Jessica Baron - VP Finance and CFO Manuel Henriquez - Co-Founder, Chairman and CEO.

Ron Jewsikow - Wells Fargo Securities Aaron Deer - Sandler O'Neill Greg Mason - KBW Douglas Harter - Credit Suisse.

Good day, ladies and gentlemen. And welcome to the Hercules Technology Growth Capital Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

Please note today’s conference is being recorded. I would now turn the conference to Jessica Baron. Please go ahead..

Thank you, operator, and good afternoon, everyone. On the call today are Manuel Henriquez, Hercules' Co-Founder, Chairman and CEO; and myself, VP of Finance and Chief Financial Officer. Hercules' second quarter 2014 financial results were released just after today's market closed. They can be accessed from the company's website at www.htgc.com.

We have arranged for a replay of the call at Hercules' webpage or by using the telephone number and passcode provided in today's earnings release. I would also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information.

Actual financial results filed with the SEC may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements.

These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including without limitations the risks and uncertainties, including the uncertainties surrounding the current market turbulence and other factors we identified from time to time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions can also be incorrect. You should not place undue reliance on these forward-looking statements.

The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update these forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or visit the website, www.htgc.com.

Now, I'd now like to turn the call over to Manuel Henriquez, Hercules' Co-Founder, Chairman and CEO.

Manuel?.

Good afternoon, everyone and thank you Jessica. Thank you all for joining us today.

After the positive feedback we received from last call I will attempt to continue to do a more streamline approach to leave more time for Q&A although there's a lot activities that took place in Q2 and also taking place in Q3 that I elaborate during this call that may fill some of that additional time.

With that said, I am once again pleased to report another outstanding and strong quarter for Hercules Technology on all fronts.

As of the agenda for today, I will cover a brief summary of our great performance and results for Q2 and provide an overview of current market conditions including best capital activities, IPO and M&A activities, our perspective and outlook for investment activities for Q3 and the remainder of 2014 and then of course turn the call over to Jessica, who will cover our financial results and performance in much greater details than my highlighted section will cover.

As to the highlight of operating performance in Q2, I am very pleased to report Hercules delivered yet again a very strong second quarter financial results and performance. We significantly grew our investment portfolio by converting over $100 million of our cash balances into new interest earning assets or loans.

We also strengthened our balance sheet during the quarter as well as post the quarter and liquidity position with the most recent bonds rate that I'll speak to and cover later on in mid-discussion.

We also expand our origination and operations teams and capabilities by growing our investor professionals that allow us to also continue to fuel the growth of our investment portfolio which will lead to future earnings as well as future dividend growth for the benefit of our shareholders.

Now some of the highlights, new commitments for the quarter were approximately $240 million, new fundings were equally strong at $173 million for the quarter. We also ended the quarter with an unprecedented, unfunded commitments of approximately $230 million.

These unfunded commitments represent future potential interest earning assets and balance sheet growth if and when these unfunded commitments get drawn over the preceding few quarters.

Also, achievements during the quarter, we achieved another solid performance with 6% year-over-year growth and our net investment income of $18.6 million or $0.30 a share. We also achieved a very impressive growth on DNOI. DNOI grew 9% year-over-year at $21 million or $0.34 per share.

We remain very committed to addressing the growing needs of many of the innovative and disruptive technology and life sciences companies that we serve.

To that end, as previously announced, Hercules has begun to expand its product offering or its financial solution to many of America’s most promising innovative technology life sciences companies by offering a comprehensive financial suite of financial solutions that include asset based lending, equipment based financing, acquisition finance, senior stretch financing and our traditional growth term loans to more effectively compete with venture banks and other BDCs attempting to enter the venture capital marketplace or venture capital lending marketplace.

We launched these initiatives mid-second quarter as they have shown great initial promise as evidenced by our recent portfolio growth of our $100 million in new loans and of course our own unfunded commitment of over $230 million.

Although much of this effort was realized late in the second quarter, we expect to see the benefits of this translate into earnings growth at the beginning of Q1 2015 and beyond.

