Hercules Capital, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments (Tables)

Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2024

Schedule of Investments Measured at Fair Value on Recurring Basis

Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of June 30, 2024 and December 31, 2023.


(in thousands)	Balance as of June 30, 2024		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description
Other assets
Escrow and Other Investment Receivables	$	1,888	$	—	$	—	$	1,888

Investments
Senior Secured Debt	$	3,320,419	$	—	$	—	$	3,320,419
Unsecured Debt	72,090		—		—		72,090
Preferred Stock	46,525		—		—		46,525
Common Stock(2)	93,726		48,281		—		45,445
Warrants	28,922		—		11,254		17,668
	$	3,561,682	$	48,281	$	11,254	$	3,502,147
Investment Funds & Vehicles measured at Net Asset Value(3)	6,857
Total Investments, at fair value	$	3,568,539
Derivative Instruments(4)	188
Total Investments, at fair value including derivative instruments	$	3,568,727


(in thousands)	Balance as of December 31, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description
Cash and cash equivalents
Money Market Fund(1)	$	56,000	$	56,000	$	—	$	—

Other assets
Escrow and Other Investment Receivables	$	10,888	$	—	$	—	$	10,888

Investments
Senior Secured Debt	$	2,987,577	$	—	$	—	$	2,987,577
Unsecured Debt	69,722		—		—		69,722
Preferred Stock	53,038		—		—		53,038
Common Stock(2)	99,132		57,342		—		41,790
Warrants	33,969		—		11,881		22,088
	$	3,243,438	$	57,342	$	11,881	$	3,174,215
Investment Funds & Vehicles measured at Net Asset Value(3)	4,608
Total Investments, at fair value	$	3,248,046
Derivative Instruments(4)	(766)
Total Investments including cash and cash equivalents and derivative instruments	$	3,303,280

(1)This investment is included in Cash and cash equivalents in the accompanying Consolidated Statements of Assets and Liabilities.

(2)Common Stock includes non-voting security in the form of a promissory note with a lien on shares of issuer's Common Stock.

(3)In accordance with U.S. GAAP, certain investments are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient and are not categorized within the fair value hierarchy as per ASC 820. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the accompanying Consolidated Statements of Assets and Liabilities.

(4)Derivative Instruments are carried at fair value and a level 2 security within the Company's fair value hierarchy.

Schedule of Reconciliation Changes for Financial Assets and Liabilities Measured at Fair Value on Recurring Basis

The table below presents a reconciliation of changes for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the six months ended June 30, 2024 and 2023.


(in thousands)	Balance as of January 1, 2024		Net Realized Gains (Losses)(1)		Net Change in Unrealized Appreciation (Depreciation)(2)		Purchases(5)		Sales		Repayments(6)		Gross Transfers into Level 3(3)		Gross Transfers out of Level 3(3)		Balance as of June 30, 2024

Investments
Senior Secured Debt	$	2,987,577	$	(9,120)	$	(17,797)	$	856,973	$	—	$	(493,121)	$	—	$	(4,093)	$	3,320,419
Unsecured Debt	69,722		—		527		1,841		—		—		—		—		72,090
Preferred Stock	53,038		—		(10,541)		1,597		—		—		2,431		—		46,525
Common Stock	41,790		(89)		(2,018)		4,100		—		—		1,662		—		45,445
Warrants	22,088		464		(4,509)		2,454		(2,829)		—		—		—		17,668
Other Assets
Escrow and Other Investment Receivables	10,888		60		9,546		43		(18,649)		—		—		—		1,888
Total	$	3,185,103	$	(8,685)	$	(24,792)	$	867,008	$	(21,478)	$	(493,121)	$	4,093	$	(4,093)	$	3,504,035


(in thousands)	Balance as of January 1, 2023		Net Realized Gains (Losses)(1)		Net Change in Unrealized Appreciation (Depreciation)(2)		Purchases(5)		Sales		Repayments(6)		Gross Transfers into Level 3(4)		Gross Transfers out of Level 3(4)		Balance as of June 30, 2023
Investments
Senior Secured Debt	$	2,741,388	$	(5,845)	$	19,330	$	648,729	$	—	$	(524,679)	$	—	$	—	$	2,878,923
Unsecured Debt	54,056		—		4,276		687		—		—		—		—		59,019
Preferred Stock	41,488		(1,941)		1,702		—		—		—		—		—		41,249
Common Stock	25,059		—		8,322		1,000		(594)		—		—		—		33,787
Warrants	19,419		(1,763)		722		2,809		(7)		—		—		—		21,180
Other Assets
Escrow Receivable	875		80		—		—		(152)		—		—		—		803
Total	$	2,882,285	$	(9,469)	$	34,352	$	653,225	$	(753)	$	(524,679)	$	—	$	—	$	3,034,961

(1)Included in net realized gains (losses) in the accompanying Consolidated Statements of Operations.

