Earnings call transcript: Hercules Capital Q3 2025 beats expectations

Hercules Capital reported its Q3 2025 earnings, surpassing analysts’ expectations with an earnings per share (EPS) of $0.49 compared to the forecasted $0.48. The company also reported record total investment income of $138.1 million, exceeding the revenue forecast of $136.95 million. Despite the positive earnings, Hercules Capital’s stock experienced a slight decline of 0.9% in aftermarket trading, closing at $17.73, down from the previous close of $17.75.

Key Takeaways

• Hercules Capital exceeded EPS and revenue forecasts for Q3 2025.
• The company reported record total investment income, reflecting a 10.3% year-over-year increase.
• Stock price declined slightly in aftermarket trading despite strong earnings.
• The company maintained a high return on equity at 17.4%.

Company Performance

Hercules Capital demonstrated robust performance in Q3 2025, with record investment income and strong net investment income of $88.6 million. The company’s return on equity remained high at 17.4%, and it achieved a net asset value per share increase of 1.8% quarter-over-quarter. The performance was driven by strategic investments in life sciences and technology sectors, which comprised 54% and 46% of commitments, respectively.

Financial Highlights

• Revenue: $138.1 million, up 10.3% year-over-year
• Earnings per share: $0.49, surpassing the forecast of $0.48
• Return on equity: 17.4%
• Net asset value per share: $12.05, up 1.8% quarter-over-quarter

Earnings vs. Forecast

Hercules Capital’s EPS of $0.49 exceeded the forecasted $0.48, marking a 2.08% surprise. Revenue also surpassed expectations, with actual figures at $138.1 million compared to the forecast of $136.95 million. This performance indicates a solid quarter for the company, building on its historical trend of meeting or exceeding market expectations.

Market Reaction

Despite the earnings beat, Hercules Capital’s stock price declined by 0.9% in aftermarket trading, closing at $17.73. This movement contrasts with the company’s strong financial performance, possibly reflecting broader market trends or cautious investor sentiment. The stock remains within its 52-week range, with a high of $22.04 and a low of $15.65.

Outlook & Guidance

Looking forward, Hercules Capital expects Q4 prepayments to range between $150 million and $200 million. The company anticipates maintaining its core yield guidance between 12% and 12.5% and plans to sustain both base and supplemental dividends. The strong pipeline and origination expectations suggest continued robust performance.

Executive Commentary

CEO Scott Bluestein emphasized the company’s leadership position in the venture and growth stage lending market, stating, "Our performance results continue to be driven by our leadership position within the venture and growth stage lending market." He also noted the company’s conservative approach to underwriting amidst market frothiness, saying, "We are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets."

Risks and Challenges

• Potential market saturation in the venture lending space could impact future growth.
• Macroeconomic pressures and interest rate fluctuations may affect investment yields.
• Competition in the life sciences and technology sectors could intensify.
• Regulatory changes could pose compliance challenges.

Q&A

During the earnings call, analysts inquired about the potential for supplemental dividends and the company’s approach to AI and technology disruptions. Executives highlighted their strong credit team and conservative strategy, addressing concerns about market share gains and the scalability of their platform.

Full transcript - Hercules Capital Inc (HTGC) Q3 2025:

Michael, Moderator/Operator, Hercules Capital: Thank you, David. Good afternoon, everyone, and welcome to Hercules Capital’s conference call for the third quarter of 2025. With us on the call today from Hercules Capital are Scott Bluestein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules Capital’s financial results were released just after today’s market close and can be accessed from Hercules Capital’s Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations webpage following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision.

Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including but not limited to the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC’s website. Any forward-looking statements made during this call are made only as of today’s date, and Hercules Capital assumes no obligation to update any such statements in the future. With that, I’ll turn the call over to Scott.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2025 earnings call. Hercules wrapped up the first three quarters of 2025 by delivering another strong quarter of record fundings and record operating performance while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations and disciplined underwriting. Our platform momentum continued in Q3 with originations of over $846 million, which led to record originations of $2.87 billion for the first three quarters of 2025, putting us on pace to exceed our previous full-year record of $3.12 billion. Our record fundings for Q3 of $504.6 million led to $95.9 million of net debt portfolio growth and a new record with over $557.8 million of net debt portfolio growth in the first three quarters of 2025.

