Good afternoon, and welcome to the TriplePoint Venture Growth second quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Andrew Olson, Chief Financial Officer of TriplePoint Venture Growth. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today. We are pleased to share with you our results for the second quarter of 2018. Here with me are Jim Labe, Chief Executive Officer and Chairman of the Board, and Sajal Srivastava, President and Chief Investment Officer. Before I turn the call over to Jim, I would like to direct your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements and remind you that during this call, we may make certain statements that relate to future events or the company's future performance or financial condition, which may be considered forward-looking statements under federal securities law. We ask that you refer to our most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements.
We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filing, please visit the company's website at tpvg.com. Now with that, I'll turn it over to Jim.
Thanks, Andrew, and good afternoon, everyone. We're excited to talk to you on the results for the quarter as we continue to lead the venture growth stage lending market and partner with some of the most successful venture capital investors and lend to some of the most exciting venture capital-backed companies globally. We had a fantastic second quarter. We hit our all-time record for total investment income, $16.6 million. We matched our record for all-time quarterly net investment income, or NII, $8.8 million. We achieved our second highest portfolio yield ever of 17.2%. We signed $212 million of new term sheets at venture growth stage companies during the quarter, a 45% increase over the previous quarter, which in itself was a substantial increase over the quarter before that. We closed $140 million worth of new deals with eight venture growth stage companies.
We redeployed the proceeds from our largest single obligor, Ring, after the closing of their sale to Amazon, which helped us further diversify our portfolio. We also got back into our target leverage ratio range during the quarter. Finally, we received approval from our shareholders to lower our asset coverage ratio to 150%. We continue to achieve, and in many cases, exceed the goals and objectives that we set out for 2018. We're just as excited going here into the second half of the year and are focused on delivering a super strong finish for the year. This progress is not the result of changes to the venture capital market. It's all been related to our focus, reputation, and approach, which has always differentiated us in the market, particularly among the venture lending BDCs. We continue to market based on the three Rs, reputation, relationships, and references.
We continue to target a very specific universe of venture capital-backed companies. These are venture growth stage companies that have meaningful enterprise value, differentiated technologies, substantial equity dollars, very high growth rates, and most importantly, backing from one or more of our leading select venture capital investors, which are generally considered among the top venture capital funds in the U.S. One only has to take a look at some of the progress and the publicly announced fundraising activity, the valuation increases, or exit events at some of our current companies in the portfolio. These are names such as [inaudible], Toast, Cohesity, and Revolut, to name just a few, as the basis for our belief that we will continue to see more successful exit events in the future.
To summarize, we plan to continue to stick to our knitting and exercise our investment discipline and continue to be what we believe will be the name brand in the venture lending industry among these leading venture capital firms. Our industry-leading yield profile, the experience of the management team here, the strong credit quality, our record pipeline, and the activity and progress among our portfolio companies all speaks for themselves. Once again, we're continuing to forecast that we will have earnings in excess of our dividend this year. We plan to continue to capitalize on this incredible and building 2018 momentum. With that, I'm going to turn this over to Sajal.
Thank you, Jim. Good afternoon, everyone. In Q2, we signed approximately $212 million of term sheets and closed $140 million of debt commitments with eight companies and added five new companies to the portfolio. On a year-to-date basis, we've signed $358 million of term sheets and closed $255 million of debt and equity investments. The first new company added to the portfolio this quarter was Roli, which is reinventing the experience of music creation with an integrated hardware software platform for the digital age. Roli makes uniquely touch responsive interfaces, keyboards, and other modular music creation instruments and tools to compose and play music that can be consumed and engaged using smartphones and other devices. Musician Pharrell Williams recently joined Roli as Chief Creative Officer as well.
The company has raised over $40 million of equity capital from Balderton Capital, Foundry Group, FirstMark Capital, Index Ventures, Founders Fund, and recently announced a strategic investment from Sony. The second was OneSource Virtual, which is a pioneer of the business process as a service sector and supports the automated delivery of solutions exclusively for Workday, one of the leading providers of financial management and human capital management software. OneSource Virtual services empower organizations of all sizes through Workday deployment, consulting, training, and in-application payroll administration, benefit administration, and application management services. OneSource Virtual has raised over $165 million of equity capital from TCV and others. The third was Grove Collaborative, which is a branded direct-to-consumer e-commerce platform for natural home and personal care products with a flexible recurring shipment model.
