Hercules Capital, Inc. (HTGC) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal strong origination and exit activities, robust liquidity, and a conservative balance sheet, indicating financial health. While there are concerns about AI disruption, the company is well-positioned with a strategic focus on high-quality credits and growth in private funds. The positive outlook on M&A and disciplined lending approach further support a positive sentiment. Despite some uncertainties, the overall sentiment leans positive, suggesting a likely stock price increase of 2% to 8% over the next two weeks.
Key Financial Performance
New debt and equity commitments $3.92 billion, an increase of 45.7% year-over-year. This growth was driven by strong business activity and platform expansion.
Gross fundings $2.28 billion, an increase of 25.9% year-over-year. This was attributed to record originations and robust funding activity.
Total investment income $532.5 million, an increase of 7.9% year-over-year. The growth was due to strong new business activity and portfolio performance.
Net investment income $341.7 million, an increase of 4.9% year-over-year. This was supported by record debt portfolio growth and consistent income generation.
Net debt portfolio growth Approximately $748.5 million. This was driven by lower early loan prepayments and strong core earnings growth.
Assets under management More than $5.7 billion, an increase of 20.5% year-over-year. This growth was attributed to the expansion of the BDC and private credit funds business.
Quarterly base distribution coverage 120% coverage of $0.40 per share in Q4. This was achieved despite a declining rate environment, supported by strong core income.
Return on equity (ROE) 16.4% in Q4. This was driven by strong portfolio performance and disciplined capital deployment.
GAAP effective yield 12.9% in Q4, impacted by lower early payoffs. Core yield remained consistent at 12.5%.
Liquidity Over $1 billion across the platform at year-end, further strengthened by a $300 million investment-grade bond offering.
Net asset value (NAV) per share $12.13 in Q4, an increase of 0.7% from Q3 2025. This was driven by net realized gains and accretion from ATM usage.
Realized gains $20.3 million in Q4, primarily from equity investments.
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Operating Highlights
Record originations: Achieved record originations of $1.06 billion in Q4, driving annual originations of nearly $4 billion and gross fundings of $2.28 billion.
New debt and equity commitments: Set a record of $3.92 billion in 2025, a 45.7% increase year-over-year.
Private credit funds business: Raised over $1 billion in new capital commitments and extensions in 2025, with the private funds managing nearly $2 billion in committed equity and debt capital.
Market positioning in life sciences and tech: Focused on life sciences (69% of Q4 commitments) and tech companies (31%), reflecting a defensive posture.
AI and software investments: Positioned to benefit from AI integration in portfolio companies, focusing on software companies with high switching costs and domain expertise.
Liquidity position: Ended Q4 with over $1 billion in liquidity across the platform, further strengthened by a $300 million investment-grade bond offering.
Credit quality: Improved credit quality with 66.6% of loans rated Grade 1 and 2, and only 1.7% rated Grade 4.
Portfolio diversification: Maintained a 50/50 split between life sciences and technology sectors, with no single subsector exceeding 25% of the portfolio.
Defensive balance sheet management: Maintained moderate leverage and focused on high-quality originations, avoiding higher-risk assets.
Focus on innovation economy: Anticipates robust new business environment in 2026, driven by strategic M&A and capital markets activity.
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Risk or Challenges
Market and Macro Volatility: The company expects higher-than-normal market and macro volatility in 2026, which could impact valuations and create challenges in the tech ecosystem.
Declining Rate Environment: The declining rate environment has already impacted core yields and could continue to affect income generation.
Credit Quality and Nonaccrual Loans: Although credit quality remains strong, there is a single loan on nonaccrual, which represents a potential risk to the portfolio.
Concentration in Life Sciences and Tech: The portfolio is heavily concentrated in life sciences and technology sectors, which could pose risks if these sectors face downturns.
Market Frothiness: The company is avoiding certain pockets of frothiness in the market, indicating potential overvaluation or risk in specific areas.
Regulatory and Competitive Pressures: The company operates in a highly regulated environment and faces competitive pressures, particularly in the private credit and venture capital markets.
Liquidity Management: While liquidity is strong, the company has increased leverage, which could pose risks if market conditions deteriorate.
Software and AI Investments: The company is cautious about software and AI-related investments, focusing on companies with high switching costs and mission-critical functions to mitigate risks.
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Guidance & Outlook
Market and macro volatility: The company expects higher-than-normal market and macro volatility in 2026, with a valuation reset occurring in certain parts of the tech ecosystem.