The strong new business that we generated during the third quarter led to continued solid net debt portfolio growth, and that helped Hercules generate record total investment income of $138.1 million and net investment income of $88.6 million, or $0.49 per share during Q3. Despite operating in a declining rate environment, we were able to achieve 122% coverage of our quarterly base distribution of $0.40 per share in the third quarter and maintain $0.80 per share of spillover income. Our strong Q3 performance was highlighted by new records, including record total gross fundings for a third quarter of $504.6 million, an increase of 85.5% year over year. Record total investment income of $138.1 million, an increase of 10.3% year over year. Record period-ending assets under management of approximately $5.5 billion, an increase of 20.7% year over year.

Our first three quarters performance was highlighted by several new records, including record total investment income of $395.1 million, record net investment income of $254.7 million, record total gross new debt and equity commitments of $2.87 billion, record total gross fundings of $1.75 billion, and record net debt investment portfolio growth of over $557.8 million. Our performance results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency, and scale of the Hercules platform, and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders. Our approach to the current market is centered around disciplined credit underwriting. Managed and controlled portfolio growth, and maintaining balance sheet strength and flexibility. We believe that this will best position the company to continue to deliver strong relative operating results irrespective of the market environment.

We noted in our Q2 2025 earnings call that we continue to see a more favorable new business landscape broadly and that we were expecting the business to be able to take advantage of that. Our expectation was that we would deliver strong new business over the second half of the year, but that Q3 would be slower as it typically is for our ecosystem. After a slow start to Q3, our investment teams were able to take advantage of several opportunities, which helped us deliver record Q3 funding performance. We are maintaining our expectation that origination activity will remain strong through year-end, and we have already delivered record new commitments and record new fundings for the year. As we noted earlier this week, Hercules Capital recently achieved another meaningful milestone by reaching the $25 billion mark in total cumulative debt commitments since our first origination in October 2004.

This is a tremendous achievement that reflects the enduring strength and impact of the Hercules Capital platform and validates our approach of building a company focused on what is best for our shareholders and stakeholders, treating our employees the right way, and providing certainty and consistency in the market to our borrowers, prospects, and their investors. While the new business environment remains constructive, we are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets, as we noted on our last earnings call. Having operated in this asset class for over 21 consecutive years and through several different credit cycles, we know the importance of being disciplined and true to the underwriting rigor that has made Hercules Capital the market leader, and that is exactly what we intend to continue to do.

We maintained a conservative and defensive balance sheet while still delivering strong originations and record funding performance for Q3. In Q3, we maintained our high first lien exposure, which remained above 90% and continues to be towards the high end of our BDC peers. As we guided, GAAP leverage increased modestly to 99.5% in Q3, up from 97.4% in Q2, and we did not utilize our ATM during the quarter. Our Q3 GAAP leverage remained at the low end of our typical historical range of 100% to 115%, and below the average of our BDC peers. Over $1 billion of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well. Let me now recap some of the key highlights of our performance for Q3.

In Q3, we originated total gross debt and equity commitments of over $846 million and record gross fundings of over $504 million. We generated record total investment income of $138.1 million and net investment income of $88.6 million, or $0.49 per share. We achieved 122% coverage of our quarterly base distribution of $0.40 per share. We continue to be very well positioned with regards to dividend coverage in a declining rate environment. With the record growth in our debt investment portfolio through the first three quarters of 2025, and given that nearly 75% of our prime-based loans, which comprise approximately 82% of the portfolio, are now at their floors, we believe that we are generating a level of core income that amply covers our base distribution of $0.40 per share.

We generated a return on equity in Q3 of 17.4%, and our portfolio generated a GAAP effective yield of 13.5% in Q3 and a core yield of 12.5%, which was consistent with Q2. Our balance sheet, with moderate leverage and low cost of leverage, remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high-quality originations versus chasing higher-yielding assets with more risk or loosening deal structure to drive short-term portfolio growth. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a specific competitive advantage. Our Q3 origination activity was well-balanced between life sciences companies and technology companies.

In Q3, approximately 54% of our commitments and 50% of our fundings were to life sciences companies, while approximately 46% of our commitments and 50% of our fundings were to tech companies. We funded that capital to 24 different companies in Q3, of which seven were new borrower relationships. Year-to-date, through the end of Q3, we have added 27 new borrowers to the Hercules Capital portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $437.5 million, down from $471.5 million in Q2. Over 50% of our gross fundings for Q3 occurred in the last month of the quarter, and that momentum continued into early Q4. Since the close of Q3 and as of October 28, 2025, our investment team has closed $554.4 million of new commitments and funded $237.4 million.

