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Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Hercules Capital Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, David. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 2025. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date and Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2025 Earnings Call. Hercules wrapped up the first 3 quarters of 2025 by delivering another strong quarter of record fundings and record operating performance while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations and disciplined underwriting. Our platform momentum continued in Q3 with originations of over $846 million (sic) [ $846.2 million ] which led to record originations of $2.87 billion for the first 3 quarters of 2025, putting us on pace to exceed our previous full year record of $3.12 billion. Our record fundings for Q3 of $504.6 million led to $95.9 million of net debt portfolio growth and a new record with over $557.8 million of net debt portfolio growth in the first 3 quarters of 2025. The strong new business that we generated during the third quarter led to continued solid net debt portfolio growth, and that helped drive -- sorry, and that helped Hercules generate record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share during Q3. Despite operating in a declining rate environment, we were able to achieve 122% coverage of our quarterly base distribution of [ $0.40 ] per share in the third quarter and maintain $0.80 per share of spillover income. Our strong Q3 performance was highlighted by new records, including record total gross fundings for a third quarter of $504.6 million, an increase of 85.5% year-over-year, record total investment income of $138.1 million, an increase of 10.3% year-over-year, record period ending assets under management of approximately $5.5 billion, an increase of 20.7% year-over-year. Our first 3 quarters performance was highlighted by several new records, including record total investment income of $395.1 million, record net investment income of $254.7 million, record total gross new debt and equity commitments of $2.87 billion, record total gross fundings of $1.75 billion. and record net debt investment portfolio growth of over $557.8 million. Our performance results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency and scale of the Hercules platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders. Our approach to the current market is centered around 3 core themes: disciplined credit underwriting, managed and controlled portfolio growth and maintaining balance sheet strength and flexibility. We believe that this will best position the company to continue to deliver strong relative operating results, irrespective of the market environment. We noted in our Q2 2025 earnings call, that we continue to see a more favorable new business landscape broadly and that we were expecting the business to be able to take advantage of that. Our expectation was that we would deliver strong new business over the second half of the year, but that Q3 would be slower as it typically is for our ecosystem. After a slow start to Q3, our investment teams were able to take advantage of several opportunities, which helped us deliver record Q3 funding performance. We are maintaining our expectation that origination activity will remain strong through year-end, and we have already delivered record new commitments and record new fundings for the year. As we noted earlier this week, Hercules recently achieved another meaningful milestone by reaching the $25 billion mark in total cumulative debt commitments since our first origination in October 2004. This is a tremendous achievement that reflects the enduring strength and impact of the Hercules platform and validates our approach of building a company focused on what is best for our shareholders and stakeholders, treating our employees the right way and providing certainty and consistency in the market to our borrowers, prospects and their investors. While the new business environment remains constructive, we are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets, as we noted on our last earnings call. Having operated in this asset class for over 21 consecutive years and through several different credit cycles. We know the importance of being disciplined and true to the underwriting rigor that has made Hercules the market leader, and that is exactly what we intend to continue to do. We maintained a conservative and defensive balance sheet while still delivering strong originations and record funding performance for Q3. In Q3, we maintained our high first lien exposure which remained above 90% and continues to be towards the high end of our BDC peers. As we guided, GAAP leverage increased modestly to 99.5% in Q3, up from 97.4% in Q2, and we did not utilize our ATM during the quarter. Our Q3 GAAP leverage remained at the low end of our typical historical range of 100% to 115% and below the average of our BDC peers. We ended Q3 with over $1 billion of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well. Let me now recap some of the key highlights of our performance for Q3. In Q3, we originated total gross debt and equity commitments of over $846 million (sic) [ $846.2 million ] and record gross fundings of over $504 million (sic) [ $504.6 million ]. We generated record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share. We achieved 122% coverage of our quarterly base distribution of [ $0.40 ] per share. We continue to be very well positioned with regards to dividend coverage in a declining rate environment. With the record growth in our debt investment portfolio through the first 3 quarters of 2025, and given that nearly 75% of our prime-based loans, which comprise approximately 82% of the portfolio, are now at their floors. We believe that we are generating a level of core income that amply covers our base distribution of $0.40 per share. We generated a return on equity in Q3 of 17.4% and our portfolio generated a GAAP effective yield of 13.5% in Q3 and a core yield of 12.5%, which was consistent with Q2. Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high-quality originations versus chasing higher-yielding assets with more risk or loosening deal structure to drive short-term portfolio growth. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a specific competitive advantage. Our Q3 originations activity was well balanced between life sciences companies and technology companies. In Q3, approximately 54% of our commitments and 50% of our fundings were to life sciences companies, while approximately 46% of our commitments and 50% of our fundings were to tech companies. We funded debt capital to 24 different companies in Q3, of which 7 were new borrower relationships. Year-to-date, through the end of Q3, we have added 27 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $437.5 million, down from $471.5 million in Q2. Over 50% of our gross fundings for Q3 occurred in the last month of the quarter, and that momentum continued into early Q4. Since the close of Q3 and as of October 28, 2025, our investment team has closed $554.4 million of new commitments and funded $237.4 million. We have pending commitments of an additional $425.5 million in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q4. Our active pipeline remains robust, with our closed quarter-to-date activity as of October 28, 2025, we have already exceeded our previous annual records for gross new commitments, and new fundings, demonstrating the continued growth and scaling of our platform. While Q4 is typically a very strong originations quarter for the venture and growth stage markets, we remain focused on maintaining our high bar for new originations, given some of our recent market observations. We are continuing to see a lot of companies in our ecosystem, looking to access the credit markets that lack scale and what we believe to be solid equity support. The volume of deals that we are screening and passing on continues to be near record levels, and we are continuing to see deals get done without strong structure and well outside of what we believe are prudent underwriting metrics for our asset class. We do not expect many of these deals to age well. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters. Lending to cash flow-negative growth-stage companies requires patience, prudence and experience. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q3 and quarter-to-date Q4, we've had 4 M&A events in our portfolio, which included 2 life sciences portfolio companies and 2 technology portfolio companies announcing acquisitions. That brings us to 10 M&A events plus 1 IPO in our portfolio year-to-date through October 30, 2025. Based on current market conditions and improving corporate sentiment, we continue to expect exit activity to accelerate towards year-end. Early loan repayments came in slightly higher than expected in Q3 at approximately $262 million (sic) [ $262.3 million ]. Even with the higher level of early loan prepayments, we still achieved strong net debt portfolio growth given the strong funding levels in the quarter, which continues to position us well for strong core earnings growth in the remainder of 2025 and into 2026. For Q4 2025, we expect prepayments to be lower and in the range of $150 million to $200 million, although this could change as we progress in the quarter. Credit quality of the debt investment portfolio remained strong and relatively the same quarter-over-quarter. Our weighted average internal credit rating of 2.27 increased just slightly from the 2.26 rating in Q2 and remains well within our normal historical range. Our grade 1 and 2 credits increased to 64.5% compared to 62.9% in Q2. Grade 3 credits decreased slightly to 32.7% in Q3 versus 34.7% in Q2. Our grade 4 credits increased to 2.8% from 2.4% in Q2. And we, again, did not have any grade 5 credits. In Q3, the number of companies with loans on nonaccrual increased by 1. We had debt investments in 2 portfolio companies on nonaccrual with an investment cost and fair value of approximately $52.2 million and $47.2 million, respectively, or 1.2% and 1.1% as a percentage of our total investment portfolio at cost and value, respectively. Subsequent to quarter end, we successfully worked through and resolved the 1 new loan that was added to nonaccrual during the third quarter. The result of that effort was that we received net proceeds on that debt position that were approximately 56% higher or nearly $14 million higher that our Q2 fair value mark. Despite a small realized loss on that particular loan, our realized IRR on that debt position was approximately 13.2%. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring still remains enhanced given the volatility in the markets broadly and the ongoing government shutdown, which has now extended into the fifth week. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we will do will continue to serve us well. As of the end of Q3, the weighted average loan-to-value across our entire debt portfolio was approximately 16% and we have not noted any meaningful deterioration in credit since our last earnings call. Our net asset value per share in Q3 was $12.05, an increase of 1.8% from Q2 2025. This is the highest net asset value per share that we have reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC and over $1 billion of liquidity across our platform. With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade corporate credit ratings, including an investment rating upgrade to Baa2 from Moody's, we remain well positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Given the enhanced focus on PIK, across the private credit markets, we wanted to provide some additional disclosure on PIK income for Hercules. For Q3, PIK was approximately 10.5% of total revenue which was flat from where it was during the first half of 2025. Approximately 85% of our PIK income in Q3 was attributable to PIK that was part of the original underwriting and not a result of any credit or performance-related amendment. Nearly 90% of our PIK income in Q3 came from loans that we have rated as 1, 2 or 3. While there was only a single loan that was rated 4 that was generating PIK income during the third quarter. Further, excluding 100% of our PIK income during Q3, the business still generated cash net investment income that provided 111% coverage of our base dividend. Philosophically, we will selectively use PIK at underwriting to enhance income for certain credits that we believe are stronger and more stable, and we expect this to continue to be the case going forward. Venture capital investment activity in Q3 mirrored the strength that we experienced in our deal flow and originations. 2025 continues to demonstrate a healthy pace with $80.9 billion in Q3 and $250.2 billion invested for the first 3 quarters of 2025, according to data gathered by PitchBook-NVCA. The $250.2 billion of investment activity already represents the second highest year in history, exceeding the $236.1 billion invested in 2022. While the aggregate data remains strong, it is highly concentrated with over 67% of all year-to-date VC equity investment going into AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies was $20 billion. Both the number of IPOs and dollars raised increased in Q3 and continues to improve. Consistent with the aggregate data for the ecosystem, during Q3, capital raising across our portfolio remains strong with 18 companies raising over $1.3 billion in new capital. For the first 3 quarters of 2025, we've now had 64 companies raise over $5 billion in new capital. Year-to-date, our portfolio companies have raised over $6 billion of new capital. Given our strong sustained operating performance, we exited Q3 with undistributed earnings spillover of $146.2 million or $0.80 per ending share outstanding. For Q3, we are maintaining our quarterly base distribution of $0.40 and our supplemental distribution of $0.07 per share for a total of $0.47 of shareholder distributions. Our Q3 net income -- net investment income covered our base distribution by 122% and our full distribution, including our $0.07 supplemental distribution by over 104%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions next year. This is now our 21st consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. In closing, our scale, institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. In Q3, Hercules delivered its 10th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Despite the declining rate environment that we are now operating in, we were able to achieve 122% coverage of our quarterly base distribution in Q3. Our continued success as a company is attributable to the tremendous dedication, efforts and capabilities of our 115-plus employees and the trust that our venture capital and private equity partners place with us every day. We are thankful to the many companies, management teams and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth.