New business environment: A robust new business environment is anticipated in 2026, with expectations for increased strategic M&A, capital markets activity, and support for the innovation economy.
Credit and underwriting approach: The company plans to maintain a disciplined credit-first approach, enhance liquidity as needed, tighten credit screens for new underwritings, focus on asset diversification, and maintain a high first lien exposure (approximately 90%).
Originations market: The company believes it is well-positioned to benefit from a favorable originations market in 2026, which is expected to be a key differentiator.
Q1 2026 commitments and fundings: As of February 9, 2026, the company has closed $894.8 million in new commitments and funded $253.9 million, with pending commitments of $587.5 million in signed nonbinding term sheets.
Prepayment activity: For Q1 2026, prepayments are expected to be in the range of $150 million to $200 million.
Core yield: Core yield is expected to decline slightly in Q1 2026 due to the impact of the most recent Fed rate cut, but remain within the range of 12% to 12.5%.
Liquidity position: The company ended Q4 2025 with over $1 billion of liquidity across the platform and further strengthened its position with a $300 million investment-grade bond offering.
Private fund business: The private fund business is expected to continue providing meaningful benefits, with $1 billion raised in 2025 and nearly $2 billion in committed equity and debt capital under management.
AI and software investments: AI is expected to be a net positive for the business and investment portfolio, with a focus on software companies with hardware moats or highly regulated customer bases.
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Shareholder Return Plan
Quarterly Base Distribution: Maintained at $0.40 per share for Q4 2025.
Supplemental Distribution: Declared a new supplemental distribution of $0.28 for 2026, distributed equally over 4 quarters ($0.07 per share per quarter).
Coverage of Distributions: Q4 net investment income covered the base distribution by 120% and the full distribution (including supplemental) by 102%.
Undistributed Earnings Spillover: $149.9 million, or $0.82 per share, as of Q4 2025.
Consecutive Supplemental Distributions: 22nd consecutive quarter of providing supplemental distributions.
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Key Q&A
Q:Given the dislocation in public markets, is there an incremental opportunity for deployment to take advantage of this volatility? If so, where would you be looking to lean into?
A:Scott Bluestein emphasized that Hercules sees an interesting opportunity to play offense during this period of volatility. The company is well-positioned with a robust liquidity position and a conservative balance sheet. They plan to be aggressive in taking advantage of deployment opportunities, with Q1 commitments already exceeding $1.2 billion to $1.3 billion.
Q:How should we think about fundraising and growth for the RIA platform in 2026? Where does fundraising stand for Fund IV, and are there any new product opportunities?
A:Scott Bluestein stated that they expect to continue raising additional capital throughout 2026, with Fund IV expected to have a final close in 2026. Discussions for the next vehicle in their private funds business are already underway. He emphasized that the growth of their private funds business benefits HTGC shareholders and stakeholders.
Q:What areas in your software portfolio are you most confident in, and are there areas where you are more cautious given the AI disruption theme?
A:Scott Bluestein explained that system software and application software are distinct, with system software including areas like cybersecurity. He expressed confidence in software companies providing mission-critical solutions and embracing AI. However, companies not adapting to AI may face negative impacts over time. Hercules' investment structure with low LTVs and shorter durations positions them well.
Q:What is your view on tech M&A and IPO activity into 2026? Has recent volatility impacted these areas?
A:Scott Bluestein noted that M&A activity has been robust, with 1,029 venture-backed M&A exits in 2025 totaling $141 billion in transaction value. He expects strategic M&A to continue in 2026, driven by larger competitors acquiring distressed smaller competitors. The IPO market is expected to remain muted, with fewer IPOs but higher dollar volumes.
Q:Are venture capital companies using debt more as a component of funding their businesses, or is the growth tied to the overall industry growth?
A:Scott Bluestein attributed growth to both the overall ecosystem expansion and some companies using more debt due to valuation disconnects or inability to raise equity. He emphasized the importance of disciplined and patient lending, with Hercules maintaining consistent debt-to-equity metrics.
Q:Are there any changes in deal structures, fees, or warrant coverage due to recent dislocation?
A:Scott Bluestein stated that deal structures remain consistent, with upfront facility fees, cash coupons, end-of-term economics, and equity upside in about 80% of deals. The focus is on custom-tailored solutions for companies, with no significant changes in deal structures.