We have pending commitments of an additional $425.5 million in signed non-binding term sheets, and we expect this number to continue to grow as we progress in Q4. Our active pipeline remains robust. With our closed quarter-to-date activity as of October 28, 2025, we have already exceeded our previous annual records for gross new commitments and new fundings, demonstrating the continued growth and scaling of our platform. While Q4 is typically a very strong originations quarter for the venture and growth stage markets, we remain focused on maintaining our high bar for new originations, given some of our recent market observations. We are continuing to see a lot of companies in our ecosystem looking to access the credit markets that lack scale and what we believe to be solid equity support.

The volume of deals that we are screening and passing on continues to be near record levels, and we are continuing to see deals get done without strong structure and well outside of what we believe are prudent underwriting metrics for our asset class. We do not expect many of these deals to age well. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters. Lending to cash flow negative growth stage companies requires patience, prudence, and experience. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q3 and quarter-to-date Q4, we’ve had four M&A events in our portfolio, which included two life sciences portfolio companies and two technology portfolio companies announcing acquisitions.

That brings us to 10 M&A events plus one IPO in our portfolio year-to-date through October 30, 2025. Based on current market conditions and improving corporate sentiment, we continue to expect exit activity to accelerate towards year-end. Early loan repayments came in slightly higher than expected in Q3 at approximately $262 million. Even with the higher level of early loan prepayments, we still achieved strong net debt portfolio growth given the strong funding levels in the quarter, which continues to position us well for strong core earnings growth in the remainder of 2025 and into 2026. For Q4 2025, we expect prepayments to be lower and in the range of $150 million to $200 million, although this could change as we progress in the quarter. Credit quality of the debt investment portfolio remained strong and relatively the same quarter over quarter.

Our weighted average internal credit rating of 2.27 increased just slightly from the 2.26 rating in Q2 and remains well within our normal historical range. Our grade one and two credits increased to 64.5% compared to 62.9% in Q2. Grade three credits decreased slightly to 32.7% in Q3 versus 34.7% in Q2. Our rated four credits increased to 2.8% from 2.4% in Q2, and we again did not have any rated five credits. In Q3, the number of companies with loans on non-accrual increased by one. We had debt investments in two portfolio companies on non-accrual with an investment cost and fair value of approximately $52.2 million and $47.2 million respectively, or 1.2% and 1.1% as a percentage of our total investment portfolio at cost and value respectively. Subsequent to quarter-end, we successfully worked through and resolved the one new loan that was added to non-accrual during the third quarter.

The result of that effort was that we received net proceeds on that debt position 56% higher, or nearly $14 million higher than our Q2 fair value mark. Despite a small realized loss on that particular loan, our realized IRR on that debt position was approximately 13.2%. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring still remains enhanced given the volatility in the markets broadly and the ongoing government shutdown, which has now extended into the fifth week. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we will do will continue to serve us well. As of the end of Q3, the weighted average loan-to-value across our entire debt portfolio was approximately 16%.

We have not noted any meaningful deterioration in credit since our last earnings call. Our net asset value per share in Q3 was $12.05, an increase of 1.8% from Q2 2025. This is the highest net asset value per share that we have reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC and over $1 billion of liquidity across our platform. With healthy liquidity, a low cost of debt relative to our peers, and four investment-grade corporate credit ratings, including an investment rating upgrade to Baa2 from Moody’s, we remain well-positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Given the enhanced focus on PIC across the private credit markets, we wanted to provide some additional disclosure on PIC income for Hercules.

For Q3, PIC was approximately 10.5% of total revenue, which was flat from where it was during the first half of 2025. Approximately 85% of our PIC income in Q3 was attributable to PIC that was part of the original underwriting and not a result of any credit or performance-related amendment. Nearly 90% of our PIC income in Q3 came from loans that we have rated as one, two, or three, while there was only a single loan that was rated four that was generating PIC income during the third quarter. Further, excluding 100% of our PIC income during Q3, the business still generated cash net investment income that provided 111% coverage of our base dividend. Philosophically, we will selectively use PIC at underwriting to enhance income for certain credits that we believe are stronger and more stable, and we expect this to continue to be the case going forward.