(2)Included in net change in unrealized appreciation (depreciation) in the accompanying Consolidated Statements of Operations.

(3)Transfers out of Level 3 during the six months ended June 30, 2024 related to the conversion of the Company's Level 3 debt investments in Better Therapeutics, Inc. and Eigen Technologies Ltd. into common stock and preferred stock Level 3 investments in acquiring companies.

(4)There were no transfers into or out of Level 3 during the six months ended June 30, 2023.

(5)Amounts listed above are inclusive of loan origination fees received at the inception of the loan which are deferred and amortized into fee income as well as the accretion of existing loan discounts and fees during the period. Escrow receivable purchases may include additions due to proceeds held in escrow from the liquidation of level 3 investments. Amounts are net of purchases assigned to the Adviser Funds.

(6)Amounts listed above include the acceleration and payment of loan discounts and loan fees due to early payoffs or restructures along with regularly scheduled amortization.

Schedule of Unrealized Gain (Loss) on Investments

The following table presents the net unrealized appreciation (depreciation) recorded for debt, preferred stock, common stock, and warrant Level 3 investments relating to assets still held at the reporting date.


(in millions)	Six Months Ended June 30,
	2024		2023
Debt Investments	$	(17.5)	$	23.0
Preferred Stock	(10.5)		(1.7)
Common Stock	(1.5)		8.3
Warrant Investments	(2.0)		(0.8)

Schedule of Quantitative Information of Fair Value Measurements

The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of June 30, 2024 and December 31, 2023. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology

for the determination of the fair value of the Company’s investments is discussed in “Note 2 – Summary of Significant Accounting Policies”. The significant unobservable input used in the fair value measurement of the Company’s escrow receivables is the amount recoverable at the contractual maturity date of the escrow receivable.


Investment Type - Level 3 Debt Investments	Fair Value as of June 30, 2024 (in thousands)		Valuation Techniques/ Methodologies	Unobservable Input(1)	Range	Weighted Average(2)
Pharmaceuticals	$	1,176,486	Market Comparable Companies	Hypothetical Market Yield	10.36% - 18.58%	13.20%
				Premium/(Discount)	(2.00)% - 4.25%	0.05%


Technology	987,037		Market Comparable Companies	Hypothetical Market Yield	10.37% - 18.45%	13.48%
				Premium/(Discount)	(1.00)% - 3.25%	0.33%
	24,820		Convertible Note Analysis	Probability weighting of alternative outcomes	1.00% - 70.00%	50.12%
	62,155		Liquidation(3)	Probability weighting of alternative outcomes	20.00% - 100.00%	66.67%

Sustainable and Renewable Technology	1,457		Market Comparable Companies	Hypothetical Market Yield	11.72% - 11.72%	11.72%
				Premium/(Discount)	2.00% - 2.00%	2.00%

Medical Devices	30,761		Market Comparable Companies	Hypothetical Market Yield	12.60% - 12.60%	12.60%
				Premium/(Discount)	0.50% - 0.50%	0.50%

Lower Middle Market	436,935		Market Comparable Companies	Hypothetical Market Yield	10.75% - 19.07%	14.00%
				Premium/(Discount)	0.00% - 3.00%	0.90%

Debt Investments for which Cost Approximates Fair Value
	554,672		Debt Investments originated within 6 months
	46,525		Imminent Payoffs(4)
	71,661		Debt Investments Maturing in Less than One Year
	$	3,392,509	Total Level 3 Debt Investments
Other Investment Receivables	1,687		Liquidation(3)	Probability weighting of alternative outcomes	10.00% - 50.00%	40.20%
	$	3,394,196	Total Level Three Debt Investments and Other Investment Receivables

(1)The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums/(discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation may result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment.

Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries noted above as follows:

•Pharmaceuticals, above, is comprised of debt investments in the “Drug Discovery & Development” and “Healthcare Services, Other” industries.

•Technology, above, is comprised of debt investments in the “Communications & Networking”, “Information Services”, “Consumer & Business Services”, “Media/Content/Info”, “Space Technologies”, and “Software” industries.

