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Hercules Capital Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Hercules Capital Q2 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded.
I would now like to hand the conference over to your speaker today, Mr. Michael Hara. Thank you. Please go ahead, sir.
Thank you, Juan. Good afternoon, everyone, and welcome to Hercules conference call for the second quarter of 2020. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules' second quarter of 2020 financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at htgc.com. We have arranged for a replay of the call at Hercules' webpage or by using the telephone number and pass codes 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 and 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 the actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence caused by the COVID-19 pandemic and other factors we 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 for subsequent events. To obtain copies of related SEC filings, please visit our website.
And with that, I will turn the call over to Scott.
Thank you, Michael, and thank you all for joining us today. We hope that everyone is staying safe and healthy. Continuing with the theme of our Q1 2020 earnings call, I'm going to provide an overview of our performance in Q2 and then discuss key areas of the business that we continue to believe require more attention. I would like to start by once again acknowledging and thanking our employees, management teams and financial partners, who continue to diligently perform their jobs with commitment and resiliency, despite the challenging operating environment that we are all facing as a result of the COVID-19 pandemic.
Q2 was a solid quarter for Hercules Capital, where we were largely successful in the three specific areas of our business that we prioritized to a greater degree during the quarter, prudent originations, balance sheet enhancement and credit management. Our industry-leading investment team and originations platform closed a number of new deals that we believe were high quality opportunities.
We were able to improve our liquidity position and delever our balance sheet. And despite one new non-accrual loan, our overall credit performance during the quarter was solid. Let me recap some of the key highlights of our performance in Q2. We originated more than $266 million of new debt and equity commitments and delivered gross fundings of $132 million.
In Q2, our investment related activity reflected our focus on diversification, controlled growth and continuing to position the portfolio best, given the current environment. Our second quarter fundings included seven new and nine existing portfolio companies. As our portfolio companies have continued to perform, we are seeing more opportunities to expand and enhance our funding relationships with existing borrowers.
Our knowledge of these companies, the management teams, and the assets make underwriting to these companies in this environment, more advantageous. We saw strong performance from both our technology and life sciences teams with respect to new debt commitments, although, our funding and commitment activity was skewed more towards life sciences companies.
During the second quarter, we had debt investment portfolio growth of $36 million at cost. Early loan repayments were $85.4 million, which was down from $150.5 million in Q1, but consistent with our guidance of $50 million to $100 million. The reduction in early loan repayments during Q2 resulted in $3 million less fee income, as compared to Q1.
In Q2, we generated total investment income of $68 million and net investment income of $35.7 million or $0.32 per share, resulting in 100% coverage of the base cash distribution. The full impact of the two March Fed funds rate cuts was reflected in our quarterly results. As of today, over 95% of our debt portfolio is now at its contractual interest rate floor.
Year-to-date, we have generated total investment income of $141.6 million, an increase of 10.6% year-over-year and net investment income of $73.6 million, an increase of 18.6% year-over-year. Credit quality on the debt investment portfolio improved slightly in Q2, with a weighted average internal credit rating of 2.30, as compared to 2.34 in Q1.
Overall, we changed credit ratings on 27 of our portfolio companies with a general positive shift towards our rated 1 and rated 2 credits, primarily due to the recovery in the public and private markets, as well as several positive credit events that took place during the quarter.
Since the end of Q1, we have seen several of our watchlist credits complete capital raises, strategic transactions and otherwise improve their credit profile despite the ongoing impact of the pandemic. Our rated 4 and rated 5 credits make up less than 5% of the entire debt portfolio at cost and 2% of the entire debt portfolio at fair value.
During the quarter, we added one new company, Patron Technology to our non-accruals, giving us five debt investments on non-accrual with a cumulative investment cost and fair value of approximately $61.1 million and $11.5 million respectively or 2.4% and 0.5% as a percentage of the company's total investment portfolio at cost and fair value respectively.
While it is now clear that the COVID-19 pandemic will be with us for some time, the ultimate duration and long-term impact to the economy and ecosystem remains unknown at this point. Again, this quarter, I would like to provide an update on three specific areas of our business that we believe are important for our shareholders and stakeholders in this environment and detail the specific things that we are doing to best position the company.
First, employee wellbeing, and the continuity of our business. Our emphasis remains on the wellbeing of our employees and the continuity of our business operations while the pandemic continues. Our Boston office reopened in June with limitations on capacity, while our California office remains closed. To-date, we have not experienced any material interruptions to our business or our ability to operate. And we are currently assuming that the majority of our workforce will remain in a work from home setting through the duration of Q3 and perhaps longer.
Second, liquidity and balance sheet strength. We are continuing to prioritize liquidity. We ended Q2 with a record $510.9 million of liquidity, which provides us with substantial coverage of our available unfunded commitments of $165 million, and the ability to fund our ongoing anticipated business activity. This also gives us the ability to be aggressive on new deals and take advantage of any potential market dislocation. When we believe that it is prudent to do so.
Our liquidity was supplemented in June by the $70 million that we received from our delayed draw private placement executed in February, as well as raising an additional $39 million of equity at a premium to net asset value throughout the quarter via our equity ATM program. Early payoffs and ordinary course principal payments have always been a source of liquidity for our business and was again the case in Q2, where we received approximately $102 million of early payoffs and amortization.
At this time, we expect early payoff in Q3 to be between $100 million and $150 million, although, this number could still change materially. Our balance sheet was strong, heading into this crisis and it remained strong today, with record liquidity and no near-term liability maturities in our debt stack.