Venture capital investment activity in Q3 mirrored the strength that we experienced in our deal flow and originations. 2025 continues to demonstrate a healthy pace, with $80.9 billion in Q3 and $250.2 billion invested for the first three quarters of 2025, according to data gathered by PitchBook and VCA. The $250.2 billion of investment activity already represents the second highest year in history, exceeding the $236.1 billion invested in 2022. While the aggregate data remains strong, it is highly concentrated, with over 67% of all year-to-date VC equity investment going into AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies was $20 billion. Both the number of IPOs and dollars raised increased in Q3 and continues to improve. Consistent with the aggregate data for the ecosystem during Q3, capital raising across our portfolio remains strong, with 18 companies raising over $1.3 billion in new capital.

In 2025, we’ve now had 64 companies raise over $5 billion in new capital. Year-to-date, our portfolio companies have raised over $6 billion of new capital. Given our strong, sustained operating performance, we exited Q3 with undistributed earnings spillover of $146.2 million, or $0.80 per ending share outstanding. For Q3, we are maintaining our quarterly base distribution of $0.40, distribution of $0.07 per share for a total of $0.47 of shareholder distributions. Our Q3 net investment income covered our base distribution by 122%, and our full distribution, including our $0.07 supplemental distribution, by over 104%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions next year.

This is now our 21st consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. In closing, our scale, institutionalized lending platform, and our ability to capitalize on a rapidly changing competitive and macro environment continue to drive our business forward and our operating performance to record levels. In Q3, Hercules Capital delivered its 10th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Despite the declining rate environment that we are now operating in, we were able to achieve 122% coverage of our quarterly base distribution in Q3. Our continued success as a company is attributable to the tremendous dedication, efforts, and capabilities of our 115-plus employees and the trust that our venture capital and private equity partners place with us every day.

We are thankful to the many companies, management teams, and investors that continue to make Hercules Capital their partner of choice. I will now turn the call over to Seth. Thank you, Scott, and good afternoon, ladies and gentlemen. Our strong momentum reported in the first half of the year continued throughout the third quarter. As Scott shared, the business activity during the quarter and year-to-date has been exceptional and record-breaking for our platform. Fundraising and investment deployment in our RIA-managed funds also has been very strong, expanding the platform and scaling the business to be even more efficient. We continue to maintain strong available liquidity of $655 million as of the end of the quarter in the BDC and more than $1 billion across the platform, including the advisor-managed funds by our wholly owned subsidiary, Hercules Advisor LLC.

Based on the performance of the quarter, Hercules Advisor delivered a third-quarter dividend of $2.1 million, which, when combined with the expense reimbursement of approximately $4.1 million, resulted in approximately $6.2 million in NII contribution to the BDC in Q3. With those points in mind, let’s review statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and then finally the financial outlook. Total investment income in Q3 was another record at $138.1 million, supported by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, increased as well to another record at $127.9 million. Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.6 million, or $0.49 per share in Q3. Our effective and core yields were 13.5% and 12.5%, respectively, compared to 13.9% and 12.5% in the prior quarter.

As of quarter-end, almost 60% of our prime-based loans were at the contractual floor, and thus the impact of any future rate reductions will be muted. Third-quarter gross operating expenses were $53.6 million compared to $52.2 million in the prior quarter. Net of costs recharged to the RIA, our operating expenses were $49.5 million. Interest expense and fees increased to $27.2 million due to the growth of the business and corresponding increase of leverage. SG&A decreased slightly to $26.4 million, above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses decreased to $22.3 million. Our weighted average cost of debt increased slightly to 5.1%. Our ROAE, or NII over average equity, increased to 17.4% for the third quarter, and our ROAA, or NII over average total assets, increased to 8.7%.

Switching to NAV, unrealized and realized activity, during the quarter, our NAV per share increased by $0.21 to $12.05 per share. This represents an NAV per share increase of 1.8% quarter over quarter. The main driver was appreciation of the debt portfolio, as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized appreciation was. Primarily attributable to $28.6 million of net unrealized appreciation on debt investments, $11.3 million of net unrealized appreciation attributable to valuation movements on publicly traded equity and warrant investments, and $0.8 million net unrealized appreciation attributable to escrow and other investment-related receivables. This was partially offset by $5.1 million reversal of previous quarter appreciation upon a realization event, and $2.6 million of net unrealized appreciation attributable to valuation movements in the privately held equity, warrant, and investment funds.

