a few weeks ago another $105 million of unsecured debt, 4.77%, that's due in five years. We've got a maturity stack and a liquidity ladder that's pretty well spread out over the next 10 or so years. And we feel confident that, again, we'll be able to weather a storm should it come.
We're also less reliant on our credit facilities than we were in 2007-2008. When that -- when the last credit crisis hit, Hercules was primarily reliant on its credit facilities to be able to fund the business. Now we have access to several different facilities. We've done multiple securitizations, multiple bond offerings. We obviously still have and utilize the credit facilities, but we're much more diversified relative to where we were in 2007-2008.
It's much bigger washing machine is what we…
It's a bigger washing machine. All right.
So just to go to Scott's point on the normal amortization in the payoffs, they provided a liquidity for us. And then we have the stability of the unsecured instruments which just to add emphasis to Scott's point, it was a much more pledged asset balance sheet in the past.
Well, it seems like you put both sides of the equation together in a very thoughtful way. So thank you.
Thanks, Henry.
And your next question comes with a lot of Christopher Nolan. Please go ahead.
Hey, guys, what do you think return on NAV can go given that you're going for higher leverage going forward?
Well, certainly, the lever aspect of that can be very beneficial. We expect our core yields to remain in that fairly tight range. I mean, it's a whole point spread. So it might feel a little differently. But I think that, as I said to the earlier question, we'll evaluate our leverage position at year end that could increase our return on our NAV going forward if we decide to take that up.
There's no indication that we will at this time. As Scott has mentioned, we've been a very conservative levered organization in the past, but we do have that capacity and if the market is very strong, and the rates are very attractive, we could take that decision. And so that could also improve it. I think that as you heard from the Fed Chairman yesterday, we're not expecting to see further rate declines, we may have rate declines, but it was making no pledge that we had changed the direction of the ship fully, just dropped the ballast.
And so it's a little bit hard for us to predict on where that baseline rate will go for us. But it's entirely possible that we see a lengthy period of stability in that regard, which then holds our core yields up and further improves it and we will continue to monitor whether we think it's the right thing to further lever the balance sheet up and improve those returns. So it's really difficult to say where we will take that without deciding to take a movement on that leverage.
If I can ask in a different way, what do you prioritize -- grow? I mean given that you're able to issue equity accretive to NAV per share, and given you've got strong deal demand and given that your asset quality is good and given that you stabilize managements. You can start issuing equity and just start accreting your book value per share just by doing that and you get the deal to manage and absorb that. Is that the plan going forward or are you targeting some sort of return on equity or return on assets? Just trying to get an idea of what the priorities are?
It's the latter. Our priority is not to grow at all costs and continue to issue equity, irrespective of the fact that we can issue equity at a premium to net asset value. We're very stingy with respect to issuing equity, we've always been pretty stingy with respect to issuing equity, we only issue equity, when we absolutely feel that we need to do so and when we think it's prudent to do so based on the market.
Our focus is not on growth at all costs, issuing equity to drive net asset value, at the expense of dilution from an NII perspective. If there is responsible, smart growth in deals that we think fit the profile that we're looking to do so, we'll certainly consider it, but that's not the model that this is following. We're trying to stay disciplined, we're trying to stay focused. We don't look at equity, we don't make equity decisions from an issuance perspective lightly, but it's something that that we focus on pretty extensively.
That's it for me. Thank you.
And your next question comes from the line of Finian O'Shea. Please go ahead.
Thanks, guys. Good afternoon.
Hey, Fin,
O'Shea. So just going back to your platform growth and market growth, you talked in the beginning about what you've talked about recently and going into larger commercial stage companies and so forth. If I -- if we pair that with the slides in the back of your deck that show the venture market, the venture capital market growing every which way. Would you say, from your vantage point that the venture capital community as well is moving into more mature commercial stage markets?
Yeah, I think, they have to, right? If you think about just companies are staying private longer, companies are raising more private capital before tapping the public markets. So there's more of a liquidity need to sort of drive the growth of these companies in the private stage, these funds have done a tremendous job raising large amounts of capital. And so the need to deploy larger amounts of capital is increasing. So when you sort of -- you think about sort of that that dynamic in the ecosystem, I think, it absolutely does come into play.