•Sustainable and Renewable Technology, above, is comprised of debt investments in the “Sustainable and Renewable Technology” industry.

•Lower Middle Market, above, is comprised of debt investments in the “Healthcare Services – Other”, “Consumer & Business Services”, “Diversified Financial Services”, “Sustainable and Renewable Technology”, and “Software” industries.

(2)The weighted averages are calculated based on the fair market value of each investment.

(3)The significant unobservable input used in the fair value measurement of impaired debt securities and other investment receivables is the probability weighting of alternative outcomes.

(4)Imminent Payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.


Investment Type - Level 3 Debt Investments	Fair Value as of December 31, 2023 (in thousands)		Valuation Techniques/ Methodologies	Unobservable Input(1)	Range	Weighted Average(2)
Pharmaceuticals	$	971,775	Market Comparable Companies	Hypothetical Market Yield	10.91% - 21.43%	13.46%
				Premium/(Discount)	(1.00)% - 3.50%	0.04%
	8,455		Liquidation(3)	Probability weighting of alternative outcomes	10.00% - 50.00%	41.83%

Technology	1,181,823		Market Comparable Companies	Hypothetical Market Yield	11.30% - 20.74%	15.03%
				Premium/(Discount)	(1.00)% - 5.00%	0.47%
	23,244		Convertible Note Analysis	Probability weighting of alternative outcomes	1.00% - 50.00%	39.32%
	—		Liquidation(3)	Probability weighting of alternative outcomes	100.00% - 100.00%	100.00%

Sustainable and Renewable Technology	1,678		Market Comparable Companies	Hypothetical Market Yield	10.75% - 10.75%	10.75%
				Premium/(Discount)	0.75% - 0.75%	0.75%

Lower Middle Market	322,162		Market Comparable Companies	Hypothetical Market Yield	12.54% - 20.15%	14.13%
				Premium/(Discount)	(0.75)% - 2.25%	0.56%

Debt Investments for which Cost Approximates Fair Value
	431,512		Debt Investments originated within 6 months
	54,430		Imminent Payoffs(4)
	62,220		Debt Investments Maturing in Less than One Year
	$	3,057,299	Total Level 3 Debt Investments
Other Investment Receivables	9,648		Liquidation(3)	Probability weighting of alternative outcomes	10.00% - 50.00%	41.83%
	$	3,066,947	Total Level Three Debt Investments and Other Investment Receivables

Debt investments in the industries noted in the Company’s Consolidated Schedule of Investments are included in the industries noted above as follows:

•Pharmaceuticals, above, is comprised of debt investments in the “Drug Discovery & Development” and “Healthcare Services, Other” industries.

•Sustainable and Renewable Technology, above, is comprised of debt investments in the “Sustainable and Renewable Technology” industry.

(2)The weighted averages are calculated based on the fair market value of each investment.

(3)The significant unobservable input used in the fair value measurement of impaired debt securities and other investment receivables is the probability weighting of alternative outcomes.

(4)Imminent payoffs represent debt investments that the Company expects to be fully repaid within the next three months, prior to their scheduled maturity date.

Investment Type - Level 3 Equity and Warrant Investments

Fair Value as of
June 30, 2024
(in thousands)

Valuation Techniques/
Methodologies

Unobservable Input(1)

Range

Weighted Average(5)

Equity Investments

44,149

Market Comparable Companies

Revenue Multiple(2)

0.3x - 16.2x

13.2x

Tangible Book Value Multiple(2)

1.5x - 1.5x

1.5x

Discount for Lack of Marketability(3)

10.60% - 92.58%

34.54%

10,845

Market Adjusted OPM Backsolve

Market Equity Adjustment(4)

(90.62)% - 4.58%

(9.31)%

32,417

Discounted Cash Flow

Discount Rate(7)

12.93% - 33.53%

30.77%

4,559

Other(6)

Warrant Investments

14,837

Market Comparable Companies

Revenue Multiple(2)

0.9x - 11.3x

4.5x

Discount for Lack of Marketability(3)

10.16% - 32.96%

24.55%

2,831

Market Adjusted OPM Backsolve

Market Equity Adjustment(4)

(44.75)% - 46.34%

(2.96)%

Total Level 3 Equity and Warrant Investments

109,638

(1)The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity securities are revenue and/or earnings multiples (e.g. EBITDA, EBT, ARR), market equity adjustment factors, and discounts for lack of marketability. Significant increases/(decreases) in the inputs in isolation would result in a significantly higher/(lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. The significant unobservable input used in the fair value measurement of impaired equity securities is the probability weighting of alternative outcomes.

