Hercules Capital Aktie

Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.

And welcome to Hercules conference call for the first quarter of 2026. With us on the call today from Hercules Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Petites 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 following the 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'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q1 2026 Earnings Call. In the first quarter of 2026, Hercules delivered another strong quarter of current originations, record total investment income and stable credit performance. During the quarter, we navigated through a period of significant market volatility.

This was driven by a sharp pullback in certain parts of the equity and credit capital markets, macro concerns largely centered around the conflict in the Middle East as well as industry-specific concerns surrounding redemptions across private credit and the long-term impact from AI disruption.

Since our first origination over 21 years ago, Hercules has maintained a disciplined credit first model that has served our shareholders and stakeholders well through a variety of market conditions and multiple cycles, and that will remain our focus going forward.

Our balance sheet and liquidity position is strong. Our [indiscernible] and our investment portfolio continued to generate net investment income in Q1 that comfortably covered our base shareholder distribution by 120%. Coming off a record-breaking year in 2025 for both originations and fundings, our momentum accelerated in Q1 with all-time record originations of over $1.81 billion.

This is consistent with the guidance that we provided on our Q4 earnings call in February and the release that we put out in early April. The strong new business activity in the first quarter helped to deliver a new record for total investment income despite operating in a declining rate environment since late 2024. Driven by the growth of both the public BDC and our private credit funds business, Hercules Capital is now managing approximately $6.1 billion of assets. An increase of 21.8% from a year ago.

To manage our growing base and expanded platform. We currently have 65 investment in credit professionals, over 25 finance and accounting professionals and 120 dedicated full-time employees in total at Hercules. As we entered 2026, we noted on our last earnings call that we continue to expect higher-than-normal market and macro volatility, and it certainly has played out that way.

Aside from the general market volatility experienced year-to-date, largely from AI disruption features and the conflict in the Middle East, there has also been an enhanced focus on liquidity and redemptions across the broader private credit space. These particular issues are concentrated largely in the nontraded BDC segment where the investor base is predominantly retail and the shareholders hold quarterly redemption rights.

Hercules is different. 100% of the equity capital that we manage in the publicly traded BDC is true permanent capital that is not subject to redemption. Our investment adviser subsidiary manages exclusively institutional GP LP funds with predetermined long-term or evergreen investors, no non-traded BDCs, no near-term redemption risk.

This capital structure is deliberate and we believe it allows us to execute a long-term strategy through cycles without unpredictable redemptions and without forced asset sales. We remain confident in the strength and stability of the Hercules platform and our ability to continue to generate strong operating results irrespective of the market backdrop.

With the expansion of our platform capabilities over the last several years and our expectation for continued market volatility, we continue to expect a robust new business environment for Hercules in 2026. Our platform scale, balance sheet and liquidity allow us to play offense during market volatility and which should position us to see a robust pipeline of high-quality companies throughout the year.

As we have done over the last several years, we will continue to manage our business and balance sheet defensively, while maintaining the flexibility to take advantage of market opportunities. This includes continuing to enhance our liquidity position as needed, further tightening our credit screens for new underwritings, staying focused on added diversification and maintaining our higher-than-normal first lien exposure, which was approximately 89% in Q1.

Let me now recap some of the key highlights of our performance for Q1. In Q1, we originated record total new debt and equity commitments of $1.81 billion. and gross fundings of over $706 million, which led to $298 million of net debt investment portfolio growth. We generated record total investment income of $141.5 million and net investment income of $88.1 million or $0.48 per share.

We generated a return on equity in Q1 of 16.9%, and our portfolio generated a GAAP effective yield of 12.8% and a core yield of 12.2% and which was consistent with our guidance. We expect core yield to remain relatively flat in Q2, given that the Fed is holding interest rates steady. As we have consistently communicated throughout 2025, we have increased leverage to support our continued growth and return effectives, allowing us to continue to focus on what we believe are high-quality originations versus chasing higher-yielding assets with more risk.

While delivering record new originations in Q1, we still maintained a conservative and defensive balance sheet. Consistent with our objectives, GAAP leverage increased to 115.4% in Q1, up from 14.4% in Q4. Our Q1 GAAP leverage was at the high end of our typical historical range of 100% to 115% but still below the average of our BDC peers.

We ended Q1 with over $1 billion of liquidity across the Hercules platform. The current market volatility is creating a very favorable capital deployment environment for Hercules and we want to ensure that we are positioned to opportunistically take advantage of that for the long-term benefit of our shareholders and stakeholders.

The focus of our origination efforts in Q1 and was on maintaining a disciplined approach to capital deployment while emphasizing diversification across the asset base. Our Q1 commitments and fundings activity was weighted slightly towards life sciences companies. which reflects a more defensive posture.

In Q1, approximately 56% of our commitments and 60% of our fundings were to life sciences companies. while approximately 44% of our commitments were to tech companies. We funded that capital to 34 different companies in Q1, of which area were new borrower relationships. During the quarter, we were again able to opportunistically increase our commitment portfolio companies that have continued to demonstrate strong performance.

As it always has been, being able to continue to support our portfolio companies as they scale is an important part of our business and a key differentiator of our expanded platform capabilities. Our available unfunded commitments increased slightly to $397.4 million from $385.6 million in Q4, still maintaining a more defensive positioning of the portfolio.

Coming off a record Q1, we expect originations to moderate in Q2 and be more back-end weighted. Since the close of Q1 and as of May 1, 2026. Our investment team has closed $79.2 million of new commitments and funded $32.3 million. We have pending commitments of an additional $506.1 million, in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q2.

We will maintain a high bar for new originations. Our investment teams are continuing to update our modeling assumptions, structuring and underwriting criteria given the rapid pace of change that we are seeing across the technology ecosystem.

The volume of deals that we are screening and passing on remains elevated, and we intend to continue to remain disciplined, patient and focused on the long term while being aggressive where we believe it makes sense. Early loan repayments of $225.8 million came in at the higher end of our guidance for Q1.

For Q2 2026, we expect prepayments to increase materially and be in the range of $350 million to $500 million, although this could change as we progress in the quarter. The increased guidance on prepayments in Q2 is being driven largely by M&A. And we believe that this positions us well to redeploy this capital in what we expect to be a more favorable originations environment.

Our net asset value per share in Q1 was $11.90 and a decrease of 1.9% from Q4 2025. We had $31.1 million of net unrealized depreciation from debt investments during the quarter approximately $23.2 million or 75% of which was attributable to market yield adjustments associated with the general market volatility. In addition, we had $12.3 million of net unrealized depreciation attributable to valuation movements in publicly and privately held equity positions.

Again, largely associated with the general market volatility experienced during the quarter. We ended Q1 with solid liquidity of $454.5 million in the BDC and over $1 billion of liquidity across the platform with healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade credit ratings we remain well positioned to compete aggressively on quality transactions, which we believe is prudent in the current environment.

Credit quality of the debt investment portfolio remained strong quarter-over-quarter. Our weighted average internal credit rating of $2.11 was stable relative to the 2.20 rating in Q4 and remains within our normal historical range. Our Grade 1 and 2 credits increased to 70.5% compared to 66.6% in Q4. Grade 3 credits decreased slightly to 28.6% in Q1 versus 31.7% in Q4.

Our rated 4 credits decreased to 0.8% from 1.7% in Q4 and we had 1 rated 5 credit at 0.1%. Our loans rated at 4 and 5 as of Q1 were a combined 0.9% and which is the lowest that we have reported since Q2 2022. In Q1, the number of companies with loans on nonaccrual remain the same with a single loan on nonaccrual and with an investment cost and fair value of approximately $10.7 million and $3.7 million, respectively, or 0.2% and 0.1% as a percentage of our total investment portfolio at cost and value, respectively.

As of the most recent reporting that we have, 100% of our debt investments that are on accrual are current with respect to the payment of scheduled principal and interest. With respect to our broader credit book and outlook, generally remain pleased by what we are seeing on a portfolio level enhanced given the continued volatility in the markets.

We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we do will continue to serve us well. Our asset base is intentionally diversified with approximately 50% of our assets in our life sciences vertical, and approximately 50% of our assets in our technology vertical.

No single subsector makes up more than 25% of our total investment portfolio and our bet investments are spread across 139 different companies. Consistent with our historical experience as of the end of Q1 -- the average loan duration across our debt portfolio was approximately 21 months. While we remain pleased with the exit activity that we saw in our portfolio during the quarter, we are seeing that in certain parts of the market, there appears to be some ongoing pricing and process discovery.

The sharp pullback in equity valuations year-to-date in certain technology sectors has slowed some ongoing M&A discussions as buyers look to establish what the new norm may be for exits, particularly with respect to valuation and exit multiples.

This is something that we will monitor over the coming quarters. In Q1 and Q2 quarter-to-date, we've had 4 new M&A events in our portfolio, which included 1 life sciences company, and 3 technology companies announcing acquisitions. We also had 2 portfolio companies filed registration statements for their IPOs with 1 of those companies completing their IPO in April.

We view this as a positive sign for our ecosystem. Based on current market conditions and volatility, we continue to expect M&A exit activity to accelerate in 2026 and although with more uncertainty with respect to valuations and process timing. In Q1, PICC declined meaningfully as a percentage of total revenue. falling to approximately 9.1% from 10.5% in fiscal year 2025. And we expect that figure to continue declining in the near term as loans pay off and accrued PIK is collected in cash.

The most important point on PIK, however, is its source. Approximately 91% of our Q1 PIK income came from PIK that was part of the original underwriting, not the result of any credit or performance-related amendment. This is picked by design, not picked by distress. Reinforcing that point, more than 98% of our Q1 PIK income came from loans rated 1 -- 2 or 3 and excluding a single convertible loan, every loan with a PIK component on accrual status is also paying cash interest.

Cash collections support the same conclusion. We collected $15.3 million in cash payments on accrued PIK during Q1. We -- and because the majority of our PIK bearing loans were originated in 2024 and 2025, we expect strong cash collections to continue throughout 2026 as those loans approach their expected duration. We continue to use PIK judiciously and where we do, it is typically a sonic of the overall deal economics.

Our investment and credit teams continue to monitor the impact of AI on our portfolio and the broader markets. The pace of change is rapid and we expect the disruption we are seeing to play out over several years. Our most recent reporting and our ongoing dialogue with our companies and their investors continue to be constructive.

Many companies across our portfolio have been embracing AI as a competitive differentiator and are experiencing tailwinds from AI adoption, greater operating efficiency and faster cycles of innovation and go-to-market. Those companies that are more aggressively integrating AI into their core product offerings are benefiting from increased adoption and AI acceptance.

We continue to expect AI to disrupt numerous industries over time and that there will be both winners and losers. Over the coming years, business models will change margin profiles may change and in many cases, companies may actually become more efficient and innovative.

Our investment teams will continue to pursue software transactions as part of our origination efforts, and we will remain disciplined and conservative in terms of our approach to financing the sector. Venture capital investment activity in Q1 and again, paralleled what we experienced in our deal flow and originations. Q1 2026 investment activity was the highest quarter on record at $267.2 billion according to data gathered by PitchBook and VCA.

While the aggregate data remains strong, it again needs to be noted that the deal was extremely concentrated and that over 88% of the Q1 deal value involved AI and machine learning companies. Q1 fundraising improved and totaled $47.8 billion, across 172 firms. The capital was heavily concentrated among a few established managers. M&A exit activity remained consistent with Q4 and but exit value in Q1 was extraordinary at $311.7 billion compared to $143.9 billion for all of 2025.

Consistent with the aggregate data for the ecosystem. During Q1, capital raising across our portfolio reached an all-time high with 21 companies raising approximately $3.4 billion in new capital. Despite the market volatility year-to-date, we have not observed a pullback in capital raising across our portfolio. Subsequent to quarter end, we have had an additional 10 companies raised over $900 million in new capital.

Given our strong sustained operating performance, we exited Q1 with undistributed earnings spillover of $149.1 million or $0.80 per ending shares outstanding. For Q1, our net investment income covered our base distribution by 120% and our full distribution, including our $0.07 supplemental distribution by 102%.

This is our 23rd consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. Finally, I would like to highlight our recent announcement on May 4 regarding the expansion of our leadership team. Effective May 18 and Seth will become President of Hercules.

Seth and I will continue to work closely on scaling our platform and enhancing our operational capabilities to ensure that we continue to deliver long-term value for our shareholders and stakeholders. Succeeding him as CFO will be Andrew Olson, who is returning to Hercules after working most recently at Revelation Partners, and prior to that, SVB Capital. Andrew's experience and track record in finance, alternative assets and private credit is strong, and I welcome him back and look forward to working with Andrew again.

To continue to build on our success and position Hercules for its next phase of growth. As we set our sights on the continued growth and scaling of our platform, I believe that this expansion of our leadership team will best position us for continued long-term success.

In closing, 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 continued success is attributable to the tremendous dedication, efforts and capabilities of our 120 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.

Thank you, Scott, and good afternoon, ladies and gentlemen. Q1 2026 was another all-around strong quarter for Hercules Capital, building on the record-setting pace established in 2025. As communicated by Scott, our strong business momentum continued into the first quarter as we delivered all-time records for both new originations and total investment income.

$300 million of net debt portfolio growth during the first quarter. Finally, based on the performance of the quarter, Hercules Adviser delivered another quarterly dividend of $2.1 million to HTGC which, when combined with the expense reimbursement of $4.6 million resulted in approximately $6.7 million of NII contribution to the BDC for the quarter.

These points in mind, we'll review the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and finally, the financial outlook. Turning first to the income statement performance and highlights. Total investment income in Q1 was a record $141.5 million, an increase of 3% quarter-over-quarter and 18.4% year-over-year, supported by our continued debt portfolio growth.

Core investment income, a non-GAAP measure, increased as well to a record $134.9 million compared to $133.3 million in Q4 and was up 16.8% on a year-over-year basis. Core investment income excludes the benefit of income recognized because of loan prepayments.

Net investment income was $88.1 million or $0.48 per share in Q1, an increase of 1.3% quarter-over-quarter and 13.8% year-over-year. Our effective and core yields were 12.8% and 12.2%, respectively, compared to 12.9% and 12.5% in the prior quarter. The decrease in core yield was near the midpoint of our communicated range, in line with our guidance and driven by the continued impact of rate reductions in the second half of 2025.

Although as noted previously, this impact has been progressively muted. As of quarter end, more than 75% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will continue to be muted. First quarter operating expenses were $58.1 million compared to $54.9 million in the prior quarter.

