Hello, everyone, and thank you all for joining us during the Lytham Partners 2024 Investor Select Conference. My name is Roger Weiss, Vice President of Lytham Partners. During this fireside chat webcast, we welcome Trinity Capital, NASDAQ ticker symbol TRIN. Joining us today from the company is Kyle Brown, Trinity's Chief Executive Officer. Also joining us today is Bryce Rowe, Senior Research Analyst with B. Riley Securities, whom we've asked to moderate today's fireside chat. Bryce, Bryce is a 20-year veteran financial services analyst, who has followed both banks and BDCs over his career and currently covers a wide variety of business development companies at Riley, including Trinity. Before I turn it over to Bryce, I want to remind everyone that management is available for one-on-one meetings throughout the conference.
If you've not already signed up and would like to schedule a one-on-one, please send me an email at weiss@lythampartners.com or visit lythampartners.com/select 2024, excuse me, select 2024. From there, you can click on the investor registration to make your one-on-one selections. Also, please note that Bryce and I webcasted an analyst roundtable on the BDC group earlier today. A replay link is available on the conference homepage, again, at lythampartners.com/select2024, and click on Presentations in the top left corner. With that said, Bryce, the floor is yours.
All right. Thanks, Roger. Kyle, good to see you on the webcast here, and excited to talk a little bit about Trinity Capital. So let's just start-
Thanks for having me.
Let's just start with the basics, Kyle. You know, maybe tell us a little bit about Trinity's investment focus, the size of companies in which you invest, competitive landscape, your mix of investment portfolio, just any, anything that would be helpful for, for investors from that perspective.
You bet. And thanks for having me. So we're a lender, and we focus on growth-oriented companies, companies that are growing at a 10%-100%+ annual growth rate. They are sponsor-backed. If they are a little less mature, they might be venture-backed. If it's more mature, they'd likely be private equity-backed. But they've raised $50 million-$100+ million of equity. And on the low end, we'll see kind of $20 million annually recurring revenues up to $100+ million. So these are pre-IPO companies. We're helping to bridge them to some liquidity event, an M&A, IPO, another large fundraise, or just profitability.
So, you know, we have been doing this since 2008 and still continue to grow and build the business. We think there's an incredible opportunity to continue to scale it, which I know we'll talk about a little bit today. But that's what we focus on primarily. Most of these companies have significant technology, real enterprise value. They've got a moat around that technology. They're a couple of years ahead of their competition, patents, IP, and we're coming in to complement the equity they've raised to help them achieve milestones and build that valuation.
That's a great, great backdrop. And so with that kind of, I guess, that context, just give us a, you know, brief history of Trinity. How did it come to be, and really, how has it changed over time? And so, you know, you said 2008 was kind of the starting point, but maybe give us a quick timeline here.
Sure. And I missed one other point on that. The mix of investments, we are really, truly a lender. Ninety-six plus percent of our investments are rate and term loans, paid current, really not a lot of PIK. I think our average rate, current pay rate's over 12% at this point. And so the majority, the bulk of our returns are really just rate and fees. So that's really important. We are truly a lender. We have a small amount of warrants and equity that we will have in there as well. We think of that as just upside potential. We've got 100 different warrant positions. We never know which one of those is going to turn into really significant value or not.
But historically, they've just covered our losses, and then we have our rates and our fees to distribute to investors. So, our history, we started as an equipment finance business to the lower middle market. We ended up meeting Silicon Valley Bank back, 2008, 2009, and saw this, you know, this venture debt market. Ended up providing some leases to some of their companies, ended up providing some loans as well, term loans, senior secured term loans, and really started a partnership there that grew and blossomed over time and discovered really a pretty significant market for technology companies looking for debt to continue to scale their business.
Companies that had real technology that were choosing to burn cash, because they had such a product-market fit and such a return on their marketing dollars, that it made sense to burn capital to build revenue, and grow the business. And so, we really scaled the business with that kind of senior secured loan product alongside of the tech banks. We ended up raising an SBIC fund in 2012. Ended up raising a second SBIC fund in 2016. Both of those funds were repaid, high-teens returns paid out to investors, over time.