Hercules Capital also experienced a small net realized loss of $1.8 million, primarily due to losses on equity investments. On leverage and liquidity, our GAAP and regulatory leverage increased to 99.5% and 83.6%, respectively, compared to the prior quarter due to the growth in the balance sheet being financed by leverage. Netting out leverage with our cash on the balance sheet, our net GAAP and regulatory leverage was 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity. The strong liquidity positions us well to support our existing portfolio companies, as well as source new opportunities.

Finally, on the outlook points for the fourth quarter, we expect our core yield to remain in the range of 12% to 12.5%. As a reminder, 98% of our debt portfolio is floating with a floor, and as of today, almost 75% of our prime-based portfolio is at the contractual floor. Although very difficult to predict, as stated by Scott, we expect $150 million to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter based on the year-to-date debt portfolio growth. For the fourth quarter, we expect SG&A expenses of $25 million to $26 million and an RIA expense allocation of approximately $4 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter.

In closing, the steps that we took in the first half of the year to strengthen our balance sheet continue to help us grow and scale our platform. I will now turn the call over to the operator to begin the Q&A part of our call. Brian, over to you. Thank you. At this time, if you’d like to ask a question, please press star and one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star and two. We remind you to please pick up your handset and please limit yourself to one question and one follow-up question. We’ll take our first question from Brian J. Mckenna with Citizens JMP Securities. Please go ahead. Your line is open.

Brian J. McKenna, Analyst, Citizens JMP Securities: Great. Thanks. Good evening, everyone. I appreciate all the detail on the business and the underlying trends and all the momentum. I also heard your comments around the expectation to continue paying supplemental dividends moving forward. If I look at the supplemental dividend as a % of excess earnings above the base dividend, this has totaled about 75% to 80% for the last two years. I don’t want to make too many assumptions, but say you hold the line on earnings for next year, $2 of NII, you assume a similar ratio, that implies about $0.30 of supplemental dividends for the full year. I just wanted to run that math by you and even just some bigger picture thoughts on kind of where the supplemental dividend can go into next year.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Thanks for the question, Brian. It is a little bit premature for us to provide any specificity with respect to the supplemental distribution for next year. That is something that we will announce on the Q4 call in the middle of February. What I can say is I think your math is pretty accurate, and that is sort of how we think about the supplemental distribution. That is part of the discussion that we will have with the board as we approach those year-end conversations. We are very optimistic based on the trajectory of the business and our expected operating performance near term that we will be very comfortably able to maintain the base distribution and continue to provide a supplemental distribution. What that ultimate supplemental distribution is will be determined by the board at the end of the year.

Again, I do not think your math is too far off.

Brian J. McKenna, Analyst, Citizens JMP Securities: Okay. That’s helpful. Maybe just switching gears a little bit to credit quality. If you just look at all the trends across the portfolio, they’re really strong across the board. I appreciate the detail on the one non-accrual that was added during the quarter, and that obviously got resolved here post-quarter-end. When you look at the portfolio, you look at your business, does anything stand out in terms of what the biggest driver of this strong credit quality is? It seems like as your platform continues to reach new levels of scale here, the underlying quality of the portfolio has gotten that much better as well. Any thoughts here would just be appreciated.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah, appreciate the recognition, Brian, and the question. I think the answer that I’ll give today is the same answer that I would give at any point in our 21-year history. It’s attributable to our investment team and our credit team. I think we have the best team in the business on the investment side. The team is incredibly experienced and has been together for a long time. That team knows how to pick the right companies. We’re not perfect. We’ve made mistakes before. We will likely continue to make mistakes. The credit for our performance is attributable to the quality of our investment team.

Brian J. McKenna, Analyst, Citizens JMP Securities: All right. I’ll leave it there. Thanks, Scott.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Thanks, Brian.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from Finian Patrick O’Shea with Wells Fargo Securities. Please go ahead. Your line is open.

Finian Patrick O’Shea, Analyst, Wells Fargo Securities: Hey, everyone. Good afternoon. Question on the advisor. Was there a change in expense allocation? That line looked a bit stronger than normal this quarter. If not, am I right? Was there some one-off that drove a higher number? Thanks.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah. No. Thanks, Finian. There’s no change in the allocation per se, but it does change as the level of originations occur. As the assets under management continue to go up in the funds, it will continue to increase. No fundamental change at all in the allocation.