Net of costs recharged to the RIA, our net operating expenses were $53.4 million. The increase in operating expenses was largely driven by increased compensation tied to a record quarter for new originations. Interest expense and fees increased to $30.8 million compared to $28.2 million in Q4 due to the growth of the business and corresponding increase of leverage to support our record origination activity.

SG&A increased to $27.2 million, just above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses were $22.6 million. Our weighted average cost of debt remained stable at 5.1%. Our ROAE or NII over average equity increased to 16.9% for the first quarter compared to 16.4% in Q4, and our ROAA or NII over average total assets was 8.1% compared to 8.2% in Q4.

Switching to NAV unrealized and realized activity. During the quarter, our NAV per share decreased by $0.23 to $11.90 per share or 1.9% quarter-over-quarter. The main driver was net unrealized depreciation on investments, primarily reflecting broad-based increases in market yields during the quarter.

Our $45 million net unrealized depreciation was primarily attributable to $31.1 million of net unrealized depreciation on debt investments, approximately $23.2 million of which was attributable to market yield adjustments associated with market volatility in the quarter.

There was also $7.9 million in fair value markdowns of 2 previously impaired loans. Additionally, $12.3 million of net unrealized depreciation was attributable to valuation movements in publicly and privately held equity and $1.9 million of net unrealized depreciation was due to reversals of previous quarter appreciation upon a realization event.

This was partially offset by $0.3 million of net unrealized appreciation attributable to valuation movements in public and privately held warrants. Hercules had unrealized losses or net realized losses of $0.6 million in Q1, primarily due to losses on legacy equity investments.

Turning next to leverage and liquidity. In line with our previous guidance, our GAAP and regulatory leverage increased to 15.4% and 99.7%, respectively, compared to 104.4% and 88.6% in the prior quarter due to the growth in the balance sheet being financed primarily by leverage to support our record originations activity.

Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 113.5% and 97.8%, respectively. We ended the quarter with $454.5 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity as of quarter end.

The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities. As previously disclosed, the quarter -- during the quarter, Hercules Capital raised $300 million of institutional 5.35% and unsecured notes due in 2029. As a final point, we continue to opportunistically access the ATM market during the quarter and raised approximately $52 million in the first quarter, selling 3.5 million shares.

The ATM usage was driven by our record new business originations and which drove very strong net debt portfolio growth in Q1. Finally, on the outlook points. For the second quarter, we expect our core yield to again be in the range of 12% to 12.5%.

As a reminder, 98% of our debt portfolio is floating with the floor. And as of today, more than 75% of our prime-based portfolio is at the contractual floor. Although difficult to predict, as stated by Scott, we expect $350 million to $500 million in prepayment activity in the second quarter. The expected elevated prepayments in Q2 will provide us with significant flexibility and optionality and with respect to liquidity and capital raising.

We expect our second quarter interest expense to increase compared to the prior quarter based on the debt portfolio growth. For the second quarter, we expect SG&A expenses of $27.5 million to $28.5 million and an RIA expense allocation of approximately $4.5 million.

Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, we have started 2026 with record-setting momentum, delivering all-time highs in originations and total investment income while navigating meaningful market volatility. Our balance sheet liquidity position and credit discipline positions us well to continue scaling our platform and capitalizing on opportunities throughout the year.

As Scott noted, effective May 18 I will be transitioning to the role of President at HTGC where I will continue to work closely with Scott and the rest of our senior leadership team to further scale and diversify the Hercules platform. During my 7-plus years at Hercules, the company has delivered exceptionally strong operational and financial performance as well as record platform growth and this expanded leadership team positions I look forward to working closely with Andrew and the rest of the Hercules Capital team in my new role.

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

[Operator Instructions] We'll take our first question from Brian McKenna with Citizens.

Okay. Great. Hope everyone is doing well. And congrats, Seth, on the new role. So given your focus on the venture market, it's not shocking you have more exposure to "software" but if not the best performing BDCs in the market today based on ROE and credit quality -- it would be helpful to get your perspective on why there's such a big disconnect between the reality and fundamentals of your business relative to perceptions? And then from your seat, what are the biggest drivers of your portfolio delivering such strong results despite all the recent volatility.

Yes. Thanks for the question, Brian. I think it's sort of consistent with what we talked about on the last call that we did in February. Underwriting and venture antigrowth venture and growth stage market is fundamentally different than traditional underwriting. .

If you look at how our investment teams underwrite software loans specifically, and we talked about this extensively on the last call, we are generally targeting to be under 1x debt to ARR. We are generally targeting to be sub 20% LTV. We are generally targeting to be debt to invested equity of less than 30% so there is significantly more equity cushion beneath our debt across the majority of our software companies.

We've also said consistently we are very confident in our portfolio. We're not perfect. We've made mistakes before. I'm sure we will make mistakes again. But from everything that we are seeing to date, we continue to feel pretty good about how our portfolio is holding up.

I would also emphasize that our portfolio is highly diversified. 50% of our investment portfolio is in our life sciences vertical, and then a significant portion of our technology portfolio is not in software companies. Many of the non-software industries are performing incredibly well in the current environment, and that gives us confidence that the portfolio as a whole will continue to perform well.

That's helpful, Scott. And then I appreciate the commentary around prepayments for the second quarter. I mean, it is a significant amount of capital coming back to you and ultimately, that's going to get redeployed. Two questions here. How should we think about fee income in the second quarter? And then how do all in yields and spreads on new deals today compared to the investments tied to the prepayments?

Sure. So a couple of things there. On the prepayment side, we did increase our guidance pretty significantly for prepayments in Q2. I want to emphasize that we view that as a positive indicator of the quality and strength of our portfolio.

The majority of that increased guidance is coming from known M&A events that have either already happened or that we expect to happen in Q2 and that gives us confidence in the overall portfolio quality that will lead to slightly higher fee income in the quarter. We're not going to give any specific guidance on what that will be because that still has to play out?

And then with respect to the second part of the question on spreads, I would say a couple of things on this. So first, in the midst of the most volatile parts of the last 4 months, which I would sort of highlight as late February and early March, we did see probably 50 to 75 basis points of spread widening on new originations. I would caveat that by saying that over the last 30 days or so as the volatility has decreased -- we've seen some of that come back in.

So while we are seeing some spread benefit, I would sort of say 25-ish basis points relative to where we were at the beginning of the year. I think the most important thing that I would highlight is actually not on the spread, but it's the fact that we are very focused on enhancing structure across the underwriting on new loans.

And that will continue to be our priority going forward. versus pushing or fighting for an incremental 25 to 50 basis points of spread.

We'll take our next question from Crispin Love with Piper Sandler.

This is Ben Gramin for Crispin Love. I'm just wondering if you could discuss the deployment backdrop for 2026. I know you've touched on how market volatility can create a favorable backdrop for you and that's continued for the most part. And if there's been heightened deployment in any particular sector such as tacker Life Sciences?

Sure. Thanks, Ben. So with respect to just deployment, a couple of comments. Number one, we're going to continue to focus on diversification. We think having a diversified portfolio on the asset side has been critical to our historical success and we think that it will be critical to our go-forward success.

So continuing to try to find the right balance between life sciences and technology. From a big picture perspective, I would tell you that we continue to be very optimistic about originations in 2026.

Our Q1 activity was a record-breaking for us at $1.8 billion of commitments. We've closed an additional approximately $79 million of commitments quarter-to-date, and we have another $506 million of signed nonbinding pending commitments.

And as I said in my prepared remarks, based on the current pipeline, we expect that number to continue to grow. -- our investment teams are continuing to stay very focused and patient and disciplined with respect to capital deployment. But given the volume of deal flow that we are seeing given how we've positioned our business in terms of having appropriate liquidity and conservative balance sheet, we feel pretty optimistic about what that will translate into for 2026 capital deployment..

Awesome.

That's it for me. I appreciate the color there.

We'll take our next question from Cory Johnson with UBS.

I was wondering if you can maybe square '08. So you guys have had or having quite a bit of M&A in your portfolio when the M&A market is a bit slow, I guess, at the moment. So I guess what maybe are you seeing in your portfolio, what type of companies are you seeing the M&A market where you're able to see the success and have upcoming higher prepayments and such?

Thanks, Cory. I think honestly, the credit goes to our investment teams. I've said this consistently over the last several years. I think our investment teams do an incredible job at identifying, selecting and underwriting deals for the best companies that are out there.

And they've done a great job over the last few years, finding companies that we think are very attractive M&A targets for both strategic and financial buyers.

Year-to-date, we've had, as I mentioned in my prepared remarks, we've had 4 new companies announced M&A events that covers both life sciences companies and technology companies.

I would also emphasize that we are aware of several additional companies in our portfolio that are in active M&A discussions and so I think that gives us confidence that we'll see continued strong M&A activity for the remainder of 2026.

I would sort of caveat that statement by saying and reiterating what I said in my prepared remarks is that we are seeing some, I would say, increased variability with respect to timing and valuation, and that's something that we'll continue to monitor over the coming quarters.

And then just one other thing, going back to the structural changes that you mentioned that you've been able to see in the terms of your underwriting. You also had mentioned earlier about how there was a significant decline in PIK. Is that decline in PIK that you're expecting, is that just to do with the payoffs?

Or are you sort of more leaning a way towards PIK. Is that something that's possibly changing in the terms that perhaps you might not have to give as much on that end as perhaps you did before to wind deal?

Sure. Great question for you. And I would sort of say 2 specific things. So first and foremost, the majority of the deals that we underwrote with PIK occurred in 2024 and 2025, and that was consistent with our public guidance about moving into larger, later-stage, more mature companies where PIK is a little bit more prevalent.

Given the fact that our average loan duration has tended to be roughly 18 to 24 months over the last several years, we expect, and we're currently seeing many of those loans now come up for prepayment.

As those loans prepay, the accrued PIK is satisfied and paid in cash. So we saw significant activity related to that point in Q1 and we expect to continue to see significant activity over the next several quarters in that regard. The second element is also what you just asked, which is we are intentionally deprioritizing PIK on new investments.

And so it's really a combination of those 2 things. But the largest driver of the decrease has to do with the fact that we had significant cash collections, and we expect that to continue in 2026.

We'll take our next question from Casey Alexander with Compass Point.

First of all, congratulations, Seth, on the new posting. And Andrew, welcome back to the publicly traded BDC marketplace. I'm struck by -- that's a really healthy amount of prepayments that you're suggesting. And to my knowledge, at least one of them is a really good-sized software prepayment -- and I'm just wondering, this gives you -- does this give you a chance to kind of influence and restructure the portfolio a little bit?

And move off of software, some or Hercules history has been to kind of fly into the wind when things get turbulent, and that's where better results have come from. Seth said, there's higher optionality coming from these repayments. And I'm just kind of curious as to how you think you might use that optionality to influence the portfolio?

Yes. It's a great question, Casey. And again, we did increase the guidance pretty considerably, and we feel very confident with that increased guidance because of either already occurred or known M&A events and you identified one, which is a large software loan that has already repaid as a result of M&A.

We view it very favorably and it does give us the opportunity to reposition the portfolio on a go-forward basis. That does not mean we are deprioritizing software. That does not mean that we are running from software companies.

And I said that specifically in my prepared remarks, our team is continuing to look at evaluate, identify what we think are very strong and we're going to continue to pursue that. Having said that, all of that recycling gives us the ability to also redeploy that capital into other parts of our technology book, space defense tech network communications, business services, et cetera.

And so I would expect to see a repositioning of the portfolio as that capital comes in from payoffs and as our teams get to redeploy it. We are focused on identifying what we think are the most attractive debt opportunities irrespective of specific subsector allocation.

Okay. Great. My follow-up to that is, I would imagine that if there's a software deal being done, that spreads are considerably wider -- but most participants that we've heard from thus far have said that as health and happens, when there's volatility and considerable widening of spreads deals just kind of dry up in that sector.

Is there stuff that can actually be done? Are there deals that are actually getting done that are out there because some of the other participants in the market have said that it's really short.

Yes. So it is certainly less than it was, but it has not dried up. So we are continuing to see -- we are continuing to evaluate. We are continuing to talk to the venture and growth stage software companies. .

I would say that the volume right now is lower than it was, for example, in the second half of last year, but I would absolutely not characterize it as having dried up. The ones that we are speaking to in our team's opinion, are of a very high quality and deals that we would feel very comfortable underwriting.

Whether we can get to a point where a deal makes sense for us and them is still TBD, but that's certainly not slowing down our capital deployment, as evidenced by the fact that we have between closed quarter-to-date and pending quarter-to-date over $580 million of signed curses.

We'll take our next question from John Hecht with Jefferies.

I think this is just sort of an extension of the last discussion, and that is when you are getting to the table to do a new debt deal or with a software company or somebody that might be in the thesis of vulnerable to changes from AI.

What are -- do you guys are getting consistent terms well covered, which is consistent with what you guys have had forever. What are the -- I'm interested in the other side of that equation are the venture capitalists, when they're adding more capital to the businesses, are they taking a different approach to valuation or how they think about deploying their capital back into these businesses?

Yes. Thanks for the question, John. A couple of things. First, with respect to new investments, I want to emphasize again -- as we think about underwriting in this environment, we are choosing to prioritize structure over pricing.

So rather than pushing for an additional 20, 25, 30 basis points of yield, our teams are pushing for tighter structure, stronger covenants and better overall underwriting. Whether you ultimately close a deal with a 12% yield or a 12.25% yield, not going to make a big difference. You closed the deal that's not structured appropriately and it results in a loss it's going to make a big difference.

So that's what we are emphasizing. That's what we are prioritizing with respect to new originations.

Okay. And then -- you mentioned -- I mean this is consistent with what everything you would say, but a little bit more in bioscience and less in tech and the time frame given what you just said. .

Anything worth calling out in life sciences that is an interesting development that you guys are sort of following and think could be the big new wave of opportunity.

Yes, it's a great question. I think the key for us is portfolio balance, right? We tend not to overreact to a material degree in either direction. For the last several quarters, we have been slightly more weighted towards life sciences, but we're talking about 55%, 60% allocation versus our sort of traditional 50-50 target. .

We're seeing high-quality opportunities on both life sciences and technology. I think specifically on the Life Sciences side, I would sort of note a couple of things that we think are ultimately tailwinds. Number one, there's obviously been a fair amount of disruption and turmoil with the I think that has caused a lot of what we believe to be very strong companies to want to be positioned from a balance sheet strength perspective.

And so we're seeing companies that maybe historically where the FDA was a little bit more sort of consistent and reliable. We're seeing those companies want to strengthen their balance sheet and get ahead of that. So I think that's working in our favor.

Obviously, we're watching the developments at the FDA pretty closely. But we have continued to see companies produce strong positive clinical results. We have continued to see companies get drugs approved. So we're very optimistic about what the life sciences ecosystem looks like on a go-forward basis.

