TPVG - Triple Point Venture Growth: 13% Yield Strong Coverage

2023-07-02 09:15:00 ET

Summary

• TriplePoint Venture Growth yields 13.6%, with strong 1.33X NII dividend coverage in Q1 '23.
• Its earnings continue to benefit from higher interest rates.
• NII rose 37% in Q1 '23, and 55% in 2022.

If you're looking for high yield venture capital exposure, you can find it via investing in certain business development companies. This industry lends to privately-held companies in various different industries. Most of these private companies have private equity and hedge fund sponsors, and some of them also have sponsors in the venture capital industry.

That's an important point. Since these sponsors have serious skin in this game, they're usually willing to offer further support to the private companies when times get tough, such as during the COVID pandemic.

Triple Point Venture Group ( TPVG ) focuses on companies which already are backed by venture capital firms, with a specific area of concentration on VC-backed firms in the venture growth stage, which haven't yet gone public:

Company Profile:

Unlike many BDCs, TPVG is an internally-managed BDC, a setup which avoids external advisor incentive fees. TPVG has a 1.75% management fee, with an 8% annualized hurdle rate for its income incentive fee.

Founded in 2005, it's headquartered on Sand Hill Road in Silicon Valley, with regional offices in New York City, San Francisco and Boston. Since inception, TPVG has committed more than $10B to 900-plus companies throughout the world. It generally does 3-4 year financings, with a loan-to-enterprise value of less than 25%. The portfolio companies are typically preparing for an IPO or M&A in the next 1-3 years.

Holdings:

As of 3/31/23, TPVG's debt portfolio was worth $890M, while its warrant and equity portfolios were worth $45M and $47M respectively. It had 154 debt investments in 59 companies, 124 warrants in 107 companies, and 58 equity investments in 48 companies. Its average yield on debt was 14.7%.

Management typically invests $5-$50M on growth capital loans of 3-5 years, with a senior collateral position on assets. Equipment financing is in a $5M - $25M range, with a 3-4 year term, whereas revolving loans have a $1M - $25M range, with a 1 - 3 year term. Direct Equity investments are generally smaller, in a $100K - $5M range.

They'll also take a warrant position along with some loans, giving TPVG more upside potential:

As of 3/31/23, TPVG's largest five industry holdings, which form ~54% of the portfolio, (up from 52% in Q2 '22), were consumer products and services, at 17.5%, up from 14.6% in Q3 '22, e-commerce clothing, at 13.3%, business applications software, at 9.2%, financial institution and services, at 7.2%, and real estate services, at 6.5%.

Rising Rates Benefit TPVG:

In total, ~61% of its loans are floating rate, which has been a benefit in the current rising rate environment. Management estimates that there's a ~$.10/share benefit for each 100 basis point rise in the prime rate:

TPVG's core yield bears that out, showing a big rise from 11.9% in Q1 '21 to 14.7% in Q1 '23:

Portfolio Ratings:

As with other BDCs, TPVG's management rates its holdings every quarter.

Q1 '23 was a rough one for these ratings, as the second lowest category, (orange) amount jumped from $9.1M in Q4 '22 to $45.7M, representing 5.1% of the debt portfolio.

"One portfolio company with a principal balance of $15M was upgraded from White (2) to clear (1). Four portfolio companies with an aggregate principal balance of $46.3M were downgraded from White (2) to Yellow (3); and two portfolio companies with an aggregate principal balance of $47.6M were downgraded from Yellow (3) to Orange (4).

As of March 31, 2023, the weighted average investment ranking of the Company’s debt investment portfolio was 2.12, as compared to 2.06 at the end of the prior quarter."

Although that's not a welcome development, it's important to note that TPVG does have several ways to recover some or all of these investments, via asset sales, restructuring, and other methods. Their record has been good on losses - since the company's inception, the cumulative net loss rate remains under 3% of cumulative commitments, and 2% of fundings.

Earnings:

Q1 '23 - total investment and other income jumped 23%, and NII rose 37% in Q1 '23, leading to a 20%-plus rise in NII/Share, even with the share count rising 14% vs. Q1 '22. Like most other companies, TPVG had higher interest expenses - a $4.15M jump, up 81%, in Q1 '23 vs. Q1 '22.

2022 also saw big gains in total investment and other income, up 36.7%, and NII, up 54.65%, as the US reopening and rising rates helped earnings. Interest expenses rose ~$9.4M, up 54% in 2022.

