Hercules Capital Inc

NYSE:HTGC

Earnings Call Analysis

Impressive Performance and Strong Liquidity

Hercules Capital reported a record year in 2023 with strong Q4 results. Net asset value per share grew to $11.43, which is a 4.6% increase from Q3 2023. The total investment income for Q4 was $122.6 million, and the company exhibited a Net Investment Income (NII) margin of 70.2%, the highest ever achieved. Hercules achieved net realized gains of $8.4 million in 2023. They maintained a base distribution of $0.40 and announced a supplemental distribution of $0.32 for 2024. With a robust liquidity profile of nearly $750 million, and additional liquidity from their funds totaling over $1 billion, the company is set to invest in a strong pipeline. They expect first lien exposure to rise, indicating a more conservative management approach.

A Banner Year for Hercules Capital: Impressive Financial and Performance Records

Hercules Capital celebrated a banner year in 2023, with financial and performance milestones that culminated in the strongest total and net investment income quarter in the company's history. The company also initiated a new supplemental distribution program for shareholders.

Remarkable Asset Management Growth: A Sturdy Foundation

Over the year, Hercules Capital experienced over 15% growth in assets under management, managing approximately $4.2 billion. This sturdy growth underpins a robust performance and strategic capabilities for the company.

Fundings and Investment Income Soar: Building on Success

2023 showcased impressive growth with total gross fundings of $1.6 billion, up by 9.1% from the previous year. The company also reported a significant 43.2% year-over-year increase in total investment income to $460.7 million and a stellar 61.7% increase in net investment income to $304 million. .

Prudent Management: Balancing Growth with Conservative Strategies

Even amidst growth, Hercules Capital maintained a conservative approach with low leverage and excess liquidity. This strategy is set to pay dividends in the expected volatile and high-interest-rate environment of 2024, mirroring prudent fiscal management that investors often seek.

Focusing on Credit Quality: A Defensive Maneuver

The company has tightened credit screens for new underwritings and increased first lien exposure to 89% in Q4, its highest level since Q1 2017. This defensive move aims to preserve capital and mitigate credit risk, affirming the company's emphasis on maintaining high credit quality.

Industry Sector Approach: A Tilt Toward Life Sciences

Hercules Capital's Q4 saw a strategic allocation: 57% of fundings were to life sciences companies. In line with market sentiments, this reflects a cautious stance on the technology sector and underscores the company's selective investment approach tailored to industry dynamics.

Portfolio and Pipeline Strength: A Look Forward

The company's deal team has been proactive since Q4's end, closing $551.8 million in new commitments and funding $383.8 million, with pending commitments for an additional $506.5 million. This demonstrates a solid pipeline, ensuring sustained success and discipline in originations.

Exit Activities in Portfolio: Evidence of Selective Underwriting

The company observed robust exit activity in its portfolio during 2023, with successful acquisitions, an IPO, and M&A transactions, despite a challenging exit environment. This activity validates Hercules Capital's selective underwriting and endorses its business model's efficacy.

Portfolio Credit Quality: Stability Amidst Volatility

Credit quality remains stable with a slight improvement in the company's weighted average internal credit rating and a decrease in the number of loans on nonaccrual. This stability is crucial for investor confidence, especially in periods of market uncertainty.

Financial Sturdiness and Investor Returns: A Positive Outlook

The company announced net realized gains of $2.8 million and an increased NAV per share to $11.43 in Q4, marking a 4.6% rise from Q3 2023. With strong liquidity of nearly $750 million and an aggregate liquidity over $1 billion including private funds, Hercules Capital stands well-capitalized to pursue new opportunities and maintain investor returns. Moreover, the company reported an undistributed earnings spillover leading to a supplemental distribution of $0.32 for 2024.

Record-Breaking Performance and Conservative Balance Sheet Management

In 2023, Hercules Capital broke multiple records, including those for total investment income and net investment income. This was paired with conservative balance sheet management, reflected by a net regulatory leverage of approximately 72% and a reduced GAAP and regulatory leverage to 87.1% and 77.4%, respectively. The company also raised approximately $100 million through the ATM market during Q4, reinforcing its financial fortitude.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to Hercules Capital Fourth Quarter and Full Year 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.