Thank you, Scott, and good afternoon, ladies and gentlemen. Our strong momentum reported in the first half of the year continued throughout the third quarter. As Scott shared, the business activity during the quarter and year-to-date has been exceptional and the record-breaking for our platform. Fundraising and investment deployment in our RIA managed funds also has been very strong, expanding the platform and scaling the business to be even more efficient. We continue to maintain strong available liquidity of $655 million as of the end of the quarter in the BDC and more than $1 billion across the platform, including the adviser managed funds by our wholly owned subsidiary, Hercules Adviser LLC. Based on the performance of the quarter, Hercules Adviser delivered a third quarter dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.1 million resulted in approximately $6.2 million in NII contribution to the BDC in Q3. With those points in mind, let's review the regular areas of income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and then finally, the financial outlook. Total investment income in Q3 was another record at $138.1 million, supported by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, increased as well to another record at $127.9 million. Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.6 million or $0.49 per share in Q3. Our effective and core yields were 13.5% and 12.5%, respectively, compared to 13.9% and 12.5% in the prior quarter. As of quarter end, almost 60% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will be muted. Third quarter gross operating expenses were $53.6 million, compared to $52.2 million in the prior quarter. Net of costs recharged to the RIA, our operating expenses were $49.5 million. Interest expense and fees increased to $27.2 million due to the growth of the business and corresponding increase of leverage. SG&A decreased slightly to $26.4 million, above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses decreased to $22.3 million. Our weighted average cost of debt increased slightly to 5.1%. Our ROAE or NII over average equity increased to 17.4% for the third quarter and our ROAA or NII over average total assets increased to 8.7%. Switching to NAV, unrealized and realized activity. During the quarter, our NAV per share increased by $0.21 to $12.05 per share. This represents an NAV per share increase of 1.8% quarter-over-quarter. The main driver was appreciation of the debt portfolio as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized depreciation was primarily attributable to $28.6 million of net unrealized appreciation on debt investments, $11.3 million of net unrealized appreciation attributable to valuation movements on publicly traded equity and warrant investments and $0.8 million net unrealized appreciation attributable to escrow and other investment-related receivables. This was partially offset by $5.1 million reversal of previous quarter appreciation upon a realization event and $2.6 million of net unrealized depreciation attributable to valuation movements in the privately held equity, warrant and investment funds. Hercules also experienced a small net realized loss of $1.8 million, primarily due to losses on equity investments. On leverage and liquidity, our GAAP and regulatory leverage increased to 99.5% and 83.6%, respectively, compared to the prior quarter due to the growth in the balance sheet being financed by leverage. Netting out leverage with our cash on the balance sheet, our net GAAP and regulatory leverage was 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of availability -- available liquidity. The strong liquidity positions us well to support our existing portfolio companies as well as source new opportunities. Finally, on the outlook points. For the fourth quarter, we expect our core yield to remain in the range of 12% to 12.5%. As a reminder, 98% of our portfolio -- our debt portfolio is floating with a floor. And as of today, almost 75% of our prime-based portfolio is at the contractual floor. Although very difficult to predict, as stated by Scott, we expect $150 million to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter based on the year-to-date debt portfolio growth. For the fourth quarter, we expect SG&A expenses of $25 million to $26 million, and an RIA expense allocation of approximately $4 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, the steps that we took in the first half of the year to strengthen our balance sheet, continue to help us grow and scale our platform. I will now turn the call over to the operator to begin the Q&A part of our call. Brian, over to you.