Finally, portfolio and credit quality. We continue to believe that it will take time to ascertain the true impact of this crisis. And then a diversified balance sheet both with respect to assets and liabilities will serve us well. Although, liquidity does not guarantee a company's ability to succeed in the future, for our companies having ample liquidity remains an important factor that we are closely monitoring.
When looking at our entire outstanding debt investment portfolio, we estimate that approximately 82% of the portfolio currently has 12-plus months of liquidity, with another 9% of the portfolio with six to 12 months of liquidity on the balance sheet. Loans which have three months or less of liquidity make up less than 4% of our outstanding debt portfolio. Of the loans with 12-plus months of liquidity over 72% or approximately 59% of our entire debt portfolio currently has 18-plus months of liquidity on balance sheet.
Within our life sciences portfolio, we now have 13 debt investments with a cost basis in excess of $25 million. Each of these companies currently has cash on hand to fund their business for at least the next 12-plus months. Within our technology portfolio, nine of our 10 largest investments at cost now have cash on balance sheet for at least the next 12 months, while all of those companies have current liquidity through year-end, based on our most recent reporting available.
Capital raising activity across our portfolio remains strong. As we saw during the period between late February and our last earnings call in early May, many of our debt portfolio companies, including several of our watchlist credits have continued to raise new capital and execute on strategic transactions. Since our last earnings call, 27 of our debt portfolio companies raised new capital, totaling over $1.7 billion.
Since the beginning of the COVID-19 outbreak in the United States, we have had 40 of our current debt portfolio companies raised a total of nearly $3.3 billion of new capital. In addition, we have had four new M&A events, one of which has closed and five companies that have filed registrations for their initial public offerings. In addition to several of our companies currently working on either new capital raises or strategic transactions.
Our top 10 debt investments currently make up only 30% of our debt portfolio at cost. As we indicated on our last call, while each of these companies will continue to be impacted to a varying degree by the current situation, all but one have at least 18 months of liquidity on balance sheet, as of the most recent reporting, and each of them have current liquidity on balance sheet for at least the next 12 months.
Our debt portfolio continues to be overweight towards drug discovery, drug delivery, and software companies. Three sectors that we expect to perform better on a relative basis during this period. And based on what we know as of today. Approximately 80% of our life sciences debt investments at cost are in publicly traded companies as of the end of Q2, these public companies have a weighted average public market capitalization of approximately $1.3 billion as of June 30. Based on the public equity market capitalization for these companies, the weighted average ratio of public equity value to our debt at cost equals 35.1 times as of June 30.
In our technology portfolio, approximately 51% of our companies are classified as either software or have a software driven contractual recurring revenue model. Of these companies, our estimated weighted average debt to annual recurring revenue attachment point, as of the most recent reporting period that we have is 0.99 times, which we continue to believe is conservative. The venture capital ecosystem continues to raise funds and make investments, as we have seen in the latest reports. Through the first half of the year, venture capital funds raised a total of $42.7 billion and invested over $69 billion in the U.S., according to data gathered by PitchBook and the National Venture Capital Association.
That cash continues to put them in a strong position as the pandemic endures. This data also reflects the many portfolio companies that we work with that have raised capital during the quarter. Our focus continues to be on maintaining an appropriate level of liquidity, actively managing our credit book and working with our companies and financial partners proactively. Our investment team has been incredibly busy evaluating an active deal pipeline that currently exceeds $1 billion of potential investments. But our bar for new deals remains high and we continue to be extremely selective with capital deployment.
Q3 is typically a slower quarter in terms of new originations. And we expect that trend to continue this year. There has been an abundance of equity capital flowing into the stronger credits, which pushes off the need for debt financing in some cases. The operation environment overall remains challenging for prudent credit managers who are focused on quality deals and appropriate risk adjusted returns. We continue to expect the quality and profile of new investment opportunities to get better with time, and we are optimistic that this will happen. We want to be positioned to take advantage of that opportunity when it arises, as we believe that it will.
Finally, I would like to discuss our shareholder distribution. With our debt investment portfolio at $2.28 billion at cost, our NII per share in Q2 generated 100% coverage of our quarterly based distribution of $0.32 per share. We are not making any changes to our current base distribution and have declared our fifth consecutive quarterly cash distribution of $0.32 per share. In addition to our quarterly net investment income in Q2 covering our base distribution, we are also fortunate to have undistributed earnings spillover of approximately $73 million or $0.64 per share subject to final tax filings.
This provides us with additional flexibility, with respect to our variable base distribution going forward, and the ability to continue to invest in our team and platform. With our spillover and current operating outlook, we do not currently see or anticipate any near-term downward changes to our quarterly based distribution. I am also very pleased and proud to have announced that we have now surpassed over $1 billion in cumulative distributions since our public debut in June, 2005. It is a testament to the sustainability of our franchise combined with our shareholder aligned internal management structure that has allowed us to reach this significant milestone.
These continue to be unique and challenging times for everyone. I would like to acknowledge and thank each of our dedicated and talented employees for maintaining their spirit, effort and focus. We send our most sincere wishes to all of those who are being affected by this unprecedented pandemic and we hope for the wellbeing for all.
Thank you very much, everyone. And I will now turn the call over to Seth.
Thank you, Scott, and good afternoon, ladies and gentlemen. Given the anticipated duration of this pandemic and the amongated impact that it is likely to have on our brighter economy. We continue to think ahead and focus on strengthening our balance sheet, enhancing our liquidity position and maintaining a well diversified portfolio. The steps we have taken to strengthen the balance sheet and improve the liquidity have been very well timed, and we will continue to be proactive as we look to further improve our position.
