Quarterly report pursuant to Section 13 or 15(d)

Investments

v3.23.2
Investments
 6 Months Ended
Jun. 30, 2023
Schedule of Investments [Abstract]  
Investments

4. 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 six months ended June 30, 2023 and 2022.

(in thousands)

 

 

 

 

 

 

Three Months Ended June 30, 2023

 

 

Six Months Ended June 30, 2023

 

Portfolio Company(1)

 

Type

 

Fair Value as of June 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

 

$

297

 

 

$

—

 

 

$

—

 

 

$

41

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(22

)

 

$

—

 

Gibraltar Acquisition LLC (3)

 

Control

 

 

44,392

 

 

 

731

 

 

 

19

 

 

 

2,667

 

 

 

—

 

 

 

1,527

 

 

 

38

 

 

 

6,402

 

 

 

—

 

Hercules Adviser LLC

 

Control

 

 

39,161

 

 

 

152

 

 

 

—

 

 

 

2,566

 

 

 

—

 

 

 

302

 

 

 

—

 

 

 

8,008

 

 

 

—

 

Tectura Corporation

 

Control

 

 

7,073

 

 

 

172

 

 

 

—

 

 

 

(701

)

 

 

—

 

 

 

342

 

 

 

—

 

 

 

(969

)

 

 

—

 

Total Control Investments

 

$

90,923

 

 

$

1,055

 

 

$

19

 

 

$

4,573

 

 

$

—

 

 

$

2,171

 

 

$

38

 

 

$

13,419

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2022

 

Portfolio Company(1)

 

Type

 

Fair Value as of June 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

 

$

422

 

 

$

—

 

 

$

—

 

 

$

(192

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(143

)

 

$

—

 

Gibraltar Business Capital, LLC

 

Control

 

 

39,064

 

 

 

844

 

 

 

17

 

 

 

(3,578

)

 

 

—

 

 

 

1,678

 

 

 

33

 

 

 

(4,805

)

 

 

—

 

Hercules Adviser LLC

 

Control

 

 

35,181

 

 

 

128

 

 

 

—

 

 

 

8,637

 

 

 

—

 

 

 

239

 

 

 

—

 

 

 

11,191

 

 

 

—

 

Tectura Corporation

 

Control

 

 

8,208

 

 

 

172

 

 

 

—

 

 

 

(139

)

 

 

—

 

 

 

342

 

 

 

—

 

 

 

(61

)

 

 

—

 

Total Control Investments

 

$

82,875

 

 

$

1,144

 

 

$

17

 

 

$

4,728

 

 

$

—

 

 

$

2,259

 

 

$

33

 

 

$

6,182

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Black Crow AI, Inc.(2)

 

Affiliate

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(120

)

 

$

3,772

 

Pineapple Energy LLC(2)

 

Affiliate

 

 

3,613

 

 

 

76

 

 

 

—

 

 

 

(1,295

)

 

 

—

 

 

 

1,123

 

 

 

—

 

 

 

(422

)

 

 

—

 

Total Affiliate Investments

 

$

3,613

 

 

$

76

 

 

$

—

 

 

$

(1,295

)

 

$

—

 

 

$

1,123

 

 

$

—

 

 

$

(542

)

 

$

3,772

 

Total Control & Affiliate Investments

 

$

86,488

 

 

$

1,220

 

 

$

17

 

 

$

3,433

 

 

$

—

 

 

$

3,382

 

 

$

33

 

 

$

5,640

 

 

$

3,772

 
(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 June 30, 2023, there were no unconsolidated subsidiaries that are considered “significant subsidiaries”. As of June 30, 2022, the Hercules Adviser, LLC qualified as a significant subsidiary pursuant to Rule 10-01(b)(1). The total revenue, operating income, and net income were $3.5 million, $(1.9) million, and $(1.8) million for the six months ended June 30, 2022.
(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.