[Operator Instructions] We'll take our first question from Brian McKenna with Citizens.

Great. I appreciate all the detail on the business and the underlying trends and all the momentum. And I also heard your comments around the expectation to continue paying supplemental dividends moving forward. So if I look at the supplemental dividend as a percent of excess earnings above the base dividend, this has totaled about 75% to 80% for the last 2 years. So I don't want to make too many assumptions, but say you hold the line on earnings for next year, $2 of NII, you assume a similar ratio. That implies about $0.30 of supplemental dividends for the full year. So I just wanted to run that math by you and even just some bigger picture thoughts on kind of where the supplemental dividend can go into next year.

Sure. Thanks for the question, Brian. So a little bit premature for us to provide any specificity with respect to the supplemental distribution for next year. That's something that we will announce on the Q4 call in the middle of February. What I can say is, I think your math is pretty accurate and that's sort of how we think about the supplemental distribution, and that's part of the discussion that we'll have with the Board as we approach those year-end conversations. We are very optimistic based on the trajectory of the business and our expected operating performance near term, that we will be very comfortably able to maintain the base distribution and continue to provide a supplemental distribution. What that ultimate supplemental distribution is will be determined by the Board at the end of the year. But again, I don't think your math is too far off.

Okay. That's helpful. And then maybe just switching gears a little bit to credit quality. I mean if you just look at all the trends across the portfolio, I mean, they're really strong across the board. And I appreciate the detail on the 1 nonaccrual that was added during the quarter and then that obviously got resolved here post quarter end. But when you look at the portfolio, you look at your business, I mean, does anything stand out in terms of what the biggest driver of this strong credit quality is? It seems like as your platform continues to reach new levels of scale here, the underlying quality of the portfolio has gotten that much better as well. So any thoughts here would just be appreciated.

