Michael Hara - Senior Director, Investor Relations Manuel Henriquez - Founder, Chairman and Chief Executive Officer Mark Harris - Chief Financial Officer.

John Hecht - Jefferies LLC Ryan Lynch - Keefe, Bruyette & Woods Aaron Deer - Sandler O'Neill Partners Leslie Vandegrift - Raymond James Christopher Nolan - Ladenburg Thalmann.

Good day, ladies and gentlemen and welcome to the Hercules Capital Q2 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference maybe being recorded.

I would now like to turn the conference over to our host for today’s conference, Mr. Michael Hara. You may begin..

Thank you, [Antonia]. Good afternoon, everyone and welcome to Hercules conference call for the second quarter 2017. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO and Mark Harris, Chief Financial Officer.

Hercules second quarter 2017 financial results were released just after today’s market close, and can be accessed from Hercules Investor Relations section at 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.

During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission 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 that 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 those forward-looking statements, including and without limitation the risks and uncertainties, including the uncertainties surrounding the current market turbulence and/or 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 also can 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 the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or our website htgc.com.

With that, I will turn the call over to Manuel Henriquez, Hercules Chairman and Chief Executive Officer..

Thank you, Michael, and good afternoon, everyone and thank you for joining us today for the Hercules Capital second quarter 2017 earnings call.

During today’s call, I will be providing a brief overview of our strong financial results and select the key highlights and accomplishments during the quarter, followed by a summary of the venture capital place and activities and conclude with a brief outlook for Q3 and the second half of 2017.

I will then turn the call over to Mark Harris, our CFO for a more detailed overview of our financial results and accomplishments for Q2 2017 and conclude with a question-and-answer session. With that, let me get started. We deliver another robust quarter with net investment income or NII of $0.31 per share and DNOI of approximately $0.33 per share.

This outstanding achievement was very possible by the hard work and dedication of origination and business development teams who delivered an impressive performance of new commitments of nearly $400 million for the first half of 2017 ending in June 30, 2017.

In addition, we're also beginning to realize the benefits from the Federal Reserve recent three rate increases, translating into a creative earnings and expected continued earnings growth in our investor portfolio. As you can change retain a highly asset sensitive balance sheet we are well-positioned for any future rate increases.

We anticipate at least one additional rate increase in 2017 and a reminder each 25 basis points increase of prime rate equates to approximately $0.03 in annual NII earnings per share where the shares are currently outstanding today.

I am also delighted to report that we are realizing material improvement in both our non-accrual and overall credit performance of our loan portfolio.

Which both key indicators returning to historical low levels, we are expecting further improvements later in Q3 as we continue to finalize and complete the M&A transaction on a various handful of trending companies where completing M&A events which will further improve our credit performance and outlook for the rest of 2017 that of course, if this M&A transactions get completed.

The completion of these events would further strengthen our overall credit performance and put us in an extremely good position in historical low levels on a credit and non-accrual loan for Hercules and Hercules history.

We're also seeing a very healthy activity of demand from current and prospective portfolio companies or clients seeking new loans as demonstrated by our nearly $400 million of new close commitments and $340 million of gross fundings that took place in the first half of 2017 putting us on pace for potential record year of new originations and commitments for the year.

As further evidenced in this growing demand is our healthy pipeline of transactions heading into Q3.

We clearly have over $1.3 billion of potential new investment opportunities of which we're evaluating right now giving us the confidence and continue to pursue our origination expectations for the second half of the year, which I'll elaborate further during this call.

It is becoming very apparent, scale matters within the venture lending industry and having access to a broad range of capital and capital sources is equally as critical to building successful eventual lending business that continues to afford the growth of Hercules as realized and achieving the stature that Hercules has in the marketplace today as a leading and a top venture lender in the marketplace outside of the non-banking community.

Now for some highlights and key achievements during the quarter. In an environment where origination activities continued to be challenge for many of our BDC peers coupled with tightening credit spreads, margin compressions, and increased levels of early loan repayments.

Hercules Capital direct venture lending platform continue to prove its resiliency and strong brand recognition amongst our venture capital partners and innovative venture capital-backed entrepreneurs as they continue to realize and grow our investment portfolio with our strong achievements that we saw in our realized and published financial performance in the second quarter 2017.