I will now turn the conference to your host, Mr. Michael Hara, Managing Director of Investor Relations. Please go ahead.

[Michael Hara, executive]

Thank you, Valerie. Good afternoon, everyone, and welcome to Hercules Conference Call for the Fourth Quarter and Full Year 2023. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO.

Hercules financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations Web page for at least 30 days following the conference call.

During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date, and Hercules assumes no obligation to update any such statements in the future.

And with that, I will turn the call over to Scott.

[Scott Bluestein, executive]

Thank you, Michael, and thank you all for joining the Hercules Capital Q4 and Full Year 2023 Earnings Call.

Following our record operating performance in 2022, Hercules Capital once again raised the bar higher and delivered record performance in 2023.

2023 was a banner year for Hercules Capital where we set several new financial and performance records, and I am incredibly proud of what our talented and growing team accomplished. Our record-setting performance in 2023 culminated with the strongest total and net investment income quarter in the company's history and the recent declaration of a new supplemental distribution program for our shareholders.

Our performance in 2023 reflects the benefits of being able to operate an institutional venture and growth stage lending platform at scale, maintain robust liquidity and a strong balance sheet and working with a best-in-class team with significant experience in this asset class. Thanks to the growth of both the BDC and our private credit funds business, Hercules Capital is now managing approximately $4.2 billion of assets, an increase of over 15% from where we were at year-end 2022.

Despite ongoing market, macro, and geopolitical volatility, which impacted growth stage companies throughout 2023, the continued strength and expansion of our origination platform, robust liquidity position, and strong balance sheet put us in position to deliver achievements on multiple fronts in 2023, including record full year 2023 total gross fundings of $1.6 billion, an increase of 9.1% year-over-year; record full year 2023 total investment income of $460.7 million, an increase of 43.2% year-over-year; record full year 2023 net investment income of $304 million, an increase of 61.7% year-over-year; 4 consecutive years of delivering supplemental distributions to our shareholders; and finally, strong net debt portfolio growth of over $240 million, which excludes the portfolio growth of our private fund business.

We are pleased that we were able to deliver record operating performance in Q4 and the full year while, at the same time, managing the business quite conservatively with very low leverage and excess liquidity. We expect 2024 to be another year with higher-than-normal volatility and a higher-for-longer rate environment. But as we discussed on our last call, we expect the market environment for new originations to improve throughout 2024. We are already seeing this come to fruition in Q1 where we are benefiting from the balance sheet decisions that we made in 2023.

Going forward, we will continue to take steps to manage our business and balance sheet defensively while maintaining maximum flexibility to shift to offense quickly and aggressively, if deal quality warrants it, as we are doing in Q1. This includes continuing to enhance our strong liquidity position, maintaining low leverage, tightening our credit screens for new underwritings, and driving our first lien exposure up, which reached 89% in Q4, our highest level since Q1 2017.

Let me now recap some of the key highlights of our performance for Q4.

In Q4, we generated record total investment income of $122.6 million, up 22% year-over-year; and record net investment income of $86 million, up over 38% year-over-year or $0.56 per share and providing 140% coverage of our base distribution of $0.40 per share. We were able to achieve 140% coverage of our base distribution despite ending the quarter with very conservative GAAP leverage of 87.1%. This is our third consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments, and our fifth consecutive quarter of delivering record net investment income.

We also generated return on equity in Q4 of over 20% for the third consecutive quarter. Our portfolio generated a GAAP effective yield of 15.3% in Q4 and a core yield of 14.3%. Our balance sheet remains very well positioned to support our continued growth objectives and serves as a key differentiator of our business relative to others in the asset class.

The focus of our origination efforts in Q4 was once again on quality and diversification. Our Q4 originations activity was driven by both our technology and life sciences teams delivering healthy funding performance during the quarter, although new business activity was again intentionally weighted slightly more towards life sciences companies. In Q4, approximately 57% of our fundings were to life sciences companies while approximately 66% of our commitments during the quarter were to life sciences companies. This reflects our slightly more cautious view on the technology sector through year-end.

