Hercules Capital's Q3 2025: Contradictions Emerge on Funding, Credit Quality, Pipeline, Market Activity, and Leverage

Date of Call: October 30, 2025

Financials Results

• EPS: $0.49 per share (net investment income per share); net investment income $88.6M in Q3 2025

Guidance:

• Q4 core yield expected to be 12%–12.5%.
• Q4 prepayments expected to be $150M–$200M.
• Q4 interest expense to increase vs prior quarter due to debt portfolio growth.
• Q4 SG&A expected $25M–$26M with RIA expense allocation ~ $4M.
• RIA quarterly dividend expected ~$2M–$2.5M; supplemental dividend sizing to be decided by the board in February.

Business Commentary:

• Record New Commitments and Fundings:
• Hercules Capital reported over $846 million in total gross debt and equity commitments in Q3, contributing to record quarterly funding performance.

• The strong performance was driven by taking advantage of new business opportunities and capitalizing on a broad-based favorable new business environment.

• Growth in Debt Portfolio:

• Hercules Capital achieved $504.6 million in record total gross fundings in Q3, leading to $95.9 million of net debt portfolio growth.

• This growth was supported by a high level of liquidity and a conservative and defensive balance sheet strategy.

• Performance and Dividend Coverage:

• The company generated record total investment income of $138.1 million and net investment income of $88.6 million in Q3.

• Despite operating in a declining rate environment, Hercules Capital achieved 122% coverage of its quarterly base distribution and maintained $0.80 per share of spillover income.

• Strategic Positioning and Market Discipline:

• Hercules Capital maintained its high first lien exposure above 90% and continues to maintain a conservative balance sheet.
• The company's disciplined approach to credit underwriting and focus on quality originations have been key drivers of success in a competitive market environment.

Sentiment Analysis:

Overall Tone: Positive

• Management reported record Q3 metrics: total investment income $138.1M, net investment income $88.6M ($0.49/sh), record Q3 gross fundings $504.6M and YTD originations $2.87B, NAV of $12.05 (highest since 2008), and strong liquidity ($655M BDC / >$1B platform), and stated credit quality remains strong.

Q&A:

• Question from Brian J. McKenna (Citizens JMP Securities): Thoughts on supplemental dividend sizing for next year (if ~$2 of NII and similar payout ratio, would ~ $0.30 supplemental be plausible)?
  Response: Too early to provide specifics; board will decide in February, but management says the math is reasonable and they expect to comfortably maintain the base dividend and provide a supplemental distribution.

• Question from Brian J. McKenna (Citizens JMP Securities): What is driving the strong credit quality and portfolio performance as the platform scales?
  Response: Management attributes credit strength to a stable, experienced investment and credit team and disciplined underwriting.

• Question from Finian Patrick O’Shea (Wells Fargo Securities): Was there a change in RIA expense allocation driving a stronger advisor line this quarter or any one-offs?
  Response: No change in allocation methodology; the allocation rises with fund AUM and origination activity, creating quarter-to-quarter variability.

• Question from Finian Patrick O’Shea (Wells Fargo Securities): Any change in mix between incumbent portfolio funding versus new borrower originations going forward?
  Response: No material change; Q3 saw elevated follow-on funding from existing portfolio performance plus selective, high-quality new borrower originations; pipeline remains disciplined.

• Question from Crispin Love (Piper Sandler): Given recent bank loan issues and media focus, what are you seeing in private credit/BDC credit quality and competitor behavior?
  Response: Hercules sees no material credit deterioration; management emphasizes consistent, conservative underwriting as the reason for relative outperformance and remains positive on credit outlook.

• Question from Crispin Love (Piper Sandler): How will recent rate cuts and the forward curve impact net investment income and NII per share?
  Response: Impact is muted because ~75% of prime-based portfolio is at floors; management estimates a 50bp cut ≈ ~$0.05 per share annual NII impact and reiterated Q4 core yield guidance of 12%–12.5%.

• Question from Douglas Michael Harter (UBS Investment Bank): When you describe 'frothiness' in the market, is that valuation or structure—what caused you to pass on deals?
  Response: Main issues are weak deal structure and outsized leverage from some competitors; Hercules is passing on deals lacking structural integrity and prudent underwriting.

• Question from Christopher Whitbread Patrick Nolan (Ladenburg Thalmann & Co.): With tokenization developments (e.g., JP Morgan), would you use blockchain to track investments/liens or change infrastructure?
  Response: No—Hercules is not using blockchain to track investments and has no plans to; they also will not directly invest in crypto-native businesses, though may finance infrastructure/service providers.

• Question from John Hecht (Jefferies): Are legacy software companies at risk from AI disruption and how is your portfolio positioned?
  Response: Portfolio duration is short (~18 months) and AI considerations have been incorporated into underwriting over the last 12–24 months; management believes the portfolio is well-positioned and is monitoring AI impact.