In the second quarter, we successfully raised $39 million of equity at a premium to net asset value and drew the previously arranged $70 million in unsecured debt priced at a fixed rate of 4.31%. We also received a Green Light letter from the SBA for a new SBIC license, which upon final licensing will provide us with additional attractive financing. Today, I'll focus on the following areas, the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and finally, the outlook.
With that, let’s turn our attention to the income statement performance and highlights. Net investment income was $35.7 million or $0.32 per share in Q2 in line with the quarter-over-quarter guidance of May, where I guided that we would have 1% to 2% share decrease related to the Fed rate cuts and a reduction in the prepayment activity, which resulted in NII per share reduction by another $0.03.
As mentioned before we raised $39 million of equity at a premium to NAV, which reduced our quarterly earnings by $0.01 per share, due to delusion. Total investment income was $68 million, a decrease of 7.7% compared to the prior quarter. The two main drivers for the lower total and net investment income during Q2 were a decrease in fee income and the full quarter impact of the March Fed rate cuts. The decrease in fee income was driven by lower playoffs and the payoff of loans with a more normal vintage compared to what we saw in Q1.
The effective and core yields in the second quarter were 12.2% and 11.5%, respectively, compared to 13.6% and 11.8% in the first quarter. The primary driver for the decrease in the effective yield was, again, related to the lower payoffs and the size of the onetime and unamortized fees associated with the loans that paid off. The core yield reduced due to the full quarter impact of the Fed rate cuts in the prior quarter and the addition of the single loan that we placed on non-accrual that Scott mentioned.
Turning to expenses. Our total operating expenses for the quarter decreased to $32.3 million compared to $33 million in the prior quarter, consistent with my guidance in May. Interest expense and fees increased slightly to $16.7 million from $16.3 million in the prior quarter, commensurate with the greater use of the credit facility and additional unsecured notes issued during the quarter. SG&A expenses decreased to $15.6 million from $16.7 million in the prior quarter, the decrease was driven by lower variable compensation expense commensurate with the lower fundings compared to Q1 and the seasonal decrease of payroll taxes, where Q1 is generally higher than Q2.
Our weighted average cost of debt was 5%, a small decrease compared to the prior quarter. Now let's switch over to NAV unrealized and realized activity. During the quarter, our NAV decreased, sorry, increased $0.27 per share to $10.19 per share; this represents an NAV per share increase of 2.7%. The main drivers for the increase were the net change in the unrealized appreciation of $25.9 million and the $38.7 million of new equity raised at a premium to NAV.
The net change of unrealized appreciation of $25.9 million represents a 34% recovery of the first quarter unrealized appreciation. Our $25.9 million of unrealized appreciation was driven by the mark-to-market of the equity and warrant portfolio as well as the yield adjustments on our debt portfolio. The key drivers for the unrealized appreciation were approximately $40.8 million of mark-to-market appreciation, including reversals of prior depreciation due to sale and/or write-offs, and the equity in warrant portfolio, partially offset by $15.9 million of depreciation on the loan portfolio, which included $24.4 million of collateral based impairments, largely attributable to one portfolio company.
Excluding the collateral based impairments and reversal of prior depreciation on loans paid off, the loan portfolio experiencing $8.4 million yield based appreciation. Net realized gains in Q2 were 141,000 compared to $2.5 million, comprised of $2.5 million of gains from disposal of an equity position offset by $2.4 million of net losses from the write-off or expiration of certain legacy warrants.
Next, I’d like to discuss our leverage. At the end of the quarter, our GAAP in regulatory leverage was 110% and 100.5% respectively, which decreased compared to the prior quarter due to the equity raised via our ATM program, as well as the unrealized appreciation increasing the equity base. Netting out cash on the balance sheet, our GAAP and regulatory leverage was 106.9% and 97.4%, respectively. We continue to manage the business with a targeted leverage ceiling of approximately 125% on a regulatory basis.
We ended the quarter with record liquidity of more than $0.5 billion supported by $475 million of credit facility capacity and $70 million of private placement announced in February and drawn in June. Our liquidity continues to be enhanced by our normal course, monthly principle and interest collection, as well as early payoffs. As a reminder, our early payoffs and normal amortization provide us with significant monthly inflows that we can use to delever when and as needed.
Finally, on the expectations on outlooks. Our core yield guidance of 11% to 12% continues to apply for the remainder of 2020. In Q2 our net investment income reflected the full quarter impact of the 150 basis point Q1 Fed rate cuts. As of the end of the quarter, 100% of our prime base loans and 95% of our variable rate loans are at their contractual floor. As a result, we do not expect further rate decreases to have any material impact on our quarterly net investment income.
For the third quarter, we expect SG&A expenses of $15.5 million to $16.5 million consistent with my prior guidance. We expect our third quarter borrowing cost to remain relatively stable compared to the second quarter. Although very difficult to predict, we expect a $100 million to $150 million in prepayment activity in the third quarter. And finally, as mentioned earlier, we received a Green Light letter from the SBA for a new SBIC license. The timing of the final approval is likely to be before year end subject to the priorities of the SBA and the numerous programs that are currently managing.
This will not only help us increase our available liquidity, but also contribute to our decreasing weighted average borrowing costs. In closing, we delivered a solid Q2 and going forward, we will continue to focus on things that we believe will position us best given the current operating environment.
So now I'll call the – turn the call over to Warren to begin the Q&A part. Warren, over to you.
Yes, sir. [Operator Instructions] And our first question comes from Crispin Love from Piper Sandler.
