Hercules gearing up for policy headwinds

The California-based BDC grew its debt portfolio to $1.38bn last quarter. 

Expecting the Trump administration and US Congress to enact advantageous regulatory reforms later in the year, Hercules Capital has started 2017 with a “slow, steady growth strategy”, executives said on Thursday’s earnings call.

Manuel Henriquez, chairman and chief executive officer at Hercules, told investors and analysts the firm remains “encouraged and optimistic” that the president and “the pro-business Congress will finally add upon various critical pieces of legislations and regulations for the benefit of the BDC industry”.

Henriquez highlighted several regulatory changes that would have a “profound, meaningful impact to the business development company industry and specifically Hercules Capital, if enacted”. 

Regulatory statutes Henriquez addressed include a disclosure provision that excludes many BDCs from the S&P index and another that limits institutional investors from owning greater than 3 percent of a BDC’s outstanding shares.

Henriquez added that Hercules is “purposely maintaining a highly liquid, low leverage balance sheet until we have clarity as to what market directions we can expect during the early tenure of the administration”.

The firm ended the year with $203 million of available liquidity, including $190 million undrawn capital in its revolving credit facilities and $13 million unrestricted cash, while the firm’s portfolio had a regulatory leverage level of 0.61x, according to the earnings release.

The firm is considering using its $34.2 million in earnings spillover from last year for a special one-time dividend in the second half of 2017, Henriquez said on the call.

The optimism for 2017 follows a strong 2016, in which the firm grew its debt investment portfolio to $1.38 billion at year-end, surpassing its target of $1.35 billion. That’s compared to $1.15 billion at the same time in 2015, the release shows.

For the year 2016, the firm reported a net investment income of $100.3 million, or $1.34 per share, an increase of 36.5 percent as compared to $73.5 million, or $1.04 per share in the year prior.

The Palo Alto, California-based BDC is focused on companies seeking growth capital. The firm’s debt portfolio includes loans to 88 companies in in technology, life sciences, and renewable energy industry seeking growth or venture capital. The loans have a maturity schedule of three to three and a half years and an average size of $5 million to $10 million.