We funded debt capital to 27 different companies in Q4, of which 5 were new borrower relationships. Consistent with what we have seen throughout the year, we expanded our funding relationship with numerous portfolio companies that continue to show strength and achieve performance milestones during the fourth quarter. In addition, the strong level of fundings to existing companies also helped to maintain our available unfunded commitments at approximately $335 million, which decreased from $400 million in Q3.

As anticipated, our origination activity has begun to accelerate in Q1. Since the close of Q4 and as of February 13, 2024, our deal team has closed $551.8 million of new commitments, and we have funded $383.8 million. We have pending commitments of an additional $506.5 million in signed nonbinding term sheets. The bar for us on new originations remains very high, and we continue to pass on the vast majority of deals that we are currently seeing in the market. Many of the quality later-stage companies that put off debt decisions in 2023 are now back at the table, and that is driving our very strong start to the year on originations. Having a strong balance sheet, staying power, and relationships that run wide and deep in the ecosystem gives us great confidence in our ability to continue to generate and deliver quality asset growth over the coming quarters.

We believe that Hercules is best positioned in the asset class for continued and sustained success. Consistent with our historical approach to underwriting credit, we will remain disciplined on new originations and we will prioritize credit quality over chasing higher-risk transactions with a yield premium.

Given the market backdrop throughout 2023, we are pleased with the exit activity that we saw in our portfolio during the year. In Q4, we had 2 additional portfolio companies complete acquisitions. For fiscal year 2023, we had 1 portfolio company complete their IPO and 2 additional portfolio companies file for IPOs, along with 17 portfolio companies completing M&A transactions. Our solid portfolio activity, despite the challenging broader exit environment, continues to validate the great work and selective underwriting that our investment teams do.

As we anticipated, early loan repayments increased in Q4 to approximately $278 million, which came in above our guidance of $150 million to $250 million. For Q1 2024, we expect prepayments to decrease from Q4 levels and be in the range of $125 million to $225 million, although this could change as we progress in the quarter.

Credit quality of the debt investment portfolio remains stable. Our weighted average internal credit rating of 2.24 improved slightly from the 2.28 rating in Q3 and remains at the lower end of our normal historical range. Our Grade 1 and 2 credits improved to 62.6% compared to 62.1% in Q3. Grade 3 credits were slightly lower at 34% in Q3 versus 34.5% in Q3. Our rated 4 credits increased moderately to 3.4% from 2.6% in Q3, and we had no rated 5 credits in Q4.

In Q4, the number of loans on nonaccrual decreased by 1. We have 1 debt investment on nonaccrual with an investment cost and fair value of approximately $30.9 million and $0 million, respectively, or 1% and 0% as a percentage of the company's total investment portfolio at cost and value, respectively. As of our most recent reporting, 100% of our debt portfolio companies remain current on contractual payments to Hercules.

Our workout efforts with regards to Convoy remain ongoing. And our recovery efforts will likely wrap up early this year, although that situation remains ongoing and fluid.

With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our monitoring remains enhanced given continued market volatility and uncertainty. Our focus on credit underwriting and a diversified asset base is continuing to serve us well. We are continuing to see general outperformance and positive momentum in terms of capital raising, M&A activity and milestone achievement throughout our life sciences book while things continue to remain more muted on the technology side with respect to the same.

During Q4 and throughout the year, we experienced many of the same themes that we have been discussing over the last several quarters. With so much attention paid to what the market has been describing as a VC winter, capital raising across our portfolio remained relatively strong with over $1.1 billion raised in Q4. In total, for the year, we had 58 portfolio companies raise approximately $6 billion in new capital, which was heavily weighted towards our life sciences portfolio.

During Q4 2023, Hercules had net realized gains of $2.8 million, comprised of net realized gains of $4.6 million primarily due to the gain on equity investments, offset by approximately $1.8 million due to the loss on debt and warrant investments. For 2023, we generated $8.4 million of realized gains. Our net asset value per share in Q4 was $11.43, an increase of 4.6% from Q3 2023.

We ended Q4 with strong liquidity of nearly $750 million. Inclusive of available liquidity in our private funds, we have more than $1 billion of liquidity as of the end of Q4.