And I do just think these companies right now, given some of the FDA uncertainty and volatility want to strengthen their balance sheets and get ahead of that, and that's working in our favor.

We'll take our next question from Christopher Nolan with Ladenburg Dolman.

Scott, on your comments on prioritizing structure over yield, given AI right now is everything is in flux for these companies, and it could result in replacing a love of headcount. Is the structure about expense -- income statement related items, more so than in the past?

Yes, Chris, I certainly appreciate the question. I'm not going to give our road map on a public call, just given that we're doing some very specific things right now on the underwriting and structuring side, and we want to keep that internal and proprietary.

I will say that we have made some changes with respect to how we are thinking about structuring these deals that involves duration that involves structure that involves covenants. It really involves the totality of things. And there's no 1 size fits all. There's no cookie cutter for us. We try to custom tailor a solution for each individual company that we think gives us the best risk-adjusted returns.

Great. And then as a follow-up on the increased M&A activity, how much of this is being driven by AI just companies looking to exit?

Very little of it, to be honest. There's a balance -- our increased guidance reflects the balance of life sciences and technology companies. In the majority of those, there's really no correlation at all to on a couple of the larger M&A events, you could argue that strategics are trying to get ahead of the AI curve, but we would not attribute the increase to anything specifically with respect to AI.

[Operator Instructions] Our next question from Ethan Kaye with Luca Capital Markets.

I'll keep it relatively short here. You mentioned just a follow-up on the PIK conversation. You mentioned you're deemphasizing pick on new investments. I guess I'm just curious what's the motivation for doing that? We've heard kind of many peers over the last several years defending the virtues of PC usage. I guess I'm curious whether something has changed in your view on that topic.

It's a good question. Nothing has changed outside of -- we were pretty consistent that we did not want PIK to become a significant part of our income. For the end of last year, our PIK as a percentage of revenue increased to approximately 10.5%.

That was close to sort of the self-imposed limit that we have put internally. So I think naturally, we just want that to slowly work its way down. And I would also say in the current environment, we are not finding a need to use PIK as frequently as we were over the course of 24 and 25. And all else being equal, we would certainly prefer cash versus PIK income.

I'm showing no further questions. I would like to now turn the call back to Scott Bluestein for any closing remarks.

Thank you, Stephanie, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q2 2026 earnings call. Thanks, and have a great rest of the day. Thank you.

This does conclude today's Hercules Capital First Quarter 2026 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.

Good afternoon. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]

I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, Angela. Good afternoon, everyone, and welcome to Hercules conference call for the fourth quarter and full year 2025. 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 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'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q4 and Full Year 2025 Earnings Call. 2025 was another year of record operating performance, record originations, platform expansion and strong and stable credit for Hercules Capital. We were once again able to set several new financial and performance records. And deliver strong platform growth, demonstrating the stability and consistency of the Hercules platform. Hercules crossed the finish line in record fashion by delivering another strong quarter of record commitments, which led to annual records for new debt and equity commitments, gross fundings, net debt portfolio growth and both total and net investment income.

Our momentum continued in Q4 with record originations of $1.06 billion, which drove record annual originations of nearly $4 billion and record annual gross fundings of $2.28 billion. Our record fundings led to a new record net debt portfolio growth in 2025. The strong new business activity throughout the year helped to deliver new annual records for both total investment income and net investment income. Our performance in 2025 and our continued confidence in the trajectory of business, put us in position to once again declare a new supplemental distribution program for our shareholders.

Despite operating in a declining rate environment, we were able to achieve 120% coverage of our quarterly base distribution of $0.40 per share in the fourth quarter and maintain $0.82 per share of spillover income. In addition to not making any changes to our quarterly base distribution, we are maintaining the same quarterly supplemental distribution as last year. Driven by the growth of both the BDC and our private credit funds business. Hercules Capital is now managing more than $5.7 billion of assets, an increase of more than 20% from where we were at year-end 2024.

Let me recap some of the highlights and achievements for 2025. Record new debt and equity commitments of $3.92 billion an increase of 45.7% year-over-year, record gross fundings of $2.28 billion, an increase of 25.9% year-over-year. Record total investment income of $532.5 million, an increase of 7.9% year-over-year, record net investment income of $341.7 million an increase of 4.9% year-over-year. Record net debt portfolio growth of approximately $748.5 million. Consistent and growing quarterly dividends from our wholly owned RIA, which generated $23.4 million in dividend and other contributions for the company in 2025.

6 consecutive years of delivering supplemental distributions to our shareholders and record platform-level year-end assets under management of more than $5.7 billion. An increase of 20.5% year-over-year. As we enter 2026, we continue to expect higher-than-normal market and macro volatility and we are already seeing this play out with the recent valuation reset that is taking place in certain parts of the tech ecosystem. With our disciplined credit-first approach to underwriting, and our unwavering commitment to always making decisions that we believe are in the best interest of our shareholders and stakeholders.

We remain confident in the strength and stability of the Hercules platform and our ability to continue to generate strong operating results irrespective of the market backdrop. The expansion of our platform capabilities over the last several years, and our expectation for continued market volatility. We expect a very robust new business environment for Hercules in 2026. Our expectation is that we will see more strategic M&A more capital markets activity and more support for the innovation economy in 2026. We are already seeing this come to fruition in Q1.

As we have done over the last several years, we intend to continue to manage our business and balance sheet defensively, while maintaining the flexibility to take advantage of market opportunities that we expect to arise. This includes continuing to enhance our liquidity position as needed, further tightening our credit screens for new underwritings, staying focused on asset diversification and maintaining our higher-than-normal first lien exposure, which was approximately 90% again in Q4. We believe that we are incredibly well positioned to benefit from a more favorable originations market in 2026, which we expect will be a key differentiator of our business this year.

Let me now recap some of the key highlights of our performance for Q4. In Q4, we originated record total gross debt and equity commitments of $1.06 billion and gross fundings of over $522 million. We generated total investment income of $137.4 million and net investment income of $87 million or $0.48 per share. With record growth in our debt investment portfolio in 2025 and given that nearly 75% of our prime-based loans are now at their floors, we are generating a level of core income that amply covers our base distribution of $0.40.

We generated a return on equity in Q4 of 16.4% and our portfolio generated a GAAP effective yield of 12.9%, which was impacted by lower early payoffs and a core yield of 12.5%, which was consistent with Q3. We expect core yield to decline slightly in Q1 with the full impact of the most recent Fed rate cut. Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high-quality originations versus chasing higher-yielding assets, which we believe have more risk. While delivering record new originations in Q4, we still maintained a conservative and defensive balance sheet.

As we guided, GAAP leverage increased to 104.4% in Q4, up from 99.5% in Q3. Our Q4 GAAP leverage remained at the very low end of our typical historical range of 100% to 115% and below the average of our BDC peers. We ended Q4 with over $1 billion of liquidity across the platform, and we further strengthened our liquidity position with our recent $300 million investment grade bond offering. The current market volatility is creating a very favorable capital deployment environment for Hercules, and we want to ensure that we are positioned to opportunistically take advantage of that for the long-term benefit of our shareholders and stakeholders.

The focus of our origination efforts in Q4 was on maintaining a disciplined approach to capital deployment while emphasizing diversification across the asset base. Our Q4 funding activity was well balanced between life sciences and tech companies. Although our new commitment activity was more heavily weighted towards life sciences companies, which reflects a slightly more defensive posture. This is consistent with our public guidance during our Q3 call, where we noted certain pockets of frothiness in the market that we were avoiding.

In Q4, approximately 69% of our commitments and about half of our fundings were to life sciences companies, while approximately 31% of our new commitments were to tech companies. We funded debt capital to 33 different companies in Q4, of which 12 were new borrower relationships. For the year, we added 39 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter and supporting our existing portfolio companies will continue to be a key priority for us in 2026.

Our available unfunded commitments declined to approximately $385.6 million from $437.5 million in Q3. Again, reflecting a slightly more defensive positioning of the portfolio. The momentum that we saw in Q1 for new originations has further accelerated in Q1. Since the close of Q4 and as of February 9, 2026, our investment team has closed $894.8 million of new commitments, and funded $253.9 million. We have pending commitments of an additional $587.5 million in signed nonbinding term sheets and we expect this number to continue to grow as we progress in Q1.

Our active pipeline remains very robust, both in terms of quantity and most importantly, quality. And our quarter-to-date commitment activity has remained more heavily weighted towards life sciences companies. We are focused on maintaining our high bar for new originations, given some of our recent market observations. The volume of deals that our teams are screening and passing on remains elevated. And yet we are continuing to see deals get done in the market without strong structure, and well outside of what we believe are prudent underwriting metrics for the asset class.

As we have always done, we intend to remain disciplined, patient and focused on the long term while being aggressive where we believe it makes sense. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q4, we had 4 new M&A events in our portfolio, which included 1 life sciences portfolio company and 3 technology portfolio companies announcing acquisitions. That brings us to 15 M&A events plus 1 IPO in our portfolio through year-end.

We had 1 additional technology portfolio company announced an M&A event in Q1 quarter-to-date. Based on current market conditions and the volatility, we respect -- with respect to valuations, we expect exit activity to accelerate in 2026. Early loan repayments of $149.7 million came in at the lower end of our range of $150 million to $200 million for Q4. The lower level of early loan prepayments had a small negative impact on Q4 NII, but it helped drive strong net debt portfolio growth and continues to position us well for strong core earnings growth into Q 2026. For Q1, we expect prepayments to be in the range of $150 million to $200 million, although this could change as we progress in the quarter.

Our net asset value per share in Q4 was $12.13, an increase of 0.7% from Q3 2025. We ended Q4 with solid liquidity of $525.5 million in the BDC and over $1 billion of liquidity across the platform. Our liquidity position was further boosted by the $300 million capital raise that we completed post quarter end with healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade corporate credit ratings. We remain well positioned to compete aggressively on quality transactions, which we believe is prudent in the current environment. Credit quality of the debt investment portfolio remains strong and improved quarter-over-quarter.

Our weighted average internal credit rating of 2.20 improved from the 2.27 rating in Q3 and remains well within our normal historical range. Our Grade 1 and 2 credits increased to 66.6% compared to 64.5% in Q3. Grade 3 credits decreased slightly to 31.7% in Q4 versus 32.7% in Q3. Our rated 4 credits decreased to 1.7% from 2.8% in Q3, and we did not have any rated 5 credits for the third consecutive quarter. The 1.7% of loans rated at 4 and 5 as of year-end is the lowest that we have reported since Q3 of 2022.

In Q4, the number of companies with loans on nonaccrual decreased by 1 to a single loan on nonaccrual with an investment cost and fair value of approximately $10.7 million and $6.3 million, respectively, or 0.2% and 0.1% as a percentage of our total investment portfolio at cost and fair value, respectively. In Q4, we generated $20.3 million of net realized gains. And as of the most recent reporting that we have, 100% of our debt investments that are on accrual are current with respect to the payment of scheduled principal and interest.

With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring remains enhanced given the volatility in the market. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we do will continue to serve us well. As of the end of Q4, the weighted average loan-to-value across our debt portfolio was approximately 14%. Our asset base is intentionally diversified with approximately 50% of our assets in our life sciences vertical, and approximately 50% of our assets in our technology vertical.

No single subsector makes up more than 25% of our total investment portfolio and our debt investments are spread across 127 different companies. With the continued enhanced focus on PIC across the private credit markets, as well as the recent market uncertainty surrounding software investments broadly. We wanted to provide some additional commentary on both topics for Hercules. For Q4, PIC was approximately 10.4% of total revenue, which decreased from where it was in Q3 and during the first half of 2025. Approximately 86% of our PIK income in Q4 was attributable to PIK that was part of the original underwriting and not a result of any credit or performance-related amendment. Nearly 91% of our PIK income in Q4 came from loans that we rated 1, 2 or 3.

With respect to the increased focus on software and AI-related investments, we note the following. Over the coming years, we believe that AI will be a net positive for our business and investment portfolio, which is largely comprised of innovative tech-oriented businesses that embrace technology with an entrepreneurial mindset. Many of our portfolio companies are differentiating themselves from legacy software competitors by integrating general and more importantly, agenetic AI into their core product offerings.

Many are also led by technical founders, which we believe provides a distinct advantage as companies look to integrate AI into their software products. AI will continue to become a key component of software offerings and many software companies will benefit from that. The software companies that are most susceptible to AI disruption are the legacy providers that are not providing a core mission-critical business function, utilizing proprietary data from their customers and who are not analyzing the data that they do have with AI to then offer solutions to customers.

Hercules factors this into our technology underwritings, and our focus over the last 12 to 18 months has largely been centered on software companies with a hardware moat or with customer bases that are highly regulated. Hercules does not lend into pure-play AI or data center GPU financing structures. This deliberate positioning allows us to avoid the highest volatility, highest risk segments of the market while still constructing a portfolio of companies that we believe will benefit from the operating efficiencies and productivity gains emerging across the broader AI ecosystem.

Many of the software companies in our portfolio serve as the gatekeepers to their customers' structured data and they provide the tools to these customers that serve mission-critical functions. Our software portfolio is largely comprised of businesses who have very specific domain expertise and competencies with very high switching costs for customers.

We continue to underwrite the software sector very conservatively with ARR attachment points less than 1x on average, and historical duration of our software loans less than 24 months, which materially derisks the debt portfolio. On the Life Sciences side of our business, we are continuing to see many of our health care services companies and drug discovery companies benefit from the efficiencies that can be derived from utilizing some of the new AI tech that is now available to them.

Lastly, underwriting growth stage and venture-backed software credits is fundamentally different than more traditional and customary middle market software credits. In the latter, deals are generally underwritten with LTVs in the 40% to 60% range, debt-to-invested equity ratios in the 50% to 70% range and that ARR attachment points between 1 and 2.5x. For us, with our software credits, we are targeting LTVs that are less than 20%, debt to invested equity ratio is less than 30% and and ARR attachment points that are sub 1x, which we believe reflects a more conservative approach to underwriting these credits.

Venture capital investment activity in Q4 and again, paralleled what we experienced in our deal flow and originations. Full year 2025 investment activity was the second highest in history at $339.4 billion, second only to the $358.2 billion invested in 2021, according to data gathered by PitchBook and BCA. While the aggregate data remains strong, it remains highly concentrated with over 65% of the full year VC equity investments going into AI and cybersecurity companies. M&A exit activity for 2025 for U.S. venture capital-backed companies was $140.7 billion. Again, the second highest amount since 2021.

