Deeply Discounted 8.3% Yield: TriplePoint BDC

Summary

  • TPVG is the "income method" of investing in a hot SPAC merger and tech-IPO environment.
  • Pandemic-tested 8.3% yield without a single dividend cut and periodic payment of special dividends.
  • Attractively valued in an extremely hot space; over 13% capital upside based on valuation alone.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »

Businesswoman Measuring The Word Big

DNY59/E+ via Getty Images

Co-produced with "Hidden Opportunities"

Introduction

Who said income investing only involves boring companies? Today we bring you a BDC that operates in one of the most exciting sectors of the financial markets - Venture Capital and pre-IPO stage companies. TriplePoint Venture Growth BDC Corp. (NYSE:TPVG) is an 8.3% yielding BDC (Business Development Company) that was formed to invest in venture growth stage companies in technology and other high-growth industries.

TPVG has outperformed the S&P 500 by a wide margin in the past five years. Not only has it navigated the darkest periods of the pandemic (on the financial markets) without a dividend cut. It even paid a special dividend in Q1 2021.

Due to higher inflation and upcoming increases in interest rates, we do not think that technology stocks will be the biggest outperformers over the next year. This is because tech companies largely rely on the present value of future cash flows - which will be worth less due to rising rates. This will cause tech sector valuations to shrink. But we expect strong earnings from this sector that will keep defaults low, making it more profitable to invest in the debt of these companies. TPVG's investments are mainly floating-rate debt, and the BDC is set to outperform as the Fed decides to move interest rates higher. Without further ado, let us dive into TPVG.

- Source: Getty

Background

TPVG is externally managed by TriplePoint Group, a firm that has, since its launch in 2006, provided more than $5 billion in commitments to more than 500 venture capital-backed companies across the globe. The firm has a successful track record of identifying and backing some of the biggest winners in the past two decades.

TriplePoint Group

- Source: TPVG Investor Presentation

So how does TPVG produce such generous distributions while investing in small growth companies that tend to pay little if any dividends?

TPVG provides debt financing to venture growth companies through a combination of capital loans, equipment financings, revolving loans, and direct equity investments.

TriplePoint Group

- Source: Investor Presentation

TPVG's portfolio primarily consists of first-lien senior secured debt, which is the source of its cash flow. Then it receives equity "kickers" in the form of warrants, preferred equity, and common equity. These equity positions are small, but if the borrower is bought out or IPOs, it can result in a very large gain.

TriplePoint Asset Exposure

- Source: CEFdata

TPVG is thus capable of producing a steady flow of cash to pay shareholders, while the equity positions provide upside potential.

Portfolio Composition

TPVG's current portfolio consists of 199 investments made to 77 companies (data source: TPVG 10-Q). As you see below, TPVG's portfolio has 35% exposure to the fast-growing IT sector and 9% exposure to the high-demand and recession-resistant healthcare sector.

TriplePoint Portfolio Composition

- Source: CEFdata

These are set to be among the most critical sectors in the upcoming decade.

  • Recognizing the convenience to its staff and analyzing improvement in overall productivity, major corporations continue to announce permanent work-from-home as the country recovers from this pandemic. We will continue to see the growing adoption of digital tools and remote collaboration as companies digitally transform their working methods.
  • The coronavirus pandemic showed how public health is vital for national interest, and all efforts and investments will be made to prevent another public health crisis. Recently, the Biden Administration announced a $65 billion plan to enhance the public health system. The plan aims to improve vaccines and therapeutics, upgrade public health infrastructure, and improve real-time monitoring capabilities over the next decade.

TPGV's allocations are in line with where massive opportunities exist, and the BDC is well-positioned to reap the rewards of significant cash inflows into these sectors.

Battle-Tested With No Dividend Cuts. What? A Special Dividend?

Today, most BDCs are yielding between 7% to 8%. TPVG is one of few high-quality BDCs out there that is still paying over 8%. This is a great opportunity for investors to take advantage of this deeply discounted BDC and lock in high yields.TPVG dividend yield

- Data Source: YCharts

TPVG has a track record of covering its distribution since inception and has paid three special dividends since inception, the most recent being in Q1 2021

TriplePoint Net Investment Income & Dividend

- Source: TPVG Investor Presentation

During the early months of the pandemic, TPVG not only held strong and continued rewarding its shareholders but also paid a special dividend in Q1 2021.