Now specifically to cover some achievements during the quarter. We delivered another strong year-over-year performance for our shareholders with solid growth across many key indicators. We grew total assets by approximately 14% to $1.6 billion. We grew total debt investments at cost by approximately 5% to $1.32 billion.

We grew quarterly total investment income by approximately 11% or $48.5 million, while also growing our net investment income by approximately 8% to $25.3 million. In addition to these achievements, we also generated solid and sustained total shareholder returns or TSR for our shareholders consistently over the past several years.

For example, one-year, five-year and seven-year total shareholder returns were 16.6 – 69% and 127.1% respectively for the same period, generously delivering results that exceeded much of the BDC industry for the same period.

And finally, we accomplished much of these results while maintaining our historical strong credit discipline, while also maintaining a very strong balance sheet and high liquidity position with approximately $355 million of available liquidity to continue to grow investment portfolio.

We intend to put this capital to work in a later half of 2017 and principally in the fourth quarter of 2017. Now turning my attention to additional key highlights in the market development within the venture capital and innovative marketplace our primary focus.

The venture capital marketplace continues to show solid levels of vitality and sustained pace of new investment activities with $17.4 billion of invested capital during the second quarter.

For the first half of the year, the venture capital were exceptionally busy with $33 billion invested for the first half of the year, which places VC investment activities on pace to potentially exceed all of 2016 levels of $54.7 billion of capital investments, this of course according to Dow Jones VentureSource.

Our continued achievement and success over the past 13 plus years is because of outstanding dedicated team of employees. These employees are responsible for our success and continued hard work. Without our employees hard work, these outstanding result would not have been achieved.

We worked diligently for behalf of our shareholders and continue to work even harder for that of our portfolio companies and client companies who continue to select Hercules as the capital provider of choice when it comes to growth capital reform of venture debt. I remain deeply grateful to our shareholders.

Our VC capital partners and to the many wonderful innovative entrepreneurs, who continue to select and have the confidence in Hercules Capital and our reputation as the long-term capital partners. Hercules Capital is widely recognized as the largest leading BDC venture lender in the marketplace today.

This is further evidenced fire sustained and steady growth of new relationships and with innovative venture capital backed pre-IPO, M&A, high growth companies with nearly $400 million of new commitments and $340 million of gross fundings completed during the first half, all culminating to our extremely strong total assets of approximately $1.6 billion a quarter end, only serve as evidence of acquisition in the marketplace today.

Thank you and thank you for your trust and confidence in us and we continue look forward to being your partner as you continue to grow our company and your company together with our entrepreneur and innovative CEO's into honors these great companies.

Now let me take an opportunity to discuss our views of the marketplace and anticipated activities as we enter the second half of 2017. As we enter the third quarter, we are extremely well positioned.

We have a low net leverage balance sheet, a highly liquid balance sheet to originate new investments and to mean as you pursue selective underwriting of critical new investment activities during the quarter. I expect Hercules Capital to continue it's very effective in time proven, slow and steady strategy as we continue to deploy our capital.

This slow and steady set – slowly and steady strategy has worked well for us for well over a decade and we are not about to abandon it.

As we have continued to away for an improved and improving competitive environment, we're seeing an improved economic outlook as we look to could see a deploy capital commencing fairly aggressively in the fourth quarter.

We are also eager to see greater clarity from Washington on various key economic issues such as tax reform and healthcare reform as well as Congress tackling and hopefully passing legislative and regulatory reforms that are critical to our business and many of our portfolio companies, which will further benefit and fuel the growth of economic growth and loan demand for many of our portfolio companies.

Although it maybe a bit early to call this an improving trend line, we are finally beginning to see encouraging science of early portfolio repayment activities beginning to add and moderate as we enter into the second half of 2017.

We are none the less optimistic anticipating a return to more normalize levels of repayment activities, at this point we feel comfortable seeing the $75 million to $100 million of earlier repayment activities for each of the subsequent next two year quarters.

As early repayment activities and we are anticipating realized modest portfolio growth late in Q3 2017.

We expected to stay slightly ahead of early repayment by the end of Q3 and generating net portfolio growth by the end of Q3 of approximately $15 million to $25 million net of $100 million of anticipated early repayment activities during the quarter.

I would also like to remind everyone that Q3 is typically or seasonally - seasonal flows origination and funding quarter for capital deployment and investment.

