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TriplePoint Venture Growth: Special Dividend Announced

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NEWS

On December 21, 2020 TriplePoint Venture Growth (TPVG) announced a special distribution of $0.10.

The distribution is “payable on January 13, 2021, to shareholders of record at the close of business on December 31, 2020“.

TPVG indicated that the  “special dividend represents a portion of the Company’s estimated net capital gain income earned during the fiscal year“.

The BDC indicated:

“The anticipated remaining undistributed net capital gain income along with the Company’s estimated undistributed taxable earnings from net investment income, which was $10.0 million or $0.33 per share, as of September 30, 2020, will spill-over into 2021”.

The special dividend income was generated from capital gains achieved in 2020 from the sale of common stock and warrant positions in 2020.

According to TPVG, this is the third special dividend announced since the BDC’s IPO.


ANALYSIS

Task At Hand

We’ll review TPVG’s changing realized and unrealized losses, including portfolio company specifics through IIIQ 2020, and what we know already about the IVQ.

Also, we’ll compare total distributions announced in 2020 with 2019 and where TPVG stands versus its publicly traded peers.

Finally, the BDC Reporter will offer its prediction for TPVG’s IVQ 2020 NAV Per Share and 2021 distributions.

IQ 2020

Like most BDCs, TPVG booked substantial unrealized losses in the IQ 2020: ($17.0mn) and non material realized losses of ($0.3mn).

This occurred just as TPVG’s portfolio size reached a record high.

During the period three companies were downgraded in the BDC’s investment rating system from a 2 rating to a 3.

This is what management said at the time:

“With regards to credit downgrades during the quarter, generally speaking, the 3 companies downgraded this quarter from 2 to 3, either had capital raises that were delayed or impacted by COVID or had recent execution challenges. Assuming the financing rounds close and the company’s execute to plan, we expect them to be upgraded later this year”.

Furthermore, due to the pandemic, management was stricter on individual company valuations in the period:

      “we made adjustments to reflect higher level of market volatility and COVID risk in the world. On top of that, we also made adjustments for certain companies in industries and subsectors, which have been more negatively impacted by COVID, such as consumer, travel, real estate and lending. Finally, for certain companies, we also adjusted our recovery expectations given the uncertain economic conditions. As a result, we took a mark against every loan in our book, except generally those with obligors who are profitable or who have operating cash runway on hand in excess of our loan maturity date, resulting in an unrealized loss of $17.6 million on the loan book or 4.3% of our net asset value”.

No new debt, though,  was placed on non accrual.

NAV Per Share dropped from $13.35 to $12.85, a (3.7%) decrease.

Although in the red, the NAV loss was substantially lower than the (14.2%) average of the BDCs we track, as shown in the BDC NAV Table.

The other two venture-debt BDCs Hercules Capital (HTGC) and Horizon Technology Finance (HRZN) dropped (6.0%) and (3.0%) respectively.

Spill over income was $7.9mn, left over from 2019 and some unannounced increase given that IQ 2020 earnings exceeded the regular dividend of $0.36.

IIQ 2020

Also like most BDCs, TPVG saw portfolio company valuations swing into positive territory in the quarter ended June 30, 2020.

The result was an increase in unrealized appreciation of $8.9mn, recovering roughly half of the unrealized write-down of the IQ.

The BDC also booked $0.8mn in net realized gains.

This small number, though, is misleading as there was much going on for good and ill in the quarter:

“During the quarter, we sold 80% of our holdings in CrowdStrike, resulting in $19.4 million of realized gains….These realized gains from CrowdStrike were offset by the realized losses from Cambridge and Harvest as part of removing them from the watch list, along with other realizations, resulting in net realized gains of $800,000 for the quarter”.

Much of the unrealized value change related to the realized gains and losses, as management explained:

“Net unrealized gain on investments for the second quarter were $8.9 million, resulting from the reversal of previously recorded unrealized losses on loans to Cambridge and Harvest, $2.5 million of valuation adjustments related to mark to market-related changes and credit-related adjustments, partially offset by the reversal of previously recorded unrealized gains associated with the shares of CrowdStrike sold during the quarter”.

In terms of changes in company ratings, there were three internal upgrades and one company that was dropped from category two to category three.

As management pointed out, there were no additions to the lowest two credit categories, including no new non accruals.

Departing

Removed from non accrual status following those realized losses were two companies: Harvest Power and Cambridge Broadband. 

The former was an investment first made in 2014, but which was completely written off, as was the latter.

In both cases the investment was almost completely in the form of debt, but still resulted in a complete loss – a vivid reminder of the all-or-nothing economics of venture lending.

No other BDCs were involved.

Net Asset Value Per Share increased a modest 2.6%, but that was slightly higher than the BDC average of 2.1%, still being dragged down by a third of the players in the red.

HTGC increased Net Asset Value Per Share by 2.7% and HRZN by 1.4%.

In terms of spillover income TPVG announced $8.9mn or $0.29 per share through June.

IIIQ 2020

Most of the net realized gains that TPVG mentions in the press release for 2020 were booked in the quarter ended September.

The P&L shows net realized gains of $4.1mn, 90% of the YTD result in this category.

“We sold a portion of our holdings in CrowdStrike, resulting in additional $4.9 million of realized gains in Q3, bringing our total to $24.3 million of realized gains on that name alone and also recorded $1.1 million of realized gains on our Medallia Holdings.” 

The gains were offset by a ($1.6mn) realized loss from the sale of Munchery.

In this case, the loss was not total as TPVG had invested a total of $2.9mn in the menu offering company.