The BDC has retained "spillover" income (totaling $12.4 million or $0.40 per share at the end of Q2) to support future distributions. Income for BDCs can be a bit lumpy, and this retention is beneficial when Net Investment Income ('NII') falls short during a few quarters due to the pursuit of pipeline expansion and portfolio growth.

During Q2, the BDC reported NII of $0.30 per share, falling short of its quarterly dividend of $0.36. But during this quarter, TPVG's pipeline doubled YoY, and the BDC maintains substantial liquidity to meet this increased financing demand. Its growing pipeline is reflective of the tailwinds faced by the BDC sector.

This basket of goodies is backed by an investment-grade balance sheet. TPVG has an asset coverage ratio of 249% (leverage ratio 0.67x) and DBRS Morningstar confirmed its BBB rating and has upgraded its outlook to Stable.

Deeply Discounted With Significant Upside

A BDC that continued paying dividends through a period of high uncertainty deserves to trade at a healthy premium. We have seen how high-quality BDCs, particularly those with a "non-standard-BDC model" but rather tech or fintech-oriented business models such as Hercules Capital (HTGC) and Newtek Business Services Corp. (NEWT) trade at a higher valuation than the BDC peer average.

NEWT management is pursuing a withdrawal as a BDC (subject to shareholder vote). The valuation prior to the announcement was north of 2.0x book value, and that is the kind of valuation we expect from a BDC that was a fintech company on the inside.

TPVG vs peers price to book value

TPVG, NEWT, HTGC price to book

- Data Source: YCharts

While these "special" BDCs trade north of 1.5x book value, investors can buy TPVG at 1.3x book value, having recovered its pre-pandemic valuation.

A growing pipeline of debt provides tailwinds to the book value. The market fundamentals are extremely favorable for TPVG, and the stock warrants a higher valuation. With a 1.5x target book value multiple, we calculate a $19.5 price target for the BDC, indicating 13% upside from current levels.

TPVG market cap and valuation

- Source: Author's calculations

Tech earnings are expected to be strong next year and early-stage companies, particularly those focusing on innovation in healthcare and tech, are well-positioned to thrive. We can expect the well-capitalized giants in the sector to continue using acquisitions as a driver of growth. The companies that TPVG invests in will be potential acquisition targets.

TPVG is a BDC superstar in the making and is in an excellent position at this time. As such, the price target is achievable in the next 12-18 months. In the meantime, investors can sit back and collect the massive dividend payments.

Not only is TPVG good on paper, but it has consistently delivered value to its shareholders, as you will see from its 5-year performance review.

Market-Beating Performance

Over the past five years, TPVG has outperformed the market while generating current income. TPVG had average annual returns of around 22%.

TPVG vs SPY return

TPVG plays smart in this hot SPAC and tech-IPO market by investing in the debt of these emerging companies. With a tremendous amount of capital flowing into these early-stage companies, most of them pre-pay their debt before the completion of the transaction. As such, the BDC does not bank on the completion of the merger or the successful IPO to have taken place for its debt to be paid.

The tech IPO market is expected to get hotter next year, and TPVG is a low-risk method to collect high yields from this momentum.

- Source: Dreamstime

Conclusion

Conservative investors often shy away from high-growth early-stage companies because of limited accessibility, high risk, and the negligible possibility of current income generation.

Having an income-centric portfolio does not mean you can't benefit from investing in companies with the potential to be tomorrow's disruptors. Today, we bring to you TriplePoint Venture Growth, a publicly-traded BDC that provides financing to venture stage growth companies.

  1. Capable Management: TPVG is a battle-tested BDC whose management team has a stellar track record of finding and funding early-stage winners.
  2. No Dividend Cuts during the pandemic with an impressive special dividend in Q1 2021.
  3. Large 8.3% yield.
  4. Very low and attractive valuation for a "unique" and "well-positioned" BDC in a high-growth sector.
  5. At least 13% upside based on valuation alone.
  6. Earning its dividends with NII consistently exceeding distributions.

Emerging companies, particularly those in healthcare and technology, are well-positioned to see a significant inflow of investment in the upcoming decade. For an income investor seeking exposure to the high-growth sectors of the market but not wanting to miss out on current income, TPVG presents a fantastic 8.3% yielding opportunity with a large capital upside. This could be the biggest winner in your high-dividend portfolio!

TPVG will report Q3 earnings on November 3rd, after market close.

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of TPVG, BIZD either through stock ownership, options, or other derivatives. 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.

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