Conversely the fourth quarter is typically our most robust period of investment activities enhance why we expect to see fairly significant growth in the portfolio by Q4 and you'll see that from our history of over 13 years of data that Q4 tends to be a more robust period.

Because of our continued patience, discipline and awful anticipation of tapering of early repayment activities as previously discussed we are anticipating realize overall net portfolio growth on a cost basis of approximately $50 million to $150 million net over the second half of 2017. This is mostly expected to be realized during the fourth quarter.

And of course again net of the $150 million to $200 million of anticipated early payoff activities that we expect over the next two quarters.

Notwithstanding nearly $150 million, $200 million in forecasted early repayment activities for the second half of 2017 Hercules Capital anticipate entering new commitments in a second half of 2017 of nearly $350 million to $400 million of gross new commitments.

Which emphasis more there will offset any impact on the projected early payoff activities that we simply we just disclose to you. As a reminder it is evident in our forecasting in our capabilities and projecting early payoff activities.

I will call your attention that in Q2 we believe strongly that early payoff activities was anticipated to be between $50 million to $75 billion. As you can see for public filings that number was dramatically higher than that.

In fact, we actually realized $166 million or nearly $90 million to $100 million higher in early payoff activities that we were anticipating. But not for the resilience of our team and our strong marketplace presence.

Our team was able to absorb nearly $100 million of unanticipated early payoff activities to keep that portfolio relatively flat coming into Q3 that is a testimony of our capabilities of the marketplace and our access to transactions in the marketplace.

Predicting early repayment activities remains elusive in difficult item since we do not control or have insight as to which company or when the company may choose to payoff its loan balances early. In fact, we typically have less than 30-day visibility or notice.

So it is subject to significant variability in market conditions on early payoff activities. Overall our business continues to prove itself and its resiliency as continue to execute in deliver strong financial performance for our shareholders. We are entered in Q3 with a solid book of business and a pipeline currently at over $1.3 billion.

However, we remain very discerning on selecting new investment opportunities while simply to maintain a fine balance of portfolio growth and margin discipline.

We refused a chase yields on the balance sheet, we refused comprise our longstanding credit discipline and we're not going to simply chase yields down or underwrite credit simply to generate earnings for earnings growth purposes. We are not that institution. We remain focused on our balance sheet and discipline and underwriting processes.

Our existing pipeline ship positioned as well as we work towards the growth objectives for the second half of 2017. So this of course a favorable market condition remaining in place and lower margin stabilizing. Now as I wrap up my prepared remarks. Let me share some quick updates on key developments from the venture capital marketplace.

As a reminder of our data does come from Dow Jones VentureSource venture capital fund raising activities. The venture capital fund raising activities were yet again strong.

As a leading indicator to future venture capital investments the VC’s fund raising was quite successful during the first half of 2017 with an impressive $21 billion of capital raised on pace and exceeded all of 2016 and certainly lays a good foundation for continued investment activities by recedes in the second half of 2017 and beyond we're quite encouraged by his activity and we're certainly seeing that activity translate into investment opportunities for us to pursue.

Venture capital investment, equally impressive start to the first half of 2017 the pace for venture capital investing activities was nearly at $33 billion to 2,100 new and existing companies receiving capital from the venture industry, and of course, putting the VCs on pace to exceed their total capital investments in 2016 which were $55 billion to 4,000 plus companies.

Of the $33 billion invested during the first half of 2017 in the second quarter alone VCs invested $17 billion to 1,100 companies. Now, on a more solid note and I would like to make this more exciting, but I can't. VC IPOs remain stagnant, IPOs remain elusive and not anywhere near where they should be.

We saw only 25 venture capital IPOs and 25 of those companies successfully their IPOs debut on pace ironically to exceed all 2016 of 38. That said, Hercules currently has seven IPOs – seven companies that IPO registration, currently filed under the Jobs Act looking to complete their very own IPO debuts.

However, given the recent high profile IPOs that took place with Snapchat and Blue Apron, they have not feared as well to post their IPO, initial public offerings and find themselves trading well below their initial IPO prices.

This has added fuel to the growing debate and skepticism on private company valuations, especially as it relates to private Unicorn company valuations.

For those of you who may not be familiar with the term Unicorn, Unicorn simply refers to companies that private companies have valuations in excess of $1 billion of which they're currently in 120 Unicorns in the marketplace today.