In addition, we expanded our origination team and origination capacity by focusing additional resources to select top tier venture capital firms who are focused on growth stage companies.

This is a very important adjunct to our origination effort as we now are widening our market reach into the venture capital community in areas that we traditionally have not focused on.

In doing so, we are willing to begin to use our balance sheet as source of strength as well as our high yield [originating] by lowering our yields as necessary to effectively offer a very competitive solution and financial suite to compete with other BDCs who are trying to enter the venture lending marketplace today.

We expect to continue to deploy our excess liquidity of nearly $300 million, very aggressively in the second half of 2014 and beyond. We intend to leverage our balance sheet as a social strength as we continue to drive new investment asset growth in loans that will translate into earnings and eventually dividend growth for our shareholders.

That we expect to see translate into EPS growth by late 2014 and early 2015. On the credit side, and in keeping where there a historical focus on credit. You can expect Hercules to proactively continue to work diligently to prudent marginal performing companies from our portfolio going to the third quarter.

This effort along with some expected M&A events with some of our portfolio companies, will lead to early payoff in Q3 of approximately $60 million to $80 million of early payouts. This excludes normal amortizations that will take place of approximately $35 million.

Because of our proactive investment approach to managing our portfolio and pruning away marginal performing companies or credits, we anticipate that net loan growth for the investment portfolio going into Q3 will be flat to declining $20 million to $30 million.

On the dividend front, our Board of Directors declared a 36th consecutive dividend since inception of $0.31 per share in the second quarter of 2014. Now let me turn my intentions to some liquidity events in our portfolio.

In Q2, we had one company complete both in M&A event and immediately complete a IPO event and that was Glory Energy during the quarter. We also finished the quarter with 5.4 companies in IPO registration whose names are listed in the earnings release for much greater detail.

Because of the recent increase in market volatility and unpredictability as evidenced today, especially as it relates to many of the leading technology companies, we are seeing many potential technology IPO choosing to delay or defer the IPO offerings for later in 2014 if not into Q1 of 2015.

Because of this prudent wait and see rationalization, by the ventures capitals and its portfolio companies we ourselves have chosen to adjust our own potential realized gains for 2014 downward to $20 million to $30 million for previously guided $40 million to $60 million driven impart by the delay and in the box IPO which is originally anticipated in the first half of 2014.

Like always, much of this anticipated gain is certainly subject to market conditions and equity capital markets remaining cooperative. Now I turn my attention to some of the venture capital marketplace activities. I must say I was quite impressed with the level of venture capital investment activities that took place in the first half of 2014.

The venture capital is invested a staggering $25 billion in the first half of 2014 which compares to the $35 billion invested in entire 2013 period of time. This is the highest level of venture capital investments since Q1 of 2001.

With nearly $14 billion of that $25 billion invested in Q2 to over 900 companies we have seen a dramatic increase in demand for venture debt financing as evidenced by our own portfolio growth and as our evidenced by nearly $240 million of newly signed commitments during the quarter.

This speaks to Hercules drawing brand awareness and growing franchise dollars in the venture capital community as well as our willingness to expand our product offering to help service the needs of these companies all aligned to higher increased deal flow for the venture capital community. (Inaudible).

Well it’s interesting to see during the quarter was the allocation of some of the investment activities. We saw a continued decline in information technology companies as we ourselves have been declining our information technology on allocation for the past eight quarter.

And in fact of the $14 billion invested in Q2, 21% of that or approximately $3 billion went to information technology, a dramatic decline of approximately 34%.

Business services and financial services companies along with consumer services, each saw approximately $3.3 billion and $3.9 billion on investment activities going specifically into consumer services also known as social media or ecommerce transactions.

Healthcare itself saw a decline to approximately $3 billion of activities or 21% of the investment in the second quarter. Now, turning my attention to VC assets. Not surprising as we advocated ourselves in the first quarter of 2014 earnings call, we saw a contraction in IPO companies going public.

In fact we saw the number contracted 25 completed IPO companies in the second quarter 2014 down to 38, raising $2.2 billion. Notwithstanding the number has declined $25 million companies going public is still impressive number of which one of those was Hercules company as I have referred to earlier as Glory Energy.