(2)Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)Represents the range of changes in industry valuations since the portfolio company's last external valuation event.

(5)Weighted averages are calculated based on the fair market value of each investment.

(6)The fair market value of these investments is derived based on recent private market and merger and acquisition transaction prices.

(7)The discount rate used is based on current portfolio yield adjusted for uncertainty of actual performance and timing in capital deployments.

Investment Type - Level 3 Equity and Warrant Investments

Fair Value as of
December 31, 2023
(in thousands)

Valuation Techniques/
Methodologies

Unobservable Input(1)

Range

Weighted Average(5)

Equity Investments

52,094

Market Comparable Companies

EBITDA Multiple(2)

12.3x - 12.3x

12.3x

Revenue Multiple(2)

0.3x - 20.1x

7.2x

Tangible Book Value Multiple(2)

1.8x - 1.8x

1.8x

Discount for Lack of Marketability(3)

7.11% - 92.72%

31.57%

11,096

Market Adjusted OPM Backsolve

Market Equity Adjustment(4)

(86.14)% - 32.69%

7.47%

28,713

Discounted Cash Flow

Discount Rate(7)

19.88% - 31.97%

30.51%

2,925

Other(6)

Warrant Investments

19,014

Market Comparable Companies

EBITDA Multiple(2)

12.3x -12.3x

12.3x

Revenue Multiple(2)

0.9x - 10.2x

4.2x

Discount for Lack of Marketability(3)

6.21% - 33.12%

21.70%

3,074

Market Adjusted OPM Backsolve

Market Equity Adjustment(4)

(70.67)% - 34.86%

13.17%

—

Other(6)

Total Level 3 Equity and Warrant Investments

116,916

(2)Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(3)Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments.

(4)Represents the range of changes in industry valuations since the portfolio company's last external valuation event.

(5)Weighted averages are calculated based on the fair market value of each investment.

(6)The fair market value of these investments is derived based on recent market transactions.

(7)The discount rate used is based on current portfolio yield adjusted for uncertainty of actual performance and timing in capital deployments.

Schedule of Fair Value Hierarchy of Outstanding Borrowings

The following tables provide additional information about the approximate fair value and level in the fair value hierarchy of the Company’s outstanding borrowings as of June 30, 2024 and December 31, 2023:


(in thousands)	June 30, 2024
Description	Carrying Value		Approximate Fair Value		Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
SBA Debentures	$	170,615	$	149,839	$	—	$	—	$	149,839
July 2024 Notes	104,975		107,142		—		—		107,142
February 2025 Notes	49,924		49,816		—		—		49,816
June 2025 Notes	69,838		68,046		—		—		68,046
June 2025 3-Year Notes	49,848		49,199		—		—		49,199
March 2026 A Notes	49,842		48,137		—		—		48,137
March 2026 B Notes	49,828		48,183		—		—		48,183
September 2026 Notes	322,830		293,518		—		—		293,518
January 2027 Notes	346,600		319,515		—		—		319,515
2031 Asset-Backed Notes	148,838		142,500		—		142,500		—
2033 Notes	38,989		39,840		—		39,840		—
MUFG Bank Facility	133,000		133,000		—		—		133,000
SMBC Facility	212,000		212,000		—		—		212,000
Total	$	1,747,127	$	1,660,735	$	—	$	182,340	$	1,478,395


(in thousands)	December 31, 2023
Description	Carrying Value		Approximate Fair Value		Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
SBA Debentures	$	170,323	$	142,011	$	—	$	—	$	142,011
July 2024 Notes	104,828		105,755		—		—		105,755
February 2025 Notes	49,866		49,144		—		—		49,144
June 2025 Notes	69,757		67,198		—		—		67,198
June 2025 3-Year Notes	49,771		48,983		—		—		48,983
March 2026 A Notes	49,795		47,702		—		—		47,702
March 2026 B Notes	49,776		47,759		—		—		47,759
September 2026 Notes	322,339		288,711		—		—		288,711
January 2027 Notes	345,935		315,832		—		—		315,832
2031 Asset-Backed Notes	148,544		142,500		—		142,500		—
2033 Notes	38,935		40,400		—		40,400		—
MUFG Bank Facility	61,000		61,000		—		—		61,000
SMBC Facility	94,000		94,000		—		—		94,000
Total	$	1,554,869	$	1,450,995	$	—	$	182,900	$	1,268,095