Okay. Is it safe to say it drifts? I know in the past we framed it as a % of other G&A. I think it really ties to origination. Is it the growth of the RIA? You have similar guidance for next quarter as well, it sounds like, on the allocation.

Yeah.

Is it growing?

I would say this, Finn. It is two parts. It is the base of the amount of assets under management compared to the entire platform. That is part of the allocation, and then the amount of originations will create a little bit of volatility to that calculation every single quarter.

Okay, that is helpful. Thank you. Can you talk about, I guess, Scott, high level? There was a lot of incumbency this quarter, less on the new portfolio company borrower front. I think you maybe tied in with your kind of projecting continued strength there. Any sort of change in the portfolio mix incumbency versus new going forward? Thanks.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Thanks, Finian. No real change. I would sort of note three specific things. Number one, we are continuing to see pretty broad-based strength across our existing portfolio with respect to performance milestones and the achievement of specific things that we underwrite to. As those companies perform, they unlock additional capital availability. That’s why you saw higher than typical funding for the portfolio in Q3. The second thing that I would note is that, frankly, we saw some better opportunities to deploy capital into the existing portfolio in Q3. The third thing that I would note is we still had very strong pure new business origination. We added seven new companies, which is on the low end of what we typically do, but it was still strong for a Q3. We focused on the new business, new borrower side on quality-scaled originations.

My comments on the pipeline activity and what we saw in terms of frothiness in the market, I think, speak to the fact that with respect to some of the new deals we saw during the quarter, we were just passing or bidding very conservatively on the vast majority of those transactions. Helpful. Thanks so much. Sure. Thanks, Finian.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from Crispin Love with Piper Sandler. Please go ahead. Your line is open.

Crispin Love, Analyst, Piper Sandler: Thank you. Good afternoon. I have a credit question as well, just asked a little bit differently. In recent weeks, there’s definitely been a pickup in credit anxiety, just given some loans at banks, some being fraud-related. It seems that private credit and BDCs have been swept up in the media surrounding all this. First, can you just share what you’ve been seeing, your outlook, and then just how competitors have been behaving?

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Pretty broad question, but I’ll respond to it with the following. I think what has made Hercules Capital unique and what has allowed us to outperform virtually every competitor in the BDC market for the last several years is the fact that we have been incredibly consistent and conservative with respect to underwriting credit. We don’t loosen our standards or get more aggressive in very strong markets. We don’t change our stripes if others are doing things that we don’t think are prudent. I think that consistency, that cautious approach has served us well and will continue to serve us well. The second thing that I would note is that we have not seen any material deterioration in the credit performance of our portfolio over the last quarter, and that would include quarter-to-date, post.

Continuing to see relative strength in terms of the numbers and the metrics that we monitor on a pretty continuous basis. Our outlook with respect to credit remains positive.

Crispin Love, Analyst, Piper Sandler: Thank you, Scott. Appreciate the color there. Given recent rate cuts and the forward curve, can you just share how you expect net investment income to be impacted over the intermediate term? It’s held up well so far. What could that mean for NII per share and where you might see a leveling off and stabilization?

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah. Crispin, this somewhat subtle guidance or statements that we made, the difference between at quarter-end, approximately 60% of our prime-based portfolio at its contractual floor. Then both Scott and I mentioned that as of today, meaning after the rate cut this week, approximately 75% or almost 75% of our prime-based floor. Further decreases will be muted. We do provide the table in the presentation and the Q as far as what we expect further rate cuts are. For instance, a 50 basis point rate cut, we guide to about $0.05 of NII per share annually impacting. That reflects the fact that the majority of our portfolio is at its contractual floor. We can’t be more specific than trying to model out the existing portfolio. At the moment, it’s pretty muted.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: I would just add to that, Crispin. We did reiterate, and this is guidance that is inclusive of the Fed activity this week. We did reiterate our core yield guidance for Q4 of 12% to 12.5%. I think that speaks to our comfort level with respect to what we can continue to originate on the front-end side of the business.

Crispin Love, Analyst, Piper Sandler: Great. Thank you. Appreciate you taking my question.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from Douglas Michael Harter with UBS Investment Bank. Please go ahead. Your line is open.