At the end of second quarter Hercules finished with approximately five companies in IPO registration. Not to be left behind in the second quarter we finished with an impressive 117 positions in various technology and life sciences companies there we hold equally in those companies waiting to achieve an IPO events.

For all of -- for the first half of 2014 63 companies have successfully completed their IPOs ranging approximately $5 billion. On the VC fund raising, a very important indication of the health and well being of the venture capital community.

The venture capital themselves were quite successful raising money, they themselves raised $7.4 billion in the second quarter of 2014 and although the amount is down by just 28% for the prior quarter it still a very strong first half of the year not seen for quite sometime raising approximately $18 billion of capital in the first half of 2014.

A very impressive achievement by the venture capital community and a primary source of deal flow and repayment of debt. So I'm very happy to see that numbers remaining strong as they were in the venture capital. Now turning my attention to the outlook for 2014 or the rest of 2014 for the Q3.

We certainly began to make various critical long-term strategic changes to our organization, most of which I start to referring to in Q1 earnings call. We set forward the foundation of change going into Q2 and laying out a foundation that I expected to be at the bedrock of our growth for next 10 years.

These change will continue throughout the remainder of 2014 as we are gradually stepping into these changes on ensuring that our foundation and growth for next 10 years of place to sustain to continue market presence in the market that we see and our ability to continue to generate growing deal flow and new investment activities on behalf of our shareholders for new earnings and dividend growth.

As begin to deploy the liquidity in our balance sheet, you could expect to see earnings growth begin to take shape further or late in Q4 and certainly by Q1 as we start to convert this new liquidity. We are still targeting and are confident of our portfolio growth of approximately 20% for fiscal 2014.

This represents approximately ending the year with an investment portfolio or just say investment loan portfolio or approximately $975 million or a $1 million that of course is subject to market conditions remaining cooperative as we continue to deploy capital.

Looking into Q3 and the remainder of 2014 Q3 as a reminder for everybody on the call that Q3 tends to be our slowest origination quarter.

We took advantage of the slow origination quarter to make most of the structural changes that we were talking about which I will refer to here in the foregoing paragraphs talking about our balance sheet and increasing our liquidity of our balance sheet and retiring some of our debt.

In an effort to ensure sufficient liquidity to meet this growing expectation of increased activities in Q4 and beyond we successfully closed a $100 million 10 year bond offering that was successfully priced at 6.25% that is fixed rate and interest.

This is very critical as Hercules continues to originate loans with an average yield in about the 13% to 14% range giving us a 600 to 700 basis points spread yield on those assets.

However I would like to remind everyone that you can expect that the initial interest expense associated with our new $100 million bond offering will cause a near-term increase in the overall interest expense that in turn will cause a potential negative impact into earnings as we deploy our new found liquidity into earning assets that drag on earnings is expected to be approximately $0.01 to $0.015 in Q3 and should begin dampen in Q4 as we convert that new liquidity into earning assets.

And those will significantly enhance and give us a competitive advantage on our long-term liquidity position and satisfy our growing unfunded commitment and our growing pipeline of new companies seeking capital, as well as lower overall cost of capital as we continue to improve and lower overall cost of our balance sheet and the debt financing.

In addition, on August 7th we recently retired approximately $33.5 million of our existing convert bonds, those bonds are exchangeable or convertible, I should say through September 30, 2014.

The impact of the retirement of the convertible bonds in Q3 EPS with the issuance of approximately 921,000 shares will cause an impact in Q3 earnings of approximately $0.01 to $0.02, attributed to the increase in that fully diluted shares to approximately 64.3 million shares that we will have at the end of Q3. Lastly on the liquidity front.

During the quarter, we also took advantage to test our ATM offering that we have available to us. During the quarter, we issued $10 million of equity offering under our ATM program, all highly accretive to book, rating net $9.5 million and issuing 650,000 shares.

The impact of this capital raise and testing of our ATM will cause an impact on earnings of approximately $0.01 in Q1 attributed to the denominator of shares, of 650,000 shares being impacted on that calculation.