Yes. Again, appreciate the recognition, Brian, and the question. And I think the answer that I'll give today is the same answer that I would give at any point in our 21-year history, and it's attributable to our investment team and our credit team. I think we have the best team in the business on the investment side. The team is incredibly experienced. The team has been together for a long time. That team knows how to pick the right companies. We're not perfect. We've made mistakes before. We will likely continue to make mistakes, but the credit for our performance is attributable to the quality of our investment team.

We'll take our next question from Finian O'Shea with Wells Fargo Securities..

Question on the adviser. Was there a change in expense allocation that line looked a bit stronger than normal this quarter? And I guess, if not, am I right? Was there some one-off that drove a higher number?

Yes. No. Thanks, Fin. There's no change in the allocation per se, but it does change as the level of originations occur. And as the AUM continues to go up in the funds, it will continue to increase, but no fundamental change at all in the allocation.

Okay. So is it safe to say it drifts. I know in the past, we framed it as a percent of other G&A. I think it really ties to origination. Is it the growth of the RIA -- and you have similar guidance for next quarter as well, it sounds like on the allocation. Is it growing?

I would say this, Fin. So it is 2 parts. It is the base of the amount of AUM compared to the entire platform. That is part of the allocation. And then the amount of originations will create a little bit of volatility to that calculation every single quarter.

Okay. That's helpful. Can you talk about, I guess, Scott, high level, there was a lot of incumbency this quarter, less on the new portfolio company, borrower front. Any -- I think you maybe tie in with you're kind of projecting continued strength there. Any sort of change in the portfolio mix incumbency versus new going forward?

Sure. Thanks, Fin. No real change. I would sort of note 3 specific things. Number one, we are continuing to see pretty broad-based strength across our existing portfolio with respect to performance milestones and the achievement of specific things that we underwrite to. As those companies perform, they unlock additional capital availability and that's why you saw higher than typical funding for the portfolio in Q3. Second thing that I would note is that, frankly, we saw some better opportunities to deploy capital into the existing portfolio in Q3? And then the third thing that I would note is we still had very strong pure new business origination. We added 7 new companies, which is on the low end of what we typically do, but it was still strong for Q3. We focused on the new business, new borrower side on quality scaled originations. And my comments on sort of the pipeline activity and what we saw in terms of frothiness in the market, I think, speaks to the fact that with respect to some of the new deals we saw during the quarter, we were just passing or bidding very conservatively on the vast majority of those transactions.

We'll take our next question from Crispin Love with Piper Sandler.

I have a credit question as well, but just asked a little bit differently. In recent weeks, definitely been a pickup in credit anxiety just given some loans at banks, some being fraud related and then it seems that private credit and BDCs have been swept up in the media surrounding all this. So first, can you just share your views on this and kind of what you've been seeing, your outlook and then just how competitors have been behaving?

Sure. So pretty broad question, but I'll respond to it with the following. I think what has made Hercules unique and what has allowed us to outperform virtually every competitor in the BDC market for the last several years is the fact that we have been incredibly consistent and conservative with respect to underwriting credit. We don't loosen our standards or get more aggressive in very strong markets. We don't change our stripes if others are doing things that we don't think are prudent. And I think that consistency, that cautious approach has served us well and will continue to serve us well. Second thing that I would note is that we have not seen any material deterioration in the credit performance of our portfolio over the last quarter, and that would include quarter-to-date post quarter end. We are continuing to see relative strength in terms of the numbers and the metrics that we monitor on a pretty continuous basis. And our outlook with respect to credit remains positive.

Great. I appreciate the color there. And then just given recent rate cuts and the forward curve, can you just share how you expect net investment income to be impacted over the intermediate term? It's held up well so far and just what that could mean for NII per share and where you might see a leveling off and stabilization.

