Quarterly report pursuant to Section 13 or 15(d)

Investments

v3.23.3
Investments
 9 Months Ended
Sep. 30, 2023
Schedule of Investments [Abstract]  
Investments Investments
Control and Affiliate Investments
As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Under the 1940 Act, the Company is generally deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more, but generally less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. For purposes of determining the classification of its investments, the Company has included consideration of any voting securities or board appointment rights held by the Adviser Funds.
The following table summarizes the Company’s realized gains and losses and changes in unrealized appreciation and depreciation on control and affiliate investments for the three and nine months ended September 30, 2023 and 2022.
(in thousands) Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023
Portfolio Company(1)
Type Fair Value as of September 30, 2023 Interest Income Fee Income Net Change in Unrealized Appreciation (Depreciation) Realized Gain (Loss) Interest Income Fee Income Net Change in Unrealized Appreciation (Depreciation) Realized Gain (Loss)
Control Investments
Coronado Aesthetics, LLC Control $ 247  $ —  $ —  $ (50) $ —  $ —  $ —  $ (72) $ — 
Gibraltar Acquisition LLC (3)
Control 55,992  772  22  (1,726) —  2,299  60  4,676  — 
Hercules Adviser LLC(4)
Control 40,668  153  —  1,507  —  455  —  9,515  — 
Tectura Corporation Control 6,243  174  —  (830) —  516  —  (1,799) — 
Total Control Investments $ 103,150  $ 1,099  $ 22  $ (1,099) $ —  $ 3,270  $ 60  $ 12,320  $ — 
(in thousands) Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Portfolio Company(1)
Type Fair Value as of September 30, 2022 Interest Income Fee Income
Net Change in Unrealized Appreciation (Depreciation)
Realized Gain (Loss) Interest Income Fee Income
Net Change in Unrealized Appreciation (Depreciation)
Realized Gain (Loss)
Control Investments
Coronado Aesthetics, LLC Control $ 400  $ —  $ —  $ (22) $ —  $ —  $ —  $ (165) $ — 
Gibraltar Business Capital, LLC Control 37,662  853  18  (1,423) —  2,531  51  (6,228) — 
Hercules Adviser LLC Control 33,945  154  —  (1,236) —  393  —  9,955  — 
Tectura Corporation Control 8,318  174  —  110  —  516  —  49  — 
Total Control Investments $ 80,325  $ 1,181  $ 18  $ (2,571) $ —  $ 3,440  $ 51  $ 3,611  $ — 
Affiliate Investments
Black Crow AI, Inc.(2)
Affiliate $ —  $ —  $ —  $ —  $ —  $ —  $ —  $ (120) $ 3,772 
Pineapple Energy LLC(2)
Affiliate —  81  —  4,631  (2,014) 1,204  —  4,209  (2,014)
Total Affiliate Investments $ —  $ 81  $ —  $ 4,631  $ (2,014) $ 1,204  $ —  $ 4,089  $ 1,758 
Total Control & Affiliate Investments $ 80,325  $ 1,262  $ 18  $ 2,060  $ (2,014) $ 4,644  $ 51  $ 7,700  $ 1,758 
(1)In accordance with Rules 3-09, 4-08(g), and Rule 10-01(b)(1) of Regulation S-X, (“Rule 3-09”, “Rule 4-08(g)”, and “Rule 10-01(b)(1)”, respectively), the Company must determine if its unconsolidated subsidiaries are considered “significant subsidiaries”. As of September 30, 2023 and September 30, 2022, there were no unconsolidated subsidiaries that are considered “significant subsidiaries”.
(2)As of September 30, 2022, Black Crow AI, Inc. and Pineapple Energy LLC were no longer affiliates as defined under the 1940 Act.
(3)Gibraltar Acquisition LLC is a wholly-owned subsidiary, which is the holding company for their wholly-owned affiliated portfolio companies, Gibraltar Business Capital, LLC and Gibraltar Equipment Finance, LLC. The subsidiary has no significant assets or liabilities, other than their equity and debt investments and equity interest in Gibraltar Business Capital, LLC and Gibraltar Equipment Finance, LLC, respectively.