With this third disposition of a non performing company, TPVG was left with only one entity rated in category four or five of its rating system.

Music Making

That’s Roli, a musical instrument manufacturer, which is rated 4 by TPVG, but which is on non accrual and has been since mid-2019.

The amount the BDC has at risk is high: over $30mn.

However, TPVG decreased the discount on the valuation in the IIIQ 2020 for the reasons given here:

“During the quarter, we saw an increase in the value of our position in Roli as a result of progress the company made during the quarter, which culminated in the launch of their Lumi keyboard on October 1, favorable product reviews and strong initial demand and sales. We hope to see momentum — we hope to see this momentum translate into continued favorable trends for the company and our investment”.

Rest Of The Numbers

In the unrealized category, TPVG recorded an unrealized loss of ($1.9mn), largely due to its success in booking realized gains:

“Net unrealized losses resulted from $4.9 million of the reversal of previously recorded unrealized gains on CrowdStrike and Medallia, offset by $1.4 million of the reversal of previously recorded unrealized losses on Montre as well as $1.2 million of unrealized gains from fair value adjustments on the rest of the portfolio”.

Net Asset Value Per Share increased ever so slightly by 0.8% to $13.28.

HTGC also increased a little in this category by 0.7% but HRZN had some credit troubles and saw its NAV Per Share drop (4.0%), the second highest of any BDC in the quarter.

As of the IIQ, TPVG’s NAV Per Share is almost equal to its level at the end of 2019.

Spill over income – as the press release indicates – has increased to $10.0mn or $0.33 per share.

IVQ 2020

Obviously the last quarter of 2020 has not closed and official results will not be forthcoming for weeks.

Nonetheless, management was implying on its November 5 IIIQ 2020 conference call that further gains might be in the works:

“So far in Q4, we’ve had 3 announced portfolio company liquidity and exit events, including Freshley’s acquisition by Nestlé for up to $1.5 billion; Hims in-process back merger; and Qubole’s acquisition by Idera. Such transactions have resulted in $30 million in loan prepayments and $2.4 million in accelerated income prior to any warrant and equity gains.We’re excited by the fact that we continue to hold 100 warrants and equity investments in 70 companies and anticipate more liquidity events in the near future.”

On the other hand, we don’t know what might be transpiring at London-based Roli from a valuation standpoint.

According to news reports, Roli has accessed the UK equivalent of PPP but has not raised – says Crunchbase – any new rounds of equity since June 2019.

To date, Roli has raised $44mn in multiple rounds so if no further funds are forthcoming that could be a danger signal, last quarter’s upward valuation notwithstanding.

There are also four companies in TPVG’s category 3 whose outlook could change for the worse:

“We have 4 portfolio companies rated category 3 due to the impact of COVID on their businesses as well as on their financing and strategic activities. All 4 companies are currently in the midst of financing our strategic activities, have experienced some delays, but are looking to complete these activities over the next 1 to 2 quarters. Our highly experienced teams are in regular and active conversations with these companies and their investors, and we have a playbook for action if the outlook for these activities, their businesses or their credit situations change”.

DIVIDEND CHANGES

In 2018, TPVG paid out $1.54 in total distributions, 4x $0.36 and a $0.10 special.

In 2019, there was no special, but there were 4 regular distributions of $0.36 each, or $1.44 in total.

In 2020 – and with this latest announcement of a $0.10 special dividend – total distributions are $1.54.

Thus 2020 is higher than 2019 and tied with 2018 for the highest dividend year ever.


VIEWS

Pretty Good. Considering

In a pretty awful year for BDCs – and BDC investors – TPVG’s performance where NAV Per Share and dividend payouts are concerned was reassuring.

The increase in total distributions paid in 2020 versus 2019 puts TPVG in an elite group with only three of its peers: Sixth Street Specialty; Oaktree Specialty Lending and Barings BDC.

We have updated the BDC Performance Table to reflect this end-of-the year change.

(BTW, only one of the four -Sixth Street Specialty Lending – could boast NAV Per Share higher as of September 2020 than at December 31, 2019).

Punished

In 2020 the market has not given TPVG full credit for its superior performance.

According to Seeking Alpha’s records, the (11.9%) drop in TPVG’s stock price is 12th out of 45.

On a total return basis- taking into account the full $1.54 in dividends collected – the loss so far is (1.1%).

Outlook

Judging by what we’ve been told about the portfolio at September 30, 2020 – including that TPVG continues to own stock in CrowdStrike and Medallia.

Both are publicly traded – tickers CRWD and MDLA – and both have risen in price since the end of the IIIQ 2020.

This could mean more realized gains in 2020 or 2021 from these sources alone.

Both Sides Now

However – and as we’ve seen throughout the year – losses are almost as likely.

There have already been three significant realized losses this year alone.

Also, Rolli is not out of the woods and other names could join the list.

Our Estimate

Overall, though, the odds seem good that NAV Per Share will continue to increase modestly in the final quarter of 2020.

Furthermore, in our own projections, we’re assuming that TPVG’s total dividend level will remain at $1.54, as we expect another $0.10 special at some point in the coming year.

Possible But Not Probable

There is a small chance the BDC might even increase the regular distribution in 2021  – currently unchanged since IVQ 2014 at $0.36.

Every quarter in 2020 TPVG’s Net Investment Income Per Share has exceeded the distribution.

Furthermore, the BDC is under-leveraged by comparison with its peers and target leverage at 0.6x and management expects a higher level of investment activity in the IVQ 2020 and beyond.

The analyst consensus for 2021 is for Net Investment Income Per Share to be $1.52, materially above the $1.44 of regular dividends.

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