The number of IPOs for the year remained flat compared to 2024, but the dollars rates increased by nearly 3x over 2024. Fundraising for VC firms slowed for the third straight year. to $66.1 billion in 2025, and this is something that we will watch closely in 2026. Consistent with the aggregate data for the ecosystem, during Q4, capital raising across our portfolio remains strong, with 20 companies raising $2.9 billion in new capital. For 2025, we had 57 companies raised over $7.9 billion in new capital, which is the highest amount since we began tracking the data across our portfolio.

Given our strong sustained operating performance, we exited Q4 with undistributed earnings spillover of $149.9 million or $0.82 per ending shares outstanding. For Q4 we are maintaining our quarterly base distribution of $0.40, and we declared a new supplemental distribution of $0.28 for 2026, which will be distributed equally over 4 quarters. or $0.07 per share per quarter for a total of $0.47 of shareholder distributions each quarter. Our Q4 net investment income covered our base distribution by 120% and our full distribution, including our $0.07 supplemental distribution by 102%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions this year.

This is our 22nd consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. Similar to what we did at year-end 2024, we want to provide a brief update on our growing private fund business, which continues to provide meaningful benefits to Hercules Capital. As a reminder, Hercules Advisor LLC is a wholly owned subsidiary of Hercules Capital, our internally managed BDC. And as a result, 100% of the earnings and value of that business, benefit our public shareholders and stakeholders.

We are very excited about the momentum in this business and the value that we are delivering for our institutional partners, and we view it as a strong tailwind for Hercules and our shareholders moving forward. Since inception in 2021, HTGC has received approximately $65 million in cumulative benefits from its wholly owned private credit funds business. Hercules Advisor LLC, now manages nearly $2 billion in committed equity and debt capital. And these private funds continue to provide a differentiated avenue for institutional investors to access the scale and proven performance of Hercules.

During 2025, between new capital commitments and the extension of existing capital commitments, we raised over $1 billion across our private fund business. In closing, our scale, institutionalized lending platform and our ability to capitalize on our rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. In Q4, Hercules delivered its 11th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments.

Despite the declining rate environment that we are now operating in, we were able to achieve 120% coverage of our quarterly base distribution in Q4. Our continued success is attributable to the tremendous dedication, efforts and capabilities of our 115-plus 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.

Thank you, Scott, and good afternoon and evening, ladies and gentlemen. 2025 was another very strong year for Hercules Capital with record operating performance and an acceleration of the growth of the Hercules platform. Our strong business momentum and performance results throughout the year continued into the fourth quarter. We delivered strong growth across both the BDC and our wholly owned private credit fund business, which continues to provide us with significant capital flexibility and the capacity to take advantage of market opportunities as they arise. .

We continue to maintain strong available liquidity of approximately $526 million as of quarter end in the BDC and more than $1 billion across the platform including the adviser funds managed by our wholly Home subsidiary, Hercules Capital -- Hercules Advisor LLC. As mentioned by Scott, after quarter end, we strengthened our liquidity position by issuing $300 million of institutional 5.35% unsecured notes. Finally, based on the performance of the quarter, Hercules delivered a quarterly dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.4 million resulted in approximately $6.5 million in NII contribution to the BDC for the quarter. For 2025, Hercules Adviser delivered $23 million in NII contribution to the BDC, an increase of approximately 33% year-over-year.

With those points in mind, I'll review the income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity, and finally, the financial outlook. Turning first to the income statement performance and highlights. Total investment income in Q4 was $137.4 million, supported by our year-to-date debt portfolio growth, core investment income, a non-GAAP measure, increased as well to a record $133.3 million.

Core investment income excludes the benefit of income recognized because of early loan prepayments. Net investment income was $87 million or $0.48 per share in Q4, and this number was partially impacted by prepayments being lower than anticipated in the fourth quarter. Our effective in core yields were 12.9% and 12.5%, respectively, compared to 13.5% and 12.5% in the prior quarter. The effective yield was down on lower prepayments, as previously noted. However, I would highlight that this is the third quarter in a row, our core yield has remained at 12.5%. 12.5% despite the base rate decreases throughout the latter half of 2025.

As of quarter end, approximately 75% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will continue to be muted. Fourth quarter operating expenses were $54.9 million compared to $53.6 million in the prior quarter. Net of costs recharged to the RIA, our net operating expenses were $50.5 million. Interest expense and fees increased to $28.2 million due to the growth of the business and corresponding increase of leverage. SG&A remained stable at $26.7 million, just above my guidance on the growth of the business.

Net of cost recharge to the RIA, SG&A expenses decreased slightly to $22.2 million. Our weighted average cost of debt remained stable at 5.1%. Our ROAE or NII over average equity decreased to 16.4% for the fourth quarter and our ROAA or NII over average total assets decreased to 8.2%. In the NAV unrealized and realized activity during the quarter, our NAV per share increased by $0.08 per share to $12.13 per share. The main driver was the net realized gains and accretion due to the use of the ATM during the quarter.

During 2025, our NAV per share increased by 4%, and this is the highest year-end NAV we've delivered since 2007. During Q4, Hercules had net realized gains of $20.3 million comprised of gross realized gains of $28.8 million, primarily due to the gain on equity investments offset by $8.5 million of losses. The losses were due to $5.3 million of losses on equity investments, $3.1 million from the write-off of 1 legacy debt investment and $0.1 million from a realized loss on debt extinguishment.

Our $16.4 million of net realized depreciation was primarily attributable to $18.3 million of net unrealized depreciation due to reversals of previous quarter appreciation upon a realization event, and $8.9 million of net unrealized depreciation attributable to debt investments. This was partially offset by $8.1 million of net unrealized appreciation attributable to valuation movements in publicly held equity in warrants, $2.4 million of net unrealized appreciation attributable to valuation movements, and privately held equity warrants and investment funds and $0.3 million of net unrealized depreciation attributable to net foreign exchange and escrow movements.

Next, on leverage and liquidity. Consistent with our previous guidance, our GAAP and regulatory leverage increased to 104.4% and 88.6%, respectively, compared to the prior quarter due to the growth in the balance sheet, mostly being financed by leverage. Netting out leverage with cash on the balance sheet, our GAAP and regulatory leverage was 111.8% and 86%, respectively. We ended the quarter with $526 million of available liquidity. As a reminder, this excludes the capital raised by the funds managed by our wholly owned RAA subsidiary. Inclusive of these amounts, Hercules platform had more than $1 billion of available liquidity as of year-end.

The strong liquidity positions us well to support our existing portfolio companies and source new opportunities. As mentioned, subsequent to quarter close, Hercules Capital raised $300 million of institutional 5.35% unsecured notes due in 2029. Finally, on the outlook points. For the first quarter, we expect our core yield to be in the middle of our previous disclosed range of 12% to 12.5%. As a reminder, 98% of our debt portfolio is floating with the floor. And as of today, approximately 75% of our prime-based portfolio is at the contractual floor.

Although very difficult to predict, as Scott mentioned, we expect $150 million to $200 million in prepaying activity in the first quarter. We expect our first quarter interest expense to increase compared to the prior quarter based on the debt portfolio growth. For the first quarter, we expect SG&A expenses of $26 million to $27 million and an RIA expense allocation of approximately $4.5 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter.

In closing, as we report out another record year we have started 2026 with the same momentum of growth and strength of our balance sheet. These 2 dimensions, along with our superior credit standards and selection will help Hercules to continue scaling our platform.

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

[Operator Instructions] We'll take our first question from Brian McKenna with Citizens.

So I appreciate all the detail on the current backdrop for software and AI and that you think it will actually be a net positive for your business and portfolio over time. With all that said, given the dislocation we've seen across the public markets, is there an incremental opportunity here on the deployment front to take advantage of some of this volatility? And if so, where would you be looking to lean into?

Sure. Thanks for the question, Brian. So I hope that we emphasized that in the prepared remarks. We absolutely think that there is an interesting opportunity here for us to play offense and our teams right now across both the tech vertical and the Life Sciences vertical are looking to do that. Hercules has typically performed its best in periods of volatility, and we've tried to position our balance sheet to be able to do the same this time. Our liquidity position is incredibly robust. Our balance sheet is conservative with low leverage, long liquidity and robust liquidity.

And so we do plan to be aggressive with respect to taking advantages of what we see are some pockets of real deployment opportunities. Our Q1 quarter-to-date numbers are as strong as we've ever announced on the Q4 call. If you look at the -- not just the pending, but what's already closed quarter-to-date, we're well north of $1.2 billion, $1.3 billion in commitments for Q1 and a large part of that is us being aggressive in taking advantage of some of the market dislocation that we think is creating some of these unique opportunities that we can be aggressive on.

And then just switching gears a little bit. On the RIA, it's great to hear all the momentum there. And it really feels that business has inflected -- but how should we think about fundraising and growth for that platform in 2026? I know you mentioned the $1 billion of fundraising, if you will, in 2025. And then -- just where does fundraising stand for Fund IV? Will that get wrapped up this year? Could you actually commence fund raising under as in for the next fund? And then are there any other opportunities from a new product perspective? .

Sure. So we continue to be very pleased by the growth of our private funds business. We're not going to disclose additional details outside of what we disclosed on the call, but I can tell you that we absolutely expect to continue to raise additional capital throughout 2026. We expect Fund IV to have a final close in 2026 and discussions are already well underway for what will be the next vehicle as part of our private funds business. I think the key thing that I would continue to emphasize, given our unique ownership structure, the larger that business becomes, the more we're able to raise, the more we're able to deploy, the better it is for HTG shareholders and stakeholders, and that has been and will continue to be our primary focus with that business. .

That's helpful. And congrats on all the momentum into 26.

Thanks, Brian. .

We'll take our next question from Crispin Love with Piper Sandler.

First, just looking at your investment portfolio composition, but 35% is made up of software companies across application software and system software. Can you drill a little deeper within those cohorts. What areas in your portfolio are you most confident in -- and then on the other side, any areas in your portfolio where you're more cautious just given the AI disruption theme out there.

Yes. So look, I appreciate the question, Crispin,. So system software is very different than application software, which is why we break it out. Think of sort of system software as companies that are providing software to more sort of general IT companies, so cybersecurity, for example, whereas application software would be software companies that are providing solutions for more general users, I would tell you that across the board, we generally feel pretty good about what we're seeing in our software portfolio. .

Our view, as I discussed in the prepared remarks is that there should be no ambiguity that AI is a disruptive technology that does not mean that it has to be a destructive technology for all software businesses, software companies that are focused on providing core mission-critical solutions, software companies that are embracing artificial intelligence, software companies that are utilizing and building AI genic solutions into their software offerings, we think are actually going to do pretty well. They'll become more value add for some of their customers. There are software companies that aren't doing that, and we think that those companies will be negatively impacted. That will take place over several years. The way we structure our investments, the way we underwrite with low LTVs, low attachment points and shorter duration than you typically see in software private credit, we think will position us relatively well.

And then just on share a little bit on your views on M&A and IPO activity into '26. You did call out an expectation more strategic M&A -- just what's your view on tech M&A as well as the IPO pipeline or tech companies? And has that been impacted at all just from recent volatility.

Yes. So it's interesting. If you look at the M&A data that we track in sort of each of the last 4 years, so '22, '23, '24 and '25. We've had roughly 1,000 venture-backed M&A exits per year. the dollar volumes are up pretty considerably. So last year, 934 M&A exits, about $84 billion of M&A exits in '25, roughly the same number, so about 1,029 M&A exits, but that number balloons to about $141 billion of transaction value. Our current expectation is that M&A will continue to be robust in '26.

We think that there will be a lot of strategic activity with acquisitions from larger competitors that are picking up some smaller competitors that are distressed from a valuation perspective. And we think that's a net positive for our business. We generally expect the IPO market to remain muted. The number of IPOs that have been done have declined in each of the last 4 years. although the dollar volume has increased considerably, and that's just a function of the number. The IPOs that are getting done tend to be the larger, much larger ones, which is moving that dollar value up despite the number of IPOs remaining flat and we don't expect that to change in 2026.

We'll take our next question from John Hecht with Jefferies.

Congrats on just continued momentum. And I guess my question -- my first question is kind of tied to that. Scott, maybe I know the venture capital companies like to use debt for portion in the last [indiscernible]. It's still a relatively small component of the overall pie for them in terms of capital raising for their portfolio companies. Is the structure of the [indiscernible].

John did disconnect. We'll move on to our next questioner. We'll go next to Finian O'Shea with Wells Fargo.

So a couple of things tied together on 1 and you've had a lot of records this quarter, perhaps even more than usual. But looking at a few other items, ATM has been light for a while. Advisor dividend sounds like a stable guide. The Hercules dividend holds up, but sort of same base dividend. So you keep a lot of supplemental, which tells us less long-term stability on that part. Sort of tying this all together, is Hercules like is the expectation to sort of run in place this year as repayments are high, perhaps the impressive growth you've achieved in the past few years we'll take a bit of a breather, I'll leave it there.

Yes, sure. Thanks for the question, Fin. And the answer is unequivocally no. I think if you take our prepared comments and you look at just the quarter-to-date data for Q1, we have tremendous conviction in the growth opportunity for the platform this year. and we are positioning the business to be able to take advantage of that. A couple of things specifically that you referenced on the ATM. I think we've been very clear on this. We have no interest in using the ATM for the purpose of diluting our shareholders until and unless we actually need that capital. .

And so in periods where we don't need to use the we are not going to use the ATM facility just to raise additional capital. We ended the year with $1 billion of liquidity across the platform over $525 million of that in the BDC, the rest in the private fund business. We've already funded close to $250 billion -- sorry, $250 million of deals in -- and we have well north of $1.4 billion in closed and pending commitments quarter-to-date, which would be the strongest quarter in the history of Hercules Capital, and our pipeline is not showing any signs of slowing down. We also just gave prepayment guidance that was flat from last quarter, so $150 million to $200 million. So our full expectation assuming we can deliver on those numbers is that you will see continued strong growth from Hercules Capital over the course of 2026.

I appreciate that. Just a follow-up on sort of another 1 on the RIA. And I know you tend to hold your cards close here, but I'll give it a shot. Some of your peers are starting to offer or plan to offer venture debt in the nontreated wealth channel. Do you think that's the right -- do you think the sort of product venture debt is right for that market? And then if sort of different question, if these are successful, do you think that's a sort of significant headwind to terms and spreads and so forth in the market?

Yes. So again, I appreciate the question, respectively, I can't speak to what our competitors are doing. And so I'm not going to take a position whether I think that's good or bad. I can just tell you what our focus has been, we think that the best path for capital raising for this asset class in the private fund side of the business is the institutional market. We have 4 active private credit funds right now that are investing. They are 100% institutional with very large institutional well-capitalized investors and that has -- and that will continue to be our focus with respect to raising capital in that channel for this asset class.