Portfolio Composition

The following table shows the fair value of the Company’s portfolio of investments by asset class as of June 30, 2023 and December 31, 2022:

(in thousands)

June 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

Senior Secured Debt

$

2,878,923

 

 

 

92.5

%

 

$

2,741,388

 

 

 

92.5

%

Unsecured Debt

 

59,019

 

 

 

1.9

%

 

 

54,056

 

 

 

1.8

%

Preferred Stock

 

41,249

 

 

 

1.4

%

 

 

41,488

 

 

 

1.4

%

Common Stock

 

94,931

 

 

 

3.0

%

 

 

92,484

 

 

 

3.1

%

Warrants

 

34,314

 

 

 

1.1

%

 

 

30,646

 

 

 

1.1

%

Investment Funds & Vehicles

 

4,353

 

 

 

0.1

%

 

 

3,893

 

 

 

0.1

%

Total

$

3,112,789

 

 

 

100.0

%

 

$

2,963,955

 

 

 

100.0

%

A summary of the Company’s investment portfolio, at value, by geographic location as of June 30, 2023 and December 31, 2022 is shown as follows:

(in thousands)

June 30, 2023

 

 

December 31, 2022

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

United States

$

2,755,178

 

 

 

88.5

%

 

$

2,670,520

 

 

 

90.1

%

United Kingdom

 

200,455

 

 

 

6.5

%

 

 

171,629

 

 

 

5.8

%

Netherlands

 

87,664

 

 

 

2.8

%

 

 

88,915

 

 

 

3.0

%

Israel

 

53,019

 

 

 

1.7

%

 

 

9,052

 

 

 

0.3

%

Canada

 

11,264

 

 

 

0.4

%

 

 

19,472

 

 

 

0.7

%

Denmark

 

3,767

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

Germany

 

999

 

 

 

0.0

%

 

 

990

 

 

 

0.0

%

Other

 

443

 

 

 

0.0

%

 

 

573

 

 

 

0.0

%

Ireland

 

—

 

 

 

0.0

%

 

 

2,804

 

 

 

0.1

%

Total

$

3,112,789

 

 

 

100.0

%

 

$

2,963,955

 

 

 

100.0

%

 

The following table shows the fair value of the Company’s portfolio by industry sector as of June 30, 2023 and December 31, 2022:

(in thousands)

June 30, 2023

 

 

December 31, 2022

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

 

Investments at
Fair Value

 

 

Percentage of
Total Portfolio

 

Drug Discovery & Development

$

1,137,725

 

 

 

36.5

%

 

$

1,150,707

 

 

 

38.8

%

Software

 

891,438

 

 

 

28.6

%

 

 

798,264

 

 

 

26.9

%

Consumer & Business Services

 

459,276

 

 

 

14.8

%

 

 

439,384

 

 

 

14.8

%

Healthcare Services, Other

 

220,673

 

 

 

7.1

%

 

 

198,763

 

 

 

6.7

%

Communications & Networking

 

105,343

 

 

 

3.4

%

 

 

101,833

 

 

 

3.4

%

Diversified Financial Services

 

94,077

 

 

 

3.0

%

 

 

68,569

 

 

 

2.3

%

Information Services

 

73,306

 

 

 

2.4

%

 

 

60,759

 

 

 

2.0

%

Manufacturing Technology

 

49,596

 

 

 

1.6

%

 

 

46,109

 

 

 

1.6

%

Biotechnology Tools

 

33,465

 

 

 

1.1

%

 

 

32,825

 

 

 

1.1

%

Electronics & Computer Hardware

 

20,727

 

 

 

0.7

%

 

 

21,517

 

 

 

0.7

%

Media/Content/Info

 

11,542

 

 

 

0.4

%

 

 

35

 

 

 

0.0

%

Sustainable and Renewable Technology

 

11,333

 

 

 

0.4

%

 

 

15,486

 

 

 

0.5

%

Consumer & Business Products

 

1,294

 

 

 

0.0

%

 

 

2,821

 

 

 

0.1

%

Semiconductors

 

1,188

 

 

 

0.0

%

 

 

21,921

 

 

 

0.7

%

Medical Devices & Equipment

 