As to growing the firm and focusing around foundation around growth we are continually and actively hiring investment professionals at all level at Hercules. We recently hired individuals for our operations in a financial accounting group as well as key members of our origination team.

We are actively looking to hire more individuals as we continue to expand our product offering and help service the needs of our venture capital and venture backed companies in the marketplace.

We took these steps to ensure that our historical credit performance and diligence in monitoring our portfolio companies as we look for continued growth sustain through 2015 that we have the foundation in place to ensure that the rigorous of our history are maintained in a discipline and credit underwriting discipline are maintained to ensure a prosperous and strong growing portfolio.

(Inaudible) hires we expect SG&A to gradually increase commensurate in Q3 and catch up eventually in Q4. We have chosen to make these strategic decision in the Q3 to ensure that we’re well positioned as I said earlier. The growing pipeline and demand for venture debt has reached unprecedented levels.

Many of our competitors do not have access to the capital markets and are currently unavailable to raise additional equity capital.

With that we’re seeing more and more companies looking to seize financial partners who have a strong balance sheet and (inaudible) any changes in the capital market to be able to operate and fund their unfunded commitments if and when needed.

Our balance sheet has become an important source of strength and a important strength of confidence to our companies and our venture capital bank partners, we thank them both for their confidence and a continues deal flow that they provide us in the coming quarters and in the future.

As to our pipeline, I am happy to report that as of August 7th, our pipeline is quite robust with over $1.3 billion of pending transactions being evaluated for potential investment opportunities, of the $1.3 billion, a $135 million of that is represented in sign term-sheet as of August 7, 2014.

In addition to that we’ve closed so far in the quarter in Q3 approximately $48 million of commitments and we’ve funded $14 million of that. That is a very important ratio to keep track of that.

We'll you speak to you further in our Q&A session but we're seeing a continued decline in the commitments of funding ratio from historical levels of 75% to 80% to now modeling more closer to 50% to 65% level that we have seen back in 2012. This is one of the reasons why you're seeing a growing unfunded commitment number as well.

We finished with nearly $230 million of unfunded commitments. As I said earlier this is critical, this represents future portfolio growth that if and when these companies (inaudible) money we now have embedded asset growth internally identified with that unfunded commitment.

I am proud to day that as of August 7th we have secured low commitments of over $570 million, surpassing any other BDC attendant to establish venture debt origination effort. At this run rate of $570 million we will easily close to $1 billion mark in new origination, something as never have been accomplished or achieved at Hercules before.

However, I want to caution that is a significant number. We are on pace and comfortable to shoot for a $700 million to $750 million level but if things continue to way they are is not unforeseen to actually achieve a $1 billion origination mark in 2014. With that I'll turn the call over to Jessica our CFO to continue..

Thanks Manuel and thanks everyone for listening today. I would like to remind everyone that we filed our 10-Q as well as our earnings press release after the market close. I will briefly discuss our financial results for the second quarter of '14.

Turning to operating results, we delivered total investment income or revenue of revenue $34 million by decrease of 1.4% when compared to the second quarter of '13.

Year-over-year decline was driven by the decrease in weighted average loans outstanding and partially offset by increased loans fee acceleration due to early payout and loan restructures during the second quarter of '14.

The all-in effective deals on a divestments during the second quarter was 16.9 down by approximately 1% relative to the previous quarter. The decrease is primarily due to the effect of fee accelerations that occurred from the higher volume of low and early pay-offs and restructures in the first quarter of '14 as compared to the second quarter of '14.

As we signaled that beginning in the year, we are focusing on portfolio of growth, we expect our investment origination yields to gradually compress by 30 to 50 basis points reported at '14 as we deploy our excess cash balances into new interest earnings assets.

Interest expense and loan fees were approximately $7.6 million during the second quarter of '14 as compared to $8.8 million during the second quarter of 2013.

The year-over-year decrease is primarily attributed to the Q1 early pay-off of 34.8 million of SBA debentures and 63.7 million of amortization of the Asset-Backed Notes that are transpired with the second quarter of 2013.

