ryasick
TriplePoint Venture Growth (NYSE:TPVG) missed net investment income expectations only by $0.01 per share for the fourth-quarter, and the BDC's Q4 '23 NII was sufficient to support the $0.40 per share dividend. The BDC's shares slumped 12%, however, as the BDC also reported a large amount of realized investment losses and an 11% drop in its net asset value, causing new concerns about the dividend. Since the investment company reported high net investment income relative to its dividend, I believe the market is overreacting to the earnings release. However, I recognize that shares have more risk than shares of other BDCs, like Ares Capital (ARCC).
Previous Coverage
In October, I presented my initial work on the BDC, in which I said that the risks with TriplePoint Venture Growth were high given the company's above-average non-accrual percentage. The BDC's shares were trading at a near-16% yield at the time, but given that the non-accrual percentage has declined since and that TriplePoint Venture Growth covered its dividend, I believe a hold rating is still justified.
A Small, Niche BDC Play With Credit Challenges...
TriplePoint Venture Growth is a closed-end BDC with significant investments in the technology and life science industries. At its core, TPVG has a similar investment strategy as Hercules Capital (HTGC) which is also focused on technology and life science companies that need growth capital. TriplePoint Venture Growth invests chiefly in debt, but also places "wagers" on certain companies through equity/warrant investments.
TriplePoint Venture Growth's investments, based on fair value, totaled $802.1M in the fourth quarter... which reflected a decline of 7.8% quarter over quarter. The BDC realized losses of $52.1M in Q4 '23 compared to $28.8M in the year-earlier quarter. The niche BDC also owns a number of other assets, worth a combined $71.8M, mostly equity in investment companies and warrants.
TriplePoint Venture Growth
TPVG has had loan issues in the past, which translated to higher than average non-accruals. The BDC's non-accrual percentage as of December 31, 2023, was 4.0% compared to 5.0% in the previous quarter. The BDC wrote off investments in four portfolio companies (resulting in the $52.1M realized investment loss described above). A non-accrual percentage of 4.0% is still pretty high and indicates problems with the company's underwriting approach. Going forward, this figure should be closely tracked, together with TPVG's NII/dividend ratio.
TriplePoint Venture Growth
Record Full-year Net Investment Income, NII Sufficient To Support The Dividend
TriplePoint Venture Growth has two specific factors supporting the bull case: 1) The BDC still supports its dividend with cash flow (mostly from interest income), and 2) TPVG generates high investment yields.
Despite challenges with its loan quality, FY 2023 was a good year from a growth perspective: TriplePoint Venture Growth achieved its highest annual amount of net investment income, $73.8M, showing 16% year-over-year growth.
TriplePoint Venture Growth
Total Q4 '23 interest income was $34.4M, which was essentially on the same level as last year. TriplePoint Venture Growth's Q4 '23 net investment income dropped 16% Y/Y to $17.3M, however, chiefly due to higher general and administrative expenses.
This net investment income was sufficient to support the dividend, which currently still stands at $0.40 per share (and which was just confirmed). Based on $0.47 per share in net investment income in the fourth quarter, I calculate a NII/dividend coverage ratio of 118%. In FY 2023, TriplePoint Venture Growth generated NII of $2.07 per share, which calculates to a NII/dividend coverage ratio 129%... so despite a rather poor credit profile, TPVG still manages to support its $0.40 per share quarterly dividend. A dividend cut, in the near term, therefore is not likely, in my opinion. Based off of a $1.60 per-share annual distribution, TriplePoint Venture Growth's shares currently yield 16.8%.
TriplePoint Venture Growth
As to the second point, yields, TriplePoint Venture Growth is seeing favorable NII returns on its invested equity capital. In the fourth quarter, the BDC generated a solid 18.3% NII return on its average equity, slightly down from 20.0% in Q3 '23, as returns have been boosted by interest rate tailwinds. The BDC's relatively strong NII/dividend coverage and double-digit NII yields are two reasons why I maintain my hold rating for TPVG despite a significant drop in NAV in Q4 '23.
TriplePoint Venture Growth
TriplePoint Venture Growth's Valuation
After Thursday's drop, TriplePoint Venture Growth is priced at a P/NAV ratio of 1.03x, meaning the BDC is trading at only a slight premium to its net asset value... which fell 11% to $9.21 per share at the end of the December quarter due to investment write-offs. The BDC has traded, on average, at a P/NAV ratio of 1.09X in the last three years and the poorer-than-average loan quality profile has led to a much lower valuation multiplier relative to its niche rivals.
Hercules Capital, which is sort of the gold standard in the venture-focused BDC niche, is trading at a significantly higher NAV premium due to the fact it has achieved strong portfolio and NII growth over time. I recently down-graded HTGC to hold because of the company's high valuation (near-60% NAV premium, significantly above 3-year average, see below). Horizon Technology (HRZN), is a much more affordable BDC choice for investors to want to increase their exposure to the technology/venture sector. I see Horizon Technology as a promising yield play for dividend investors.
Although TPVG has a much lower NAV ratio than its niche BDC rivals, I believe the consideration of all important factors -- 11% Q/Q drop in NAV, large amount of realized losses, but also a supported dividend -- makes the BDC still a hold here. My fair value estimate is TPVG's updated net asset value of $9.21 per share. I project that TPVG will trade at or below net asset value for a while following the Q4 '23 reports, as NAV declines and investment losses rarely attract new dividend buyers.
| Name | Q4 NAV/share | Share Price | P/NAV | Prem./Disc. NAV | 3-Year Average Premium |
| TriplePoint Venture Growth | $9.21 | $9.53 | 1.03X | 3.5% | 9.1% |
| Hercules Capital | $11.43 | $18.15 | 1.59X | 58.8% | 43.9% |
| Horizon Technology | $9.71 | $11.57 | 1.19X | 19.2% | 23.0% |
(Source: Author)
Risks With TriplePoint Venture Growth
TriplePoint Venture Growth is one of those BDCs where you would want to closely track the quality/performance of the debt portfolio and the non-accrual percentage. From a NII/dividend coverage point of view, the dividend appears to be well-supported, at least for the time being and is not imminently headed for a cut, in my opinion. Given the relatively high non-accrual percentage of 4.0%, however, I believe that dividend investors would only want to invest a very small percent of their available resources into a high-risk BDC like TriplePoint Venture Growth.
Final Thoughts
TriplePoint Venture Growth is not a BDC that you can buy and hold forever. You have to stay alert and follow closely what is happening at the portfolio level, largely because of TriplePoint Venture Growth's suboptimal loan quality profile. However, the BDC did manage to support its quarterly dividend of $0.40 per share with NII and the non-accrual profile did get a bit better Q/Q. With a FY 2023 NII/dividend ratio of 129%, I believe the dividend should be reasonably safe in the next quarters, but risks overall have increased following the report of an 11% NAV Q/Q drop. Given that TriplePoint Venture Growth also achieves high NII returns on average equity, there is an argument to be made for owning TPVG, but it shouldn't be an outsized position. As a result, I maintain my hold rating after Q4 '23 earnings.