Unfortunately because of these two high profile IPOs, we anticipate that because of these companies IPO performance after their offering that it may have a potential chilling effect on allowing other companies worthy of pursuing IPOs and secure liquidity or exit via an IPO to most likely delay their offerings further into the – for the near foreseeable future.

Having said that and contrary to public perception, VCs overwhelmingly realized exit of their investors primarily through M&A activities and not so by IPO activities which tend to get and generate all the media attention.

M&A activities continues at a nice and steady healthy pace with transactions and amounts paid during the second quarter with a 142 companies being acquired and valuations the chip $19 billion through the second quarter.

Culminating and 305 transactions completed and $45 billion of transaction value so far in the first half of 2017, again putting it on pace to also exceed all of 2016 which had $97 billion of M&A activities.

As evidenced by our very owned press release issued on June 29, 2017 Hercules Capital was equally busy with its own portfolio on exits realizations through M&A activities. And in fact, nearly 100% of Hercules exits realized during the second quarter were related to M&A activities that took place.

M&A activity continues to remain very robust and healthy in our own portfolio. We are expecting similar levels of activities as we head into the second half of 2017 assuming of course sustained and favorable market condition. In closing, we completed an outstanding quarter with a solid finish to the first half of 2017.

We are extremely well positioned entering Q3 2017 with over $355 million of liquidity. We have access to the equity capital markets through our ATM program and we have access to the debt capital markets through our debt ATM program.

We continue to source and evaluate potentially new and interesting investment opportunities to convert our liquidity and continue to drive growth origination for the second half of the year in $350 million to $450 million the majority of which were expected in the fourth quarter.

We expect to continue and here to our slow and steady growth strategy and looking to grow our total investment portfolio by year-end to $1.4 billion to $1.45 billion with what we see today in light of the $200 million plus of early payoff activities.

Again, we expect to finish the year with $1.4 billion and $1.45 billion driven in no small part to the fourth quarter activities that were anticipated. And finally, as I'm sure many of you are interested in receiving an update.

I wanted to address the issue of our own externalization announcement and process that we shared with you earlier in the year.

As we had previously indicated in our earlier press release, the Company’s Board of Directors continued to work diligently with our respective advisors on the previously announced expanded review designed to determine those most appropriate, investment advisory structure that enhances in a line shareholder value as many of you kindly shared your feedback during that process.

We expect this process will continue until late Q3 or mid Q4, which time the respective advisors will present their findings to the Company and the Board of Director's. It would be inappropriate and premature for me to comment any further on that process until the Board of Directors has concluded its own process that evaluation.

Now let me turn the call over to Mark Harris to review our Q2 financial performance and results.

Mark?.

Thank you, Manuel, and good afternoon or evening ladies and gentlemen. I’m please to report our second quarter results with our true industry leading venture lending platform that continue to deliver strong financial performance even with the strong headwinds from payouts and amortization in the quarter. Today I will compliment Manuel’s remarks.

They focus on key performance metrics that drove the second quarter earnings.

But before I do this, I want to comment on our outstanding continued long-term performance metrics that we've achieved from inception through the second quarter of 2017, such as our remarkable low net losses of $4.8 million on cumulative basis since inception or over the 13 years history, and effective zero annualized losses since inception basis points.

Our continued strong performance in terms of return on average equity of 13.2% and return on average assets of 6.8% in the second quarter is the highest amongst all BDC, our resilient origination platform that delivered almost $190 million of fundings in the pace of $201 million of headwinds, all happening in the one quarter.

Our ability to work with in monetize positions when there are refinancing and other actions and finally the resilience of our dividend policy, which is driven $13.40 of dividend income, [indiscernible] our public offering and 16 consecutive $0.31 dividends quarters declared including the second quarter of 2017.

With that, let’s turn my attention to second quarter key performance metrics. I’d like to first start off the resilience of our origination platform. We had strong investment fundings of $187.3 million in the second quarter or 22.2% from the first quarter 2017, of $133.3 million.

This includes the addition of seven new portfolio companies that accounted for nearly 66% of our originations in the second quarter.

Prior to the conversion of one position of debt to equity, our loan portfolio on a cost basis was able to stave off the $201 million headwinds from unscheduled early payoffs and scheduled amortization or reduction of only $13.6 million.

This resulted in our debt investment portfolio balance of $1.324 billion the end of the second quarter on a cost basis.

