TPVG - TriplePoint Venture Growth's 14% Yield Makes Up For The Risks

2023-08-05 08:05:00 ET

Summary

• TriplePoint Venture Growth now yields 14% after dropping post Q2 earnings.
• TPVG provides debt financing to high-growth venture capital-backed companies and targets returns in the 10-18% range.
• TPVG has a high weighted average portfolio yield, strong net investment income, and a well-covered dividend yield, making it an attractive option for risk-tolerant investors.

Earnings time can be great for picking up bargains, especially those in the high yield sector. For example, a 10% drop on a stock that was previously yielding 10% results in an 11% yield, whereas the same percentage drop on a stock that was yielding 2% would result in just a 2.2% yield. As you can see, the first case results in a meaningful bump to income where as the second case does not.

This brings me to TriplePoint Venture Growth ( TPVG ), which I last covered here back in December of last year, noting its high investment yields. TPVG’s stock price dropped after the recent Q2 results, and as shown below, is now trading towards the low end of its 52-week range. In this article, I discuss why bargain seekers may want to considering TPVG on this share price weakness, so let’s get started.

Why TPVG?

TriplePoint Venture Growth is an externally-managed BDC that provides debt financing to high growth venture capital backed companies, such as those in the technology and life sciences space. This segment is highly fragmented with just a handful of BDCs that are focused on it. TPVG targets returns in the 10-18% range with potential for additional upside through equity kickers in the form of warrants.

At present, TPVG has a debt portfolio worth $853 million that’s spread across 56 obligors and 162 loans. It also has an additional $89 million worth of equity and warrant investments for potential upside.

TPVG signed $114 million of term sheets with venture growth stage companies, and closed $18 million of new debt commitments during the second quarter. It also funded $30 million in debt investments to eight portfolio companies with a 16.4% weighted average annualized yield at origination. As shown below, this marks a slowdown in deal activity from the 2020-2022 timeframe, when VC companies were flush with cash.

During the quarter, TPVG also achieved a high 14.7% weighted average annualized portfolio yield on total investments, which sits higher than the 12.2% that BDC bellwether Ares Capital ( ARCC ) achieved during the same quarter. As shown below, TPVG has been able to maintain consistently high weighted average portfolio yield over the past 2 years.

Importantly, TPVG recorded net investment income of $0.53 per share, which is meaningfully higher than the $0.41 received in the prior year period. This also equates to a 76% payout ratio based on the $0.40 quarterly dividend rate. This buffer enables TPVG to pad its spillover income, which currently stands at $0.90 per share, enabling it to cover help cover future dividends should the need arise or to make incremental investments in the future.

Notably, risks are elevated for TPVG, as its net asset value per share declined by $0.99 on a sequential QoQ basis to $10.70. This was due primarily to net unrealized losses of $37.8 million (compared to $0.7 million of net realized losses) on the debt investment portfolio and $3.8 million of net unrealized losses on the warrant and equity portfolio resulting from fair value adjustments.

While no one likes to see a decline in the NAV, valuations of high growth companies do tend to be more volatile, and unrealized losses are by no means permanent. At the same time, TPVG’s portfolio generates plenty of capital and overall portfolio credit appears to be stable, with a 2.07 weighted average portfolio credit score (on a scale from 1 to 5, with 1 being the lowest risk) and 6 investments in the higher risk categories, as shown below.

Looking forward, TPVG should benefit from the recent 25 basis point rate hike by the federal reserve, considering that 61% of its debt portfolio is floating rate. However, I would expect near term deal activity to be muted considering a more challenging environment for VCs and pre-IPO tech companies. TPVG is also somewhat balance sheet constrained as its debt to equity ratio currently sits at 1.67x. TPVG has relied on a growing debt balance to grow its portfolio, with leverage trending up over the past 5 quarters, as shown below.

Lastly, it appears that the market has largely baked in the risks, with the stock having fallen by 9% since before the earnings release. At the current price of $11.43, TPVG trades at a price-to-NAV ratio of 1.07x and a low forward PE of just 5.7, thanks to high yielding investments.

It’s also worth noting that most of the drop in NAV was due to unrealized losses, which could come back with improved valuations in its underlying companies. As shown below, TPVG’s price to book ratio currently sits well within its trading range with a price-to-NAV that’s trended as high as 1.36x in 2021.

Investor Takeaway

Overall, TPVG produced a mixed bag quarter with strong and growing net investment income but a decline in NAV/share due to unrealized losses. Meanwhile, portfolio quality remains stable and I believe TPVG should be measured more against its earnings generating power. Near-term growth could be muted due to higher leverage, but investors are well-compensated by the 14% dividend yield that's well-covered by NII. As such, risk tolerant investors may want to layer into this high yielding stock while watching for signs of a potential turnaround in underlying portfolio valuations in the coming quarters.

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