And we'll take our next question from John Hecht with Jefferies. .

Back in the queue. Sorry about that. So the question to go back to it was, Scott, I mean, there's been tremendous growth in the venture industry overall. Your momentum, obviously, it's correlated to that. But I'm wondering kind of structurally, are the venture capitalists using debt more as a component of funding their businesses or are you just -- or the momentum of growth just tied to the total industry growth?

So I think it's a function of both, John, I appreciate you jumping back in the queue to ask the question. So there is no question that the overall growth in the ecosystem, the growth in terms of the dollars being invested from the VC partners that we work with. Has created more of a market opportunity, more of a TAM for us. So that is sort of what is contributing to the growth in our business. I would also say that there is a component of the first part of what you said, which is that certain companies are utilizing more debt than they typically would have used and that could be for a variety of reasons.

Number one, because there's a valuation disconnect and they don't want to raise around at a lower valuation could be because they can't raise equity capital, so they're trying to raise as much debt and as much leverage as they can. I would tell you, when we sort of said this in each of our last few calls, with venture or growth stage lending, you have to be disciplined, you have to be patient, you can't chase the market. And I think our teams, while not perfect, I think I've done a pretty good job on that. So if you look at our metrics in terms of debt to invested equity debt to paid-in capital, all of our metrics and all of our ratios are largely flat over the last several years, which at least gives me comfort that we're not chasing some of that aggressiveness in the market as leverage has gone up for many of these companies.

A second question maybe for Seth. Just in terms of deal structures, kind of the minutia there. Anything going on or worth calling out with respect to the call it, the fees that are part of the deals and the structures around that or kind of warrant coverage are those factors changing given some of the recent dislocation.

Yes, John, I'm happy to take that one. So no real change. We're generally pretty consistent in terms of how we structure these deals. I would tell you, and we've always said this, it's not a one-size-fits-all model. So I think our teams work very closely with our management team partners and our VC partners to try to put together custom-tailored solutions that work well for the companies. But generally speaking, the deals are going to have an upfront facility fee, they're going to have a cash coupon with floor protection. The vast majority of our venture and growth stage loans will be based off of prime vast majority of our loans are going to have some form of end-of-term economics.

And then in about 80% of the deals that we do, we will get some form of equity upside, whether it's from warrants or from -- in RTI, which gives us the right to invest in a subsequent equity round. So depending on the profile, depending on the stage, those metrics, those sort of tools that we have may change. But generally speaking, the deals are going to look pretty similar in terms of those different levers.

Our next question comes from Doug Harter with UBS.

Can you just talk about how you look to balance taking advantage of kind of the opportunity from dislocations today versus kind of continuing to be patient in case things get worse before they get better?

Sure. Thanks, Doug. So it's a balance, right? I think our team right now is being pretty targeted -- so we've identified a handful of what we think are very attractive, strong opportunities, and we're going after those opportunities as aggressively as we think is prudent. At the same time, we are making sure that we are maintaining a significant amount of dry powder. I think the $300 million raise that we closed last week, I think, is sort of evidence of that, that we are trying to position ourselves to be aggressive now but not overly aggressive where we utilize all of our available liquidity.

We do think that over the course of the next several quarters, more and more opportunities will come to fruition, and we want to make sure that we're positioned to take advantage of that. So we're being aggressive, we're picking our spots, but I would describe it as targeted. And we expect that to continue certainly over the remainder of Q1 and well into Q2 as well.

Appreciate that. And I guess as you think about the ability to be targeted here, can you get wider wider spreads in these deals in this environment? Or is it you're able to kind of finance and pick kind of cleaner companies or better credits and get the same returns. So just how to think about the risk return trade-off where you're able to kind of pick something up in this environment?

I think it's the latter, Doug. We're focused right now on credit. We're not focused on chasing yield. So I think we're getting relatively speaking, the same overall economics, but we're deploying [indiscernible] we think are better overall more stable scale credits. That's been our focus for the last several years. I think we've tried to emphasize we're not chasing yield, we think that the deals that are getting done outside of sort of the typical yield spot or just a much more challenging difficult stories. And I think we're doing a pretty good job staying away from that. So I would think about it as we are maintaining our underwriting yields, but we're targeting better quality, more mature, more scale, more sophisticated businesses that we think have more staying power. .

We'll take our next question from Ethan Kaye with Lucid Capital Markets.

Most of my have been asked and answered. I just have 1 hopefully, quicker 1 on software. So you talked a bit about kind of a more enhanced or sharper portfolio monitoring approach, given AI disruption risk, I guess, what are the red flags or like warning signs that you're looking out for that could maybe indicate whether AI disruption is materializing -- it sounds like maybe you haven't seen them yet in the portfolio, but any color you can provide on what specifically you're looking for, I think, would be helpful.

Sure. I think it's just -- it's aggressive, active, consistent discussion, conversation and monitoring. One of the benefits that we have of operating at scale, right? And for us, that scale is $5.7 billion of AUM. It's a debt portfolio north of $5 billion. It's 127 different companies. It's $4 billion of committed capital last year. We have access to a lot of different companies, a lot of executives, a lot of venture capital partners. And so we are constantly having conversations with our portfolio ecosystem. -- which I think gives us a pretty good insight as to what our customers, what the investors are hearing and seeing on the ground. We also have very robust documentation -- we require monthly financials -- we require monthly compliance certificates and bring down of reps and warranties. Our investment teams are having conversations with the vast majority of our companies on a biweekly basis where we're touching base, hearing what they are hearing from their customers -- and I think that puts us in a position to sort of avoid the red flag scenario where we can work with our companies to identify the yellow flags where if we start to see deterioration in KPIs, if we start to hear from a good portion of our companies in a particular software vertical that there's some pushback we can react pretty aggressively and pretty quickly.

We'll take our next question from Christopher Nolan, Ladenburg Tallman. .

Scott, in your comments, it sounds like the venture debt market is a little bit more active venture equity market. Is that more a function of just these portfolio companies are now focusing more on cash flow generation rather than growth?

Yes. Chris, I think the venture equity market, certainly in 2025, was incredibly robust, second strongest year on record -- the only year where more equity dollars were invested was 2021, which is sort of the peak of COVID. In 2025, $339.4 billion invested in about 15,000 different venture capital companies. So from the data that we have that we track, the age data is pretty robust. The 1 data point that is not as robust is VC fund raising that has declined in each of the last 4 years. but it's really declined and reverted back to what it was pre COVID where historically, the venture capital firms would raise somewhere between $30 million and $60 billion per year. There was obviously the large spike '21 through '24. And then last year, that number reverted back down to about $66 billion. So that's the 1 data point that was down. But in terms of the equity dollars being invested, those numbers are very robust. They've increased in each of the last 3 years. And as I mentioned, 2025 was the second strongest year on record since we've been tracking it.

As a follow-up question, in the news has been reported that a new tax law in California could tax unrealized gains. And I think it applies only to 1 billionaires. But how does that apply to the conversations that you're having with your portfolio companies?

It actually doesn't. So we're not interested in the equity exit. I mean we wanted to be successful and such, and we certainly want these founders to be successful. But our main goal is getting our debt repaid, making sure that they're operating to the plan in between granting them the money and getting it back. So we're not focused on that at this time. .

I'm showing no further questions. I would now like to turn the call back to Scott Bluestein, for any closing remarks. .

Thank you, Angela. -- and thanks to everyone for joining our call today. We look forward to reporting progress on our Q1 2026 earnings call. Thanks, and have a great rest of the day. .

This does conclude today's Hercules Capital Fourth Quarter and Full Year 2025 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.

Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Hercules Capital Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, David. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 2025. 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 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'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2025 Earnings Call. Hercules wrapped up the first 3 quarters of 2025 by delivering another strong quarter of record fundings and record operating performance while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations and disciplined underwriting. Our platform momentum continued in Q3 with originations of over $846 million, which led to record originations of $2.87 billion for the first 3 quarters of 2025, putting us on pace to exceed our previous full year record of $3.12 billion.

Our record fundings for Q3 of $504.6 million led to $95.9 million of net debt portfolio growth and a new record with over $557.8 million of net debt portfolio growth in the first 3 quarters of 2025. The strong new business that we generated during the third quarter led to continued solid net debt portfolio growth, and that helped drive -- sorry, and that helped Hercules generate record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share during Q3. Despite operating in a declining rate environment, we were able to achieve 122% coverage of our quarterly base distribution of $0.40 per share in the third quarter and maintain $0.80 per share of spillover income.

Our strong Q3 performance was highlighted by new records, including record total gross fundings for a third quarter of $504.6 million, an increase of 85.5% year-over-year, record total investment income of $138.1 million, an increase of 10.3% year-over-year, record period ending assets under management of approximately $5.5 billion, an increase of 20.7% year-over-year. Our first 3 quarters performance was highlighted by several new records, including record total investment income of $395.1 million, record net investment income of $254.7 million, record total gross new debt and equity commitments of $2.87 billion, record total gross fundings of $1.75 billion. and record net debt investment portfolio growth of over $557.8 million.

Our performance results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency and scale of the Hercules platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders. Our approach to the current market is centered around 3 core themes: disciplined credit underwriting, managed and controlled portfolio growth and maintaining balance sheet strength and flexibility. We believe that this will best position the company to continue to deliver strong relative operating results, irrespective of the market environment. We noted in our Q2 2025 earnings call, that we continue to see a more favorable new business landscape broadly and that we were expecting the business to be able to take advantage of that.

Our expectation was that we would deliver strong new business over the second half of the year, but that Q3 would be slower as it typically is for our ecosystem. After a slow start to Q3, our investment teams were able to take advantage of several opportunities, which helped us deliver record Q3 funding performance. We are maintaining our expectation that origination activity will remain strong through year-end, and we have already delivered record new commitments and record new fundings for the year. As we noted earlier this week, Hercules recently achieved another meaningful milestone by reaching the $25 billion mark in total cumulative debt commitments since our first origination in October 2004. This is a tremendous achievement that reflects the enduring strength and impact of the Hercules platform and validates our approach of building a company focused on what is best for our shareholders and stakeholders, treating our employees the right way and providing certainty and consistency in the market to our borrowers, prospects and their investors. While the new business environment remains constructive, we are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets, as we noted on our last earnings call.

Having operated in this asset class for over 21 consecutive years and through several different credit cycles. We know the importance of being disciplined and true to the underwriting rigor that has made Hercules the market leader, and that is exactly what we intend to continue to do. We maintained a conservative and defensive balance sheet while still delivering strong originations and record funding performance for Q3. In Q3, we maintained our high first lien exposure which remained above 90% and continues to be towards the high end of our BDC peers. As we guided, GAAP leverage increased modestly to 99.5% in Q3, up from 97.4% in Q2, and we did not utilize our ATM during the quarter.

Our Q3 GAAP leverage remained at the low end of our typical historical range of 100% to 115% and below the average of our BDC peers. We ended Q3 with over $1 billion of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well. Let me now recap some of the key highlights of our performance for Q3. In Q3, we originated total gross debt and equity commitments of over $846 million and record gross fundings of over $504 million. We generated record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share.

We achieved 122% coverage of our quarterly base distribution of $0.40 per share. We continue to be very well positioned with regards to dividend coverage in a declining rate environment. With the record growth in our debt investment portfolio through the first 3 quarters of 2025, and given that nearly 75% of our prime-based loans, which comprise approximately 82% of the portfolio, are now at their floors, we believe that we are generating a level of core income that amply covers our base distribution of $0.40 per share. We generated a return on equity in Q3 of 17.4% and our portfolio generated a GAAP effective yield of 13.5% in Q3 and a core yield of 12.5%, which was consistent with Q2.

Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high-quality originations versus chasing higher-yielding assets with more risk or loosening deal structure to drive short-term portfolio growth. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a specific competitive advantage. Our Q3 originations activity was well balanced between life sciences companies and technology companies.

In Q3, approximately 54% of our commitments and 50% of our fundings were to life sciences companies, while approximately 46% of our commitments and 50% of our fundings were to tech companies. We funded debt capital to 24 different companies in Q3, of which 7 were new borrower relationships. Year-to-date, through the end of Q3, we have added 27 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $437.5 million, down from $471.5 million in Q2. Over 50% of our gross fundings for Q3 occurred in the last month of the quarter, and that momentum continued into early Q4. Since the close of Q3 and as of October 28, 2025, our investment team has closed $554.4 million of new commitments and funded $237.4 million.

We have pending commitments of an additional $425.5 million in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q4. Our active pipeline remains robust, with our closed quarter-to-date activity as of October 28, 2025, we have already exceeded our previous annual records for gross new commitments, and new fundings, demonstrating the continued growth and scaling of our platform. While Q4 is typically a very strong originations quarter for the venture and growth stage markets, we remain focused on maintaining our high bar for new originations, given some of our recent market observations. We are continuing to see a lot of companies in our ecosystem, looking to access the credit markets that lack scale and what we believe to be solid equity support.

The volume of deals that we are screening and passing on continues to be near record levels, and we are continuing to see deals get done without strong structure and well outside of what we believe are prudent underwriting metrics for our asset class. We do not expect many of these deals to age well. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters. Lending to cash flow-negative growth-stage companies requires patience, prudence and experience. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q3 and quarter-to-date Q4, we've had 4 M&A events in our portfolio, which included 2 life sciences portfolio companies and 2 technology portfolio companies announcing acquisitions.

That brings us to 10 M&A events plus 1 IPO in our portfolio year-to-date through October 30, 2025. Based on current market conditions and improving corporate sentiment, we continue to expect exit activity to accelerate towards year-end. Early loan repayments came in slightly higher than expected in Q3 at approximately $262 million. Even with the higher level of early loan prepayments, we still achieved strong net debt portfolio growth given the strong funding levels in the quarter, which continues to position us well for strong core earnings growth in the remainder of 2025 and into 2026. For Q4 2025, we expect prepayments to be lower and in the range of $150 million to $200 million, although this could change as we progress in the quarter.

Credit quality of the debt investment portfolio remained strong. and relatively the same quarter-over-quarter. Our weighted average internal credit rating of 2.27 increased just slightly from the 2.26 rating in Q2 and remains well within our normal historical range. Our grade 1 and 2 credits increased to 64.5% compared to 62.9% in Q2. Grade 3 credits decreased slightly to 32.7% in Q3 versus 34.7% in Q2. Our rated 4 credits increased to 2.8% from 2.4% in Q2, and we, again, did not have any rated 5 credits. In Q3, the number of companies with loans on nonaccrual increased by 1. We had debt investments in 2 portfolio companies on nonaccrual with an investment cost and fair value of approximately $52.2 million and $47.2 million, respectively, or 1.2% and 1.1% as a percentage of our total investment portfolio at cost and value, respectively.

