Hercules drops externalisation bid to focus on core business

The Palo Alto, California-based BDC says externalising management has been a “distraction”.

Hercules Capital will not pursue any further plans for externalisation for the foreseeable future following discussions with shareholders.

In the business development company’s third-quarter earnings call, Manuel Henriquez, chief executive officer and chairman of Hercules, said the process would be a “distraction” from managing the core business.

In May, Hercules was forced to withdraw a proposal to be managed by Hamilton Advisers, which is owned by Henriquez, after a decline in its stock and an approach from another potential external manager.

“We are beginning to see improving signs across many key leading indicators in our business,” he told analysts. “We are encouraged with what we’re seeing but need to be monitoring to ensure that what we’re seeing truly leads to a trend and not just simply a blip in the quarter. At this point, the trending seems to be taking shape and pointing in the right direction.”

Hercules also said that it had purchased a book of venture debt loans from Ares Capital Corporation for $125 million.

The first nine months of 2017 saw a return of average equity investment of 12.1 percent, only narrowly behind 2016’s full-year figure of 12.6 percent, putting the firm on course for improved returns by year’s end.

Hercules also saw yields increase to 11.6 percent in Q3 despite predictions in Q2 that yields would fall to between 11-11.2 percent.

Total debt investments grew 3 percent during Q3 to $1.3 billion, while total assets increased 8 percent to $1.6 billion, this was despite early payoffs of $150 million.

Commitments of $146.7 million were made across 16 portfolio companies in the third quarter. Investment income fell 5.3 percent from $48.5 million in Q2 to $45.9 million in Q3, which Hercules said was due to “a lower amount of one-time accelerations from early unscheduled payoffs of $114.7 million during the quarter”.

The firm also said it was bullish about prospects for interest rates, which the US Federal Reserve is expected to increase by a further 25 basis points before the end of 2017, with further rate rises in 2018 being widely anticipated.