Hey guys, thank you for taking my questions. Can you talk a little bit about how working from home and less traveling has impacted deal activity and the different types of deal activity? Are you more focused on working with legacy clients or smaller deals, or are you able to come source new investments despite not being able to meet with management teams in person? I did hear your commentary about the seven new portfolio companies and nine existing, and just curious how that would relate to past more normal quarters?
Sure. So with respect to the numbers specifically, every quarter is really different depending on what the pipeline looks like. In Q2, we definitely placed a greater emphasis on fundings across our portfolio, and there are really two primary reasons for that. Number one, within our existing portfolio, we already have the relationship, we have familiarity and comfort with the management teams and the assets and the diligence can really be confirmatory. That's very different than being able to go or being – having to go out and do due diligence in person in the current environment.
The second thing that we're seeing, and we mentioned this in Q1 as well, a number of our portfolio companies are achieving performance milestones, and looking for additional capital to help fund some growth initiatives. So we're seeing attractive opportunities on the funding side, across the portfolio that we're really looking to take advantage of. There is no question that the current environment has an impact in terms of our ability to complete new debt financings. We’re very pleased with what we did in Q2, adding seven new portfolio companies providing nearly $270 million of new commitments, but the bar is very high for us and in an environment where you can't go and travel and you can't go and meet the company in person and get a familiarity with the business and the operations, it's just simply more challenging.
Okay. And then just one more for me. So seeing the decline in total investment income in the second quarter, relative to first, what are your views on – what you – fee for trajectory could be there? Do you believe it can be stable or trying to even out a little bit lower or do you – would you expect some improvement from the second quarter levels?
Sure. So we don't provide NII guidance and so we're not going to provide go-forward guidance. But I think what we tried to do in the prepared remarks is really sort of provide a bridge between Q1 and Q2. In Q1, as we announced, we had $0.37 of NII, we had $0.03 reduction in NII in Q2 directly attributable to a lower amount of payoffs, and the vintage of the loans that paid off during the quarter. And then we had about $0.01 to $0.02 impact from the March Fed funds rate cuts.
We're obviously announcing that 95% of our entire portfolio is now at its contractual floor. So we don't see any further yield compression coming from any further rate cuts on a go-forward basis. And on the fee income side, going forward, it'll largely be driven by the amounts of prepayments and the vintage of the prepayments that we have on a quarterly basis.
Okay. Thank you for taking my question.
Sure.
And our next question comes from Finian with Wells Fargo.
Hi guys. Thanks for taking my question. Good afternoon. Scott, just first one on the high level environments, couple of your comments, one was that a lot of the high quality companies were getting funding, you also mentioned you had a very strong pipeline. If you dovetail that for us, are you getting more aggressive on the credit side? Or this maybe just a couple larger opportunities that expand your pipeline, any color there would be appreciated?
Sure. So I think it's the two things like you just mentioned. So number one, we are certainly looking at evaluating some larger transactions right now, which does boost that pipeline up considerably. But I think the second thing is, despite the fact that many companies are raising equity capital, there are a lot of companies. Some of them; good companies and some of them, not so good, that are currently exploring debt financing.
And as we always do in the market, it's our team's job to look at canvas and evaluate the entire landscape. We want to make sure that we're seeing, evaluating, speaking to every company that's out there, that's in our addressable market, that's looking for debt financing. And then we're just being incredibly selective in terms of the ones that we're converting from active pipeline into actual closed transactions.
Okay. That's helpful. And just a follow to that. Are you seeing any, I know you've done this in the past for example an Ares portfolio. Are you seeing any portfolios being shopped around? Is there any opportunity on that front?
We are aware of a few smaller things, but nothing that has been attractive to us at the current time.
Okay, thanks. One final small one on the SBA, the third SBA, you have a Green Light for. I think the remaining SBA you have is being paid down. But the new family limits of course hire $350 million. Can you – what are the available anticipated commitments, assuming you are finally approved on the – on an SBIC debenture?
So Finian, assuming that we're approved, we'll be arranging $175 million for the license, which is above the $150 million that we had on the existing license, we've paid that down to $110 million, at the moment we paid that, part of it down in February. Is that what you were looking for?
Yes. Well, I'm looking for what you'll have going forward with the new one. I think you said the new one is $175 million and the current one is being amortized, it sounds like right?
Yes. In the deck – on our webpage you can see when those amounts come due, the most significant amount in the near-term is in 2022, it's about $60 million, the amount due in 2021 is a small amount. So we'll pay that as the portfolio runs off and as they come due.
Okay. That's all for me. Thanks so much.
Thanks, Fin.
And our next question comes from Mr. Chris York with JMP Securities.
Hey guys, thanks for taking my questions. So first I'd just like to begin to talk about the competitive environment for a moment. Scott, how would you characterize the terms you were receiving on new deals today, say versus the beginning of the year, let's just call it January 1? And have you seen this new operating environment reduce either bank or non-bank competition?
Sure. Thanks, Chris. So with respect to comparing current terms to what the terms we were seeing at the beginning of the year, I would say they are largely consistent with each other at the beginning of COVID. So in sort of the March and April time period, we did see some opportunities that presented themselves with more attractive terms. We were getting slightly better pricing, and we were able to be a little bit more conservative on terms. I would say over the last sort of 30 to 60 days, we've seen that come back a little bit. And right now, I would sort of characterize the environment as consistent with where it was at the beginning of the year.
So in kind of the pre-COVID environment, the competitive landscape sort of continues to be as it has been historically, there are a couple of players that we tend to see in certain transactions, as we've always said, we don't chase the market, our team I think is very good at making sure we do the deals that we want to do. We have a strong enough balance sheet now, where we can get incredibly aggressive to win the deals that we think we want to win. And we're perfectly comfortable letting the deals that we think are more marginal go to somebody else, who's willing to be more aggressive.