And we maxed out that program, continued to scale the business and decided, really kind of 2019, you know, we, our executive team got around and decided we want to be the best in the world at this, providing capital to growth-oriented companies... and, you know, to do that and accomplish that big goal, we really needed a different capitalization. And so, we discovered the BDC space. We ended up pulling over a couple seasoned veterans, one of the founders of Hercules, and one of the Oaktree guys, CFO of Oaktree, into pulling them over and taking them out of retirement, teaching us everything there was to know about BDCs, since they'd been there and done that, taking them public.
We decided to create a BDC and consolidate all of our funds, five funds into one entity. Specifically, an internally managed BDC, which I know you wanted to touch on, and maybe I'll just segue into that. We decided to consolidate our funds into an internally managed BDC. That was the first time SBIC funds and private funds had done that. We did that intentionally. When you buy our stock, you are not just buying assets, a pool of assets that generate income. You're buying into the management company. There is no separate management company. There are no management fees. There is no incentive fees charged to our investors. That management company is part of our company, which is what the internally managed structure looks like.
So, there's a reason that we typically trade at a premium to NAV. It's because when you buy our stock, you're buying into an operating entity, one that is more efficient than its peers. And historically, they trade higher because they generate outsized returns for investors. They also have the ability to generate income above and beyond the loans that they've issued, and you're starting to see that with us as well. With our structure, we also now have SEC approval to manage other funds with an RIA. And so you've seen over the last Q4 , Trinity has started to generate income above and beyond its loans and its equipment financings, and it's steadily growing, which is a big part of our future. It's a big part of our ability to differentiate ourselves from other BDCs out there.
That's, you know, that's the history behind why we went. Since consolidating those funds at the beginning of 2020, we've raised over $500 million to the equity and debt markets. We've done that while also increasing returns for investors each and every quarter, increasing the dividend 12 straight quarters. I think what we've done is proven out our ability to scale and grow the business, raise capital in a way that's not dilutive to investors. As we scale, you get the benefits of participating in that management company, what's built into the BDC, and the returns are very scalable for our investors.
Yeah, I mean, so that decision, you know, was, I guess, was pretty important in that there are only four what I call prominent BDCs that are internally managed. You've got, you know, you've got 90% plus of the space that is externally managed. So, you know, that the again big decision to make on your part. And certainly, it feels like it's paying off at this point with a better valuation and certainly a track to trade at an even higher valuation. Is that kind of what you guys saw internally when you made-
Yeah
... made that decision?
Yeah, that's, that's exactly why. We needed access to capital, we knew we needed to raise a lot of capital. We knew we needed to do it in a way where it was good for investors, and we've been able to prove that out. I would say that we're still early on in the adoption of what, what it is we are, an internally managed BDC. Investors, not everyone gets it and... or the benefits of it, and we are, I mean, I'm out there every day talking about it to make sure folks understand the real benefit and long-term benefits, right? I mean, externally managed BDC, we certainly could have gone that route.
It might have been better for some of our owners of that management company or executive team in the short run, but this internal structure gives us the ability to really scale and provide significant upside over time for investors. Most BDCs, if you look at their stock price, or even their dividend, they're pretty flat, right? They're just a pool of assets that generate income. They may or may not grow at all, over time. You go 10 years and not see a stock price move at all. Our goal is very different. We're, you know, we have shown with 12 straight quarters of dividend increases, that is our goal. Our goal is to increase the dividend. Our goal is to have a very strong and growing return on equity, and a very steady and growing NAV.
And so those things are really, you can only accomplish that goal by doing what we've done here with the internally managed structure.
Yeah. Yeah. Roger and I on the analyst roundtable yesterday talked about kind of ROE and NAV per share growth being the two primary kind of fundamental metrics that I look at, and agree 100% that the internally managed model is really the better model to achieve that level of outcome.
Yeah.
So, you know, maybe as a segue, you know, in talking about scalability and growth of the platform, you know, I would say that you place an incredible amount of emphasis or value on culture within Trinity and, you know, as an outsider, having visited you all in Phoenix or been around a group of Trinity employees, it's, you know, it's very palpable. Can you talk about, you know, developing such a strong culture and, you know, and maybe how you, how you've gone about it, maybe even some anecdotes around the culture?