The weighted average costs debt increased to 6.3% in the second quarter of '14 versus 6% during the second quarter of '13 primarily attributed to the acceleration of fee amortization triggered by the amortization of the Asset-Backed Notes in second quarter of '14.

Operating expenses for the quarter was 7.8 million as compared to 8.2 million in the second quarter of '13 decrease was primarily due to decrease in our variable compensation. Q2 '14 net investment income was 18.6 million compared to 17.6 million in the second quarter of '13, representing an increase of approximately 5.7%.

Net investment income per share was $0.30 for the second quarter of 2014 as compared to $0.29 for the same period of '13. We recorded approximately 7.3 million of net unrealized depreciation on our investments during the quarter.

Of this 7.3 million of depreciation 6.1 million was primarily attributed to net collateral based impairments on our debt, equity and warrant investments in seven companies. We reported 2.5 million of gross realized gains primarily from the sale of foreign and equity investments in five portfolio companies.

We ended Q2 of ‘14 with total investment assets including warrants and equity at a cost basis at approximately $995 million, was net up by 107.9 million from our investment portfolio balance of 887.7 million as of March 31, 2014.

The increase was driven again by our strong origination of funding activities of new gross investments totaling approximately 172 million in the quarter.

The debt portfolio company count increased by 10 up from 80 to 90 since March 31, 2014 and this is attributed to three companies paying us off offset by the addition of 13 new companies which spend all of our industry verticals bet debt portfolio in Q2 of ‘14.

As Manuel noted we anticipate 60 million to 80 million of early payouts in the third quarter the companies which we believe may pay us off are from some of the earlier vintage years represented in our current investment portfolio and as a result we do not anticipate a large revenue acceleration impact from these investments paying us off.

Debt investment amortization typically commences 9 to 12 months after an interest only period that we have on our term loans and the amortization is scheduled to occur over a 36 to 42 month timeframe.

Apart from earlier payments we current have scheduled amortization as Manuel mentioned of approximately $35 million from our portfolio on a quarterly basis. With respect to the credit quality of our portfolio.

The credit quality remains very solid, the weighted average loan rating of our portfolio was 2.10 at June 30, ‘14 reflecting a slight degradation in credit quality from 2.05 at the end of the first quarter.

We had three investments on non-accrual at the end of the quarter, with a cost basis of 2.4% of the total investment portfolio and 0.7% of the total investment portfolio after value. Okay, regarding Hercules liquidity.

At the end of the second quarter, we had approximately 221 million in available liquidity, which includes a 116 million of cash and a 105 million of credit facility availability.

As of June 30th, our debt to equity ratio including our SBA debentures was 72.9%, lower than 76.1% as of March 31st primarily due to the amortization of the asset backed note. As a reminder, our $192 million of SBA debentures are excluded for regulatory leverage calculation purposes.

The exemption effectively allows us to leverage beyond a one to one debt to equity ratio to 1.29.21 which means that at the end of the Q2 we had additional capacity to add $368.9 million of leverage on our balance sheet. Our net leverage, which is calculated, based on total debt minus cash is approximately 55.3% at the end of June.

In June, 2014 we utilized the ATM equity distribution agreement we put in place last summer. We sold 650,000 shares of common stock for total accumulated net proceeds of approximately $9.5 million, all again accretive to net asset value.

Note that subsequent to July, third quarter end in July we further bolstered our balance sheet versus data for long-term growth, we closed a bond offering of 100 million 10 year 6.25% notes and receive notes yesterday of the underwrite and tend to exercise to the (inaudible).

We intend to deploy the capital from the bond offering definitive investments over the course of the next three quarters as we identify the right opportunity. This week as Manuel mentioned, we also retired approximately 33.5 million of our existing convertible notes with a combination of stock and cash payment.

Now we issued 921,000 of additional common shares in conjunction with this version. As a result we anticipate a $0.01 to $0.02 non-cash impact to our Q3 earnings due to the accelerating origination fees and the amortization acceleration of the conversion feature.