1,052

 

 

 

0.0

%

 

 

1,834

 

 

 

0.1

%

Surgical Devices

 

731

 

 

 

0.0

%

 

 

3,038

 

 

 

0.1

%

Drug Delivery

 

23

 

 

 

0.0

%

 

 

90

 

 

 

0.0

%

Total

$

3,112,789

 

 

 

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 June 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 June 30, 2023 and December 31, 2022, the Company’s ten largest portfolio companies represented approximately 30.3% and 29.0% of the total fair value of the Company’s investments in portfolio companies, respectively. As of June 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 June 30, 2023, the Company had four equity investments representing approximately 52.6% 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 June 30, 2023 and December 31, 2022:

 

Percentage of debt investments (at fair value), as of

 

 

June 30, 2023

 

 

December 31, 2022

 

Senior Secured First Lien

 

 

 

 

 

All assets including intellectual property

 

50.3

%

 

 

42.0

%

All assets with negative pledge on intellectual property

 

21.1

%

 

 

26.1

%

“Last-out” with security interest in all of the assets

 

11.7

%

 

 

11.6

%

Total senior secured first lien position

 

83.1

%

 

 

79.7

%

Second lien

 

14.9

%

 

 

18.4

%

Unsecured

 

2.0

%

 

 

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 June 30, 2023 and December 31, 2022:

(in thousands)

 

 

Fair Value

 

Derivative Instrument

Statement Location

 

June 30, 2023

 

 

December 31, 2022

 

Foreign currency forward contract

 Other assets

 

$

(554

)

 

$

—

 

 

Total

 

$

(554

)

 

$

—

 

Net realized and unrealized gains and losses on derivative instruments recorded by the Company during the three and six months ended June 30, 2023 and 2022 are in the following locations in the Consolidated Statements of Operations:

(in thousands)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 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

 

 

(554

)

 

 

—

 

 

 

(554

)

 

 

—

 

 

Total

 

$

(554

)

 

$

—

 

 

$

(554

)

 

$

—

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Contractual interest income

$

86,147

 

 

$

56,063

 

 

$

168,938

 

 

$

105,607

 

Exit fee interest income

 

14,054

 

 

 

6,655

 

 

 

23,436

 

 

 

13,381

 

PIK interest income

 

5,819

 

 

 

4,968

 

 

 

11,347

 

 

 

9,943

 

Other interest income (1)

 

2,966

 

 

 

1,045

 

 

 

5,162

 

 

 

2,052

 

Total interest income

$

108,986

 

 

$

68,731

 

 

$

208,883

 

 

$

130,983

 

 

(in thousands)

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Recurring fee income

$

2,135

 

 

$

1,907

 

 

$

4,175

 

 

$

3,686

 

Fee income - expired commitments

 

108

 

 

 

433

 

 

 

351

 

 

 

521

 

Accelerated fee income - early repayments

 

5,002

 

 

 

1,044

 

 

 

7,912

 

 

 

2,082

 

Total fee income

$

7,245

 

 

$

3,384

 

 

$

12,438

 

 

$

6,289

 

 

(1)
Other interest income includes OID interest income and interest recorded on other assets.

As of June 30, 2023 and December 31, 2022, unamortized capitalized fee income was recorded as follows:

(in millions)

June 30,

 

 

December 31,

 

 

2023

 

 

2022

 

Offset against debt investment cost

$

43.9

 

 

$

43.1

 

Deferred obligation contingent on funding or other milestone

 

12.2

 

 

 

10.9

 

Total Unamortized Fee Income

$

56.1

 

 

$

54.0

 

As of June 30, 2023 and December 31, 2022, loan exit fees receivable were recorded as follows:

 

 

 

 

 

 

(in millions)

June 30,

 

 

December 31,

 

2023

 

 

2022

 

Included within debt investment cost

$

32.5

 

 

$

32.5

 

Deferred receivable related to expired commitments

 

3.5

 

 

 

5.0

 

Total Exit Fees Receivable

$

36.0

 

 

$

37.5