... Sure. Yeah, I listen, I love talking about this. You know, when you run a business, you know, you really, you're selling, you're a salesperson, and then, you're a leader of leaders, and your whole goal is to train up and build leaders. And so, we have a very large goal, and to do and accomplish what it is we've set out to do, you have to build up and provide opportunities for people to grow. And so culture is huge here at Trinity. Humility, trust, entrepreneurship, uncommon care, integrity, and continuous learning, those are our core values. Everybody here knows them.
Uncommon Care is probably the most unique core value that we have, and that's providing value above and beyond to employees, to clients, to investors, above and beyond their input into the relationship. That is different than you're gonna find at most finance companies. When it comes to our borrowers, we're trying to provide more than just money. We want to provide expertise, technical expertise, financial expertise. When it comes to our investors, we're trying to be different. This internally managed structure, the return profile that we've been able to accomplish, that is different and better for investors.
And then when it comes to our employees, really the most important piece of this is, you know, to grow and to retain top talent, and we have incredibly high retention internally here at Trinity. To retain the best people in the world, to hire the best people in the world, you have got to have something, a culture that is different and that is unique, that really puts that person first. And here at Trinity, we're really trying to grow and build the platform, and entrepreneurship is one of our core values, because if you wanna retain the best people in the world, you need to give them the ability to grow and scale with the company, take on more responsibility, leadership. And so, we have continued to see people do that here, grow up within the organization.
You know, we want people to create autonomy and freedom for themselves through the work they're doing. We want people to have dignity in the work that they're doing, and we're really focused on that. So we make a deal with every employee when they start here. We have ambitious goals and clear goals laid out, planned out, modeled out for at least five years. We want you to buy into that, buy into the plan, buy into the culture, and in return, we're gonna understand what it is your goal, your personal goals are, and we're gonna do everything we can to help you accomplish them. That's a trade we make with every person here. It's not a family, it's a team, and everyone here understands that. And so when you have...
You know, we've got 70-plus employees now, when each one of those people is living out their dreams and accomplishing their own personal goals, they are killing it for the organization. And so we've seen that play out, and we're gonna just keep doing that.
Good stuff. All right, so maybe talking a little bit about, you know, the business of lending, and as you've grown, you've developed four distinct business verticals: tech lending, equipment finance, life sciences lending, and warehouse lending.
Yeah.
I'm curious how you, you've come to kind of source, underwrite, and monitor investments within each of those verticals, and then just maybe talk a little bit about how, how those verticals have developed, you know-
Yeah
... since you started.
Well, since we started, we were equipment-only, equipment leases, right?
Yep.
We added in venture debt, we call it tech lending, and scaled the business there. You know, that's a larger market. I'd say we're kind of top 3-5 in the space for annual deployment into tech lending and venture debt. Along the way, we identified you know, the need for really kind of traditional ABL against financial receivables. A lot of our companies have generate fees off of a large amount of assets that sit in these SPVs or bankruptcy remote entities. And banks, they were providing some of that advance against those assets, but even since the banking volatility began last year, they're providing less. And so really interesting opportunity to make teens, you know, mid- to high-teens returns against really traditional financial receivables.
And the underlying company, the company that owns those assets or managing those assets, just happens to fit that kind of growth stage profile. They may be EBITDA negative, and so the receivables are, you know, very collectible, just great, but the value prop exists because banks cannot provide the full advance that's needed. So that's an interesting business. We call that warehouse lending, and that's growing for us. And then our life science and healthcare business, we actually have a separate location and office and team in San Diego that focuses on mostly kind of post-FDA-approved products, a lot of med device, scaling and growing. We're really focused on execution risk there, not doing a lot of bio or pharma. And so those are our four business verticals.
The reason we have those completely separate is a couple reasons. One, much more scalable that way. We are not trying to be the number one venture debt lender in the world. We happen to be one of the top lenders in the space, but it actually only accounts for, it'll only account for about 35% of our deployment this year. And so, and that's the cash-burning companies. That's intentional. That diversification into these other verticals, different product sets, is good for investors. It's good for us. It protects us when there's an ebb or flow in the VC space. And so, you know, the other reason was just to mitigate risk. So we actually have separate teams completely, from credit to originators, sales to portfolio management, legal.