Our balance sheet is both strong and stable, and it puts us in a strong position to be able to benefit from a new business environment that we anticipate will get better throughout 2024.

Venture capital ecosystem fundraising and investment activity finished 2023 with fundraising activity at approximately $67 billion and investment activity at approximately $171 billion, according to data gathered by PitchBook-NVCA. To put that into perspective, investment activity equaled 2020 levels in both dollars invested and number of companies raising capital at over 13,000 companies. Fundraising for the year exceeded 2019 levels. However, we expect fundraising to stay at the current level for the foreseeable future. We do not expect investment activity to reach the levels that we saw during the COVID pandemic near term. but we do expect investment activity to remain at healthy levels with more selectivity in terms of the profile of the companies that are receiving equity funding.

With our record operating performance in 2023, we exited Q4 with undistributed earnings spillover of over $125 million or $0.80 per ending share outstanding. We are also very pleased to announce that our RIA has delivered its first distribution to HTGC shareholders. For Q4, we are maintaining our base distribution of $0.40 and we declared a new supplemental distribution of $0.32 for 2024, which will be distributed equally over the next 4 quarters or $0.08 per share per quarter for a total of $0.48 of shareholder distributions. This is our fourth consecutive year of being able to provide our shareholders with a supplemental distribution on top of our regular quarterly base distribution.

In closing, 2024 marks our 20th year investing in the venture and growth stage asset class, which is another milestone for our company. Our scale, institutionalized lending platform, and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our success since inception over 20 years ago is attributable to the tremendous dedication, efforts and capabilities of our employees and the trust that our venture capital and private equity partners place with us every day.

We are thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice.

I will now turn the call over to Seth.

[Seth Meyer, executive]

Thank you, Scott, and good afternoon, ladies and gentlemen.

As Scott mentioned, this was another record quarter for Hercules Capital, capping off a record-breaking 2023. In addition to record investment activity in 2023, Hercules broke quarterly and annual records in many dimensions, including total investment income, net investment income, core income and many more, all while managing the balance sheet conservatively with low leverage and strong liquidity.

In 2023, we further validated the benefits of operating at scale by demonstrating meaningful operating leverage as we grew assets under management to record levels. This allowed us to deliver NII margin of 70.2% in Q4, the highest that we have ever achieved.

In 2023, our weighted average cost of debt remained below 5% and leverage remained conservatively low, putting us in a very strong position relative to others in our asset class. We were able to do this by proactively strengthening our balance sheet and liquidity position early in the year by renewing our $400 million credit facility led by MUFG and putting in place a new committed letter of credit facility with SMBC to cover $175 million of our available unfunded commitment in a more cost-effective manner.

We continue to supplement liquidity by raising, net of fees, $108 million with the equity offering in August and another $230 million throughout the year via our ATM program. We have started 2024 with nearly $750 million in available liquidity, a net regulatory leverage of approximately 72%, in possession of our fourth Green Light letter from the SBA, which will provide $175 million of additional regulatory exempt leverage, and a very small maturing private placement of $105 million in July. This positions us very well to invest in the strong pipeline Scott discussed and be able to strategically time accessing the market for additional liquidity to support the business side of the balance sheet, if needed.

With all that in mind, let's review the following areas: the income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity, and the financial outlook.

First, on the income statement performance and highlights for Q4. Total investment income exceeded the prior quarter at $122.6 million. Driven by the year-to-date growth in the debt portfolio on consistent business underwriting and a small increase due to the $1.4 million dividend from our wholly owned RIA, core investment income, a non-GAAP measure, again exceeded $100 million at $114.5 million. Core investment income excludes the benefit of income recognized as a result of loan prepayments.

Net investment income was another record at $86 million, a 12% quarter-over-quarter increase or $0.56 per share in Q4. As mentioned, NII margin was 70.2% for Q4 and has increased every quarter since Q1 2022.

Our effective and core yields changed modestly in the fourth quarter to 15.3% and 14.3%, respectively, compared to 15.5% and 14.2% in the prior quarter. The decrease to the effective yield was due to lower back-end and onetime fees on prepayments versus the prior quarter.

