On October 5, 2016 Hercules Capital, Inc. (NYSE:HTGC) ("Hercules" or the "Company"), the leading specialty financing provider to innovative venture growth, pre-IPO and M&A stage companies backed by leading venture capital firms, reported its portfolio update for Q3 2016 (Press release, Hercules, OCT 5, 2016, View Source [SID:SID1234515612]).
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"Hercules Capital achieved another solid quarter of new originations and fundings as we continue to build our debt investment portfolio to our desired target of $1.35 billion," stated Manuel A. Henriquez, chairman and chief executive officer of Hercules. "While Q3 is normally our seasonally softest calendar quarter, our team continued to execute our ‘slow and steady’ growth and origination strategy achieving nearly $180 million of new commitments, including five new innovative venture growth stage technology and life sciences companies, backed by some of the leading venture capital firms in the U.S. The success of our origination team is a reflection of our strong brand and reputation within the venture capital and entrepreneurial communities."
Henriquez continued, "During the quarter, we also witnessed a healthy pick up in M&A activities with four companies announcing or completing M&A events, further bolstering our growing earnings spillover, as we look to harvest those capital gains for potential future distributions to our shareholders. We were also excited to see one of our portfolio companies, TPI Composites (NASDAQ:TPIC), successfully complete its IPO and become part of the Russell 2000 Index as it had nearly doubled its market capitalization prior to that event. During the quarter we were also able to bolster our liquidity and strengthen our balance sheet, positioning us well for the fourth quarter as we work to convert this strong liquidity into new interest-earning investments in a methodical fashion across our key investment markets driving additional growth in our debt investment portfolio."
New Debt and Equity Commitments for Q3 2016
As of September 30, 2016, Hercules has originated $178.0 million of debt and equity commitments to new and existing portfolio companies.
Five (5) new commitments to innovative venture growth stage companies:
Technology Portfolio – $45.0 Million
$25.0 million to a technology developer of enterprise analytics focused on customer and employee interactions and behaviors
$20.0 million to a software developer that designs a leading application for note taking, organizing and archiving
Life Sciences Portfolio – $85.0 Million
$35.0 million to a pharmaceuticals sales and distribution company
$30.0 million to a physician management and technology company that provides physician practice management and population health technology
$20.0 million to a biopharmaceutical company dedicated to developing therapeutics that address important unmet medical needs in otolaryngology
New Commitments to Existing Portfolio Companies – $48.0 Million
Unscheduled Principal Repayments "Early Pay-Offs:"
As of September 30, 2016, Hercules received $84.2 million in unscheduled principal repayments "early pay-offs."
Portfolio Company IPO and M&A Activity in Q3 2016:
IPO Activities
1. TPI Composites, Inc., (NASDAQ:TPIC) the largest U.S.-based independent manufacturer of composite wind blades for the wind energy market, raised $69.0 million by offering 6.25 million shares of its common stock at $11.00 per share in July 2016. Hercules committed a total of $20.0 million in two (2) venture debt financings to TPI Composites beginning in June 2013. Hercules held warrants for 160 shares of Preferred Series B stock as of June 30, 2016, which represents an unrealized gain of approximately $1.2 million as of the closing price of $18.47 for TPI Composites on September 14, 2016.
2. As of September 30, 2016, Hercules held warrant and equity positions in four (4) portfolio companies that had filed Registration Statements in contemplation of a potential IPO, including:
Four companies filed confidentially under the JOBS Act
There can be no assurances that companies that have yet to complete their IPOs will do so.
M&A Activities
1. Celator Pharmaceuticals, Inc. (NASDAQ:CPXX), a pharmaceutical company developing new and more effective therapies to treat cancer, was acquired by Jazz Pharmaceuticals, Inc. (NASDAQ:JAZZ), an international biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing meaningful products that address unmet medical needs, for $30.25 per share. The transaction closed on July 12, 2016. Hercules initially committed $15.0 million in venture debt financing to Celator Pharmaceuticals in May 2014. The Company recognized a net realized gain of approximately $1.5 million from the sale of shares, generating a fully realized internal rate of return ("IRR") of approximately 19.8% from its loan repayments and equity/warrant gains.
2. ReachLocal, Inc. (NASDAQ:RLOC), a leader in powering online marketing, helping local businesses grow and operate their business better with leading technology and expert service, was acquired by Gannett Co., Inc., (NYSE:GCI), a next-generation media company committed to strengthening communities across the company’s network, for $4.60 per share in cash, via a tender offer. The transaction closed on August 9, 2016. Hercules initially committed $25.0 million in venture debt financing to ReachLocal in April 2015. The Company recognized a net realized gain of $610,000 from the transaction, generating a fully realized IRR of approximately 24.1% from its loan repayments and equity/warrant gains.
3. TouchCommerce, a technology partner and leader in digital customer service and engagement solutions, was acquired by Nuance Communications, Inc. (NASDAQ:NUAN), a leading provider of voice and language solutions for businesses and consumers around the world, for $215.0 million in total consideration. The transaction closed on August 16, 2016. Hercules committed a total of $18.0 million in three (3) venture debt financings to TouchCommerce beginning in June 2013. Hercules held warrants for 2.3 million shares of Preferred Series E stock, as of June 30, 2016, which represents a realized gain of approximately $698,000 and an unrealized gain of approximately $770,000 as of the closing price of $14.46 for Nuance Communications on September 14, 2016.
4. IronPlanet, a leading online marketplace for used heavy equipment and other durable assets, announced that it had entered into a definitive agreement on August 29, 2016 under which Ritchie Bros. Auctioneers Incorporated (NYSE & TSX: RBA), the world’s largest industrial auctioneer and a leading equipment distributor, will acquire IronPlanet for approximately US $758.5 million, subject to customary closing adjustments. Hercules initially committed $37.5 million in venture debt financing to IronPlanet in October 2014. Hercules currently holds warrants for 1.2 million shares of Preferred Series D stock, as of June 30, 2016.