Hercules Technology Poised for Growth

| About: Hercules Capital, (HTGC)
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Hercules Technology (NASDAQ:HTGC) announced today the addition of four new investment professionals. Two of the new hires will be spearheading lending to "venture-backed companies in the early stage technology and life sciences sectors, focusing on companies who have completed their Series A financing." This is an area which HTGC is beginning to develop, and the company is hiring two "heavy hitters" judging by their summarized resumes in the press release. One of these two is Glen Howard, a former co-founder of Hercules , coming home again after being a partner of a private firm Pacific Point Investments. We looked up the company online but found nothing useful. There’s a story there, but we only know what we read in the press release. The other two new managers (all of whom have the title "Managing Director") will join the well established lower middle market lending group which provides "debt financing to established companies in the technology and healthcare sectors with positive cash flow and annual revenues between $10.0-$200.0 million, both with private equity sponsors and "sponsorless" transactions."


These new hires underscore Hercules Technology’s commitment to growing its balance sheet in 2011, as the press release explicitly states. 2010 was a transition year for Hercules as several troubled investments absorbed much of management’s attention. At the beginning of the year the Company had $38mn in Realized and Unrealized Losses on its balance sheet. By September 2010, those losses had risen to $65mn. A big hit was the disposition of Spa Chakra, which caused a $19mn write-off. However, much of that is in the rear view mirror as two-thirds of the losses have now been Realized, and Hercules was able to sell one of its largest portfolio companies for a realized gain of $8.0mn last month. At September 30, 2010 Hercules still had four loans on non-accrual, but their drag on the Company was minimal. At par value the non performing loans accounted for only 3.2% of yield assets, and had been almost completely written off from a fair market viewpoint.


Likewise, Hercules liquidity is in good shape, thanks to access to both SBIC borrowings and from cash on the balance sheet from an equity offering in November 2010. Yes, the Company does have access to two Revolving lines of credit as well, but management seems wary of using these sources to fund its investments, except for very short periods. Once burned, twice shy.

Nonetheless, we estimate HTGC has $200mn to spend on net new investments, which is equal to 47% of investment assets at cost on September 30, 2010. We actually track this metric (available capital to invest to total investment assets at cost) for all 24 BDCs we cover, and HTGC’s percentage is the 5th highest. Given that the industry average (and remember that this data is a little stale because it’s based on third quarter 2010 balance sheets) was 14%, HTGC’s percentage points to superior asset growth prospects.

Of course, having firepower and finding appropriate targets is another matter altogether, especially given the robust refinancing market underway. It’s clear, though, from Hercules new senior manager hires that the company has high hopes for growing its balance sheet materially in the year ahead. At September 30, 2010, HTGC’s balance sheet at fair market value was at $408mn. If the company is able to deploy all $200mn available, that would take this specialty BDC over the half a billion mark to $600mn, and place HTGC squarely in the top half of the BDC industry by asset size.

Disclosure: I am long HTGC.