TPVG - TriplePoint Venture Growth: Now My Third-Largest BDC Position

2023-11-05 00:37:52 ET

Summary

• TriplePoint Venture Growth BDC's high non-accrual ratio may deter passive income investors.
• However, the BDC's earnings show that it easily covered its dividend payout with net investment income, suggesting dividend sustainability.
• Despite the BDC's credit portfolio challenges, the stock is selling at net asset value, making it an attractive option for passive income investors.

TriplePoint Venture Growth BDC Corp. ( TPVG ) is probably not in good standing with passive income investors due to the BDC’s high non-accrual ratio.

With that being, said, though, the BDC just released earnings that showed once again that the BDC easily covered its dividend pay-out with net investment income, the main metric that counts when it comes to judging dividend sustainability.

TriplePoint Venture Growth BDC’s dividend pay-out ratio fell to just 74% in 3Q-23 which strongly suggests that the dividend is sustainable. TriplePoint Venture Growth BDC does not have the best-performing credit portfolio, however, but the situation did not get substantially worse QoQ.

With the stock selling at net asset value, I think the risk/reward relationship remains attractive for passive income investors.

My Rating History

I aggressively jumped on TPVG when the stock was selling at a 14% yield. Today, the yield is 16% and I am still buying. Why?

Because TriplePoint Venture Growth BDC’s non-accruals didn’t get all that much worse in 3Q-23 and the BDC easily covered its dividend payout of $0.40 per share quarter with net investment income. Thus, the BDC’s dividend has a higher margin of safety as well, compared to prior quarters.

TriplePoint Venture Growth BDC’s Portfolio And Non-Accruals

TriplePoint Venture Growth BDC remained a heavily-debt focused BDC that managed a total of $870 million in investments and 90% of such investments referred to debt. The portfolio included 160 different loan investments pertaining to a variety of industries including Consumer Products, E-Commerce, Business Services and Health Care Technology Systems.

TriplePoint Venture Growth BDC’s credit quality remained challenged in the third quarter and the non-accrual ratio, which reflects the amount of bad loans in the investment portfolio, increased from 11.0% in 2Q-23 (on a cost basis) to 11.1% in 3Q-23, reflecting a small increase of 0.1 percentage points. Taking into account how high the non-accrual ratio is, the QoQ increase is not particularly worrisome.

However, as we will see later, despite the increase in bad loans, the BDC easily covered its dividend obligations with NII in the third quarter.

At the end of the third quarter, TriplePoint Venture Growth BDC had investments in eight portfolio companies on non-accrual with a cost basis of 94.8 million (fair value: $39.2 million) compared to just one portfolio company on non-accrual at the end of 2022 (cost basis: $29.5 million, fair value: $9.1 million). The decline in portfolio quality has been quite staggering and it raises some legitimate questions about the rigidity of the BDC’s underwriting process.

Dividend Coverage, NII Upside

I think the second most important metric when it comes to evaluating the investment suitability of TriplePoint Venture Growth BDC for passive income investors is the dividend pay-out ratio. TriplePoint Venture Growth BDC presently offers a 16.5% dividend yield, so some investors are concerned about the implications of a high non-accrual ratio for the BDC’s dividend.

TriplePoint Venture Growth BDC strongly made a case for itself by reporting NII of $0.54 per share for the third quarter, which translates into a dividend pay-out ratio of 74% compared to 75% in 2Q-23. The dividend, as such, should be sustainable and it actually has a rather high margin of safety.

TriplePoint Venture Growth BDC could improve its dividend coverage further if the central bank continues to hike rates, the odds of which are not entirely bad after inflation experienced a bit of a flare-up in the last couple of months.

TriplePoint Venture Growth BDC has positioned itself for rising interest rates (62% floating-rate exposure) and the BDC has positive interest rate sensitivity to the tune of $0.08 per share in the event of a 100 basis point rate increase.

TPVG Is Selling At NAV

Technology-focused BDCs often sell at a premium NAV multiple due to the potential to earn outsized returns in the event of a lucrative Equity exit.

The rise in non-accruals, in the case of TriplePoint Venture Growth BDC, however, has weighed on the BDC’s valuation multiple before earnings and since accrual situation didn’t substantially worsen, I think passive income investors are still in a good position to buy.

TriplePoint Venture Growth BDC reported a NAV of $10.37 (reflecting a decline of 3.2% QoQ) and the stock is selling at NAV now.

Hercules Capital, Inc. ( HTGC ) , the king of the tech-focused BDCs, is selling for a 45% NAV premium, but the BDC has exceptionally robust credit quality and very few dividend risks, in my view .

What To Watch Out For (Risks)

TriplePoint Venture Growth BDC’s non-accrual ratio poses risks to the dividend and the BDC’s NAV. Loan write-offs obviously erode the BDC’s NAV, but there is also the possibility of potential value recoveries for those 8 portfolio companies that are presently on non-accrual status.

With that being said, the non-accrual ratio and the QoQ drop in NAV should have made clear to passive income investors that they are dealing with a BDC of a higher risk classification.

Taking into account that the dividend was covered by NII in 3Q-23, I still think that TPVG’s 16.5% yield classifies as a Buy opportunity for passive income investors with a high risk appetite.

My Conclusion

The improvement in TriplePoint Venture Growth BDC’s dividend coverage in the third quarter was a comforting piece of information and it implies that the high 16.5% dividend yield is not a red flag.

Taking into account that TriplePoint Venture Growth BDC sells at NAV and that the non-accrual ratio hasn’t gotten that much worse in the third quarter, I used the opportunity to double down on TPVG and I made the BDC the third-largest position in my passive income portfolio.

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