Subsequent to quarter end, we successfully worked through and resolved the 1 new loan that was added to nonaccrual during the third quarter. The result of that effort was that we received net proceeds on that debt position that were approximately 56% higher or nearly $14 million higher that our Q2 fair value mark. Despite a small realized loss on that particular loan, our realized IRR on that debt position was approximately 13.2%. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring still remains enhanced given the volatility in the markets broadly and the ongoing government shutdown, which has now extended into the fifth week.

We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we will do will continue to serve us well. As of the end of Q3, the weighted average loan-to-value across our entire debt portfolio was approximately 16% and we have not noted any meaningful deterioration in credit since our last earnings call. Our net asset value per share in Q3 was $12.05, an increase of 1.8% from Q2 2025. This is the highest net asset value per share that we have reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC and over $1 billion of liquidity across our platform.

With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade corporate credit ratings, including an investment rating upgrade to Baa2 from Moody's, we remain well positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Given the enhanced focus on PIK, across the private credit markets, we wanted to provide some additional disclosure on PIK income for Hercules. For Q3, PIK was approximately 10.5% of total revenue. which was flat from where it was during the first half of 2025. Approximately 85% of our PIK income in Q3 was attributable to PIK that was part of the original underwriting and not a result of any credit or performance-related amendment.

Nearly 90% of our PIK income in Q3 came from loans that we have rated as 1, 2 or 3. While there was only a single loan that was rated 4 that was generating PIK income during the third quarter. Further, excluding 100% of our PIK income during Q3, the business still generated cash net investment income that provided 111% coverage of our base dividend. Philosophically, we will selectively use PIC at underwriting to enhance income for certain credits that we believe are stronger and more stable, and we expect this to continue to be the case going forward.

Venture capital investment activity in Q3 mirrored the strength that we experienced in our deal flow and originations. 2025 continues to demonstrate a healthy pace with $80.9 billion in Q3 and $250.2 billion invested for the first 3 quarters of 2025, according to data gathered by PitchBook/NVCA the $250.2 billion of investment activity already represents the second highest year in history, exceeding the $236.1 billion invested in 2022. While the aggregate data remains strong, it is highly concentrated with over 67% of all year-to-date VC equity investment going into AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies was $20 billion. Both the number of IPOs and dollars raised increased in Q3 and continues to improve.

Consistent with the aggregate data for the ecosystem, during Q3, capital raising across our portfolio remains strong. with 18 companies raising over $1.3 billion in new capital. For the first 3 quarters of 2025, we've now had 64 companies raise over $5 billion in new capital. Year-to-date, our portfolio companies have raised over $6 billion of new capital. Given our strong sustained operating performance, we exited Q3 with undistributed earnings spillover of $146.2 million or $0.80 per ending share outstanding. For Q3, we are maintaining our quarterly base distribution of $0.40 and our supplemental distribution of $0.07 per share for a total of $0.47 of shareholder distributions.

Our Q3 net income -- net investment income covered our base distribution by 122% and our full distribution, including our $0.07 supplemental distribution by over 104%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions next year. This is now our 21st consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution.

In closing, 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. In Q3, Hercules delivered its 10th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees, or fee accelerations from early repayments. Despite the declining rate environment that we are now operating in, we were able to achieve 122% coverage of our quarterly base distribution in Q3. Our continued success as a company is attributable to the tremendous dedication, efforts and capabilities of our 115-plus 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.

Thank you, Scott, and good afternoon, ladies and gentlemen. Our strong momentum reported in the first half of the year continued throughout the third quarter. As Scott shared, the business activity during the quarter and year-to-date has been exceptional and the record-breaking for our platform. Fundraising and investment deployment in our RIA managed funds also has been very strong, expanding the platform and scaling the business to be even more efficient. We continue to maintain strong available liquidity of $655 million as of the end of the quarter in the BDC and more than $1 billion across the platform, including the adviser managed funds by our wholly owned subsidiary, Hercules Advisor LLC. .

Based on the performance of the quarter, Hercules Advisor delivered a third quarter dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.1 million resulted in approximately $6.2 million in NII contribution to the BDC in Q3. With those points in mind, let's review the regular areas of income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and then finally, the financial outlook. Total investment income in Q3 was another record at $138.1 million, supported by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, increased as well to another record at $127.9 million.

Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.6 million or $0.49 per share in Q3. Our effective and core yields were 13.5% and 12.5%, respectively, compared to 13.9% and 12.5% in the prior quarter. As of quarter end, almost 60% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will be muted. Third quarter gross operating expenses were $53.6 million, compared to $52.2 million in the prior quarter. Net of costs recharged to the RIA, our operating expenses were $49.5 million. Interest expense and fees increased to $27.2 million due to the growth of the business and corresponding increase of leverage. SG&A decreased slightly to $26.4 million, above my guidance on the growth of the business.

Net of costs recharged to the RIA, the SG&A expenses decreased to $22.3 million. Our weighted average cost of debt increased slightly to 5.1%. Our ROAE or NII over average equity increased to 17.4% for the third quarter and our ROAA or NII over average total assets increased to 8.7%. Switching to NAV, unrealized and realized activity. During the quarter, our NAV per share increased by $0.21 to $12.05 per share. This represents an NAV per share increase of 1.8% quarter-over-quarter. The main driver was appreciation of the debt portfolio as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized depreciation was primarily attributable to $28.6 million of net unrealized depreciation on debt investments, $11.3 million of net unrealized depreciation attributable to valuation movements on publicly traded equity and warrant investments and $0.8 million net unrealized depreciation attributable to escrow and other investment-related receivables.

This was partially offset by $5.1 million reversal of or previous quarter appreciation upon a realization event and $2.6 million of net unrealized depreciation attributable to valuation movements in the privately held equity, warrant and investment funds. Hercules also experienced a small net realized loss of $1.8 million, primarily due to losses on equity investments. On leverage and liquidity, our GAAP and regulatory leverage increased to 99.5% and 83.6%, respectively, compared to the prior quarter due to the growth in the balance sheet being financed by leverage. Netting out leverage with our cash on the balance sheet, our net GAAP and regulatory leverage was 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity.

The strong liquidity positions us well to support our existing portfolios, companies as well as source new opportunities. Finally, on the outlook points. For the fourth quarter, we expect our core yield to remain in the range of 12% to 12.5%. As a reminder, 98% of our portfolio -- our debt portfolio is floating with a floor. And as of today, almost 75% of our prime-based portfolio is at the contractual floor. Although very difficult to predict, as stated by Scott, we expect $150 million to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter based on the year-to-date debt portfolio growth.

For the fourth quarter, we expect SG&A expenses of $25 million to $26 million, and an RIA expense allocation of approximately $4 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, the steps that we took in the first half of the year to strengthen our balance sheet, continue to help us grow and scale our platform. I will now turn the call over to the operator to begin the Q&A part of our call. Brian, over to you.

[Operator Instructions] We'll take our first question from Brian McKenna with Citizens.

Great. I appreciate all the detail on the business and the underlying trends and all the momentum. And I also heard your comments around the expectation to continue paying supplemental dividends moving forward. So if I look at the supplemental dividend as a percent of excess earnings above the base dividend, this has totaled about 75% to 80% for the last 2 years. So I don't want to make too many assumptions, but say you hold the line on earnings for next year, $2 of NII, you assume a similar ratio. That implies about $0.30 of supplemental dividends for the full year. So I just wanted to run that math by you and even just some bigger picture thoughts on kind of where the supplemental dividend can go into next year?

Sure. Thanks for the question, Brian. So a little bit premature for us to provide any specificity with respect to the supplemental distribution for next year. That's something that we will announce on the Q4 call in the middle of February. What I can say is, I think your math is pretty accurate and that's sort of how we think about the supplemental distribution, and that's part of the discussion that we'll have with the Board as we approach those year-end conversations. We are very optimistic based on the trajectory of the business and our expected operating performance near term, that we will be very comfortably able to maintain the base distribution and continue to provide a supplemental distribution, what that ultimate supplemental distribution is will be determined by the board at the end of the year. But again, I don't think your math is too far off.

Okay. That's helpful. And then maybe just switching gears a little bit to credit quality. I mean if you just look at all the trends across the portfolio, I mean, they're really strong across the board. And I appreciate the detail on the 1 nonaccrual that was added during the quarter and then that obviously got resolved here post quarter end. But when you look at the portfolio, you look at your business, I mean, does anything stand out in terms of what the biggest driver of this strong credit quality is? It seems like as your platform continues to reach new levels of scale here, the underlying quality of the portfolio has gotten that much better as well. So any thoughts here would just be appreciated.

Yes. Again, appreciate the recognition, Brian, and the question. And I think the answer that I'll give today is the same answer that I would give at any point in our 21-year history, and it's attributable to our investment team and our credit team. I think we have the best team in the business on the investment side. The team is incredibly experienced. Team has been together for a long time. That team knows how to pick the right companies. We're not perfect. We've made mistakes before. We will likely continue to make mistakes, but the credit for our performance is attributable to the quality of our investment team. .

We'll take our next question from Finian O'Shea with Wells Fargo Securities..

Question on the adviser. Was there a change in expense allocation that line looked to a bit stronger than normal this quarter? And I guess if not, am I right? Was there some one-off that drove a higher number?

Yes. No. Thanks, Fin. There's no change in the allocation per se, but it does change as the level of originations occur. And as the AUM continues to go up in the funds, it will continue to increase, but no fundamental change at all in the allocation.

Okay. So is it safe to say at drift, I know in the past, we framed it as a percent of other G&A. I think it really ties to origination. Is it the growth of the RIA and you have similar guidance for next quarter as well. It sounds like on the allocation. Is it growing?

I would say this, Fin. So it is 2 parts. It is the base of the amount of AUM compared to the entire platform. That is part of the allocation. And then the amount of originations will create a little bit of volatility to that calculation every single quarter.

Okay. That's helpful. Can you talk about, I guess, Scott, high level, there was a lot of incumbency this quarter, less on the new portfolio company, borrower front. Any -- I think you maybe tied in with you're kind of projecting continued strength there. Any sort of change in the portfolio mix incumbency versus new going forward?

Sure. Thanks, Fin. No real change. I would sort of note 3 specific things. Number one, we are continuing to see pretty broad-based strength across our existing portfolio with respect to performance milestones and the achievement of specific things that we underwrite to. As those companies perform, they unlock additional capital availability and that's why you saw higher than typical funding for the portfolio in Q3. Second thing that I would note is that, frankly, we saw some better opportunities to deploy capital into the existing portfolio in Q3? And then the third thing that I would note is we still had very strong pure new business origination. We added 7 new companies, which is on the low end of what we typically do, but it was still strong for Q3. We focused on the new business, new borrower side on quality scale originations. And my comments on sort of the pipeline activity and what we saw in terms of frothiness in the market, I think, speaks to the fact that with respect to some of the new deals we saw during the quarter, we were just passing or bidding very conservatively on the vast majority of those transactions.

We'll take our next question from Crispin Love with Piper Sandler.

I have a credit question as well, but just asked a little bit differently. And recently, has definitely been a pickup in credit anxiety just given some loans at banks, some being fraud related and then it seems that private credit and BDCs have been swept up in the media surrounding all this. So first, can you just share your views on this kind of what you've been seeing in your outlook and then just how competitors have been behaving?

Sure. So a pretty broad question, but I'll respond to it with the following: I think what has made Hercules unique and what has allowed us to outperform virtually every competitor in the BDC market for the last several years is the fact that we have been incredibly consistent and conservative with respect to underwriting credit. We don't loosen our standards or get more aggressive in very strong markets. We don't change our stripes if others are doing things that we don't think are prudent. And I think that consistency, that cautious approach has served us well and will continue to serve us well.

Second thing that I would note is that we have not seen any material deterioration in the credit performance of our portfolio over the last quarter, and that would include quarter-to-date post quarter end. We are continuing to see relative strength in terms of the numbers and the metrics that we monitor on a pretty continuous basis. And our outlook with respect to credit remains positive.

Great. I appreciate the color there. And then just given recent rate cuts and the forward curve, can you just share how you expect net investment income to be impacted over the intermediate term, it's held up well so far and just what that could mean for NII per share and where you might see a leveling off and stabilization.

Yes. I think -- so Crispin, somewhat subtle guidance or statements that we made, the difference between at quarter end, approximately 60% of our prime-based portfolio at its contractual floor. And then both Scott and I mentioned that as of today, meaning after the rate cut this week, approximately 75% or almost 75% of our prime-based floor. So further decreases will be muted. We do provide the table in the presentation and the Q as far as what we expect further rate cuts are, for instance, a 50 basis point rate cut, we guide to about $0.05 of NII per share annually impacting, and that reflects the fact that the majority of our portfolio is at its contractual floor. So we can't be more specific than trying to model out the existing portfolio. But at the moment, it's pretty muted.

And I would just add to that, Crispin, we did reiterate, and this is guidance that is inclusive of the Fed activity this week. We did reiterate our core yield guidance for Q4 of 12% to 12.5%. So I think that speaks to our comfort level with respect to what we can continue to originate on, on the front-end side of the business.

We'll take our next question from Doug Harter with UBS. .

Scott, just pumping to drill down a little bit more on your comment about some of what you're seeing in the pipeline of the pipeline in the market on kind of frothiness. Is that on structure of deals? Is that on valuation? If you could just kind of drill into that, what you're seeing that kind of caused you to pull back a little bit from those things?

Sure. I think it's 2 things. It's mainly structure and funding amounts and not necessarily tied to yield. What we've seen over the last several quarters is that a handful of market participants have been incredibly aggressive with respect to underwriting deals that from a leverage perspective or from a commitment to value perspective, exceed what we think are prudent underwriting parameters. The second thing that we've seen recently, and this would probably be over the last quarter or 2, there continue to be a handful of deals getting done in the market where there's just not a lot of structure in terms of how those deals are being put together.

We think structural integrity is critical to success long term in this business. We had as a firm, have 0 interest in driving short-term portfolio growth by booking credits that will not age well. And so we're just operating the way we've historically tried to operate with a conservative approach to credit, being aggressive where we see spots of opportunity, and we think that's going to serve our shareholders and stakeholders incredibly well going forward.

We'll take our next question from John Hecht with Jefferies.