In the second half of 2017, we expect to see growth in our debt investment portfolio between $1.4 and $1.45 billion at cost, subject to more normalized levels of unscheduled early payoffs in the quarters Permian Wells previous comments. Secondly I'd like to just turn to the strong income statement performance that we saw in the second quarter.

Our net investment income was $25.3 million in the second quarter or $0.31 per share, which was an increase of 11.5% and 10.7% respectively over the first quarter of 2017. This was driven by the increase in our total investment income of $48.5 million in the second quarter from $46.4 million in the first quarter 2017 or an increase of 4.5%.

Our net investment income margin increased to 52.2% in the second quarter, which was on the high side of our trailing a quarter average of 50.6%. Our interest in fee expenses is $10.6 million in the second quarter, which was in line with our expectations of around $10.5 million to $11 million per quarter subject to changes in our borrowing base.

Our SG&A $12.6 million in the second quarter from a $11.2 million in the first, which was driven in part by a variable compensation plan, which rewards our team for strong originations and other corporate expenses in the period. We continue to believe that our SG&A will be between $11 million and $12 million.

But as Manuel spoke to earlier, lighter in Q3 and higher and Q4 as a third quarter is typically quieter in terms of fundings compared to that of the fourth quarter, which is usually our strongest funding quarter in the year.

Our net interest margins continue to expand $37.9 million in the second quarter of 2017 from $33.9 million or [indiscernible] adjusted for one-time acceleration of finance costs for the retirement of $110 million to 7% 2019 notes and interest overlap would adjusted at $36 million which is still an achievement in the second quarter at $37.9.

Further our net investment margin as a percentage of average yield assets was 11.1% in the second quarter compared to that of 10.1% in the first quarter of 2017. As we're able to generate more income over in our growing yield asset base while effectively managing a cost of capital.

Third, I would like to talk about our significant and distributed earnings leading into the second half. As we disclosed last quarter we closed 2016 with $34.2 million or $0.42 per share of undistributed earnings are spillover which was result of Hercules over earning our dividend in that year on a tax basis.

Today we estimate our undistributed earnings remain strong with an estimated spillover of $28 million as of June 30, 2017 which equates to approximately $0.34 per share based on the second quarter weighted average share count.

While this considers the first half performance up 2017 it will be subject to change from both the remaining performance in the second half of 2017 and any tax adjustments at year-end.

However, like we saw in 2015, this allows us to have the tactical ability to implement strategy for the long-term benefit of Hercules while maintaining our current dividend policy. It has always been our strategy that we maintain a variable dividend policy which typically evaluates our expected financial performance on a rolling 12-month basis.

The board will evaluate our dividend policy each quarter and determine if any changes are warranted ranging from one-time distribution or special dividend to an increase or decrease of our expected dividend distribution policy. Now talking about credit. And our improving credit in our near-term outlook.

In the second quarter 2017 our weighted average credit rating approved 2.27 from 2.43 in the first quarter and our watch list grades which are grades 3.25, decrease from 39.4% to 33.6% on a cost basis primarily from the conversion.

Our non-accrual decreased 2.9% as a percentage of our total investment portfolio on a cost basis and 0.3% on a value basis in the second quarter of 2017 which was consistent with our historical performance levels.

We expect four to six companies to complete or be through their M&A process in the third quarter although some may close in the fourth quarter which we believe will have the ability to significantly reduced our non-accruals in the future period.

Looking at our NAV we saw NAV increase to $117.5 million in the second quarter from $807.9 million in the first quarter or increase of 1.2% to $9.87 per share. This $9.6 million increase as a result of $2.5 increase in our asset base at value and a decrease in our liabilities of about $7.1 million.

We saw assets increased by 2.5 to nearly $1.6 billion in the second quarter of 2017 which was mainly driven by the increase in cash of approximately $16.6 million and a decrease in our total investments add value of $10.8 million.

Our liabilities decrease $7.1 million in the second quarter of 2017 to $771.3 million dollars which was caused by the amortization our securitization and $13.5 million due to paydown in the quarter offset by a combined increase in interest accrual related to our convertible bonds and or six and a quarter bonds of about $5.7 million.

Given this performance we saw strong investment income performance in the quarter which our ROEs increasing to 13.2% in the second quarter from $11.9 in the first and our return on average assets increasing to $6.8 from $6.2 between the second and first quarter of 2017 respectively. Next the strong liquidity at quarter end.