Q:How do you balance taking advantage of current dislocation opportunities versus being patient for potentially better opportunities later?
A:Scott Bluestein described their approach as targeted, aggressively pursuing attractive opportunities while maintaining significant dry powder. They aim to balance current deployment with readiness for future opportunities, supported by a recent $300 million raise.
Q:Can you get wider spreads in deals in this environment, or are you targeting better credits for the same returns?
A:Scott Bluestein clarified that they are maintaining underwriting yields while targeting better quality, more mature, and stable credits. The focus is on credit quality rather than chasing higher yields.
Q:What are the red flags or warning signs you monitor for AI disruption in your software portfolio?
A:Scott Bluestein highlighted active and consistent monitoring through conversations with portfolio companies and VC partners, monthly financials, compliance certificates, and biweekly touchpoints. They focus on identifying yellow flags, such as deterioration in KPIs, to address potential issues proactively.
Q:Is the venture debt market more active than the venture equity market, and is this due to companies focusing more on cash flow generation?
A:Scott Bluestein noted that the venture equity market was robust in 2025, with $339.4 billion invested. However, VC fundraising has declined, reverting to pre-COVID levels. The venture debt market's activity is partly due to companies focusing on cash flow and avoiding equity rounds at lower valuations.
Q:How does the new California tax law on unrealized gains impact your portfolio companies?
A:Seth Meyer stated that the tax law does not impact their focus, as Hercules is primarily concerned with debt repayment and ensuring companies operate according to plan.
Q:Review of Unclear Management Responses
A:Management avoided providing additional details on fundraising and growth for the RIA platform in 2026 beyond what was disclosed on the call. They also refrained from commenting on competitors' strategies in the venture debt market for the non-traded wealth channel.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI investment
ARR attachment
Advisor LLC
Capital Full
Hercules Advisor
Hercules Capital
LTVs debt
PIK income
Record debt
Record investment
activity life
asset base
attachment point
commitment activity
company AI
company efficiency
company portfolio
environment Hercules
environment coverage
equity ratio
expansion
increase Record
market volatility
mission function
momentum
offering
positioning
product
ratio ARR
record platform
software company
software credit
stability
tech
underwriting
underwritings
HTGC Transcript
Hercules Capital, Inc. (HTGC) Q4 2025 Earnings Call Transcript
Positive2-13
The earnings call summary and Q&A reveal strong origination and exit activities, robust liquidity, and a conservative balance sheet, indicating financial health. While there are concerns about AI disruption, the company is well-positioned with a strategic focus on high-quality credits and growth in private funds. The positive outlook on M&A and disciplined lending approach further support a positive sentiment. Despite some uncertainties, the overall sentiment leans positive, suggesting a likely stock price increase of 2% to 8% over the next two weeks.
Hercules Capital, Inc. (HTGC) Q3 2025 Earnings Call Transcript
Unknown10-31
The earnings call presents a mixed picture: strong credit quality, liquidity, and cautious market strategies are positives, but lack of clear guidance on dividends and blockchain impact tempers enthusiasm. The Q&A reveals management's conservative stance, with muted effects from rate cuts and no major changes in portfolio mix. Despite some optimism, the absence of specific guidance and the slow Q3 originations suggest a balanced outlook, leading to a neutral sentiment.
Hercules Capital, Inc. (HTGC) Q2 2025 Earnings Call Transcript
Positive7-31
The earnings call summary highlights strong financial performance with record revenue and fundings, increased NAV, and stable yields. The Q&A section reveals confidence in future funding levels and strategic positioning despite competitive pressures. The management's cautious approach to equity investments and positive outlook on U.S. investments further support a positive sentiment. Given the company's market cap and the absence of critical negative factors, a positive stock price movement of 2% to 8% is likely over the next two weeks.
Hercules Capital, Inc. (HTGC) Q1 2025 Earnings Call Transcript
Unknown5-1
The earnings call presents a mixed picture. Financial performance shows growth in net debt portfolio and total investment income, but there's a decline in net investment income and ROE. The shareholder return plan is stable, with consistent distributions. The Q&A suggests resilience in a volatile market, but there's cautious guidance and acknowledgment of macroeconomic challenges. The convertible debt issuance could be a concern, but strong liquidity is a positive. Overall, the sentiment is balanced, leading to a neutral stock price prediction over the next two weeks.
HTGC Slides
HTGC Report
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