NAV fell 15.2% in 2022, with -$45M in realized gains, and -$37.6M in unrealized, non-cash gains. "In Q4 2022, the Company recognized net realized losses on investments of $29M, resulting mainly from $34.6M of realized losses from the disposition of investments in Medly Health, partially offset by $6.5M of realized gains from the sale of publicly traded shares held in ForgeRock." (TPVG site)

Other than 2021, when NII fell during the COVID era, TPVG has had continuing growth in NII since 2014. Its Q1 '23 NII of $18.6M is on pace to outstrip its 2022 total NII, but that may be hampered by problems in its lower-rated holdings.

New Business:

In Q1 '23, TPVG entered into $3.7M of new debt commitments with 1 portfolio company, funded debt investments totaling $57.6M to 11 portfolio companies, acquired warrants valued at $0.1M in three portfolio companies, and made direct equity investments of $0.1M 1 company. Debt investments funded during the quarter carried a weighted average annualized portfolio yield of 14.1% at origination. TPVG received $3.4M of early repayments, and $16.6M of scheduled principal amortization in Q1 '23.

Triple Point Capital, TPC, signed term sheets of $198.8M with venture growth stage companies in Q1 '23.

Tailwinds:

As noted on the Q1 '23 earnings call , management sees tailwinds from the downfall of Silicon Valley Bank, Signature Bank, and First Republic Bank: "There are significant and lasting impacts from these events and we expect these developments will continue to have a monumental effect on our market. It is turning into a major game changer that is significantly and potentially permanently altered the competitive landscape for venture lending, translating into what we believe are increased in growing opportunities for the overall TriplePoint Capital platform to capitalize over the long term, including a very promising long-term outlook for TPVG."

Dividends:

At its 6/29/23 $11.77 closing price, TPVG yielded 13.59%. Management declared a second consecutive $.40/share payout, up from $.37 in Q4 '22, which went ex-dividend in mid-June, and paid this past week. TPVG's next declaration date should be ~7/27/23.

NII/distribution coverage was robust in Q1 '23, at 1.33X, improving on TPVG's record of strong coverage from 2022's 1.25X figure. Additionally, there was $.77/share in UNII as of 3/31/23:

Profitability and Leverage:

ROA and ROE both improved markedly vs. one year ago and remained well above BDC industry averages. Credit revolver debt increased by $45M to $220M in Q1 '23, vs. Q4 '22, which, coupled with lower NAV, pushed TPVG's debt/NAV leverage from 1.08X to 1.48X, much higher, but still below the BDC industry average of 1.57X.

Higher debt leverage isn't necessarily a bad development in the BDC industry, as these companies require capital for loans and investments.

The assets/debt ratio has been declining a bit over the last two quarters, going from 1.84X as of 9/30/22, to 1.71X as of 3/31/23. As seen frequently in other companies, EBIT/Interest coverage has declined a bit, due to rising interest expenses.

Debt and Liquidity:

TPVG's debt looks well-laddered out into the future, with no maturities until 2025, when its $350M credit revolver and $70M in unsecured Senior Notes come due. There was $220M outstanding on its revolver, as of 3/31/23.

As of 3/31/23, TPVG had liquidity of $187.6M, comprised of $57.6M of cash and cash equivalents, and $130M of credit facility availability.

Performance:

While it has lagged the BDC industry, the broad financial sector, and the S&P 500 over the past year, TPVG has caught a bid over the past month, and has outperformed its industry and the financial sector so far in 2023, while slightly trailing the market.

Analysts' Targets and Ratings:

Thar price rise has pushed TPVG ahead of street analysts' low and average price targets.

The most recent analysts' ratings were negative, with price revisions that were all downward, $10.00, from Wells Fargo in early May, and Keefe Bruyette in late December '22, and $13.50 from Piper Sandler in early December '22.

UBS initiated coverage with a neutral rating and a $13.50 target in early December '22.

Valuations:

At its 6/29/23 $11.77 closing price, TPVG is selling at a slight 0.68% premium to its 3/31/23 NAV of $11.69/share, vs. an average ~7% discount to NAV for the BDC industry.

Perhaps more importantly, it's selling at a much lower earnings multiple - its price/NII of 5.8X is much lower than the 8.82X BDC industry average.

Parting Thoughts:

We rate TPVG a Hold at present. We'll continue to hold our shares, and collect those juicy distributions, but there may be better entry for new income investors over the summer and early autumn. We'd also like to see how things proceed with those companies that TPVG downgraded in its Q1 '23 ratings. We suggest adding TPVG to your watchlist.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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