These are four distinct teams with their own focus on contribution margin to the business. So, much more scalable that way. Each of those businesses is run by a 20+-year veteran who has only done what it is that business vertical does. And so, you know, internally and internally, it looks like four different businesses underneath the, you know, underneath the umbrella of Trinity. And really, you know, over time, investors will think of us more as an asset management platform with multiple different business verticals that all really kind of complement one another, that are focused on growth-oriented companies.
Okay. Yeah, that's another good segue here. So you've really only been public for three years, give or take, but obviously operated as a private company long before that. We've already talked about that. I was going to ask about kind of what fundamental metrics have guided you along the way, but you know, I think we established that ROE, NAV per share growth are really two of those fundamental metrics that really guide you. If there's another, certainly jump in there.
Yeah.
But I wanted to ask, you know, about, you know, the plans to maybe solidify your ability to hit those fundamental metrics, and I'm kind of thinking about what you talked about earlier, the addition of a joint venture in the RIA and kind of what that means for the platform, you know, going forward.
Yeah. So, return profiles and metrics have not really changed fundamentally since 2008. We are focused on where sponsors are placing equity. We're waiting for those markets and industries to be established and more mature, then we come in to provide, you know, some less dilutive capital for these companies. So fundamentally, it really hasn't evolved too much. The structure has for investors, I mean, I mentioned it before, return on equity, we want to be best in class in the BDC space on return on equity, and not because we have extremely high leverage. You're starting to see that right now. We actually have one of the highest ROEs of all BDCs, yet we actually have one of the lower leverage ratios, right?
Investors should see that as our ability to generate returns above and beyond just the loans and equipment financings we've got on the books. We don't need to have high leverage to generate high returns. And you're going to see more of that down the road as we continue to build our off-balance sheet funds. The management fees and incentive fees that we generate managing that capital, 100% of that is owned by Trin. So our RIA is solely owned by Trin and our shareholders, so all those benefits flow right into right into Trin. It also gives us the ability to offset expenses. We can push expenses down in that RIA and lower our expense ratios to, again, over time, become a best-in-class. We're not going to be that right now on a expense ratio.
We're building this business, scaling it, so we're going to continue to invest in advance of our growth. NAV stability and growth, you mentioned it, but absolutely, that's a reflection of the portfolio. So if you see that being stable over time and growing over time, that's what we're shooting for. Investment income continuing to increase, that's important. That along with really kind of, and more importantly, dividend growth. So dividend growth, to me, and our ability to over earn the dividend reflects growing the business without diluting investors, right? So that earnings per share is going to continue to increase. That's our goal. ROE stays high, market class. We're trying to be, from a metric standpoint, kind of best in class in the BDC space, and I think our structure allows us to do it.
I think, you know, I think the industry that we serve gives us the ability to scale and continue to grow. So, those are our primary metrics. The RIA is a game changer for us. We can manage as much capital as we can raise off balance sheet. And it's either no risk to our investors because it's other people's money, or very limited risk if we happen to be co-investing a little bit. So, the returns are, from a percentage standpoint, incredible, and it gives us the ability to do a couple things. Yes, generate new income above and beyond our loans and equipment financings that increase that earnings per share, but it also gives us the ability to manage our leverage as well.
So, last quarter, you saw our leverage dip even below 1 to 1, yet at the same time, we increased returns again for investors. That's because we're starting to generate income. We can offload assets to our off-balance sheet entities and generate fees off of those. You know, you know, one of your questions was around the, assets, and, you know, once you start thinking about Trin as an asset management platform, the balance sheet and, assets, even if it stays stable for a couple quarters, if we're offloading hundreds of billions of dollars into our off-balance sheet entities that we manage, we really think about that as AUM growth as well.
And so we've actually seen over the last four quarters, pretty substantial increase in managed AUM, which is why income has been able to continue to rise during that time period. We don't need to go raise capital to generate more loans and equipment financings on Trin balance sheet anymore. We'll do that as it makes sense to do it, right? So long as it's not dilutive to investors, but now we have the ability to offload some assets into our off-balance sheet entities and just generate fees.
Yeah, pretty recent additions too, to have that off-balance sheet capability, just so viewers here know that, right?
That's right. Yeah, we're, I think we're into our fourth quarter year now of managing capital off balance sheet.