Turning to expenses. Our gross operating expenses decreased on lower compensation accruals of $38.2 million compared to $42.4 million in the prior quarter. Net of cost recharged to the RIA, our net operating expenses decreased $36.6 million.

Interest expense and fees increased modestly to $19.9 million from $19 million in the prior quarter due to greater utilization of the credit facilities.

SG&A reduced to $18.2 million, below my guidance of $21 million to $22 million on lower compensation accruals. Net of cost recharged to the RIA, the SG&A expenses were at $16.6 million.

Our weighted average cost of debt was 4.9%, a slight increase compared to the prior quarter, reflecting greater utilization of the credit facilities. Our ROAE, or NII over average equity, increased another 110 basis points to 21.3% for the fourth quarter. And our ROAA, or NII over average total assets was 10.6%.

Switching to the NAV unrealized and realized activity. During the quarter, our NAV increased $0.50 per share to $11.43 per share. This represents an NAV per share increase of 4.6% quarter-over-quarter. The main drivers were the record net investment income of $86 million; unrealized appreciation of $31.3 million, including the reversal of prior unrealized appreciation of $9.9 million; net realized gains mainly on the sales of equity positions of $2.8 million; accretion due to the use of the ATM, all of which exceeded the dividends paid in the quarter. Our $31.3 million of unrealized appreciation was primarily driven by $9.2 million of net unrealized appreciation on the loan portfolio and $12 million of appreciation to the public equity and warrant portfolio.

On leverage and liquidity, our GAAP and regulatory leverage decreased to 87.1% and 77.4%, respectively, compared to the prior quarter due to the equity raise via our ATM. Netting out leverage with cash on the balance sheet, our net GAAP and net regulatory leverage was 81.6% and 71.9%, respectively. We ended the quarter with nearly $750 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned registered investment adviser subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity at year-end. The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities.

As a final point, we continued to opportunistically access the ATM market during the quarter and raised approximately $100 million, resulting in a $0.16 per share accretion to NAV. For the year, we raised approximately $230 million from the ATM program.

On the outlook points. For the first quarter, we're maintaining our core yield guidance range of 13.8% to 14%, excluding any future benchmark interest changes. As a reminder, approximately 95% of our portfolio is floating with a floor, so any Fed decreases in interest rate may not have an equal reduction in our core yield.

Although very difficult to predict, as communicated by Scott, we expect $125 million to $225 million in prepayment activity in the first quarter. We expect our first quarter interest expense to remain relatively flat compared to the prior quarter.

For the first quarter, we expect SG&A expenses gross of $25.5 million to $26.5 million and an RIA expense allocation of approximately $2.5 million to $3 million. As a reminder, the first quarter always has higher payroll taxes and benefit expenses. As previously guided, the adviser business began paying dividends in the fourth quarter to Hercules Capital. Going forward, we expect a quarterly dividend from the RIA of approximately $1 million to $1.5 million per quarter.

In closing, as we reflect on the record achievements of 2023, we remain optimistic about 2024 and our ability to continue to drive growth across the platform while maintaining focused on delivery and best-in-class shareholder returns.

I will now turn the call over to the operator to begin the Q&A portion of our call. Valerie, over to you.

[Operator]

[Operator Instructions] Our first question comes from the line of Brian Mckenna of Citizens JMP.

[Brian Mckenna, analyst]

So just a question on the dividend to start, it was clearly a record quarter of results and, as you noted, dividend coverage on a core basis totaled 140%. So it would seem like the starting point for earnings in 2024 is quite a bit higher than the base dividend you announced yesterday. So could you just walk us through the rationale about maintaining and not increasing the current base dividend?

[Scott Bluestein, executive]

Sure. Thanks, Brian. I think we've been pretty consistent over the course of the last several years in terms of how we manage the base distribution. We never want to set the base distribution at a number that we think would jeopardize our ability to maintain it, irrespective of market and rate environment conditions. We set the base distribution based on our outlook for core income where we essentially back out the benefit of any prepayments and accelerations. And right now, we want to continue to take a conservative position. That was the choice that we made with respect to Q4. We are continuing to deliver that outperformance to our shareholders via the supplemental distributions. This is the fourth consecutive year where we've been able to enhance the quarterly base distribution with an additional supplemental distribution. And we think that that's the right way to operate the business in the current environment. It certainly does not mean that that's not going to change on a go-forward basis, but that was the rationale for the decision to maintain the $0.40 and declare a $0.32 supplemental distribution, payable $0.08 per quarter in 2024.