Every product Grove offers, both from their flagship Grove Collaborative brand and from exceptional third-party brands, has been thoroughly vetted for health, sustainability, and efficacy. Grove has raised over $60 million of equity capital from Norwest Venture Partners, Mayfield Fund, and others. The fourth was Untuckit, which is a leading omni-channel direct-to-consumer apparel brand, which started out in men's casual dressing by offering an untucked shirt that fit and looked good, and it expanded its product line to include men's sweaters, jackets, and more. Untuckit has raised more than $30 million of equity capital from Kleiner Perkins and others. The fifth is Fiverr, which is a freelance services platform and offers a marketplace for creative and professional services. Fiverr gives entrepreneurs, freelancers, small businesses, and even enterprises the resources they need to get things done quickly and flexibly.
Fiverr has raised over $111 million of equity capital from Accel, Bessemer Venture Partners, Lightbank, and others. Overall, during Q2, we funded $53 million of debt investments to nine companies, half a million of equity in one company, and acquired warrants valued at $1.2 million in eight companies. On a year-to-date basis, we have funded $91 million of debt and equity investments to 12 companies. We also had a $50 million prepayment from Ring after it closed its acquisition by Amazon during the quarter. As a result of this prepayment, our portfolio yield was 17.2%. Without customer prepayments, our portfolio yield was 13.9%, which was up from 13.6% last quarter. Moving on to credit quality. As of June 30th, the weighted average internal credit rating of the debt investment portfolio was 1.92 as compared to 2.03 at the end of the prior quarter.
As a reminder, under our rating system, loans are rated from one to five, with one being the strongest credit rating and new loans are initially generally rated 2. During the quarter, we removed $50 million of loans from category 2 due to prepays. We added $53 million of new loans to category 2, upgraded two customers, PillPack and BlueVine, with a combined principal balance of $45 million from category 2 to category 1, and downgraded one customer, Munchery, with a principal balance of $3 million from category 3 to category 4. During the quarter, six portfolio companies closed new rounds of equity financing. BlueVine raised $60 million in a round led by Menlo Ventures. Cohesity raised $250 million of equity in a round led by SoftBank. CrowdStrike raised another $200 million at a reported $3 billion valuation co-led by Accel and General Atlantic.
Fuze raised $150 million in a round led by Summit Partners. Revolut raised $250 million at a reported $1.5 billion valuation led by DST. Toast raised $115 million at a reported $1.4 billion valuation led by T. Rowe. On top of that, as Jim mentioned, Amazon announced its acquisition of PillPack for $1 billion. These are all great developments, and we congratulate our portfolio companies. We hold warrant investments and/or equity investments in all of these companies. With regards to strategic objectives, our highest priority in 2018 remains to capitalize on the strong demand for venture growth stage lending and grow the company from an exceptional but small cap BDC to a larger and more diversified BDC. I'm pleased to say that we are ahead of our plan for 2018, and our brand, reputation, and relationships continue to differentiate us in the market with prospective portfolio companies.
As Jim mentioned, in Q2, our shareholders approved the lower asset coverage requirement. We thank our shareholders again for their support, as we described in our proxy, we do not plan to change our investment strategy, product mix, security profile, or the targeted yield profile of the investments we will make as a result of the availability of additional leverage. We see this as providing us with greater flexibility in our ability to continue to meet the strong demand and pipeline we have today and expect to continue to see. We intend to use the additional leverage in a focused and balanced way, in particular, expanded our target leverage ratio range to 0.6 to 1.0. We believe that with this approach, we are not materially changing the risk profile for our shareholders while increasing the potential to drive higher returns on equity through higher net investment income.
On a year-to-date basis, we have made substantial progress on diversifying our portfolio and some of our larger customer concentrations. During Q2, we completed our first co-investment with our sponsor and have several more opportunities in the works. We also rotated out of our largest loan exposure with the acquisition of and prepayment from Ring, which was a $50 million exposure. As we announced today, here in Q3, we rotated out of another top 5 obligor, resulting in $3 million of additional investment income this quarter as a result. We again expect to put all these prepayment proceeds back to work this quarter and have put $18 million to work so far. Given this progress to date, our taxable earnings are on track for the second year in a row to exceed our distributions.
We continue to be thoughtful about the impact of our continued portfolio growth, as well as prepays and our exceptional portfolio yield, as well as the benefits of higher leverage that have kept our quarterly distribution at $0.36 and will continue to reevaluate based on our outlook and progress. I'll now turn the call over to Andrew to highlight some of the key financial metrics achieved during the quarter.