In our remarks, we've said this now two quarters in a row, based on everything that we are seeing in our current assessment of the operating environment, we continue to expect deals to get better with time, as we get a little bit deeper into the pandemic and a little bit closer to the end of the pandemic, we think the opportunities will be better, and that's why we are emphasizing liquidity and really trying to position the firms to take advantage of those opportunities when they come.
Got it. That's very helpful color. Just maybe drilling down on one term. Have you seen any changes in IO periods, maybe back to 12 months say to 18 or 24 months? And then borrowers ask for extensions of IO periods?
Sure. So I’ll take that first question first. So we've actually seen the opposite. So there are a couple of players that have come into the space over the last year or so that are actually going the other way in terms of interest only provisions. We've seen a lot of deals that have essentially been structured as bullet loans for cash flow negative companies. That's something that we've talked about historically, we've seen that on occasion, we saw it in 2015 and 2016, we saw it again in 2018, and we've seen that over the last couple of months, again, that's just not a game that we're going to play unless we think it's truly an exceptional opportunity and we can put some other creative structuring mechanism in place to get ourselves comfortable.
With respect to the second part of the question, we really haven't seen a change at all from a bank and non-bank perspective. I think some of the bank players in the space really pulled back at the beginning of COVID in kind of that March, April time period. But we've seen them be fairly aggressive over the last 30 or 60 days as I think they're probably trying to defend their current portfolios.
With respect to the final part of the question on the interest only question. We've had a small number of amendments requests, but it is not a material number and we've actually made changes and completed amendments with respect to extensions of interest only periods on less than a handful of companies across the entire portfolio.
Great. Again, very helpful and insightful. Staying on the topic of just maybe VC, has the increase of enterprise value in late stage recurring revenue tech companies? And then we've seen a consequential robust funding fundraising environment by VCs in this later stage, which appears to be on a pace for a record. Does that increase your desire to be more active in growth stage lending today?
It does. And if you look at what we've done over the last two years or so, we've really transitioned a significant part of our technology book into kind of later stage, growth stage opportunities greater than 50% of our technology book, which is right now about $1.2 billion, $1.3 billion is in sort of later stage recurring revenue businesses. That's a different profile underwriting than kind of our traditional venture stage technology opportunity. And so with the influx of equity capital into that space, we've certainly seen an influx in terms of number of companies that we're speaking to and actually closing financings with.
The other thing that we've seen across the market, that's not specific with respect to sort of late stage tech, it was just a tremendous influx of equity capital into biotech. If you look at kind of the year-to-date numbers on the biotech side of things, you've had 40 biotechnology IPOs year-to-date that have raised $7.2 billion of new equity capital. When you combine what the VCs and the public markets have funded into biotechnology year-to-date, you're looking at over $40 billion of equity capital flowing into that space. So there's just been a tremendous amount of equity support for later stage tech and for biotech year-to-date. And we don't see that trend changing near-term.
That's great. Okay. Last question for me, and then we'll hop back into queue. I saw Gibraltar financing larger deals than they normally do in the second quarter, and suspect the demand for the company's debt capital has to be pretty robust in this market. So could you update us on that business and then your expectations for growth?
Sure. So as we've said historically, given that it is a portfolio company, we don't disclose specific information on their business and performance outside of high level commentary and what they announced themselves. I think you sort of described the situation accurately, that business continues to perform very well, their pipeline right now is very strong. It should not be a surprise to anybody, but given the current environment, the demand and interest in ABL I mean, is extensive. They are a very well capitalized credit shop and that business continues to perform at or above our initial expectations.
Okay. Fair enough. That's it for me. Thanks guys.
Sure. Thanks, Chris.
And ladies and gentlemen, our next question comes from Mr. Tim Hayes from B. Riley.
Hey guys. This is actually Mike on for Tim. Congrats on a good quarter.
Thanks, Mike.
So if I'm not mistaken back in 2016 Hercules kind of slowed down and went on pause a little bit around the election. So I was just wondering, can you provide any color on how you're thinking about the upcoming election? And I guess specifically with how it relates to origination activity?
Sure. I don't think there's anything specific with respect to the election. We've been very clear in our commentary and Q1 and again, in Q2 that we're being very selective in terms of new originations. We're obviously very pleased with what we were able to do in Q2, $265 million of new commitments, $132 million of fundings, added seven new portfolio companies to the portfolio when we were able to support nine existing portfolio companies with some additional financing.
So we're going to continue to take a conservative approach to the market in the second half of the year, but we're seeing a number of attractive opportunities. And we're confident that we're going to be able to get those deals structured in a way that will be appropriate for what we're looking to do.
That's very helpful. Thank you very much. And then just one follow-up. As we think about the other side of the eventual economic rebound, I'm just wondering what portfolio size could you support today, given your current infrastructure, and as you prepare for the next level of a record portfolio?
That's a great question. One of the things that we’ve talked about pretty openly over the last year or so is the fact that we have been, and we continue to invest in our platform and our team and the COVID situation has not changed that over the course of the last six months, we have continued to both invest in the platform and invest in our team. We've added to virtually every group within the company, investment team, finance team, credit team, operations, legal and support. We're going to continue to make sure that we have a platform that's able to support us and our growth objectives on a go forward basis.
The portfolio right now is at a record $2.2 billion, $2.25 billion from a cost perspective. We currently believe the existing infrastructure that we have in place and the additions that we've made can support us into the $2.5 billion, $3 billion portfolio level.
That's helpful. Thank you for taking my questions,
And our next question comes from Mr. John from Jefferies.