The certain part impacted the net additional liquidity from our new bond offerings and retirements will be a net increase in interest expense of approximately one penny in third quarter. Our net asset value at June 30th, was $658.9 million or $10.42 per share compared to approximately $653.3 million or $10.58 per share as of March 31st.

The small per share decrease in net asset value is due to dilution from the new shares from the ATM offering and as well due to the annual employee stock grants. Finally consistent with prior quarter we’ll be distributing a dividend of $0.31 to our shareholders and this payment is scheduled to occur on August 25th.

So in closing, as Manuel mentioned we are optimistic due to what we’re seeing in the venture debt marketplace and we’ve been actively investing in the new originations talented team to address these opportunities that we see.

However, as we’re Hercules we will continue to take a cautious and steady approach to on boarding new assets in the third quarter and beyond.

As we noted due to our proactive investment portfolio monitoring and management, we are cycling at a various investments and we anticipate our debt investment portfolio will be flat quarter-over-quarter with the potential to decrease by $15 million to $25 million.

So we remain committed to our strategy of controlled growth and we intend to continue to acquire stringent underwriting standards which have resulted in our first 10 year performance in historically low (inaudible) loss rate. So with that operator we’re now ready to open the call for questions..

Thank you. (Operator Instructions). Our first question comes from the line of Ron Jewsikow from Wells Fargo Securities..

Yes. Good afternoon and thanks for taking my questions. I just have two quick questions here.

What percentage of the annual retention will be safe fall into kind of the new ABL strategy relative to your more traditional mix?.

The ABL as I said just really started earnest in Q2 so little to none. The really outstanding at where the funded assets are represent ABL because, it takes a while to get the borrowing, base and get the mechanics going so those are not yet..

All right.

And then just kind of I guess than the long term opportunity of that kind of what percentage of originations you gave the 700 million to 1 billion range for this year depending on the market environment? What percentage in the long run do you see that making up of your origination mix?.

I think that when you look at on commitment basis not on a funded basis which is a critical issue..

Yes..

You're looking at that in a I guess a fully focused year or fully 12 month year that give you as probably as a billion dollar level, could be as high as 25% of our portfolio. On a funded basis it probably be somewhere around 10% to 15% on a funded basis, but on a commitment basis it could be as high as 25%..

That's great color and then just one last question and I'll back in the queue.

I was wondering if you talked about your decision to issue the 10 year baby bonds or term debt relative to maybe other options for financing like securitization converts or something else?.

Well, don't underestimate that we're not going to doing that as well. This is simply a very important critical part of the 10 year growth foundation that we wanted to show our ability to tap the 10 year bond market as a critical lathering out of maturities for get offerings and especially when I can lock in 10 year paper at 6.25.

We are certainly and will be actively approaching the securitization market again sometime I would say conservatively some times in the next six months or less you could see and tap the securitization market as we continue to covert new liquidity into funded assets. We remain as everything we do very flexible in terms of the market.

And we're doing that, yes, securitization remains a very critical part of our funding strategy and certainly lowering our near-term cost of capital even further..

That's great color. I'll hope back in the queue. Thanks..

Thank you. Our next question comes from the line of Aaron Deer from Sandler O'Neill..

Hi, good afternoon everyone..

Hi, Aaron..

Manuel the growth this quarter was very impressive and it sounds pretty optimistic going forward although, your guidance with respect to the third quarter I guess was a little surprising.

I understand the projected pay-offs that you're anticipating, but the, it look like the number of terms sheets was down and I'm just trying to reconcile your guidance.

How much of this slowdown if you will is really due to seasonality versus other factors that might be going on?.

Well, significant part of it is in fact seasonality. So there are two embedded questions you're asking there. The portfolio decline, just to be very crystal clear here is driven in almost entirely by us.

If you have been following us for many years, you will see that it is pretty typical that we will proactively approach, what seem to be growing credit situations very proactively and in fact look to prune or purge marginal credits or companies that seem to be showing evidence of stress or deterioration.

And we tend to do it very proactively and look to managing the balance sheet as self evidenced with our credit historical performance. So if that means that we end up giving some earnings up because of credit quality, I am more than happy to give up a penny or two in earnings and not have a $20 million to $30 million capital loss from a bad loan.