Thank you, Sajal. I'm pleased to report another exceptional quarter of performance. Some of the highlights included record investment income, net investment income in excess of our dividend, stable credit performance, positive portfolio exit activity driving net realized gains, and NAV appreciation. Total investment and other income was up 31% to $16.6 million or $0.93 per share for the second quarter of 2018, compared to $12.6 million or $0.71 per share for the first quarter. Our investment portfolio generated a weighted average yield of 17.2%, including prepayments and other activity. The increase in total investment income and yield relative to the prior quarter was primarily due to higher prepayment and other income related to portfolio turnover.
Portfolio yield excluding the impact of prepayments was up 30 basis points to 13.9% from 13.6% in the prior quarter, resulting in an increase in investment income when excluding the impact of prepayment and other activity. Net investment income for the quarter was up 48% to $8.4 million or $0.50 per share, compared to $5.9 million or $0.34 per share in the first quarter of 2018. Expenses during the quarter were $7.7 million, consisting of interest and fee expense of $2.5 million, base management fee of $1.8 million, income incentive fee of $2.2 million, and administrative and general expenses of $1.2 million. The increase of total expenses from $6.6 million in the first quarter of 2018 is primarily due to higher base management fees and income incentive fees due to portfolio growth and strong fund performance.
We recognized net realized gains of $0.8 million or $0.04 per share in the second quarter of 2018 from the disposition of investments in three portfolio companies. In addition, we had a net change in unrealized appreciation during the quarter of $1.2 million or $0.07 per share, consisting of the reversal of previously recognized net unrealized appreciation into net realized gains of $2.9 million, primarily from Ring, offset by mark-to-market appreciation of $1.7 million on the investment portfolio. The above activity resulted in a net increase in net assets for the quarter of $8.3 million or $0.47 per share, compared to $7.9 million or $0.45 per share in the prior quarter, bringing year-to-date net income to $16.3 million or $0.92 per share. Turning to the balance sheet.
We funded $53.4 million of debt and equity investments in nine companies during the quarter and had one company repay its outstanding obligations in full in the amount of $50 million. All told, we ended the quarter with long-term investments of $398 million or generally flat from the prior quarter. At quarter end, we held 124 investments in 45 companies with a cost and fair value of approximately $399 million. The company's debt portfolio ended the quarter with a cost of $381 million, of which 57% carry floating rates. We continue to see strong demand and have a robust pipeline for near-term opportunities. Our unfunded commitments totaled $203 million to 16 companies, of which $87 million is dependent upon the companies reaching milestones. Of those total commitments, $58 million will expire in 2018, $76 million will expire in 2019, and $70 million will expire in 2020, if not previously drawn.
We ended the quarter with total liquidity of $134 million, consisting of cash of $11 million and $123 million of undrawn availability under our revolving credit facility. Total outstanding borrowings as of quarter end was approximately $160 million, consisting of $75 million of long-term fixed-rate notes at a cost of 5.75% maturing in 2022, and $87 million outstanding under our revolving credit facility, which carries a rate of L+300. This put us at a leverage ratio of 0.68x within our target range of 0.6-1.0. We ended the quarter with $239 million of equity capital, or $13.45 per share, up $0.11 from $13.34 per share in the prior quarter. At NAV, our annualized distributions generate a dividend yield of 11%. As of June 30th, 2018, we estimate earnings in excess of our distribution were still spillover income to be $4.2 million or $0.23 per share.
With that, I'm pleased to announce for the third quarter of 2018, our board of directors declared a distribution of $0.36 per share, payable on September 14th to stockholders of record as of August 31st. This marks the 18th consecutive quarter we have increased or maintained our quarterly distribution rate. Now with that, I'll turn the call back over to Jim.
Thanks again, Andrew. At this point, we'll be happy to take your questions. Operator, can you please open the line?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from George Bahamondes of Deutsche Bank. Please go ahead.
Hey, guys. Good afternoon. Just a few questions following your prepared remarks. You had mentioned there's about $53 million of fundings in the second quarter across nine companies. Can you guys disclose how much of the $53 million was tied to investments that were closed in the second quarter versus prior commitments that were unfunded and then funded in the second quarter?