(4)Hercules Adviser LLC is owned by Hercules Capital Management LLC and presented with Hercules Partner Holdings, LLC which are both wholly owned by the Company. Please refer to “Note 1” for additional disclosure.
Portfolio Composition
The following table shows the fair value of the Company’s portfolio of investments by asset class as of September 30, 2023 and December 31, 2022:
(in thousands) September 30, 2023 December 31, 2022
Investments at
Fair Value		 Percentage of
Total Portfolio		 Investments at
Fair Value		 Percentage of
Total Portfolio
Senior Secured Debt $ 3,021,950  92.7  % $ 2,741,388  92.5  %
Unsecured Debt 69,930  2.1  % 54,056  1.8  %
Preferred Stock 42,290  1.3  % 41,488  1.4  %
Common Stock 94,705  2.9  % 92,484  3.1  %
Warrants 27,833  0.9  % 30,646  1.1  %
Investment Funds & Vehicles 4,683  0.1  % 3,893  0.1  %
Total $ 3,261,391  100.0  % $ 2,963,955  100.0  %
A summary of the Company’s investment portfolio, at value, by geographic location as of September 30, 2023 and December 31, 2022 is shown as follows:
(in thousands) September 30, 2023 December 31, 2022
Investments at
Fair Value		 Percentage of
Total Portfolio		 Investments at
Fair Value		 Percentage of
Total Portfolio
United States $ 2,901,718  89.0  % $ 2,670,520  90.1  %
United Kingdom 201,853  6.3  % 171,629  5.8  %
Netherlands 88,986  2.7  % 88,915  3.0  %
Israel 52,967  1.6  % 9,052  0.3  %
Canada 10,222  0.3  % 19,472  0.7  %
Denmark 4,135  0.1  % —  0.0  %
Germany 1,069  0.0  % 990  0.0  %
Other 441  0.0  % 573  0.0  %
Ireland —  0.0  % 2,804  0.1  %
Total $ 3,261,391  100.0  % $ 2,963,955  100.0  %
The following table shows the fair value of the Company’s portfolio by industry sector as of September 30, 2023 and December 31, 2022:
(in thousands) September 30, 2023 December 31, 2022
Investments at
Fair Value		 Percentage of
Total Portfolio 		Investments at
Fair Value		 Percentage of
Total Portfolio
Drug Discovery & Development $ 1,191,061  36.5  % $ 1,150,707  38.8  %
Software 828,849  25.4  % 798,264  26.9  %
Consumer & Business Services 497,664  15.3  % 439,384  14.8  %
Healthcare Services, Other 278,221  8.5  % 198,763  6.7  %
Information Services 122,485  3.8  % 60,759  2.0  %
Diversified Financial Services 107,554  3.3  % 68,569  2.3  %
Communications & Networking 106,032  3.3  % 101,833  3.4  %
Biotechnology Tools 33,763  1.0  % 32,825  1.1  %
Manufacturing Technology 25,879  0.8  % 46,109  1.6  %
Medical Devices & Equipment 22,191  0.7  % 1,834  0.1  %
Electronics & Computer Hardware 20,285  0.6  % 21,517  0.7  %
Media/Content/Info 13,117  0.4  % 35  0.0  %
Sustainable and Renewable Technology 10,514  0.3  % 15,486  0.5  %
Consumer & Business Products 2,159  0.1  % 2,821  0.1  %
Semiconductors 1,179  0.0  % 21,921  0.7  %
Surgical Devices 418  0.0  % 3,038  0.1  %
Drug Delivery 20  0.0  % 90  0.0  %
Total $ 3,261,391  100.0  % $ 2,963,955  100.0  %
No single portfolio investment represents more than 10% of the fair value of the Company’s total investments as of September 30, 2023 or December 31, 2022.
Concentrations of Credit Risk
The Company’s customers are primarily privately held companies and public companies which are active in the “Drug Discovery & Development", "Software”, “Consumer & Business Services”, “Healthcare Services, Other”, and “Communications & Networking" sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property.