[Brian Mckenna, analyst]

Got it. Helpful. And then maybe just a bigger picture question for you, Scott. So you noted Hercules has been operating the business for 20 years now. You've clearly seen a lot of evolution across the industry over this time. But when you think about the next 5 or 10 years plus, how do you see the sector evolving from here? And then what are you doing at Hercules today to make sure you're positioning the firm for this change over time?

[Scott Bluestein, executive]

Thanks for the question, Brian. I think when you look back over 20 years, it's a long period of time. And while that performance for us has been incredibly impressive, I think what's most unique about Hercules is how optimistic the team and I are about what the next 5 to 10 years look like despite the tremendous success that we've had. Our firm has grown exponentially. We've maintained a very strong culture. We have always, since inception, operated the firm with a focus on serving our clients and the venture ecosystem exclusively. There are a number of opportunities in terms of platform expansion that we expect to continue to play out over the coming years. Over the last 2 to 3 years, you've seen us rapidly build and grow our private funds business. And we really think that this is just the beginning of the next level of evolution for us as an operating company.

[Brian Mckenna, analyst]

Congrats on another great quarter.

[Scott Bluestein, executive]

Thanks, Brian.

[Operator]

Our next question comes from the line of Crispin Love of Piper Sandler.

[Crispin Love, analyst]

Just first, looking at funding, they were a little softer in the 4Q versus prior quarters, but 1Q '24 commitments are very strong. So what do you believe the biggest changes are since late 2023 to the first quarter so far? Is some of that just timing? And then also looking out to the year, do you believe that fundings in 2024 should increase relative to the $1.6 billion you did in '23?

[Scott Bluestein, executive]

Sure. Thanks, Crispin, a couple of things. The benefit of being an internally managed BDC is that we do not need to chase deals if the quality does not meet our expectations. In Q4, we saw a tremendous amount of deal flow, and we thought that a lot of it, frankly, did not meet our underwriting standards. And so we chose to be a little bit defensive. We still had a very strong quarter in Q4, $413 million of commitments. We funded $307 million. We funded some great new companies, and we were able to expand our funding relationship with several companies that are in the current portfolio and are outperforming expectations.

Starting in Q3 of last year, we gave some pretty clear guidance that we expected the new deal environment to improve in 2024. That was based on conversations that our teams were having with companies in the market. If you think about the way most of our business works, where companies raise equity capital every 12 to 14, 12 to 18 months, you can sort of model in the cycle of fundraising for those companies, and we expected to see a tremendous increase in later-stage quality companies coming to the table in early 2024. And that's exactly what has happened so far.

You mentioned the pipeline, and it's the strongest that it's ever been both in terms of closed commitments quarter-to-date and signed commitments quarter-to-date. Our team through February 13 has already closed $552 million of commitments. We have another $500 million-plus in signed nonbinding commitments. And so we feel very good about what our funding trajectory will look like. We don't provide full year guidance with respect to funding numbers. But certainly, if we continued on the trajectory that we're seeing to start the year, we would expect to exceed that $1.6 billion number that we achieved last year.

[Crispin Love, analyst]

And then just on expenses, Seth, as you said, you came in below the SG&A guide. It looks to be primarily driven by lower comp and benefits expenses. I think that line was down over 30% sequentially. You mentioned the belief that it was due to lower variable comp. But what was the reason there just given the strong results? And what does that mean for that line as you start 2024? Should there be a pretty big jump there in the first quarter?

[Seth Meyer, executive]

Yes. And that's why I guided higher, Crispin. So you hit the right punchline that we would expect a reversion back to normal. But it was based on the lower funding volume in Q4, and that's what really drove the variable comp portion of the accrual. It's that simple.

[Operator]

[Operator Instructions] Our next question comes from the line of Christopher Nolan of Ladenburg Thalmann.