George, we can get that information. We don't have that breakdown handy. I would say generally it's some from existing unfunded commitments and then a portion from customers that closed during the quarter. If I were to guess, I'd say it's probably 50/50. We'll look through it and come back to you once we get that information.
Great. Yeah. We can follow up offline. It's fine. Next one. You had mentioned there was a co-investment in the second quarter. Are you able to provide any additional color?
We don't generally disclose who are the co-investees. I think the good news is, again, along the themes of portfolio diversification, keeping our maximum transaction sizes reasonable with the goal of diversity. I think it was consistent with that objective.
Absolutely. Okay, great. That's fine. I think next one here. I missed this. You mentioned you rotated out of a top five investment. Was that in the second quarter, or was that subsequent to 630?
Both. Ring was our largest investment during Q2.
Right.
Ring prepaid at the beginning of Q2. Here in Q3, we had another top five, as we announced in today's earnings releases. In subsequent events, we had another top five rotate out.
Got it. Okay. Let's see. That was it for me. We'll follow up offline regarding that first question. Thank you.
Our next question comes from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Hi. Thanks for taking my questions. Good quarter. Saj, just to confirm, you reiterated the leverage target of 0.6 to 1 times NAV.
Correct.
Is that correct? Great. Are you guys still need to renegotiate the bank revolver if you want to take the leverage ratio above 1.0?
No. As we mentioned in our proxy, our lenders are supportive. We could. There may be periods where we may take that leverage ratio higher, as we said in the proxy, in between capital raises for short periods of time. The target is 0.6 to 1.0.
Got it. Thank you. Andrew, it seems to me that most of the prepayments or almost all the prepayments may have come from Ring. Is that a fair characterization?
That's correct.
What was the end of term payments in the quarter?
The aggregate amount, I don't have it offhand. Generally, it's about 2% of the total yield.
Okay. We have 17.2. It would be 2% off that 17?
Yeah.
Great.
I think it was 3.2% was accretion during the quarter.
From the non-prepayments.
Correct.
Of the 17.2, 3.3 was related to prepayments, 2.2 was related to end of term payment or income accrual.
Finally, I guess for Jim, just for anyone. You guys sound pretty enthusiastic about the conditions. Obviously, the pipeline is starting to grow. The margins are expanding and so forth. What are you seeing in the venture debt lending space? Are you seeing new entrants come in? If you can give a little characterization of them, that'd be helpful.
Thanks. I like how you're asking all three members of the team here. I didn't want to be left out. I'd say overall, there really hasn't been any change. Things still remain the same in the sense of it's all about reputation, references, and relationships, what we call the three Rs. It's a fairly close community here among the leading venture capital investors, and experience counts, track record counts. Also, that you know what you're doing. At the venture growth stage, our biggest competition remains one thing, equity, and that's it. Other entrants may float in and out and do venture lending here and there, but really haven't seen any change in that landscape.
Great. Thanks for taking my questions.
There's real high barriers to entry to the segment.
Yeah, no, I know that. You get money coming in when it gets attractive enough regardless of that, and it flows out, too. I'm just asking what you're sort of seeing. Okay, great. Thank you for taking my questions.
Our next question comes from Ryan Lynch of KBW. Please go ahead.
Hey, good afternoon, and thanks for taking my questions. The first one, clarification and also a question. I believe you guys said you guys had another top five investment prepay in the third quarter. Did you say that there was $3 million of additional income associated with that prepayment? Also, you guys have about $60 million of prepayments quarter to date in the third quarter. That's really strong. Can you just give us a sense of, so far quarter to date, how much accelerated income you guys have already received so far?
Yeah, let me start and then Andrew jump in. Correct, Ryan. $59.3 million of early principal payments so far in the quarter, offset by roughly $18 million of new loan fundings that we've had. A strong start, and we're only one month into the quarter, so redeploying those proceeds. Yes, I did say from the prepayments, over $3 million of additional interest income as a result. Andrew, any more color on that?
No, I think you covered it.
Okay. Was the $3 million additional interest income, was that from all of the other $59 million prepayments or just from the one top 5 investment?
Correct. All $59 million.
Okay.
Yeah. Sorry. Correct.