Right. Okay. All right, so we talked a little bit about balance sheet leverage. You know, it's something that I focus on quite a bit as an analyst. And, you know, the industry is kind of governed to a certain amount of leverage that you can use. I think I've made the point that I would prefer to see lower balance sheet leverage. It creates a kind of a lower risk profile, and for even if you might get lower returns. But in some cases, like in yours, you've got the off-balance sheet sources to help, you know, drive ROE, even without the use of leverage. So you've seen leverage go down here recently, you know, it sounds like it was intentional.
Do you kind of intend to keep it at these levels, or, you know, will it fluctuate over time, you know, as assets come and go?
Yeah, I think over time you'll see it, you know, continue, kind of the range continue to decrease-
Yeah.
Right? As we manage more capital off-balance-sheet, where you're really using it as a tool to fund deals and then move to your various entities off-balance-sheet. So it's going to ebb and flow a bit, but, you know, we've kind of given guidance kind of 1-to-1, 1-to up to 1.3, and over time, that range is going to continue to decrease as our off-balance-sheet AUM increases. Yeah.
Let's maybe talk about your sources of capital, both debt and equity. What are you using to finance the on-balance sheet activities?
Yeah. So, you know, we have a revolving line of credit, led by KeyBank, that has been a great partnership, and we've continued to expand that. We will continue to just expand that, and that revolver has been very helpful to us. There's a series of unsecured notes that we've issued. We really are considerate around just diversification of those notes, making sure over time that it's very diversified, very spread out. We are very intentional around the capital, the bonds that we're raising there. So you'll continue to see us tap into those markets as it makes sense to do so. Bonds, baby bonds, et cetera. We've just now crossed that three-year threshold of being a listed BDC. Four years as a public reporting, but three years listed, which opens the door for new ratings.
So you'll see us starting to work on some different, ratings, which opens the door again for some different securitizations, et cetera. But just like, you'll see with our revolver, which includes 12 or more banks, very diversified within that syndicate, very diversified with, our unsecured loans, we'll continue to just make sure that we don't have any big, debt issuances that are coming due that we're, you know, struggling to refinance. So, I think we're being, methodical in how we, capitalize the business. That's on the debt side. On the equity side, you know, we have historically continued to do some follow-ons. We're still getting up to scale. That's becoming a little less of a need, being able to access our ATM at the market.
Equity raise, that's a very inexpensive option to raise capital, and we will do so and continue to do so, to the extent that it's accretive and good for investors. Again, that internal structure kind of drives the right behaviors, right? Because I own the same shares as our institutional investors, our retail investors, as every one of the employees here. So AUM growth for the sake of growth makes no sense at all, actually. And so the structure really drives behaviors that are in alignment with investors, meaning we're really focused on return on equity. We're really focused on that dividend increasing. And so when we raise equity, it's intentional, and it's planned out.
We know that we have the ability to deploy it both on and off balance sheet, and we know we have the ability to generate outsized returns quarter-over-quarter. And so when we raise equity, that's what you can expect from us, and you have been able to expect from us historically. That's our goal is to continue that trend.
Okay, let's maybe shift to the dividend. Obviously, an important consideration for any investor in a BDC, given the double-digit nature of dividend yields. So you've established a track record of increasing the base dividend. Kind of curious what's fueled that, number one, and then you've also paid out some supplementals. And, you know, maybe talk about, you know, why supplemental? And then just so investors are fully aware, you did have outsized supplementals in 2022. Just maybe talk about why they were outsized in 2022.
Yeah, somebody said to me the other day, "Hey, your NAV went down, you know, in 2022.
Yeah.
You know, so our core dividend, our goal is to continue to increase that. Supplemental dividends are simply, we are regulated, we are a RIC, a registered investment company. We are required to distribute out, ninety-plus percent of our earnings annually to investors, and we've had the unfortunate problem of over-earning our dividend and creating too much income, and we're forced to distribute out more than our core income. It also has some specifically had to do with some of our warrants. I mentioned we get warrants. We have over 100 warrant positions right now, and in 2022, we generated nearly $60 million of realized gains from two warrant positions, Lucid Motors and Matterport technology.
That created such a massive increase in NAV, which is why it spiked up and then came back down, 'cause we distributed it to investors.
Yeah.