Hey guys, good quarter and thanks for taking my questions. And really appreciate all the color Scott, with respect to the liquidity of the portfolio level for your company, I thought that was very helpful. But just on credit do you know or can you tell us, is there – are the companies you're financing, did they – any of them get any access to like the PPP program or any other stimulus program?
So with respect to any other stimulus program, not that we are aware of, with respect to PPP specifically, we did have several companies applied for and received PPP loans, we estimate that number is somewhere roughly between 10 and 12 companies. There were some other ones that also applied and received funds, but ended up making the decision to return the funds. We don't have a 100% confirmation with respect to those final numbers, but our estimate is about 10 to 12 companies received and kept PPP funds.
Okay. And then you talked about selectivity in the current environment and you talked about – it's tough to get deals go on, because of just the lack ability due in person diligence and so forth, and that all makes a ton of sense. But given that these are innovation, high tech companies, growth companies that typically don't have a ton of correlation to GDP factors. How much does sort of the economy weigh on your deal judgment now versus other factors like inability to due diligence and so forth?
I think it's a combination of the two. We are definitely being a little bit more cautious in terms of new originations, given the current environment. This is a global crisis that it's just difficult to predict the ultimate impact from, right, we don't know if there is going to be a vaccine in Q4 and Q1, and this will kind of go away in the near-term, or if this is something that we're going to be dealing with for an elongated period of time. So there is certainly a cautious approach with respect to originations and new underwriting based on kind of our concerns about the broader economy. But I would also say, despite the fact that these are innovative technology companies that we are financing, this firm was built as an old school traditional credit organization.
That's how we've always operated and that's how we will continue to operate. And there is nothing that can replace in person due diligence. When you can sit across the table and look a management team in the eye and ask the tough questions, we've certainly – we've made some changes, we’ve adapted to the current environment, we're obviously using zoom in teams a lot more frequently than we did historically, and it's not impacting our ability to get deals done, but we're certainly not going to do the same level of originations that we did last year when we were able to travel and go see and meet every company in person and do some extensive in-person due diligence.
Okay. Thanks. And then there is a final question, I mean, as a result of this, we've seen a seismic shift in consumer behavior payments in FinTech, and obviously pharmaceuticals and biotech and so forth. And I'm just wondering, is it too earlier, or have you guys been thinking about how these swift changes will impact kind of the sectors you're focused on and are there any emerging sectors that you're increasing your side?
So yes and yes. We as an investment team have spent a considerable amount of time, both on the technology side and on the life sciences side, really trying to sort of get our hands around the exact question that you just outlined. What does the future look like and what type of changes are we going to see in sort of the overall landscape from a technology and from an innovation perspective. So it’s something that we are actively thinking about exploring and looking at.
We have started to make some changes in terms of our internal screens, with respect to new originations, focusing on a couple of areas that we think are very attractive. Obviously, I don't want to provide too much information in terms of what those areas are, because then everyone's going to follow us into them. But there are a couple of specific areas that we are intrigued by that we're actively diligencing and speaking to a number of companies assuming the diligence holds could turn into transactions in the second half of the year for us.
Great. Thanks guys and congratulations.
Thanks John.
And our next question comes from Mr. Christopher Nolan [Ladenburg Thalmann].
Hey guys on new deals that you're doing, what's the pricing in terms of yields, you're getting relative to those already on the books?
So again, I think very consistent with what we were seeing in 2019 and in the beginning of 2020. If you look at what our core yield guidance is across the portfolio, it's 11% to 12% core, the new deals that we're booking, all sort of fall within that range.
Okay. Given everything going on in the world right now is really an 11% to 12% yield. Is that really your risk adjusted return, you're okay with or is it simply just the market – what the market will bear?
Look, I think when you look at how well capitalized the companies that we are onboarding right now are, we do think that it's inappropriate risk adjusted return. In some cases, if you look at the seven companies that we provided capital to in Q2, these are companies that are sitting on hundreds of millions of dollars of liquidity, in some cases with 12 to 24 months of runway.
And so I think when you sort of think about that, when you put it in context and you compare that to what you're looking at from a yield perspective in lower middle market or upper middle market lending, which people historically have used as safer and the yield environment there is several hundred basis points tighter than what it is. Across our portfolio, we do think that it is appropriate now, would we love to have some higher yield opportunities? Of course, but what I can tell you is and we've seen this now consistently for the last couple of years. We're not going to book weaker credits just to book higher yields. We, as a firm think that that's a very dangerous game.
I'd rather have the team focused on quality opportunities, strong credits and companies that we are confident in over the next several years. And if that yield is slightly lower than what it is for some of the more challenging, aggressive structure deals, we're perfectly okay with that.
Great. And in case I miss it is 1.25x still the target threshold for debt equity?
It is. From a regulatory perspective, right now we're at 100% regulatory leverage, about 97% net and the target ceiling for us is 125% regulatory.
Great. Okay. Thank you.
And our next question comes from Mr. Henry from Wedbush.
Good afternoon, everyone. And thanks for taking my call. Great quarter, lots of good news to look at. When we look at the P&L for the last six months, you still are in an unrealized loss position. Obviously market factors have improved dramatically since March, but when we – and you've given us a great update on the liquidity of your companies.
But from a point of view, I’ve just got a strict fundamental performance, when you start thinking of your portfolio companies, are we in a situation where we're seeing in other sectors where market appreciation is running way ahead of actual changes in fundamentals? Or do you think you're in a situation where, in addition to the cash runway that you suggested for your companies that – in some percentage of all cases, fundamentals are actually holding up fairly well. And the market – and the disconnect is not there, I mean, the market's good, the fundamentals are good and the marks are favorable.