Another good quarter. Congrats. First one, I mean, I guess these are sort of both kind of industry level kind of questions. Number 1 is, there's just increasing concern on legacy software companies because if they weren't developed with AI in mind, then they could get disrupted very quickly. I'm wondering your perspectives on that. And if you could talk about your portfolio of that type and how it is -- how it is kind of positioned for the AI revolution.

Sure. Thanks for the question, John. One of the more interesting aspects of our business and depending on how you look at this, it's either a positive or a negative is the fact that our duration on the portfolio side is really short. Over the last 21 years, our duration on the loan book has been somewhere between 15 and 24 months. Right now, the duration is right around 18 months. So for us, when we talk about legacy companies, these are not companies that are generally very old in terms of borrowers for Hercules. And when we think about the question that you just asked, we think that's a significant positive because our portfolio is turning every, generally speaking, 1.5 years. We do not have a lot of legacy companies that really haven't been able to benefit from the AI revolution that we've seen over the last year or 2.

We built in AI analysis into our underwriting the deals that we have booked over the last 12 to 24 months, how these companies are using AI, how these companies can be impacted positively or negatively from AI has been a part of our underwriting thesis. So I think it's certainly something that we're watching closely, and our credit teams are doing a great job at monitoring that. But we feel pretty good about how our portfolio is positioned with respect to what we're seeing across the AI landscape right now.

Okay. And then another kind of industry-level question. I mean you guys have seen several quarters of very strong commitment and deployment activity. Is this just a function of a growing TAM, I mean, just the venture business is growing and you're just capturing your share? Or is it that you are increasing your share? Or is it a greater propensity for the borrowers to seek debt as a solution as opposed to equity? Or is it some combination? Just interested in your thoughts about the changing marketplace.

Yes, I think it's 2 things, John. First and foremost, it is our view that we are absolutely taking market share. There's been some changes in the venture and growth stage ecosystem over the last handful of years. And I think we believe that we have, on a controlled managed basis, been able to take some significant market share, which is probably the single biggest driver of the increase in commitments. I think the second element is if you look at where our platform is today in terms of scale, in terms of liquidity, in terms of diversification with respect to funding sources, all of those things have helped position us to be able to take advantage of a larger TAM with respect to potential opportunities.

And then the third thing is, I think we've done a really nice job at selectively hiring new employees onto the platform that have opened up some new markets, some new geographies, some new focus areas for us, and those things have all been very accretive, which have helped drive those numbers.

We'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Following up on John Hecht's question, but in a different way. The Wall Street Journal today had a very interesting article talking about how JPMorgan is tokenizing which is a digital representation of asset ownership in the blockchain ledger for its private equity funds. And I know John was talking about AI, but turning that around to blockchain and how you're able to track ownership of assets and so forth. What does that represent in terms of a change in how you guys might do business, barriers to entry that venture BDCs typically had over other BDCs and so forth. Any comments would be would be interested to hear.

Yes. So I can't comment specifically on the JPMorgan announcement because we obviously haven't dug into that yet. I can tell you that philosophically, our approach to blockchain and crypto and all sort of related esoteric assets has not changed. We do not intend to invest on the lending side directly in those types of businesses. We think there are opportunities for us, and we've done a handful of them alongside more of the infrastructure side of things and companies that are using technology to sort of facilitate the growth of those industries and currencies, et cetera. But in terms of investing directly in those areas, it's not something that we're going to do.

Yes. Actually, my question is more about your own infrastructure, whether you're using blockchain to track investments and your leaned against specific assets versus others. .

We are not, Chris.

We'll take our next question from Paul Johnson with KBW.

I was just wondering if you could talk maybe just about the unrealized gains this quarter. It looks like $29 million or so to the debt portfolio. How much of that is just that gets kind of kind of specific events, things were written up. I mean it sounds like there was a positive outcome on nonaccrual. I'm not sure if that was included in there. Just how much is kind of credit specific versus kind of mark-to-market, I guess, within the portfolio?

Thanks, Paul. So $33 million approximately of unrealized depreciation during the quarter, $28.6 million of that appreciation came from the debt side. That was a combination of credit and yield related. I did make the comment about that 1 specific credit that went on nonaccrual in Q3 and was very quickly resolved shortly after the quarter. Just to give you some context of the magnitude of that change, that was a position at a cost basis of approximately $41.5 million. In Q2, that had a fair value of $24.6 million and we wrote that up to a fair value in Q3 of $38.4 million, which reflects the actual proceeds received and ties into that $14 million outperformance relative to the fair value mark in Q2 and that I mentioned in the prepared remarks. .

Got it. So roughly half of the kind of debt depreciation this quarter was due to that nonaccrual?

Correct.

Okay. And then just 1 kind of maybe more of a technical question on how PIK works within ventral and your portfolio. When a borrower is on PIK, is it typically a table structure and what is kind of like the general rule in terms of the limit, like how much of the spread, I guess, are they generally able to defer under those arrangements?

Sure. Thanks for the question. So first, I would just reiterate a couple of the key points that I mentioned in the prepared remarks. I think it's critical in terms of how we evaluate PIK, but 85% of our PIK income during the third quarter was attributable to PIK that was part of the original underwriting, not the result of a credit or performance-related amendment or issue. With respect to when we utilize PIC in a new underwriting, it is generally going to be a small part of the company's overall interest and it will generally be struggled with -- structured as a toggle feature where the company will have the option subject occasionally to certain specific milestones or performance achievements to maybe turn 1% of cash interest into 1.15% or 1.25% of PIK. There are very few deals where we have PICC that exceeds 1% or 2%.

And I am showing no further questions on the line at this time. I would now like to turn the call back to Scott Bluestein, for any closing remarks.

Thank you, David, and thanks to everyone for joining our call today. We will also be attending the Citizens Financial Services Conference in New York on November 18. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2025 earnings call. Thanks, and I hope everyone has a great rest of the day.

This does conclude today's Hercules Capital Third Quarter 2021 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.

Good afternoon. My name is Jess, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Jess. Good afternoon, everyone, and welcome to Hercules conference call for the second quarter of 2025. 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 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 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'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q2 2025 Earnings Call. Hercules wrapped up the first half of 2025 by delivering another strong quarter of record fundings and record operating performance while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations.

After originating over $1 billion of new commitments in Q1, our momentum continued in Q2 with our second consecutive quarter of originations of over $1 billion. Our record fundings led to $192.1 million of net debt portfolio growth in Q2 and a new record with over $461.9 million in the first half of 2025.

During the second quarter, we took additional steps to further strengthen our balance sheet and liquidity position with the closing of our institutional investment-grade bond offering of $350 million of 6% unsecured notes due 2030. We also extended and upsized our credit facility led by MUFG to $440 million. Our staggered liability maturity stack, low cost of capital relative to our peers and ample liquidity across our platform continues to put us in an advantageous competitive position.

Post Q2, we announced the first close of our adviser subsidiary's fourth private credit fund. Hercules Advisors LLC now manages 4 funds with approximately $1.6 billion in committed equity and debt capital. As a reminder, Hercules Advisors LLC is a wholly owned subsidiary of Hercules Capital, an internally managed BDC. And as a result, 100% of the earnings and value of that business benefit our public shareholders and stakeholders.

Our strong Q2 performance was highlighted by several new records, including record total gross fundings of $709.1 million, an increase of 53.7% year-over-year, record total investment income of $137.5 million, an increase of 10% year-over-year and record net investment income of $88.7 million or $0.50 per share, an increase of 7.7% year-over-year.

Our first half performance was highlighted by several new records, including record first half 2025 total investment income of $257 million, record first half 2025 net investment income of $166.2 million, record first half 2025 total gross new debt and equity commitments of $2.02 billion and record first half 2025 total gross fundings of $1.25 billion. Our performance results are driven by our leadership position within the growth stage lending market, the longevity, consistency and scale of the Hercules Capital platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders.

In our public comments during the first quarter of 2025, we noted that we anticipated a more favorable new business landscape broadly, and that we were positioning the business to be able to take advantage of that. It has played out largely consistent with our expectations.

While the equity and credit markets have remained volatile, we have noted a general improvement in overall market sentiment subsequent to our last earnings call. Management teams appear less hesitant, investors are active and companies seem to be navigating the market choppiness and changing messaging from the current administration more effectively. We believe that certain sectors, geographies and end markets are positioned better right now, and our recent and near-term originations will reflect that.

Despite strong originations and record fundings, we have maintained a conservative and defensive balance sheet. In Q2, we maintained our high first lien exposure, which remained at approximately 91% and continues to be towards the high end of our BDC peers. GAAP leverage decreased modestly to just over 90% -- 97% in Q2, down from 99.9% in Q1. Our Q2 GAAP level typical historical range of 100% to 115% and below the average of our BDC peers.

We ended Q2 with over $1 billion of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well.

Let me now recap some of the key highlights of our performance for Q2. In Q2, we originated total gross debt and equity commitments of over $1 billion and record gross fundings of over $709 million. We generated record total investment income of $137.5 million and record net investment income of $88.7 million or $0.50 per share.

We were able to achieve 125% coverage of our quarterly base distribution of $0.40 per share. We generated a return on equity in Q2 of 17.1%, and our portfolio generated a GAAP effective yield of 13.9% in Q2, which was relatively flat compared to Q1. Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives, and provides us with the ability to continue to focus on high-quality transactions versus chasing higher-yielding assets, which we believe have more risk.

The focus of our origination efforts in Q2 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a competitive advantage. Our Q2 originations activity were well balanced between life sciences and tech companies. In Q2, approximately 53% of our commitments and fundings were to life sciences companies, while approximately 47% of our commitments and fundings were to tech companies.

We funded debt capital to 26 different companies in Q2, of which 11 were new borrower relationships. Year-to-date, through the end of Q2, we have added 20 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $471.5 million, up slightly from $455.7 million in Q1.

Since the close of Q2 and as of July 28, 2025, our deal teams have closed $44.2 million of new commitments and funded $33.5 million. We have pending commitments of an additional $480 million in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q3. Q3 is historically our slowest quarter for new originations, and we expect that to be the case again this year.

While that is typical for the venture and growth stage markets generally, we have chosen to be even more selective and patient recently given some of our recent market observations. In certain sectors, we have seen an abundance of liquidity and the desire for asset growth, leading to transactions that we do not believe reflect appropriate risk-adjusted returns. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters.

We are generally pleased with the exit activity that we saw in our portfolio during the second quarter. In Q2, we had 3 M&A events in our portfolio, which included 1 life sciences portfolio company and 2 technology portfolio companies announcing acquisitions. That brings us to 6 M&A events in our portfolio year-to-date through the end of Q2.

In addition, we had 1 technology company complete their IPO in the quarter. Based on current market conditions and improving corporate sentiment, we expect exit activity to accelerate towards year-end. Early loan repayments increased as expected in Q2 to approximately $267 million. Even with the higher level of early loan repayments, we still achieved strong net debt portfolio growth given the record funding levels in the quarter, which continues to position us well for strong core earnings growth in the second half of 2025.

For Q3 2025, we expect prepayments to be similar to Q2 and in the range of $200 million to $250 million, although this could change as we progress in the quarter. The credit quality of the debt investment portfolio improved quarter-over-quarter. Our weighted average internal credit rating of 2.26 decreased slightly from the 2.31 rating in Q1 and remains within our normal historical range.

Our Grade 1 and Grade 2 credits increased to 62.9% compared to 61.1% in Q1. Grade 3 credits increased slightly to 34.7% in Q2 versus 33.9% in Q1. Our rated 4 credits decreased to 2.4% from 4.1% in Q1, and we did not have any rated 5 credits as of Q2 quarter end.

In Q2, the number of loans and companies on nonaccrual decreased by 1. We had 1 debt investment on nonaccrual with an investment cost and fair value of approximately $9.8 million and $7.9 million, respectively, or 0.2% as a percentage of our total investment portfolio at cost and value. During the second quarter, we concluded our workout efforts with our 3 rated 5 loans from Q1, including Koros, a legacy loan that had been impaired and on nonaccrual status since Q2 of 2024. The resulting realized loss on those 3 positions was $6.5 million less than our previous quarter's impairment, and there was a positive impact to net asset value during Q2 as a result.

With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring remains enhanced. Given the ongoing uncertainty of the current tariff and trade-related environment, we continue to proactively assess any material impact across our credit portfolio. Based on what we know as of today and continued conversations with our borrowers, we continue to believe that none of our portfolio companies will be negatively impacted by the current tariff situation to a material degree.

Our net asset value per share in Q2 was $11.84, an increase of 2.5% from Q1 2025. We ended Q2 with strong liquidity of $785.6 million in the BDC of liquidity across the Hercules platform. With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade grade corporate credit ratings, we remain well positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment.

Venture capital investment activity continues to demonstrate a healthy pace with $69.9 billion invested in Q2 and $162.8 billion invested for the first half of 2025, according to data gathered by PitchBook NBCA. M&A exit activity in Q2 for U.S. venture capital-backed companies was $32.2 billion. IPO activity improved, but remained muted during the second quarter.

Consistent with the aggregate data for the ecosystem, during Q2, capital raising across our portfolio remained strong with 19 companies raising over $1.1 billion in new capital during the second quarter. For the first half of 2025, we've had 45 companies raise over $3.8 billion in new capital.

Given our strong sustained operating performance, we exited Q2 with undistributed earnings spillover of $134.1 million or $0.74 per ending share outstanding. For Q2, we are maintaining our quarterly base distribution of $0.40 and our supplemental distribution of $0.07 per share for a total of $0.47 of shareholder distributions.

Our Q2 net investment income covered our base distribution by 125% and our full distribution, including our $0.07 supplemental distribution by over 106%. This is our 20th consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution.

In closing, 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. In Q2, Hercules delivered its ninth consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Our success is attributable to the tremendous dedication, efforts and capabilities of our 100-plus 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 choice. I will now turn the call over to Seth.

Thank you, Scott, and good afternoon, ladies and gentlemen. The second quarter for Hercules Capital was very busy across our balance sheet. As Scott shared, the business activity during the quarter [indiscernible] and record-breaking for our platform. To support the growth of our investment portfolio, we've added to the more than $325 million of capital raised in the first quarter by raising another $500 million split between $350 million of institutional 6% unsecured notes and nearly $150 million of highly accretive capital via our ATM. In addition, we increased our available liquidity by renewing our MUFG-led credit facility and upsizing it to $440 million based on strong demand. These activities helped us maintain our weighted average cost of debt at approximately 5% and our conservative leverage position remaining below 1:1 on both GAAP and a regulatory basis, supported by the full deployment of our most recent SBIC license.

