9.7% Yield: TriplePoint Venture Growth Sports A High Yield With Low Leverage
Summary
- TPVG is a technology-focused BDC with a stabilizing NAV and improving portfolio yield.
- It has plenty of dry powder, and should benefit from the current SPAC merger IPO environment.
- I also highlight the dividend coverage, valuation, balance sheet, and risks worth considering.
The BDC sector has made a solid rebound in recent months, and TriplePoint Venture Growth (NYSE:TPVG) is no exception. TPVG has performed well since my last bullish take on it, returning 9.7% based on share price appreciation alone, outpacing the 6.1% rise in the S&P 500 (SPY). That’s not bad for a BDC, which are primarily regarded as income vehicles. In this article, I evaluate whether TPVG makes for a continued buy at present, so let’s get started.
Looking Into TPVG
TPVG is an externally managed BDC that provides debt financing and equity investments into venture growth stage companies in the technology and other high-growth sectors backed by venture capital firms. TPVG currently has an investment portfolio worth $634M at fair value, comprised of $583M of loans to 33 companies, and $50.4M of warrants and equity investments in 68 companies. TPVG has made a number of investments into well-known emerging tech companies, with strong realized gains, as seen below.
(Source: Q4’20 Investor Presentation)
TPVG had a fairly stable book value per share in the years leading up to the pandemic. Like many BDCs, TPVG’s book value took an impact last year due to the economic downturn. As seen below, TPVG’s book value per share began a recovery during Q3’20, but dropped again at the end of last year. I’m not too concerned, however, since part of the drop accounts for a $0.10 special dividend that it declared last year. Adding back the special dividend would put TPVG’s book value/share close to the low end of its range over the past 5 years.
(Source: YCharts)
Plus, unlike “plain vanilla” BDCs that have very little exposure to equity investments, TPVG’s 8% exposure to warrants and equity investments give it more potential for improvements to book value and/or continued special dividends. Since its IPO in 2014, TPVG has paid $10.78 in cumulative dividends, including $0.35 worth of special dividends.
As seen below, TPVG is currently sitting on a $1.3M net unrealized gain across its warrants and equity investments. I see potential for improvement this year, as an economic recovery this year could result in a boost to the equity value of TPVG’s investments.
(Source: Q4’20 Investor Presentation)
Looking forward, I see TPVG benefitting from the current environment of companies going through an IPO via a SPAC merger. This could help TPVG realize gains on its equity investments quicker than the traditional IPO process, which can be arduous and takes longer. This is supported by management’s comments regarding SPAC mergers during the recent conference call:
“In fact, a couple of notable events in Q1 so far include Hims Inc. successful SPAC merger completion, views anticipated completion of their SPAC merger, and Group Internets, who goes by Talkspace, announced a SPAC merger. Our equity in warrant positions in these three companies are valued at $1.9 million as of 12/31. In addition, several other portfolio companies are an active fundraising and strategic discussions.”
Meanwhile, TPVG maintains a strong balance sheet, with $38M in cash, and a debt-to-NAV (leverage ratio) of just 0.66x. This sits well below the 1.02x level from Q1’20, and well below the regulatory leverage limit of 2.0x.
As such, TPVG has plenty of dry powder to make add-on investments. Impressively, TPVG actually saw its weighted average yield grow over the course of 2020, while many other BDCs saw a decline, due to the lower interest rates. I see this as a sign of continued high demand for investment in TPVG’s key segments, and this is supported by $67M worth of new debt investments that TPVG made during the fourth quarter, a 77% increase from the prior quarter.
(Source: Q4’20 Investor Presentation)
Meanwhile, TPVG pays a high 9.7% dividend yield that’s well covered for a BDC, at a 92% payout ratio (based on Q4’20 NII/share of $0.39). TPVG also maintains $0.53 per share of spillover income, thereby providing further support to the dividend.
Admittedly, most of the alpha from share price appreciation is now gone. As seen below, TPVG’s price to book value now sits at 1.15x, which is more or less in-line with its historical norm. However, I continue to see value in TPVG, considering the well-covered high dividend yield and the strong balance sheet. Analysts also rate TPVG as a Buy, with an average price target of $15.10.
No investment is risk-free, and the following points are worth considering:
- TPVG’s external manager charges a 1.75% base management fee, which is a bit higher than the 1.5% base fee charged by industry bellwether, Ares Capital (ARCC). Management quality matters in this space, and investors should continue to monitor whether if company performance is deserving of shareholder capital.
- BDCs are generally sensitive to interest rates, and a low-rate environment negatively impacts portfolio yield on debt investments. TPVG has successfully navigated a low-rate environment, and interest rates have seen a strong upward revision this year. Nonetheless, this is something worth considering.
Investor Takeaway
TPVG has successfully navigated a difficult economic environment, with a stabilizing NAV/share, an increasing portfolio yield, and a covered dividend yield with plenty of spillover income. Looking forward, I see TPVG as having plenty of dry powder to grow its portfolio, and its equity investments could benefit from the current SPAC merger IPO environment. I continue to find value in TPVG at the current price of $14.87, and view it as a Buy.
This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 15 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
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.
This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
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.
Recommended For You
Comments (14)