Douglas Michael Harter, Analyst, UBS Investment Bank: Thanks. Scott, just hoping to drill down a little bit more on your comment about some of what you’re seeing in the pipeline, or not the pipeline, in the market on kind of frothiness. Is that on structure of deals? Is that on valuation? If you could just kind of drill into that, what you’re seeing that kind of caused you to pull back a little bit from those things.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. I think it’s two things. It’s mainly structure and funding amounts and not necessarily tied to yield. What we’ve seen over the last several quarters is that a handful of market participants have been incredibly aggressive with respect to underwriting deals that, from a leverage perspective or from a commitment to value perspective, exceed what we think are prudent underwriting parameters. The second thing that we’ve seen recently, and this would probably be over the last quarter or two, there continue to be a handful of deals getting done in the market where there’s just not a lot of structure in terms of how those deals are being put together. We think structural integrity is critical to success long-term in this business. We, as a firm, have zero interest in driving short-term portfolio growth by booking credits that will not age well.

We’re just operating the way we’ve historically tried to operate with a conservative approach to credit, being aggressive where we can, and we think that’s going to serve our shareholders and stakeholders incredibly well going forward.

Douglas Michael Harter, Analyst, UBS Investment Bank: Great. Appreciate that, Tolar. Thank you.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Thanks, Doug.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from John Hecht with Jefferies. Please go ahead. Your line is open.

Crispin Love, Analyst, Piper Sandler: Hey, guys. Another good quarter. Congrats. First one, I mean, I guess these are both kind of industry-level questions. Number one is there’s just increasing concern on legacy software companies because if they weren’t developed with AI in mind, they could get disrupted very quickly. I’m wondering your perspectives on that and if you could talk about your portfolio of that type and how it is positioned for the AI revolution.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Thanks for the question, John. One of the more interesting aspects of our business, and depending on how you look at this, it’s either a positive or a negative, is the fact that our duration on the portfolio side is really short. Over the last 21 years, our duration on the loan book has been somewhere between 15 and 24 months. Right now, the duration is right around 18 months. For us, when we talk about legacy companies, these are not companies that are generally very old in terms of borrowers for Hercules Capital. When we think about the question that you just asked, we think that’s a significant positive because our portfolio is turning every, generally speaking, year and a half. We do not have a lot of legacy companies that really have AI revolution that we’ve seen over the last year or two.

We’ve built in AI analysis into our underwriting, the deals that we have booked over the last 12 to 24 months, how these companies are using AI, how these companies can be impacted positively or negatively from AI has been a part of our underwriting thesis. I think it’s certainly something that we’re watching closely, and our credit teams are doing a great job at monitoring that. We feel pretty good about how our portfolio is positioned with respect to what we’re seeing across the AI landscape right now.

Crispin Love, Analyst, Piper Sandler: Okay. Another kind of industry-level question. You guys have seen several quarters of very strong commitment and deployment activity. Is this just a function of a growing TAM, where the venture business is growing and you’re just capturing your share, or is it that you are increasing your share, or is it a greater propensity for the borrowers to seek debt as a solution as opposed to equity, or is it some combination? Just interested in your thoughts about the changing marketplace.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah. I think it’s two things, John. First and foremost, it is our view that we are absolutely taking market share. There’s been some changes in the venture and growth stage ecosystem over the last handful of years. I think we believe that we have, on a controlled, managed basis, been able to take some significant market share, which is probably the single biggest driver of the increase in commitments. The second element is, if you look at where our platform is today in terms of scale, in terms of liquidity, in terms of diversification with respect to funding sources, all of those things have helped position us to be able to take advantage of a larger TAM with respect to potential opportunities.

The third thing is I think we’ve done a really nice job at selectively hiring new employees onto the platform that have opened up some new markets, some new geographies, some new focus areas for us. Those things have all been very accretive, which have helped drive those numbers.

Crispin Love, Analyst, Piper Sandler: Okay, that’s very helpful. Thanks, guys.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Thanks, John.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from Christopher Whitbread Patrick Nolan with Ladenburg Thalmann & Co. Please go ahead. Your line is open.