So I'm going to answer that question two different ways. So as a firm, we absolutely believe that there is a disconnect and a dislocation between what the equity markets are saying and what the real economy is saying. And we think it will take time for that to play out. So that's something that we absolutely believe it is the case based on what we're hearing and what we're seeing. And a lot of the companies that we're talking to in terms of what they're hearing and seeing with respect to sort of the real economic impact from this crisis, relative to what the equity markets are telling us in terms of the stock market.
With respect to our portfolio specifically, I would say two things. Number one, liquidity and fundraising is actually holding up much better than we had anticipated at the beginning of this crisis. The fact that we've had over 40 companies raised over $3.3 billion of new capital since COVID hit the United States in late February is significantly higher than what we had anticipated in the first sort of 30 days of evaluating what the impact was going to be from this crisis.
In terms of the more sort of fundamental impact, it really depends on the sector, right. In our portfolio, we are highly diversified by sector and stage, 50% of our book is technology. 50% of our book is life sciences on or about. Within the life sciences space, the vast majority of our companies are in drug discovery, drug development. And we really haven't seen any fundamental impact there outside of some pretty immaterial delays in terms of ongoing clinical activity.
On the tech side, we've had a number of companies who have actually performed very well and above expectations in this crisis. And we obviously have a small number of companies who are in industries that are being hit very hard, and there the fundamental performance has been a lot worse than expected. But the good thing for us at a portfolio level is that makes up less than 4% of the portfolio as we talked about in our prepared remarks.
So, and then on the SBA license, obviously lots of advantage to that capital, including the fact that you don't have to keep it in your regulatory leverage ratio. I get mixed comments from people about the advantages of an SBA – SBIC license. In your case, do you think you have enough in the way of portfolio companies, to invest that capital fairly quickly, or what is your thought process in terms of the connect between the SBIC and your expected originations?
Sure. So we've had a 13-plus year relationship with the SBA. It's a relationship that's been very good and it's now crossed three different funds. The SBA program has been very accretive to the Hercules platform and Hercules franchise. We see and we come across a number of financing opportunities that would be SBIC eligible that we believe we would be able to put into that new fund, should we get it. So from a big picture perspective, we view it as a very attractive financing source for the company.
It's having an SBIC license, a new one, a new pool of funds. Is that just going to allow you to service your existing expected originations or does it open up a few new doors for you?
Primarily the former, but there will be some additional opportunities that we hope to be able to take advantage of as well.
And then – no, that's very helpful. Thank you for answering my questions.
Thank you, Henry.
And our next question comes from Casey Alexander with Compass Point.
Hi, good afternoon. First of all, Seth, I may have missed this. I mean, you mentioned the $100 million to $150 million of early payoffs in Q3. Did you give a range for expected originations or fundings for Q3?
I did not. There were $150 million on payoffs is what we indicated, yes.
Okay. Secondly, from a broader level, your portfolio has a pretty good sized allocation to software companies. And that has been a good area. But just my experience has been listening the last couple of quarters that almost every BDC, including the more traditional cash flow BDCs are chasing software companies. Has pricing and competition in that area changed? And are you potentially kind of slowing down what you're looking at in software companies because of it, because it just seems like everybody and their brother thinks that software is just the place to be.
Thanks, Casey. So we certainly agree with your observation there, that everyone is sort of saying that they're doing software and is actively chasing software. I think what we define as software is pretty specific. So these are businesses that have contractual annual recurring revenue models for the large part. The part of the market that we tend to be more aggressive in is a little bit below the part of the market that you've seen some of the later stage, more traditional, lower middle market BDCs go after.
If you look at the average debt financing that we are making in the software space, we're somewhere between $20 million and $35 million and that's an average. That's generally speaking, going to be below the threshold where some of the larger later stage asset managers are going to play. And so we've seen a little bit of yield compression in the software part of the market that we play in, but we really have not seen it to any material degree.
Okay. Thank you. That's helpful. Going back to the originations or fundings, would you at least give us some sense as to whether you expect the portfolio to grow or contract versus the payoffs in the quarter?
So we're not going to provide any quarterly guidance with respect to the portfolio. We generally speaking have not done that historically, and it's not something that we're going to do now. The largest driver of what growth will or will not be is going to be from the prepayment side of things. And that's just a number that's very difficult to predict. We've tried to provide some guidance with respect to Q3 anticipated prepayments and we gave a range of 100 to 150, but as we've seen historically, that number can vary materially from that guidance. And that will ultimately determine whether we have growth or not.
Longer term, we're not concerned about our ability to grow this portfolio. If we see attractive opportunities in Q3 and there are a number that we currently have in closing, in the underwriting process. We'll get those deals closed, subject to diligence and we'll book them. And if we don't see opportunities that we think are attractive for our franchise, we're not interested in growth just for the sake of growth.
Understood. Thank you very much for taking my questions.
Sure. Thanks, Casey.
And our next question comes from Ryan Lynch with KBW.
Hey, good afternoon. And thanks for taking my questions. First one, I had a little more of a higher level question. You guys provided some statistics regarding on Page 40 of your slide deck regarding venture capital, investment activity in venture capital, fundraising that seems to be very strong. You also provided some commentary, mentioned I think 27 companies have raised $1.7 billion since your last earnings call, your portfolio companies have high levels of cash runway.
So as I look at these statistics that you've provided both on the – just the general venture capital market as well as your specific portfolio. These statistics don't really match really the sharp declines we've seen in U.S. economic data, GDP and unemployment rates. So I would just love to hear your opinion on why the venture capital funding ecosystem really seems to be operating unabated. And do you feel that the access to the capital markets for your portfolio companies has really changed much from pre-pandemic levels?