Yes. I think -- so Crispin, this somewhat subtle guidance or statements that we made, the difference between at quarter end, approximately 60% of our prime-based portfolio at its contractual floor. And then both Scott and I mentioned that as of today, meaning after the rate cut this week, approximately 75% or almost 75% of our prime-based floor. So further decreases will be muted. We do provide the table in the presentation and the Q as far as what we expect further rate cuts are, for instance, a 50 basis point rate cut, we guide to about $0.05 of NII per share annually impacting, and that reflects the fact that the majority of our portfolio is at its contractual floor. So we can't be more specific than trying to model out the existing portfolio. But at the moment, it's pretty muted.

And I would just add to that, Crispin, we did reiterate, and this is guidance that is inclusive of the Fed activity this week. We did reiterate our core yield guidance for Q4 of 12% to 12.5%. So I think that speaks to our comfort level with respect to what we can continue to originate on, on the front-end side of the business.

We'll take our next question from Doug Harter with UBS.

Scott, just hoping to drill down a little bit more on your comment about some of what you're seeing in the pipeline of -- or not the pipeline in the market on kind of frothiness. Is that on structure of deals? Is that on valuation? If you could just kind of drill into that, what you're seeing that kind of caused you to pull back a little bit from those things?

Sure. I think it's 2 things. It's mainly structure and funding amounts and not necessarily tied to yield. What we've seen over the last several quarters is that a handful of market participants have been incredibly aggressive with respect to underwriting deals that from a leverage perspective or from a commitment to value perspective, exceed what we think are prudent underwriting parameters. The second thing that we've seen recently, and this would probably be over the last quarter or 2, there continue to be a handful of deals getting done in the market where there's just not a lot of structure in terms of how those deals are being put together. We think structural integrity is critical to success long term in this business. We, as a firm, have 0 interest in driving short-term portfolio growth by booking credits that will not age well. And so we're just operating the way we've historically tried to operate with a conservative approach to credit, being aggressive where we see spots of opportunity, and we think that's going to serve our shareholders and stakeholders incredibly well going forward.

We'll take our next question from John Hecht with Jefferies.

Another good quarter. Congrats. First one, I mean, I guess these are sort of both kind of industry level kind of questions. Number one is, there's just increasing concern on legacy software companies because if they weren't developed with AI in mind, then they could get disrupted very quickly. I'm wondering your perspectives on that. And if you could talk about your portfolio of that type and how it is kind of positioned for the AI revolution?

Sure. Thanks for the question, John. One of the more interesting aspects of our business and depending on how you look at this, it's either a positive or a negative is the fact that our duration on the portfolio side is really short. Over the last 21 years, our duration on the loan book has been somewhere between 15 and 24 months. Right now, the duration is right around 18 months. So for us, when we talk about legacy companies, these are not companies that are generally very old in terms of borrowers for Hercules. And when we think about the question that you just asked, we think that's a significant positive because our portfolio is turning every, generally speaking, 1.5 years. We do not have a lot of legacy companies that really haven't been able to benefit from the AI revolution that we've seen over the last year or 2. We built in AI analysis into our underwriting, the deals that we have booked over the last 12 to 24 months, how these companies are using AI, how these companies can be impacted positively or negatively from AI has been a part of our underwriting thesis. So I think it's certainly something that we're watching closely, and our credit teams are doing a great job at monitoring that. But we feel pretty good about how our portfolio is positioned with respect to what we're seeing across the AI landscape right now.

Okay. And then another kind of industry-level question. I mean you guys have seen several quarters of very strong commitment and deployment activity. Is this just a function of a growing TAM where I mean, just the venture business is growing and you're just capturing your share? Or is it that you are increasing your share? Or is it a greater propensity for the borrowers to seek debt as a solution as opposed to equity? Or is it some combination? Just interested in your thoughts about the changing marketplace.

