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Hercules Capital: Fear Discount Likely To Persist Over The Short Haul

Achilles Research profile picture
Achilles Research


  • Hercules Capital’s management was seeking management externalization in May.
  • However, the BDC has withdrawn its proposal of a new investment advisor relationship.
  • HTGC has not yet recovered much, suggesting that a lot of uncertainty still weighs on the BDC’s shares.
  • Positive asset sensitivity and potential for NII growth in higher interest rate environment biggest reason to buy into the BDC.
  • An investment in HTGC yields 9.34 percent.

Hercules Capital, Inc.'s (NYSE:HTGC) management upset shareholders in May when it announced that it would hold a special meeting for investors to approve a new management and compensation structure. Shareholders didn’t like the idea of an externalized management and dumped its shares. Uncertainty is likely going to continue to weigh on Hercules Capital’s shares over the short haul. However, if management decides to stick with an internal management structure, shares could edge higher.

Fear Discount Likely To Persist Over The Short Haul

Hercules Capital said in early May that it would seek to externalize management for "strategic reasons". According to management, externalization would allow the company to "broaden the size and categories of assets under its future management". Seasoned BDC investors, however, know what this means: A change in compensation structure would likely imply higher management fees, which in turn would create an incentive problem. Management’s primary motivation would be to increase the size of assets under management in order to earn incentive fees rather than focus on maximizing shareholder value.

In fact, internally-managed investment companies have better reputations in the stock market largely because of their superior incentive structures compared to externally-managed investment companies whose management can siphon off a lot of cash at the expense of shareholders. Prospect Capital’s (PSEC) shares, for instance, sold for a large discount to Net Asset Value for a long time primarily because of its high management fees.

Two weeks after the initial announcement, however, Hercules Capital postponed the Special Meeting of Stockholders previously scheduled for June 29, 2017, after shareholders voiced their dissatisfaction with the new management and compensation structure. However, the damage had already been done. Hercules Capital’s shares were obliterated in early May, and shares have yet to meaningfully recover from the sell-off.

Source: StockCharts.com

Hercules Capital’s shares have stabilized

This article was written by

Achilles Research profile picture
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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