We finished in the second quarter with $355.4 million and available liquidity which was comprised of $160.4 million in cash and $195 million of undrawn availability under our revolving credit facilities which are subject to borrowing base leverage and other restrictions.

Our cash alone if invested at our core yields of 12.1% add another $0.07 and NII per share based on the second quarter weighted average shares outstanding demonstrate the potential financial impact of putting this cash to work.

Further given our net regulatory leverage, which excludes SBA debentures as we have exempted relief from the SEC declined to 50.9% in the second quarter from 54.7% in the first quarter, which leaves us ample room for growth. With our cash position at the end of the quarter and soften to oppose a one-to-one to 1.1 to 1 gap leverage.

This potentially would enable us to add approximately $0.09 of NII per share on the same basis we previously discussed. Finally, I want to discuss our asset sensitivity which is one of the hallmarks of our financial statements.

As we've commented in the past, we have a very well positioned portfolio with a highly asset sensitive balance sheet in the event of future interest rate movements.

Given 94% of our loans are variable interest rate loans with floors and 100% of our debt outstanding was fixed interest rate debt at the end of the second quarter, 25 and 50 basis points increase in the benchmark interest rates would be accretive by $0.03 and $0.07 respectively of NII per share on an annualized basis.

In closing, we're very pleased with the current position. At the end of the second quarter, our liquidity position allows us to grow our book opportunistically and cautiously. Our long-term focused approach and disciplined underwriting standards will enable us to continue to drive strong results for the foreseeable future.

With that report, I now like to turn the call over to the operator to begin our Q&A part of our call..

[Operator Instructions] And our first question comes from John Hecht of Jefferies. Your line is open..

Hey guys. Thanks very much. You give some guidance for the range of yields in the portfolio.

Is that contemplating a rate hike in that margin or would rate hiking increase that yield range?.

We never publish prospective yields related to any rate hikes because we don't know if they are going to happen, so the answer is no. It does not reflect any rate hikes that may happen. As to the formal part of your question, as we indicated in our release today, we expect yields to modulate slightly downward.

We are seeing yield compressions ourselves. And I think the new guidance for yields that we are putting out there on the senior secured sole lender to our companies is going to be more in the neighborhood of 11.5% to 12.5% range, and it’s probably down in the last 12 months by 100 basis points or so, so now we're forecasting that.

The more normalized yields are going to be 11.5% to 12.5% of the overall weighted portfolio on the core basis..

Okay. Thanks for that color. This quarter you gave some good details and breakouts of the fee kind of components of several recurring in one-time fees.

Just couple questions, I know one-time fees are one-time fees, I think you tend to – you have those every quarter, what’s like an average pace of that, what you would consider non-recurring fees in any quarter? And then is the recurring fee kind of component amount you reported this quarter, is that a typical rate?.

So I’ll let Mark expand on that. We've been grappling with this problem now and what is a normalized one-time fee and that kind of occurs consistently. And I would tell you that after 13 years here that number is probably $3 million to $4 million [indiscernible] events, but I’ll let Mark kind of expand on the fee color for you..

Yes. It’s a difficult question to answer because obviously it’s a function of what’s paying off and how old it was on our profile.

The comment that I would make is, we did the breakout because obviously it was required under the SEC rules, but I think to really kind of answer your question on point, taking a little bit differently which is more of a percentage of the early pay downs that we see and that can typically range between 3% and 5%, but it's difficult because you need to understand what the aging is and what's paying off..

And I would just expand on that that it is highly likely that the breakout you see now most likely wouldn’t be repeated because it's a anomaly under the reporting requirements, under GAAP that if you have to pick interest that composes approximately 5% of your income and you have to break it out – in our history this is the only quarter that happened and we're not expecting that to occur in Q3 and beyond again.

It was driven by early payout activities this quarter..

Okay. That’s helpful. And then you have a pretty big pipeline and given us what you think will converge in the next couple quarters or convert excuse me.

Any interesting characteristics or trends you are seeing in the pipe, but in terms of maybe industry developments or geographic components that we should be talking about?.

I think that I would describe, the industry right now is growing healthy demand for capital.

I think everybody is looking to position their balance sheets rolling into the second half of 2017, especially if the IPO market seems of the non-existent and everybody want to have capital just in case something happens within the administration of the broader economy.

