Andrii Yalanskyi
Everyone knows that you pay for quality and good stocks tend to be expensive. That is the reason in our first article on TriplePoint Venture Growth (NYSE:TPVG), we were bemused by the fact that investors were ponying up extra for this business development company, or BDC. Perhaps the reason was the dividend yield. The high dividend rate on common equity was certainly a juicy draw. But what the stalwart BDCs could not accomplish with a stable and increasing NAV, TPVG was aiming to do with a declining one. Well, in all the euphoria over the last 3 months, it seemed not to matter. But perhaps it still might.
Q4 2023
It was a rough quarter (10-K link) for TriplePoint Venture Growth, with $52 million of realized losses. In combination with principal repayments by underlying companies and a small amount of new investments, the portfolio value declined by about $68 million in the last quarter.
TPVG Q4-2023 Results
You can see the material movement in the ending portfolio fair value from December 2022 to December 2023 in the same picture. During the year ended December 31, 2023, we recognized net realized losses on investments of $75.8 million, resulting primarily from the write-off of investments in Hi.Q, Inc., Demain ES (d/b/a Luko), Untitled Labs, Inc., Mystery Tackle Box, Inc. (d/b/a Catch Co.) and VanMoof Global Holding B.V. Source: TPVG Q4 2023 Results. The company did report a net investment income of $0.47 and stuck to its $0.40 dividend payment rate, though. Considering the pre-market action, you are now looking at a 16% yield. Do you bite?
The Soft Spots
It is important to note that TPVG is being able to maintain the dividend, thanks to the waiver of the incentive fee. If you had anything like normalized levels there, it would be hard to get NII above the current dividend rate. TPVG Q4-2023 Results But the dividend chasers are likely to see this as a positive, as the company appears to be looking out for investors. Well, perhaps. But with no incentive fees, you can expect top talent to eventually leave the company, and you will have bigger issues in the long run. But let’s table that for a moment. The bigger issue is that NAV has dropped from $11.88 to $9.21 in one year. TPVG Q4-2023 Results Alongside this, leverage has moved up. Some leverage increases are a bit misleading as the company also ramped up how much cash it was holding on hand. TPVG Q4-2023 Results So the delta in the net leverage was far lower. But there are some commitments that could make even that net leverage ramp up. As of December 31, 2023, the Company’s unfunded commitments totaled $118.1 million, of which $29.2 million was dependent upon portfolio companies reaching certain milestones. Of the $118.1 million of unfunded commitments, $86.7 million will expire during 2024 and $31.4 million will expire during 2025, if not drawn prior to expiration. Since these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. Source: TPVG Q4 2023 Results. TPVG still has 21.6% of its portfolio marked as “yellow” and “orange.” Last year, we were at 11.5%. TPVG Q4-2023 Results This was about $98 million at the end of 2022 and then TPVG took $75.6 million in losses over the last 12 months. So it is a bit of a shock that after those kinds of losses, the yellow and orange categories are standing at 21.6% of portfolio value. Even more interestingly, we think that it is strange that “red” remains almost unobservable over this timeframe.
Outlook
We have to remind investors that the current market conditions are some of the “loosest” in terms of credit tightness. Keep that in mind as you read what the company said about its investments. Non-traditional investors and other investors in the growth market have paused or remain on the sidelines. This change has also affected our growth stage companies, many of which had planned for either an IPO or potential acquisition in the one to three-year time period or so after their last financing rounds. Given the market downturn, our priority remains on closely managing our portfolio. Our teams maintain close contact with our companies and their venture investors while remaining heads down working through credit situations. Given the challenging capital raising environment for venture growth companies, for some companies, we believe we will see continued pressure on valuations and the potential for inside rounds. Some companies are further reducing burn and executing on a path to profitability. Source: TPVG Q4-2023 Conference Call Transcript. We hate to imagine what will happen in an actual recession if these companies are struggling today. TPVG also sold some equity using their ATM program, and that got at least one analyst a bit excited.
Casey Alexander
Yes. I just have one question. How can it be appropriate to sell 1.5 million shares into the market through the ATM program with the knowledge that significant material losses are on the way and a significantly lower NAV is going to be presented to shareholders when you report this quarter?
Sajal Srivastava
Yes, Casey, it’s Sajal. I’ll take this. So again the ATM is a program that acts on its own, so it’s set and it operates on our (unclear).
Casey Alexander
Do you have the ability to shut it down?
Sajal Srivastava
Yes, and then as we said, as developments are learned or known, then we adjust and act accordingly. Source: TPVG Q4-2023 Conference Call Transcript. The company currently sports a BBB rating from DBRS with a negative watch, and we keep coming back to this. TPVG Q4-2023 Results That is $157.88 million of total assets or around 21.6% as we previously mentioned. But that number is 45.5% of the NAV. TPVG Q4-2023 Results Do you want to chase this with a level of problems? As of December 31, 2023, we had investments in five portfolio companies which were on non-accrual status, with an aggregate cost and fair value of $41.7 million and $29.0 million, respectively. Source: TPVG Q4 2023 Results. In addition, about 11% of the portfolio is on payment in kind or PIK, and that won’t be very useful for a cash dividend which TPVG needs to pay.
Verdict
Over the last three years, TPVG has had the largest percentage NAV drawdown amongst companies we follow in this sector. YCharts has not finished its morning coffee yet, so we will have to update where this quarter stands. YCharts With Edit By Author If you had this at a 30-40% discount to NAV, we would stand aside and say, it is probably priced in. But even after the 10% bath in the pre-market, this trades at a premium to NAV. TPVG would get an “Extreme” level of danger of a dividend cut on our proprietary Kenny Loggins Scale. Author’s Scale This rating signifies a 50-75% probability of a dividend cut in the next 12 months. Note the 12-month timeframe. It might take time to play out. The last time we used this rating level, the dividend was cut in 12 days. If we had to guess, we think it will be cut in two quarters. We rate this a Sell and would look to upgrade post a realignment of pricing and dividends. Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