• Question from John Hecht (Jefferies): Is the strong commitment and deployment activity driven by a larger TAM, increased share, or borrowers preferring debt over equity?
  Response: Management believes they are taking market share due to scale, liquidity, diversified funding and selective hires, enabling capture of a larger TAM.

• Question from Paul Conrad Johnson (Keefe, Bruyette & Woods): How much of the debt unrealized appreciation (~$28.6M) was credit-specific (e.g., the resolved non-accrual) versus mark-to-market?
  Response: About $33M total unrealized appreciation; ~$28.6M from debt, and roughly half of that debt appreciation was driven by one resolved non-accrual that revalued from ~$24.6M to ~$38.4M.

• Question from Paul Conrad Johnson (Keefe, Bruyette & Woods): How are PIK toggles structured in your venture loans and typical limits on deferred spread?
  Response: PIK is mostly set at origination, typically small and structured as a toggle (cash vs PIK), rarely exceeding 1%–2% of interest and often tied to milestones.

Contradiction Point 1

Funding Levels and Market Conditions

It involves differing perspectives on funding levels and market conditions, which are crucial for investor expectations and strategic planning.

Have you seen concerns about private credit and BDCs from recent media coverage, and what is your outlook on credit quality? - Crispin Love (Piper Sandler)

2025Q3: We have not seen material deterioration in credit quality. Our outlook remains positive due to our consistent and conservative underwriting approach. - Scott Bluestein(CEO)

How competitive is the venture lending market from banks and nonbanks? - Crispin Elliot Love (Piper Sandler)

2025Q2: We're seeing certain nonbanks and banks being very aggressive in sectors, lacking structure, and going below our yield threshold. We remain disciplined and focused on long-term growth. - Scott Bluestein(CEO)

Contradiction Point 2

Credit Quality and Market Conditions

It involves changes in the company's perspective on credit quality and market conditions, which are crucial for assessing risk and confidence in the company's underwriting strategy.

Are there concerns about private credit and BDCs due to recent media coverage, and what is your outlook on credit quality? - Crispin Love (Piper Sandler)

2025Q3: We remain confident in our credit outlook. Companies are freezing decision-making due to market uncertainty. Volatility has not significantly changed quarter-over-quarter credit performance, with stable credit ratings and only two loans on nonaccrual. - Scott Bluestein(CEO)

How are you balancing leverage increases by raising capital or using third-party funds to manage growth? - Douglas Harter (UBS)

2025Q1: We are seeing aggressive underwriting and lack of structural integrity in some deals. We remain cautious and focused on disciplined credit underwriting. - Scott Bluestein(CEO)

Contradiction Point 3

Pipeline and Deployment Activity

It involves differing statements about the pipeline and deployment activity, which are key indicators for future investment and growth potential.

What is driving the market's strong commitment and deployment? - John Hecht (Jefferies)

2025Q3: We are taking market share, driven by our scale, diversified funding sources, and strategic hiring. We believe we are capturing more market share, enhancing our position. - Scott Bluestein(CEO)

How do you plan to fund the second-half pipeline—through leverage or the ATM? - Douglas Michael Harter (UBS)

2025Q2: We're well capitalized, with available liquidity. We plan to gradually increase leverage back to the 100% to 105% range before using the ATM again. - Scott Bluestein(CEO)

Contradiction Point 4

Market Activity and Borrower Behavior

It highlights a shift in the company's narrative about market activity and borrower behavior from one quarter to the next, which could impact investor expectations regarding future growth and stability.

Can you provide details on the portfolio composition of new vs. existing borrowers? - Finian Patrick O’Shea (Wells Fargo Securities)

2025Q3: We continue to see broad strength across our existing portfolio, with better opportunities to deploy capital. We also added seven new borrowers, focusing on quality and scale. - Scott Bluestein(CEO)

What is driving the sustained strong activity amid the broader macroeconomic environment? Has there been a slowdown in activity at the beginning of the month, followed by a recovery later in April? - Brian McKenna (Citizens JMP)

2025Q1: Over the last 20 years, our business tends to outperform in periods of market volatility. When the markets are more volatile, equity becomes more expensive and scarce, providing opportunities for Hercules to selectively target quality companies. - Scott Bluestein(CEO)

Contradiction Point 5

Leverage and Capital Deployment

It involves differing statements about the company's approach to leverage and capital deployment, which impacts financial strategy and risk management.

Have you seen concerns about private credit and BDCs from recent media coverage? What is your outlook on credit quality? - Crispin Love (Piper Sandler)

2025Q3: We are under-levered and have a lot of liquidity, so we plan to increase leverage to deploy capital aggressively and offset yield compression. - Scott Bluestein(CEO)

Are you targeting leverage to cover the dividend and supplemental expenses? - Christopher Whitbread Patrick Nolan (Ladenburg Thalmann & Co.)

2024Q4: We're focusing on the base dividend coverage first. Our leverage ceiling is 1.25, but we'll stay below this and use leverage opportunistically to support earnings. - Seth Meyer(CFO)