Sure, that's helpful. And then also, you touched on, I think, clubbing with likeminded investors. Forgive me if that's not new language, but can you kind of expand there in terms of what kind would this be other -- sort of other BDCs on the software side or does this mean more partnering with Silicon Valley Bank on a larger deal or bifurcated deal? Just anything new that you meant to communicate to us there?
Sure. Yeah, I don't want to provide too much specificity on it for a variety of reasons, but I'll make the following comments. We indicated on our call in Q1 and we indicated again on this call that, that was a focus for us and it absolutely is a focus. I will tell you that, over the last four or five months, we've had extensive conversations with several players in the space who have a desire to work with us on transactions, we're not going to take that lightly.
For us, the focus needs to be on working with and partnering with like-minded investors who have a credit first approach and have the same underwriting credibility and discipline that we have.
As you approach sort of larger, later stage, more mature companies, they may have relationships with commercial banks for example. And if those commercial banks view us more as a partner than a natural competitor, and there's more of a willingness on both sides to work collaboratively on deals, when and where it makes sense, that's something that that we have begun to take advantage of and that I think we can continue to take advantage of on a go forward basis.
Sure, thank you. That's helpful. Then one final question. Back to the interesting theme of potential cannabis investments, just curious, if that were to become mainstream or legal, do you view that opportunity as significant for say the private markets? Do you see would this be a major venture capital pool flowing in and thereby venture debt or do you think this would be more a large corporate or bank market?
I think it's a difficult question to answer, because you're going to have this sort of discrepancy between the state level and the federal level, which we certainly don't think gets resolved anytime soon, right?
So you can sort of play this out going forward and you can certainly see a scenario where more and more states continue to take sort of a liberal position with respect to usage and the legality of it, and then you could also make a very credible argument that the federal government has absolutely no incentive and there is no likelihood of them changing sort of the federal aspects of the space. So I don't think that sort of dichotomy between state and federal goes away any time soon which from our perspective is going to continue to drive sort of some uncertainty with respect to investment in this space.
Sure, that’s all for me. Thank you so much.
Thanks, Fin.
And your final question comes from the line of Ryan Lynch. Please go ahead.
Hey, good afternoon.
Hey, Ryan.
First, I wanted to talk a little about interest rates. Obviously, the fed cut rates yesterday, the consensus is for more rate cuts in the future. So I wanted to talk about, you guys are unique type of BDC that you guys are venture lenders versus most BDCs are standard middle market lenders, and so my question was the middle market lending, it feels like to most borrowers are very -- can be very sensitive to interest rates as little more financial engineering versus the venture-backed companies or maybe more focused on successful product launches or drug or device approvals.
So my question was, if the fed continues a rate guiding cycle going forward that obviously could pressure the yield and that's obviously going to move down short-term rates, do you think that you guys are in a better position than other BDCs being in the venture lending environment that you guys can offset some of that by increasing the spreads that you guys are charging to borrowers?
Yeah, I think, we certainly will be able to offset some of the spread. First with respect to sort of predicting what the fed is going to do, that’s a pretty difficult task, right? If we were having this conversation six, eight, nine months ago, certainly we would not have predicted a fed cut this year, but that's what we got yesterday, and as you pointed out the sort of working consensus is one more cut either at the September or the October meeting.
Given the market in which we play, it's our expectation that you'll see sort of spreads widen from a risk perspective. And so we will be able to offset some of that decline in the broader interest rate market on our new underwritings. I'd also point out and you know this from having called us for a while, the vast majority of our portfolio is set with interest rate floors. So if you think about all the loans that we've originated in Q4, Q1, Q2 that are prime based, where prime was at 550, irrespective of what the Fed does, there is a certain percentage, a large parentage of our portfolio that is essentially insulated given the virtue of the fact that we're underwriting at floors.
Okay. That’s helpful, that’s all for me, I appreciate the time today.
Thanks.
And I’m showing no further questions at this time. I would now like to turn the call back to Michael Hara. Please go ahead.
Thank you, operator, and thanks to everyone for joining our call today. We look forward to reporting our progress in what has been a strong year so far on our next call in Q3. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.