We just generated too much income. I said this to someone, I think a couple of days ago, I just said, "You know, that's a growth problem. Sorry for distributing out the supplementals. We've earned too much." I think we'll probably continue to see that trend. We have 100 more positions. They're worth something, and eventually, those companies exit, and that creates realized gains. Which, by the way, in most cases, are capital gains that we're distributing out to investors, which is really unique and different as well. So, our goal is to increase core along the way. To the extent we see these unrealized or these realized gains, in most cases, they're offset by realized losses, and they just kind of wash.
But over time and over our, you know, our almost 17-year history, those warrants have served to cover losses and then provide some incremental upside to investors. So when you see supplemental, that's just, that's icing on the cake. That was really less expected. And then to your comment on the dividend yield, the dividend yield is high because the stock is too low right now. So I'll just say that, that's my opinion. But, the dividend yield is high because the stock is trading too low.
Fair enough. All right, one more for me, just in the interest of time here. So maybe just to kind of a general view of credit quality. Obviously, the venture capital space went through quite a bit last year, with Silicon Valley Bank, you know, kind of going by the wayside. Can you talk about just a little bit about kind of that experience and, you know, and how you've handled it, how the industry's handled it... And then the one thing that I found interesting over the last year is just talking about capital continuing to flow into the space, you know, as companies, portfolio companies and beyond, you know, still get support from their sponsors.
Yeah. So we've seen annualized loss rates of 20, let me make sure I give you the right number. 30, just over 30 basis points annually since our inception.
Yeah.
That does not include realized gains, which when offset, provides a really negative loss rate for us historically. So again, we will, we will see defaults, we will see non-accruals, we will see losses, and we will see significant outsized realized gains. Those things offset each other and provide a little extra incremental upside for investors. That is our - that's really a big, that's a big part of the model, and, and so, you know, we will see non-accruals pop up, and then we'll see some drop off. The idea behind the investments we're making is that the companies have real value. They have real technology, and in a liquidity position, in a downside position, they're - it's worth something, right? Someone will pay something for it.
Or if the company happens to run low on cash, they're fundable companies at the right valuation. And really, over the last 18 months, that's what we've seen a lot of. In 2023, we saw nearly $3 billion of equity flow into our portfolio of 100 companies. Almost exclusively, those were down rounds or convertible notes. I think what you're seeing in the sponsor-backed companies, private companies, PE or VC-backed, is the data would reflect that there's down rounds happening, but not really at scale. I think it's actually, it's actually kind of hidden because of these convertible notes. We are seeing 25%-75% decreases in value from where they were at in 2020 to 2022. But as a senior secured lender, we don't really care, right?
Yeah.
If the money flows in and the values decrease, we're still a senior secured lender. In fact, in most of those scenarios, if new equity flows into a company, we might extend our interest-only period, or we might be helpful to the company in some way or the other. What we'll do is we'll get our warrants revalued at whatever that new valuation is. This is really interesting, a time for us. New investments, certainly. I mean, we're making some of the opportunities that we're seeing today are incredible.
These are companies that were very bankable really 12-18 months ago, and they either don't want to work with a bank, because they want to work with a permanent capital source like us, who they can depend on, and they know that next draw, and they can grow with that company. And then also just, you know, banks, the companies are willing to pay that extra 200-400 basis points, just knowing that, we're not gonna go anywhere. So, it's a really interesting time to make new investments, but then we're also being really proactive in the portfolio to find opportunities to outearn just based on the new valuations that we're starting to see.
Good deal. All right, well, this was awesome. Appreciate your time, and definitely think that the investors have gotten a good feel for Trinity. And at this point, I will turn it over to Roger for kind of exit remarks, closing remarks. Thanks.
Very good. Thank you to both Kyle and to Bryce, very much, we appreciate your time today. The conversation was great, and I'm sure all our viewers will find it very enlightening. As we wrap up, two quick reminders to anyone out there who's not already signed up for one-on-one, again, please send me an email at weiss@lythampartners.com, or again, visit us at lythampartners.com/select2024, and click on the Enter Conference Site button. And don't forget about the BDC Analyst Roundtable that Bryce and I participated in. Our earlier webcast links are available on the conference home page at that same address, lythampartners.com/select2024, and click on Presentations in the top left corner. I hope you can all join us. Again, Kyle, Bryce,