Early repayments spur deployment at Hercules

The firm expects the Federal Reserve’s rate hike to boost its debt portfolio income. 

An unexpected bump in its principal “early payoffs” allowed Hercules Capital to close a total of $400 million in debt and equity deals the first half of this year, the firm said on Thursday.

This total exceeded the firm’s target of investing up to $375 million over the two quarters, according to a statement. The Palo Alto, California-based lender received roughly $166 million in unscheduled early repayments on its existing portfolio over that period, boosting its deployment activity.

“Unscheduled early payoffs continue at higher-than-expected levels, driven by a combination of M&A activity, increased portfolio company milestone and development achievements, and an abundance of liquidity in the broader capital markets looking for assets and higher yields,” Manuel Henriquez, founder and chief executive officer at Hercules, said in a statement.

Hercules will maintain its reinvesting unscheduled early principal repayments with a “slow and steady” growth strategy and “conservative underwriting”, Henriquez added.

In the second quarter, the firm closed $206 million in investments to nine new and existing portfolio companies, in the technology and life sciences fields. The largest financings included a $55 million loan to an undisclosed developer of a cloud-based communications platform and a $35 million loan to a specialised pharmaceutical company.

The firm was not immediately available to comment further.

Hercules also expects the recent increase by 25 basis points of the Federal funds rate to boost the income of its debt portfolio, which is overwhelmingly floating rate loans. The Federal Reserve’s decision last month to increase the rate from 1 percent to 1.25 percent will net Hercules an additional $2.4 million, or $0.03 per share, of net investment income, the company said in June.

Earlier this year, the firm had briefly proposed to be advised by a third-party entity, Hamilton Advisers, which is owned by Henriquez. However, due to a decline in stock value and a similar bid from TCW Group, the firm pulled its bid to externalise the management.

The firm provides senior secured loans for venture growth to technology, life sciences and renewable energy companies. Hercules has committed more than $6.7 billion in capital since its beginning in December 2003, according to the statement.