We continue to maintain strong available liquidity of more than $785 million as of quarter end and more than $1 billion across the platform, including the adviser funds managed by our wholly-owned subsidiary, Hercules Capital LLC. Based on the performance of the quarter, Hercules Adviser delivered a second quarter dividend of $2.1 million, which when combined with the expense reimbursement of $3.4 million resulted in approximately $5.5 million in NII contribution to the BDC in Q2.

With that in mind, let's review the following areas: the income statement performance and highlights, the NAV, unrealized and realized activity, leverage and liquidity; and finally, the financial outlook. Turning to the income statement performance and highlights. Total investment income in Q2 was a record $137.5 million, a 15% quarter-over-quarter increase, supported by our debt portfolio that has grown to $4 billion as of the second quarter. Core investment income, a non-GAAP measure, increased to a record $124.6 million. Core investment income excludes the benefit of income recognized as a result of loan prepayments.

Net investment income increased quarter-over-quarter 14.6% to $88.7 million or $0.50 per share in Q2. Our effective and core yields were 13.9% and 12.5%, respectively, compared to 13% and 12.6% in the prior quarter. As of quarter end, approximately half of our prime-based loans are at the contractual floor and thus the impact of any future rate reductions will be muted.

Second quarter gross operating expenses were $52.2 million compared to $45.3 million in the prior quarter. Net of costs recharged to the RIA, our net operating expenses were $48.7 million. Interest expense and fees increased to $25.7 million due to the growth of the business and corresponding increase of leverage. SG&A increased to $26.5 million, above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses were $23 million. Our weighted average cost of debt increased slightly to 5%. Our ROAE or NII over average equity increased to 17.1% for the second quarter, and ROAA or NII over average total assets increased to 8.6%.

Switching to the NAV activity. During the quarter, our NAV per share increased by $0.29 per share to $0.11 per share. This represents an NAV per share increase of 2.5% quarter-over-quarter [indiscernible] accretion due to use of the ATM. Our realized loss of $57.6 million was primarily [indiscernible] of 3 previously impaired debt positions, 2 of which were on nonaccrual as of the first quarter.

[indiscernible] [ $6 ] million from these 3 positions was lower than the previous quarter impairment.

Our $47.8 million of net unrealized depreciation attributable to $53.8 million of reversal of previous quarter depreciation mentioned earlier, $7 million of net unrealized depreciation attributable to valuation [indiscernible] privately and publicly held equity warrant and investment funds, including foreign exchange movements. This was a $13 million of net unrealized depreciation on debt investments primarily from collateral-based impairments on [indiscernible].

The reversal of prior unrealized depreciation resulted in a net realized loss of [indiscernible] million, primarily due to the losses on debt and warrant investments and losses from foreign exchange movements.

On leverage and liquidity, our GAAP and regulatory leverage decreased to 97.4% and 81.1%, respectively, compared to the prior quarter due to the use of the ATM to support the growth in the balance sheet.

Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 95% and 78.7%, respectively. We ended the quarter with a little over -- more than $785 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly-owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than [ $1 ] billion of available liquidity. The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities.

As mentioned, in June, Hercules Capital issued $350 million of institutional 6% unsecured notes due in 2030 and renewed and increased our credit facility led by MUFG to $440 million.

As a final point, we continued to opportunistically access the ATM market during the quarter and raised approximately $149 million in the second quarter, resulting in $0.28 NAV per share.

On the outlook, for the third quarter, we expect our core yield to be at the high end of our guidance range of 12% to 12.5%, excluding any future benchmark interest rate changes. As a reminder, 98% of our debt portfolio is floating with a floor and presently, approximately 50% of our prime-based portfolio is at its contractual floor. Although difficult to predict, as communicated by Scott, we expect $200 million to $250 million in prepayment and activity in the third quarter. We expect our third quarter interest expense to increase compared to the prior quarter based on the debt portfolio growth during the first half of the year.

For the third quarter, we expect SG&A expenses of $24 million to $25 million and an RIA expense allocation of approximately $3 million.

Finally, we expect a quarterly dividend from the RIA of approximately $1.9 million to $2.1 million per quarter. In closing, the steps we have taken to strengthen our balance sheet will help us continue scaling our platform and ensure we are well positioned for the remainder of 2025.

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

[Operator Instructions] We will take our first question from Crispin Love with Piper Sandler.

Your debt fundings have been extremely strong year-to-date. On the fundings outlook or commentary, you seemed a little cautious on the immediate near term, but positive on longer-term funding. So as you look forward to the fourth quarter and into '26, do you think funding levels that you put up late last year and the beginning of this year, are those types of levels attainable based on what you're seeing today? Or any reasons why you may pull back for an extended period of time on the funding basis?

Thanks for the question, Crispin. No sense that there's going to be a pullback. I think what we did in the second half of last year is likely indicative of what we'll do in the second half of this year. Q3 is typically, as we've mentioned several times, several years in a row, our slowest quarter. In addition to it just being sort of a seasonally slow Q3, we have pulled back slightly to start the quarter just given some of the observations that we're making in terms of the current market environment. But we are very bullish with respect to our overall funding activity for the second half of this year, and we expect to end 2025 with both record fiscal year commitments and record fiscal year gross fundings.

Great. I appreciate that, Scott. And then just building on that a little bit, can you discuss the competitive environment you're seeing in venture lending from other nonbanks as well as the bank space? Have you seen meaningful changes in the landscape? You alluded to -- or I believe you did a little bit that some lenders might be behaving a little bit irrationally in the third quarter. Is that right? And if so, can you just dig a little bit deeper into that?

Sure. I would not characterize what we're seeing necessarily as anything specific to banks or nonbanks. We continue to see certain banks that we compete with from time to time. We also, as I think you now, Crispin, we continue to partner with certain commercial banks for certain profile of transaction.

On the nonbank side, we've seen a handful of lenders recently, particularly in certain sectors, be very aggressive with respect to a lack of structure and a willingness to go well below our threshold from a yield perspective. And so that's what has caused us to be a little bit more patient to start Q3. We don't think that's a permanent shift. We think that's largely a result of just an abundance of liquidity in the system and some managers desperate for asset growth. We've always taken a long-term approach to the space. That's what we're going to continue to do. We're still finding pockets. We expect Q3 to be strong, but seasonally slow, and we expect the second half of the year to be strong from my earlier comments.

[Operator Instructions] We will go next to Brian Mckenna with Citizens.

And first off, just congrats on another impressive quarter here. The business has clearly inflected in terms of size and scale. And I think results the last couple of quarters also highlight the meaningful share you've taken within the industry. But I'm curious, as you reach these new levels of scale and as the business continues to perform incredibly well, I mean, what does all of this mean for attracting and retaining top talent? I'm assuming it's been a very positive dynamic, and you'll continue to hire at a strong clip, but any thoughts here would be great.

Sure. Thanks for the comment and the compliment, Brian, certainly appreciate it. Our culture continues to be of utmost important to us. I think if you look at this business, particularly over the last 5-plus years, we've done a tremendous job in terms of not only attracting talent to the platform, but retaining the strong talent that we have. And that will continue to be a focus for us. We have a really high bar with respect to new hires, particularly at the senior level. We're not afraid to make new hires, but we are very selective when we do so. If you think about sort of the environment, particularly over the last 2 to 3 years in the immediate aftermath of the SVB situation, we hired a handful of individuals who have been very accretive to the platform. over the last year or so, we've added some significant senior talent to the originations team in certain markets. And then we just recently year-to-date have continued to do so selectively.

So continuing to focus on finding the right talent to add to the platform, focused on particular sectors, focused on particular geographies, but maintaining a corporate culture where our employees want to be here, want to stay with the platform and want to continue to help us drive the company forward is of the utmost importance to us.

Okay. That's really helpful. I appreciate it, Scott. And then just on the RIA, it's great to see the first close for Fund 4. Just a few related questions to that, if you have detail here. How much equity capital did you raise in the first close? And then what's the hard cap or target for that fund? Of the $1.6 billion of AUM that RIA is now managing, how much of that is equity capital versus debt? And then just a little bit bigger picture, looking at the platform today, the existing infrastructure and the team in place, I mean, how much more AUM can you manage longer term?

Sure. So a couple of questions there, Brian. Consistent with our approach to Funds 1, 2 and 3, given that it is a wholly-owned subsidiary underneath the BDC, we do not disclose individual equity commitments or debt commitments per fund. What we do disclose is the aggregate number when we have certain meaningful events. So as of the most recent data that we've publicly disclosed, between the 4 funds, we have approximately $1.6 billion of committed equity and debt capital. I think we've been pretty clear that the leverage in our private fund business is generally consistent with the leverage in our public BDC business.

So if you would sort of back into what the equity commitments are versus what the debt commitments are, we continue to think that the private fund platform and vehicle is a tremendous growth opportunity for us. It is flexible capital. We are raising money from strong long-term institutional investors. We continue to see opportunities to raise capital, and we will continue to do so as long as we think we can prudently put it to work. Given that the BDC is internally managed, this has never been and will never be a growth at all cost mentality. But if we see pockets, if we see opportunities to deliver strong risk-adjusted returns for our investors, we'll take advantage of that.

We'll go next to Corey Johnson with UBS.

This is actually Douglas Harter from UBS. Given your comments about the strong pipeline for funding in the second half, can you talk about kind of how you think about funding that, whether that be through increasing leverage from current levels or using the ATM or both?

Sure. So I think we're in really good position, Doug, with respect to liquidity. If you look at just the BDC, ended Q2 with $785 million of available liquidity. If you look at it across the platform, inclusive of the private fund business, a little bit over $1 billion of liquidity. We ended the quarter sub-100% from a GAAP leverage perspective. We ended the quarter sub-82% from a regulatory leverage perspective. So no imminent plans to raise additional capital. We think the business is very well capitalized, strong balance sheet, very conservative balance sheet, and that should put us into a position to, again, gradually take leverage up. And if we see pockets of opportunity to deploy more capital than our current pipeline shows, obviously, we have the ATM. But we are very sensitive to using the ATM despite where the stock trades. We use the ATM on an as-needed basis to maintain our leverage ratios. Right now, we're a little bit underlevered relative to where we would like to be. So we would anticipate taking that leverage ratio up back to that 100%, 105% range before using the ATM again.

Just to clarify that last comment, that $100 million, $105 million, is that on a GAAP basis or a regulatory basis?

That's a GAAP basis.

We'll go next to Casey Alexander with Compass Point.

That was my question. My question was just asked and answered.

We'll go next to Finian O'Shea with Wells Fargo.

Just hitting on a couple of smaller items in the details. In recent periods, it looks like there's a lot less equity co-investment and also less principal repayment. So seeing the trends there if you're, to a lesser extent, investing in or lending to amortizing structures as is the case historically and whether or not you find the equity co-invest attractive?

Sure. Thanks, Fin. So with respect to amortization in principle, I would make sort of 2 comments. Number one, over the last 2 to 3 years, initial interest-only periods have extended slightly relative to where they once were. So that's certainly a component. The other component is in the majority of transactions that we do, we allow our portfolio companies to earn interest-only extensions based on specific preset performance milestones.

Thankfully, many of our companies continue to achieve those preset milestones. As those companies achieve those milestones, they're able to earn into additional interest-only extensions. So we look at that as an indicator of strong performance across the portfolio.

And then with respect to the second point, we have been a little bit more judicious with respect to equity investments, with respect to RTIs, with respect to co-investments. And that's just largely been a function of valuation relative to our assessment. We think the market has become relatively frothy from an equity perspective. Where we see pockets of opportunity in the portfolio, we are continuing to make equity investment decisions, but we're just being a little bit more judicious in terms of equity investments in the current environment.

Okay. That's helpful. And just sort of tying in there, like if there's a frame of time where you don't do equity co-invest, is there -- is the ATM in part a tool to shore up NAV as it has been to some extent in the last few years?

We don't think about it that way. We think of the ATM as something that we can use sporadically to help us maintain a strong, conservative, defensive balance sheet. We don't use the ATM to drive net asset value.

[Operator Instructions] We will go next to Christopher Nolan with Ladenburg Thalmann.

And apologies if I missed it, but given all the changing currents with all the tariffs and these tariff deals announced, how does Hercules stand to benefit given many of these countries are going to be supposedly making large dollar investments into the United States?

Yes. I think it's a great question, and it's something we've spent a lot of time thinking about as an organization. I think our current assessment, and this can change daily just based on the changing messaging. But our current assessment is that the biggest driver of positivity for our portfolio companies will be increased interest and investment in the United States. In a lot of these tariff deals or trade deals or just deals in general, you're seeing things announced where these countries are committing to certain investments in U.S. infrastructure, U.S. technology, et cetera. And so we think just from a portfolio perspective, the increased investment into the U.S. markets will be a net positive for technology-oriented growth stage businesses broadly.

Okay. And then for my follow-up for Seth. Congratulations on the low coupon for the $350 million raise. Has there been any sort of changes on the advance rates?

Yes. Thanks a lot, Chris. So it isn't a new. It's an extension of an existing. We just upsized it as well. And MUFG and the other lenders have worked with us to actually improve the conditions each and every time we renew the facility and improve the availability for us. So there's no change in the advance rates, although there are categories associated with it where they give us a better opportunity to increase the overall average advance rate.

We'll go next to Paul Johnson with KBW.

Most of might have been asked, but I just ask with the recent IPO activity, understanding that the [indiscernible] issuance is still at a pretty low level, but it's still recovering. But with performance we've seen [indiscernible], Figma, do you think that that's changed sort of BC's mindset in terms of kind of the exit pathway and potentially looking closer at the IPO route versus just the buyout, even if it means potentially like a lower multiple than kind of where the peak valuation was?

Yes, it's a great question. I think our assessment is that it's still too early to make that assessment. We did see some improvement in terms of you mentioned a couple of the names, including the one from today. But that's really early just in terms of sort of that projecting out to be an indicator of what's to come and what's going to change potentially with respect to VC sentiment. Our perspective is the bar right now continues to be really high for successful IPOs for growth stage companies. And so when you look at the sort of the types of companies that are going public, it's really the top of the top in terms of of quality. So when we think about sort of the broader markets, I think we continue to view the M&A market as likely the largest driver going forward of exit activity. But we do think that the backdrop in Q2 with respect to IPOs is helpful as long as it's sustained through the second half of the year.

I'm showing no further questions. I would now like to turn the call back over to Scott Blounstein for any closing remarks.

Thank you, Jess, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q3 2025 earnings call.

This does conclude today's Hercules Capital Second Quarter 2025 Financial Results Conference Call. You may now disconnect your line, and have a wonderful day.