[Christopher Nolan, analyst]

Seth, on the RIA dividend of $1 million to $1.5 million, is that quarterly or annual?

[Seth Meyer, executive]

That's quarterly. Good question. Yes, I should have emphasized that. Thanks, Chris.

[Christopher Nolan, analyst]

Also, back to the earlier dividend question, your excise tax seems to be growing a bit year-over-year. Could we see, while you're keeping the base dividend steady, a supplement on top of the one you just announced just to manage the excise tax expense?

[Seth Meyer, executive]

Yes. Well, it's two-dimensional. One, we keep the base dividend at a level that we believe is sustainable through an entire interest rate cycle. Two, we do distribute an additional supplemental level to make sure that we are keeping the excise tax in check but also the requirement as a registered investment company that we need to distribute 90% of our income. So we're balancing all those dimensions out, making sure that we're returning the income to the shareholders, retaining what we can and should for building out the infrastructure and the structure for future investment. But it is a balancing act between those. And the excise tax would naturally go up as our income levels go up. So the small amount that we're retaining is certainly going to attract a higher amount of nominal tax at a 4% rate.

[Christopher Nolan, analyst]

And then I guess a final broader question, following the demise of SVB, I presume more of your portfolio companies are banking in a broader array of banks. Given the threat posed to that sector by commercial real estate, how do your investment loans -- what portion of your portfolio companies have a bank facility ahead of your loans?

[Scott Bluestein, executive]

Chris, a couple of things there. First, I would not characterize it as the demise of SVB. It was certainly the demise of SVB as we all once knew the firm. But the firm is continuing to operate under the First Citizens umbrella. We continue to see them in the market from time to time. We've done a handful of transactions with them. And so the firm didn't all of a sudden, in March of last year, just go away. Obviously, they're rebranded and the team has changed quite a bit. But we are still seeing them in the market.

We made the comment in the prepared remarks about our first lien exposure. That first lien exposure has been moving up steadily throughout 2023, and we ended the year at about 89%, which is the highest we've had since 2017. That gives you a pretty good indication of a couple of things. Number one, we are managing the business more conservatively and we're focusing in on first lien exposure. And number two, banks in general are just being a little bit less active. So we're able to get more deals done alone than historically we have been able to. And so that really speaks to both of those points at the same time.

[Operator]

Our next question comes from the line of Ryan Lynch of KBW.

[Ryan Lynch, analyst]

First question, I wanted to kind of circle back around to some of the previous comments you made regarding just the level of activity you're experiencing thus far in 2024 because it's been quite remarkable. If I look at the gross debt and equity commitments you did in all of 2023, it was $2.2 billion. If I look at the investments you've closed and pending commitments you've done in the first 45 days of 2024, it's $1.1 billion. So it's half of the amount you did in the entire year of 2023. I know you provided some commentary on why there was a pickup. I'm just curious, in addition to what you said, is there any change in the size of average position you were looking at? Are you targeting larger businesses and larger companies in this marketplace? Is that part of the reason that you're seeing such a big uptick in commitments? Or is it purely just that much activity and that much higher-quality, favorable activity occurring in 2024?

[Scott Bluestein, executive]

Thanks, Ryan, a couple of things there. First, I just want to point out, the $1.1 billion is not just through 45 days, right? $551 million of that has actually closed through the first 45 days and then that next $500 million is signed as of the 45th day. So we would expect that $505 million, which is signed, if it gets through our diligence process, to sort of get to the closing side of things over the next 30 to 60 days. So don't think of that $1.1 billion as something that we've done in 45 days. I would think of it as something that we would expect to do over the first 90 to 115 days of the year. So it's still incredibly impressive, but I just wanted to point that out.

In terms of the second part of the question, it's primarily just based on activity. There is certainly a component of we are looking at, as we've signaled the last several quarters, larger, more scaled, more stable businesses. That is an intentional shift that we've made. We continue to be of the view that a lot of the smaller companies that received financing historically are going to struggle to receive equity support on a go-forward basis. So when we think about things from a risk-adjusted return perspective, we want to focus right now and we're going to continue to focus on larger, more scaled, more stable businesses. And we think that, that's the best thing to do for our shareholders long term. If you look at it in terms of average dollars per deal, the numbers are up slightly, but it's not really materially increased from where it was throughout 2023.