And that’s exactly what we are doing here. And we do that pretty proudly throughout our history. As to the term sheets, Q3 has always been slow but I got to be honest, $576 million of signed term sheets through the August 7th or August 4th is a pretty significant number when we had I think it was $700 million of signed term sheet all of last year.

I think that the element of the portfolio growth that you are seeing is certainly as evidenced as I indicated in our opening remarks attributed to the funding to commitment ratio, that funding to commitment is both purposely managed by us downward, meaning that historical 75% to 80% funding rate, we are putting much more structured loans on the books.

And those loans have purposely structured a risk mitigates to it. Some of our competitors who don’t know the asset class very well, venture debt, are willing to do deals, they don’t have those structures; we invite them to come in and do all of they want. We are not going to do those deals.

We are going to be continuing to focus on credit quality and focus on sustained quality of earnings growth. And we don’t get paid for assets under management. So we care more about credit and margins than anything else..

And then what type of companies that you’re pruning, is there specific verticals or lending categories where you are pulling back from?.

No, actually it's not discriminated against any one particular category. We’re just seeing some size of stress in the overall market, there is some anxiety on some companies that were -- let me be very clear.

A lot of venture lenders that don't venture lending very well, rushed in over last five or six quarters and did what they thought were budget free IPO companies at quite excessive valuations. Those companies are now coming back around looking for money.

We have some of those in our portfolio companies that were also looking to achieve an excess event or liquidity event that had now seen that window being pushed out. And until we see a higher level of confidence of capital being injected to those companies, those companies represent a higher level of risk.

And we feel that currently that risk is not being properly priced. And other new, naïve venture lenders are more than willing to absorb some of those assets, we’re more than happy to encourage those assets to go see them..

Okay. And then lastly, in addition to the ABL on equipment finance. You also mentioned, I think acquisition finance and there might have been one or two new lending categories that you mentioned.

Can you talk about what types of yields you expect on each of those categories?.

Well, the acquisition finance remains a very attractive area.

And what's going on in the acquisition finance is a lot of our later stage venture capital-backed companies are looking to acquire either technology or customers for some weaker private companies and using our financing to actually bolt on either technology or customers, choose acquisitions in order to groom themselves for a potential IPO.

So, those transactions are very attractive to do. They are fort with many due diligence issues, as you’re looking at a target and making due diligence analysis of target and financial modeling it out.

So the growth that we’ll see going into 2015, I mean acquisition financing was probably going to be a $50 million to $100 million line of business maybe initially because we’re dealing with venture backed companies not necessarily lower middle market companies.

On the equipment finance, this is an area that we’re being pulled in every day more and more by our own portfolio companies, asking us to expand our product offering. We historically have said no to equipment based financing and now we’ve finally chosen to open up our balance sheet and now pursue those.

Those are equally attractive transactions because they offer what is basically a typical large back-end final payment, let’s call the end of term payment that you see John, so they typically a lower coupon rate on a front end but have an effective yield that often time is much higher than a term loan for example.

And then ABL, asset based lending is another asset item that we’ve been pulled into by companies who have basically chosen not to go pursue a bank and want to stay with Hercules longer-term. And so now we’re offering anywhere $2 million to $20 million ABL line.

And those typically will have an interest rate anywhere between 7% to 8% on a coupon rate and they could have different structure to make that yield probably higher than that as well..

Okay. Thanks for taking my questions..

Thank you. And our next question comes from the line of Greg Mason from KBW..

Great, good afternoon.

Just to follow-up on kind of this prepayment activity in the third quarter calling the portfolio, just is this companies that have financing options and you’re just not defending your position and letting them go? Are you proactively telling them, listen we went out, you need to find another financing?.

Well, let me just take the specific of that question. I would say that we as the incumbent always have the option to defend the credit. And in many of these cases, we're choosing not to defend the credit and let the credit find financing somewhere else..

Okay, great. And then in the Q you mentioned that you have filed for co-investment exemption with other affiliates.

Are you looking at raising other funds or other strategic alternatives or what’s that regarding?.