Douglas Michael Harter, Analyst, UBS Investment Bank: Hey, guys. Good quarter. Following up on John Hecht’s question, but in a different way. The Wall Street Journal today had a very interesting article talking about how JP Morgan is tokenizing, which is a digital representation of asset ownership on a blockchain ledger for its private equity funds. I know John was talking about AI, but turning that around to blockchain and how you’re able to track ownership of assets and so forth. What does that represent in terms of a change in how you guys might do business? Barriers to entry that venture BDCs typically had over other BDCs and so forth? Any comments would be interested to hear.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah. I can’t comment specifically on the JP Morgan announcement because we obviously haven’t dug into that yet. I can tell you that philosophically, our approach to blockchain and crypto and all sort of related esoteric assets has not changed. We do not intend to invest on the lending side businesses. We think there are opportunities for us, and we’ve done a handful of them alongside more of the infrastructure side of things and companies that are using technology to sort of facilitate the growth of those industries and currencies, etc. In terms of investing directly in those areas, that’s not something that we’re going to do.

Douglas Michael Harter, Analyst, UBS Investment Bank: Yeah. Actually, my question is more about your own infrastructure, whether using blockchain to track investments and your lien against specific assets versus others.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We are not, Chris.

Douglas Michael Harter, Analyst, UBS Investment Bank: Okay, thank you.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: We’ll take our next question from Paul Conrad Johnson with Keefe, Bruyette & Woods. Please go ahead. Your line is open.

Paul Conrad Johnson, Analyst, Keefe, Bruyette & Woods: Hey. Good evening, guys. Thanks for taking my questions. I was just wondering if you could talk maybe just about the unrealized gains this quarter. It looked like $29 million or so came from the debt portfolio. How much of that is just, I guess, kind of credit-specific events where things were written up? I mean, it sounds like there was a positive outcome on a non-pool. I’m not sure if that was included in there. Just how much was kind of credit-specific versus kind of mark-to-market, I guess, within the portfolio?

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Yeah. Thanks, Paul. $33 million, approximately, of unrealized appreciation during the quarter. $28.6 million of that appreciation came from the debt side. That was a combination of credit and yield-related. I did make the comment about that one specific credit that went on non-accrual in Q3 and was very quickly resolved shortly after the quarter. Just to give you some context of the magnitude of that change, that was a position that had a cost basis of approximately $41.5 million. In Q2, that had a fair value of $24.6 million. We rose that up to a fair value in Q3 of $38.4 million, which reflects the actual proceeds received and ties into that $14 million outperformance relative to the fair value mark in Q2 that I mentioned in the prepared remarks.

Paul Conrad Johnson, Analyst, Keefe, Bruyette & Woods: Got it. Roughly half of the kind of debt appreciation this quarter was due to that non-accrual.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Correct.

Paul Conrad Johnson, Analyst, Keefe, Bruyette & Woods: Okay. Thank you. Just one kind of maybe more of a technical question on how PIK works within a venture loan within your portfolio. When a borrower is on PIK, is it typically a PIK toggle structure? What is the general rule in terms of the limit, how much of the spread, I guess, are they generally able to defer under those arrangements?

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Sure. Thanks for the question. First, I would just reiterate a couple of the key points that I mentioned in the prepared remarks. I think it’s critical in terms of how we evaluate PIC. About 85% of our PIC income during the third quarter was attributable to PIC that was part of the original underwriting, not the result of a credit or performance-related amendment or issue. We utilize PIC in a new underwriting, it is generally going to be a small part of the company’s overall interest, and it will generally be structured as a toggle feature where the company will have the option, subject occasionally to certain specific milestones or performance achievements, to maybe turn 1% of cash interest into 1.15% or 1.25% of PIC. There are very few deals where we have PIC that exceeds 1% or 2%.

Paul Conrad Johnson, Analyst, Keefe, Bruyette & Woods: Got it. Thank you, Scott. That’s very helpful. That’s all for me.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Thanks, Paul.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: I am showing no further questions on the line at this time. I would now like to turn the call back to Scott Bluestein for any closing remarks.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: Thank you, David. Thank you to everyone for joining our call today. We will also be attending the Citizens JMP Securities Conference in New York on November 18. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2025 earnings call. Thank you, and I hope everyone has a great rest of the day.

Scott Bluestein, CEO and Chief Investment Officer, Hercules Capital: This does conclude today’s Hercules Capital Third Quarter 2025 Financial Results Conference Call. You may now disconnect your line and have a wonderful day.

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