Yes. I think it's 2 things, John. First and foremost, it is our view that we are absolutely taking market share. There's been some changes in the venture and growth stage ecosystem over the last handful of years. And I think we believe that we have on a controlled managed basis, been able to take some significant market share, which is probably the single biggest driver of the increase in commitments. I think the second element is if you look at where our platform is today in terms of scale, in terms of liquidity, in terms of diversification with respect to funding sources, all of those things have helped position us to be able to take advantage of a larger TAM with respect to potential opportunities. And then the third thing is, I think we've done a really nice job at selectively hiring new employees onto the platform that have opened up some new markets, some new geographies, some new focus areas for us, and those things have all been very accretive, which have helped drive those numbers.

We'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Following up on John Hecht's question, but in a different way. The Wall Street Journal today had a very interesting article talking about how JPMorgan is tokenizing which is a digital representation of asset ownership in a blockchain ledger for its private equity funds. And I know John was talking about AI, but turning that around to blockchain and how you're able to track ownership of assets and so forth. What does that represent in terms of a change in how you guys might do business, barriers to entry that venture BDCs typically had over other BDCs and so forth. Any comments would be interested to hear.

Yes. I can't comment specifically on the JPMorgan announcement because we obviously haven't dug into that yet. I can tell you that philosophically, our approach to blockchain and crypto and all sort of related esoteric assets has not changed. We do not intend to invest on the lending side directly in those types of businesses. We think there are opportunities for us, and we've done a handful of them alongside more of the infrastructure side of things and companies that are using technology to sort of facilitate the growth of those industries and currencies, et cetera. But in terms of investing directly in those areas, it's not something that we're going to do.

Yes. Actually, my question is more about your own infrastructure, whether you're using blockchain to track investments and your lean against specific assets versus others.

We are not, Chris.

We'll take our next question from Paul Johnson with KBW.

I was just wondering if you could talk maybe just about the unrealized gains this quarter. It looked like $29 million or so came from the debt portfolio. How much of that is just, I guess, kind of credit-specific events, things were written up. I mean it sounds like there was a positive outcome on nonaccrual. I'm not sure if that was included in there. Just how much is kind of credit specific versus kind of mark-to-market, I guess, within the portfolio?

Thanks, Paul. So $33 million approximately of unrealized depreciation during the quarter, $28.6 million of that appreciation came from the debt side. That was a combination of credit and yield related. I did make the comment about that 1 specific credit that went on nonaccrual in Q3 and was very quickly resolved shortly after the quarter. Just to give you some context of the magnitude of that change, that was a position that had a cost basis of approximately $41.5 million. In Q2, that had a fair value of $24.6 million and we wrote that up to a fair value in Q3 of $38.4 million, which reflects the actual proceeds received and ties into that $14 million outperformance relative to the fair value mark in Q2 and that I mentioned in the prepared remarks.

Got it. So roughly half of the kind of debt depreciation this quarter was due to that nonaccrual?

Correct.

Okay. And then just one kind of maybe more of a technical question on how PIK works within venture loans in your portfolio. When a borrower is on PIK, is it typically a PIK toggle structure? And what is kind of like the general rule in terms of the limit, like how much of the spread, I guess, are they generally able to defer under those arrangements?

Sure. Thanks for the question. So first, I would just reiterate a couple of the key points that I mentioned in the prepared remarks. I think it's critical in terms of how we evaluate PIK. About 85% of our PIK income during the third quarter was attributable to PIK that was part of the original underwriting, not the result of a credit or performance-related amendment or issue. With respect to when we utilize PIK in a new underwriting, it is generally going to be a small part of the company's overall interest, and it will generally be struggled with -- structured as a toggle future, where the company will have the option subject occasionally to certain specific milestones or performance achievements to maybe turn 1% of cash interest into 1.15% or 1.25% of PIK. There are very few deals where we have PIK that exceeds 1% or 2%.

And I am showing no further questions on the line at this time. I would now like to turn the call back to Scott Bluestein, for any closing remarks.

Thank you, David, and thanks to everyone for joining our call today. We will also be attending the Citizens Financial Services Conference in New York on November 18. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2025 earnings call. Thanks, and I hope everyone has a great rest of the day.