[Ryan Lynch, analyst]

And then on the guidance you gave regarding the adviser, I think you said, and correct me if I'm wrong, $2.5 million to $3 million of RIA expense reductions and then $1 million to $1.5 million from the RIA for a dividend. So that's $3 million to $4.5 million of total value that's going to come back to the BDC from either expense reductions or dividends. That's a pretty big jump from certainly what you were doing in kind of the beginning of 2023 and even from the most recent, this fourth quarter, in just total value that the RIA is generating. Can you talk about what's really driving that sizable increase in value coming back to BDC shareholders recently?

[Seth Meyer, executive]

Sure. Thanks, Ryan. So $2.5 million to $3 million is not actually outside of the scope of what we've been doing on a per quarter basis. We had a little bit lower allocation on the fact that our total SG&A costs went down in the fourth quarter on, as discussed previously, the variable comp accruals. And so there's nothing abnormal about that, although the portfolio does continue to grow that we're managing in the private funds. And therefore, it absolutely is driven and connected to that. Originations are the biggest portion of our expense allocation on a per quarter basis. So the variable comp that is associated with originating new deals is something that also gets tacked and allocated to those deals that are allocated or originated by the RIA managed funds. So there's a direct relationship there.

Coming up and is new is this $1 million to $1.5 million per quarter of the dividend flow coming into Hercules Capital, the BDC, and then ultimately, to our shareholders. That, we had guided from the very beginning that this would eventually come as soon as the RIA manage to overcome the original establishment costs as it was getting started and generating enough of a carry and a management fee to start paying the dividend to the BDC. So absolutely in line with what the original guidance is. It just looks like a lot right now because we had a lower allocation in Q4, and these are the initial dividend flows that are occurring.

[Ryan Lynch, analyst]

Really great quarter, guys.

[Scott Bluestein, executive]

Thanks, Ryan.

[Operator]

Our next question comes from the line of John Hecht of Jefferies.

[John Hecht, analyst]

Congrats. First question is you've grown a lot. You've got very, very low nonperforming assets and your leverage, in the context of your target, is pretty low. I'm just wondering, for this year, should we think about some sort of desire to increase leverage? Or how do we think about your target leverage ratios as you grow this year?

[Scott Bluestein, executive]

Thanks for the question, John. No change in terms of our guidance for leverage. You've been following us for a long time, so you'll appreciate the comment. We've always sort of run the balance sheet conservatively. Right now, we're running it conservatively, and we're taking a defensive posture. So we're running it at even lower leverage than we typically do. I think our expectation is, given our funding goals for 2024, that leverage will increase slowly throughout the year. But we would expect to continue to manage the business, from a balance sheet perspective, conservatively with low leverage and long liquidity.

[John Hecht, analyst]

Okay. And then maybe can you talk about LTV and spreads on recent transactions and how that maybe has changed over the course of the last few months?

[Scott Bluestein, executive]

Sure. LTV is pretty consistent with our historical underwriting. The range for us, if you look at our publicly reported data over the last several years, has been on the very low end, 5%; on the very high end, 20%. The majority of deals that we're doing currently are in that sort of low teens from an LTV perspective. And I think that's what we're going to continue to target short to medium term here. And then in terms of spreads, we're not seeing a lot of pressure right now on spreads. Seth just updated our guidance in terms of core yield. We expect to continue to be in that very high 13%, low 14% from a core yield perspective. And we've done a great job -- or Seth's done a great job in terms of managing the liability side of the balance sheet to maintain those spreads, which have continued to increase over the last several years as the rate environment has improved in our favor.

[Operator]

I'm showing no further questions at this time. I'd like to turn the call back over to Scott Bluestein, CEO, for any closing remarks.

[Scott Bluestein, executive]

Thank you, Valerie, and thanks to everyone for joining our call today. As a final note, we will be participating in the UBS Financial Services Conference on February 26 to the 29 in Miami. If you are interested in meeting with us at this event, please contact UBS directly or Michael Hara. We look forward to reporting our progress on our Q1 2024 earnings call. Thanks, everybody.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.