Sure. As we look at the next 10 years, we are certainly looking multiple different family of funds.

If you will like an Aries, like Apollo among others out there, TPG and we’ve come to the conclusion, similar to what these other very formidable and very reputable players have also noticed is that by having very specific vertical entities or funds that could complement our current activities, makes a lot of sense to leveraging the brand across these verticalized funds.

So, we’re certainly evaluating multiple different options in that area. We have yet to close on an initiative right now, but we are actively evaluating multiple different strategies by having vertical identities that are in transactions by which Hercules does not working today.

And we feel that having a sister relationship with an affiliate fund would really strengthen the brand and more importantly increase our access across the board to companies in different verticals or stages that we’re not investing in today..

Okay. And then one last modeling question.

Could you give us some level of the accelerated income in the quarter that was in the total interest income line just ballpark?.

Are you referring to Q2?.

Yes..

Yes. So as we said the total effective yields for the portfolio was 16.9%. Our historical rate of naturally yield on the portfolio hasn't changed that much. There has been as we talked about on the call, a slight degradation in our yields on a natural basis.

But I believe historically, we've disclosed that a 200 basis points are typically related to the one-time effect of early pay-offs from loan restructure..

So the other way look at it is total one-time fees that have become kind of a core one-time fees event is probably in the $2.5 million level. And then any one quarter you can add what is generally unpredictable one-time fees if you will the variability of that is probably another $2.5 million to $3.5 million that can vary widely quarter-over-quarter.

As Jessica said in her comments, a lot of the early pay-offs that we're seeing in fiscal, sorry in just been in Q3 are going to be all the vintage companies. So there are not going to have a lot of accretion of fee acceleration because they’ve been on the books for quite sometime.

And so this is been on maybe about 18, 24 months and therefore the impact of any early pay-off will significantly dampen, contrary to what we saw occur in Q1 or Q4 last year..

Great color. Thank you..

Thank you. And our next question comes from the line of Douglas Harter from Credit Suisse..

Thanks most of my questions have been answered, but I guess just one Manuel I guess can you talk about the timing of why raise the 10 year growth in front of a quarter where you are expecting kind of flat to down when you still have significant cash position?.

Well first of all we all are very cognizant of global capital markets and then global geopolitical crisis going on and with an unfunded commitment pipeline of $230 million and a growing backlog of signed term sheets as well as the pipeline, the last thing I want to do is put our franchise at risk on having hit the brakes on new origination activities in Q4 because the capital markets are not bitter and I rather raise debt than equity because the impact in EPS can be managed a lot more efficiently.

And I think that the opportunity to raise 10 year paper that’s blocked in 6.25 I will do all day long and as evidenced by the credibly successful offering that is I still in a very good position from a liquidity point of view to capitalize on the market that we are going to be looking at Q4 and Q1 that we think a lot of that liquidity will be absorbed.

The other element of your question is that when the capital raise was being initiated for the bond, our credit outlook at some of these companies was not geld as it is today and therefore the prepayment number was significantly south of what it is today and we run a very fluid portfolio in credit process we are constantly weekly or bi-weekly evaluating the credit performance of portfolio on a continuous basis.

And so I’d rather be long liquidity all day long than short liquidity with a growing pipeline..

That makes a lot of sense. Thanks Manuel..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back for any closing comments..

Well, thank you operator and thank you everyone for joining on this call today. And once again we look forward to meeting with most investors and analysts in the upcoming conferences. We have a very busy September and early October on conferences and non-investor roadshow meetings that we'll be doing.

It will be our first conference company up will be the RBC Financial Institution Conference, September 16 in Boston. We also have the JMP Securities Conference at September 30th. I believe we also have a Credit Suisse Investor Conference in mid-September in Manhattan as well.

If you like to arrange a meeting with any of these conferences or spend more time with management, we'll be happy to do so, please contact our Investor Relations department. And once again thank you for continued interest and support for Hercules Technology and we are continuing to be working hard on behalf of our shareholders.

Thank you very much operator..

Thank you. Ladies and gentlemen, thank you participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..