Sure. So couple of great questions there. So number one, I think we said this in response to a prior question, but fundamentally we believe that there is a disconnect between the public equity markets and what the real economic impact is from this crisis. I think there's a couple of reasons why you're seeing sort of a contrary indicator with respect to the VC market.
Number one, the VC ecosystem tends to be incredibly resilient. If you look at the VC ecosystem and you go back through several crises, so you had the internet crisis, you had the 9/11 crisis. And you had a couple of starts and stops along the way, including the global financial crisis. Broadly speaking, the VC ecosystem has proven to be very resilient. There have been periods where you've seen equity inflows into companies pull back.
You're not seeing at this time and I think a large driver of that is, people are looking at technology. People are looking at innovation as sort of one of the ways out of this crisis, whether it be on the biotechnology side, in terms of therapeutic solutions or vaccine solutions, or whether it be on the technology side, looking at just a changing way that consumers are going to interact. And that's going to really change the fabric of society and make things more technologically driven. And so companies that have technology-enabled solutions are right now much more attractive opportunities. And I think that's why you're seeing the tremendous amount of equity flow into those parts of the market.
Okay. That's helpful color and good commentary on that. Kind of jumping off from there, given you kind of talked about the environment being very uncertain. It's a much more difficult environment to due diligence companies. You have a higher bar just given the uncertainty and some of the focus on existing portfolio companies. Do you think it's fair to expect that that Hercules’ portfolio will show net repayments or continue to contract until really we get out of this pandemic?
That certainly wasn't the case in Q2. In Q2, we had $35 million, $36 million of portfolio growth from a cost perspective. And again, as we indicated, I think what you'll see in Q3 and Q4 is largely going to be driven by the level of prepayment activity across the portfolio. We are confident in our ability to continue originate new deals. We expect new deal activity to pick up as we've indicated a couple of times as we get a little bit later into the pandemic and when the end is closer than it is now.
And so we are very optimistic and confident in terms of the origination side of the business. And we're prepared with our current liquidity position of $500 million to step on the gas pedal, once we see opportunities that we think are attractive to us. And whether the portfolio grows or contracts in any given quarter again, it’s not really a focus for us.
We are an internally managed BDC. We're not focused on growing the book, just for the sake of growing the book. We're going to book the deals that we think are attractive. And we've got a strong enough balance sheet now, where we can be very aggressive and book deals very quickly if we see an opportunity to do so.
Okay. Got it. And then you mentioned earlier, you guys are in the process of evaluating some deals to some larger companies. Does it make sense to kind of maybe shift your focus to some more larger companies and larger deals, just given the limited amount of resources that you have, and everybody has.
And the harder – the harder the time it is to due diligence companies you can focus on some larger companies and larger deal sizes where essentially if you do end up closing on one of those. It has much more of a meaningful impact to Hercules. So that's kind of part one of that question, should that be a focus of yours? And then number two, what is the level of deal size that you all feel comfortable of holding on your balance sheet for a single portfolio company?
Sure. So sort of three things there. Number one, we absolutely do not have a resource problem. I think we have, if you look at the venture lending or growth stage lending landscape, I think we have the deepest team in the business. The company today is, we have about 80 full time employees. We have over 40 individuals on our investment team, we've expanded and added to our finance team, our operations team, our credit team and our legal team year-to-date.
So we are not resource constraints in any way. With respect to the later stage opportunities, look, there's no question if you do one or two large deals, you can put some points on the board pretty quickly, and that's attractive. But I would also say we built this business with the focus on diversification. And so being highly diversified by sector, stage, geography and sponsor has always been a focus for us, and it's going to continue to be a focus for us.
So we don't want to be a firm that's just going to do a couple of large deals. We would much rather build our business slowly, methodically and make sure that we're building it in a way that's diversified, given that we think that's the right way to grow a venture lending platform.
And on that what was the largest hold size and do you feel comfortable holding on your portfolio or holding it in your portfolio for a single borrower?
So we've done several commitments that are in the $100 million to $150 million range from a commitment size perspective. And with our balance sheet where it is today, we could hold $150 million of fundings in any one portfolio company. And that wouldn't be a concern for us.
Okay, understood. I appreciate the time today. Those are all my questions.
Sure. Thanks, Ryan.
[Operator Instructions] And our next question is from Chris York with JMP Securities.
Hey guys, just one quick follow-up. It's on portfolio company liquidity. Just want to approach it from another perspective. How has funded utilization on revolving credit facilities by your portfolio companies change sequentially?
Sure. So we actually have very little exposure to traditional revolving credit facilities. If you look across our entire portfolio, it's less than $50 million that we would classify as sort of true revolving credit facilities. And we really haven't seen any change at all in terms of behavior from our borrowers, with respect to utilizing those revolving credit facilities.
In terms of sort of unfunded commitments or term loans that are sort of delayed draw features that may or may not be available. We also have not seen any material change in behavior. I think when you look at our portfolio, when you look at our balance sheet, every one of our borrowers looks at, understands the strength of our balance sheet. So there's no concern about our ability to fund those unfunded commitments.
And so we just haven't seen companies, sort of create this traditional or concerning run on the bank type atmosphere where they're all asking us to borrow. We have more than enough liquidity to cover a multiple of our unfunded commitments. And I think all of our borrowers know that.
Great. That's it for me. Thanks again.
Thanks Chris.
And we have no further questions at this time.
Thank you operator, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q3 2020 earnings call. Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you very much for participating. You may now disconnect.