Industry and sector concentrations vary as new loans are recorded and loans are paid off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and warrant or other equity interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies.
As of September 30, 2023 and December 31, 2022, the Company’s ten largest portfolio companies represented approximately 29.6% and 29.0% of the total fair value of the Company’s investments in portfolio companies, respectively. As of September 30, 2023 and December 31, 2022, the Company had six and eight portfolio companies, respectively, that represented 5% or more of the Company’s net assets. As of September 30, 2023, the Company had four equity investments representing approximately 52.7% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of the Company’s equity investments. As of December 31, 2022, the Company had four equity investments which represented approximately 39.8% of the total fair value of the Company’s equity investments, and each represented 5% or more of the total fair value of such investments.
Investment Collateral
In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. The Company's investments were collateralized as follows as of September 30, 2023 and December 31, 2022:
Percentage of debt investments (at fair value), as of
September 30, 2023 December 31, 2022
Senior Secured First Lien
All assets including intellectual property 53.8  % 42.0  %
All assets with negative pledge on intellectual property 21.8  % 26.1  %
“Last-out” with security interest in all of the assets 11.7  % 11.6  %
Total senior secured first lien position 87.3  % 79.7  %
Second lien 10.4  % 18.4  %
Unsecured 2.3  % 1.9  %
Total debt investments at fair value 100.0  % 100.0  %
Derivative Instruments
The Company enters into forward currency contracts from time to time to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. The following is a summary of the fair value and location of the Company’s derivative instruments in the Consolidated Statements of Assets and Liabilities held as of September 30, 2023 and December 31, 2022:
(in thousands) Fair Value
Derivative Instrument Statement Location September 30, 2023 December 31, 2022
Foreign currency forward contract  Other assets $ 230  $ — 
Total $ 230  $ — 
Net realized and unrealized gains and losses on derivative instruments recorded by the Company during the three and nine months ended September 30, 2023 and 2022 are in the following locations in the Consolidated Statements of Operations:
(in thousands)   Three Months Ended September 30, Nine Months Ended September 30,
Derivative Instrument Statement Location 2023 2022 2023 2022
Foreign currency forward contract Net realized gain (loss) - Non-control / Non-affiliate investments $ —  $ —  $ —  $ — 
Foreign currency forward contract Net change in unrealized appreciation (depreciation) - Non-control / Non-affiliate investments 784  —  230  — 
  Total $ 784  $ —  $ 230  $ — 
Investment Income
The Company’s investment portfolio generates interest, fee, and dividend income. The composition of the Company’s interest income and fee income is as follows:
(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
  2023 2022 2023 2022
Contractual interest income $ 89,747  $ 66,451  $ 258,685  $ 172,057 
Exit fee interest income 10,904  8,696  34,340  22,077 
PIK interest income 6,652  4,944  17,999  14,888 
Other investment income (1)
3,036  1,317  8,198  3,369 
Total interest and dividend income $ 110,339  $ 81,408  $ 319,222  $ 212,391 
(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Recurring fee income $ 2,243  $ 2,076  $ 6,418  $ 5,762 
Fee income - expired commitments 300  29  651  550 
Accelerated fee income - early repayments 3,862  716  11,774  2,798 
Total fee income $ 6,405  $ 2,821  $ 18,843  $ 9,110 
(1)Other investment income includes OID interest income and interest recorded on other assets.
As of September 30, 2023 and December 31, 2022, unamortized capitalized fee income was recorded as follows:
(in millions) September 30,
2023		 December 31,
2022
Offset against debt investment cost $ 44.6  $ 43.1 
Deferred obligation contingent on funding or other milestone 12.1  10.9 
Total Unamortized Fee Income $ 56.7  $ 54.0 
As of September 30, 2023 and December 31, 2022, loan exit fees receivable were recorded as follows:
(in millions) September 30,
2023		 December 31,
2022
Included within debt investment cost $ 34.7  $ 32.5 
Deferred receivable related to expired commitments 2.9  5.0 
Total Exit Fees Receivable $ 37.6  $ 37.5