Perfect. Okay. Well, you guys had quarter-to-date, another strong quarter of prepayments. You guys had strong prepayments in the second quarter as well. You guys are lenders. That's a good thing. It obviously gets your money back, and particularly when you guys are getting strong fees associated with that. There's no doubt that's a good thing. Maybe that speaks to the quality of company you guys are underwriting, that they're paying back early because they're having that much success. The other counterpoint to that, though, is with those strong prepayments, obviously it's hard to grow the portfolio in that environment. Can you just give any sort of outlook on where we are quarter-to-date? There's already been strong prepayments, but do you guys foresee that continuing? If that does, how do you guys grow your portfolio in that environment?
Again, it's good to get your money back being a lender and you guys are getting strong fees on that.
Good question, Ryan. Maybe to start with, a customer gets acquired, we can't avoid getting our money back, and that's the touchdown, to use Jim's favorite analogy. We helped our customers score the touchdown, and we're appreciative of that. To the extent that customers finance us out because of significant equity capital raises, from those perspective, we use the analogy again that it's halftime. We're going back on the bench because most of our portfolio companies burn cash. We expect to call back in the game in a quarter or two. Those are not lost opportunities. Those are income-generating and return-generating events, then we can come back, see how they perform, and come back and provide them more capital.
I'd say again, overall, very positive events, we're very pleased with them in general, especially given I know some of the concern was concentration in our larger exposures, we want to be mindful of some of that feedback. Again, that with the co-investment relief and the additional leverage will allow us to optimize the portfolio size. Working hard to address some of the concerns associated with our portfolio. I think to the bigger picture, as Jim talked about, the venture equity markets are strong. The venture debt or the demand for venture debt is particularly strong, as reflected by the $200 million of signed term sheets. I think that was a record level for a quarter for us for signed term sheets, then $140 million of closed deals. The pipeline is the biggest it's been.
I would say again, we continue to feel pretty confident on our ability to grow the portfolio on a year-over-year basis. Again, we're blocking and tackling on a quarter-to-quarter basis.
Okay. That's helpful and makes sense. Again, yeah, getting repayments and prepayments is always a good thing as a lender. Just one last one on PillPack. I'm not sure if you can answer this, but obviously saw you guys talk about that getting repaid in the third quarter. There's a nice 9% end of term payment. I also saw you guys had like a $55,000 equity investment with the cost and fair value both at $55,000. Do you guys expect that to appreciate in the third quarter? Can you give us any sense of what sort of gain you guys are anticipating with that sale?
Yeah, I can answer that, Ryan. I think overall, we had written up the position to what the exit value is because it was an announced transaction relatively early in the quarter, so this isn't something new to us. I think, come back to the quarter, it should
If you look at the Q that was just filed, you'll see the fair value associated with the markup.
Yeah. I think the fair value of the position was written up to around $850,000 or $900,000.
Okay. Yep. Sorry. That makes sense. I was referring to the old Q because I guess your Q2 hadn't come out, but it's just come out, so the fair value in the second quarter should reflect the exit value. Okay. That's helpful. That's all the questions. Thanks.
Thank you.
Our next question comes from Casey Alexander of Compass Point. Please go ahead.
Hi, good afternoon. The $59 million of early principal repayments that have occurred in the subsequent events, would those have come from the clear category?
There was a combination. A number of those positions, because of the timing of when the prepayments occurred, we'd upgraded them during the quarter. I would say a larger percentage is just going to come from that one.
Some, not all. Correct.
Some but not all. Okay. As we haven't had a chance to take a look at the Q. Can you walk me through what the top five names are in the portfolio as of the end of the second quarter?
Yes. I'll let, if you have any specific questions about the companies themselves, I think Jim and Sajal can answer them for you. FinancialForce is our number 1 position. Vue is number 2. Rent the Runway is number 3. WorldRemit is number 4, and Virtual Instruments is number 5.
I'm sorry, I didn't hear number 4.
Number 4 is WorldRemit.
WorldRemit. Oh, great. Okay. On the two orange, which is Munchery, and I assume still Mind Candy. Any update on what you guys are doing to help realize the value of those?
Yeah. We continue to work actively with the companies, the investors, and help them kind of as they reposition themselves. I'd say we continue to be very active as they optimize their businesses. I don't think there are any public updates specifically to those companies, but they're hard at work.
Okay. All right. That's it for me. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Jim Labe for any closing remarks.
Thanks, operator. In short, if you can't tell, we're pretty excited to hear about the remainder of 2018 and what we believe it holds in store for our business. I'll close again by expressing my appreciation to all of you for your continued interest and support in TriplePoint Venture Growth. Thanks, everyone, and we'll speak with you again soon. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.