So I think that if you really want my opinion, I think that you're seeing a lot of companies pursuing an insurance type of liquidity enhancement to their balance sheets and we're expecting a fairly healthy growth of activities.

We do believe and are seeing early signs that the competition is beginning to add also quite a bit, a lot of our players that we certainly see are either out of money and have liquidity constraints or origination limitations or other factors that are not allowing them to be back in the marketplace. So even though we're forecasting yield compression.

We're hoping to see that yield compression begins to bounce off the bottom meaning 11.5% and rise hopefully in the first quarter of 2018. But we're seeing a broader range of companies looking for capital right now. No one industry is being highlighted and no one industry is being discriminated upon because it seems to be across the board right now..

Great, thanks very much guys..

Thank you..

And our next question comes from Ryan Lynch of KBW. Your line is open..

Hey, guys. Thank you for taking my questions. The first one has to do with kind of the market environment. I mean there is obviously a robust second quarter as far as capital deployed in the D.C. market.

I was just wondering what exactly is driving or has been driving the strong prepayment that you guys received in your portfolio in the second quarter and you guys also expect fairly healthy prepayment in the third and fourth quarter and then you said you expected to maybe add a little bit, so what's driving the strong prepayment that we've seen historically? And then why do you guys expect those to start to kind of slow down a little bit later this year?.

So I it's funny that we use the word now more conservative $100 million when in our history that would have been a robust quarter. So that kind of tells you the new paradigm that we're operating under $100 million of really repayment activities is the largest and to be robust.

That said, what is driving, it is probably bifurcated in two kinds of high level buckets. The first bucket or 50% will be driven by M&A event that the company is being acquired.

It is a big driver for some of the refinancings and the second driver of that the next major budget probably a third of it will be driven by bank refinancing is probably a third of it. And the remaining corresponding balance is believe it or not equity.

Equity is a big competing process for us and most of us may say why would people want to use equity to displace debt, well where you're getting inflated valuations, it makes a lot of sense to actually overcapitalize your company with equity when you're getting excessive valuations.

And so as VC activities remains very robust with $33 billion invested and given that the IPO market is non-existence that meaningful part of that is that private companies have to survive longer privately, which means they consume more capital and they want to be cognizant of dilution.

So that becomes a great demand vehicle to mitigate the dilution as you're having to wait longer for exit event with an IPO and M&A event. And we have good sharks in our website.

If you look at our Investor deck, we actually have a good data from Dow Jones that shows you, the ventures years of exit from M&A and ventures year of exit from an IPO event for a company. They’re corresponding about 5.6 year and seven years for an IPO to go public..

Okay, thanks for that color.

And then kind of following back up on the prepayment fees, and accelerated IT, with $75 million to $100 million of prepayments – early prepayments in the third quarter that's about one-half or two-thirds kind of where lands of the prepayments that you guys received in the second quarter and kind of on pace for what do you guys received in the first quarter.

So should we expect, I’m just kind of think for modeling purposes, expect prepayment fees in the third quarter to be about one-half or two-thirds of what we saw in the second quarter or pretty similar to what we saw in the first quarter of this year?.

I would have say that right now and it's hard to say for us to answer this question is that it is prepayment coming in that $35 million, $50 million or $100 million and I think that if you assume that it comes in $100 million of prepayment activities for example.

I think that a fair number to use is probably $4.5 million to $5.5 million of total fees of which as I said $2 to $3, $3 to $4 are kind of normalized levels of expected normal fees. So I think if you trust me I think $4.5 to $5.5 million our fee income in Q3 is probably the right cadence to look at and maintain..

Okay. That’s definitely helpful. And then you mentioned the high profile IPO Snap and Blue Apron not really doing so well post IPO which is push back the IPO timeframes for some potentially you know smaller companies that probably could stand it IPO but just because those high profile ones not working out well it's push back that timeframe.

So does that provide any sort of opportunity for you guys to provide more capital lease company since you're actually going to stay public warrant obviously that's worse from the standpoint of you guys being able to exit any companies you have warrants or equity investments and if they are not going IPO but conversely if companies are staying private longer I would assume they still need to raise capital [audio dip] able to would provide them and that capital either private for longer..

Yes. This is where scale is critical in the business. Where the $1.6 billion balance sheet our ability to have a high concentration positions of $40 million, $50 million, $60 million transactions we get easy absorbed out without any problem and when you want to play and pre-IPO market.

You have to have the ability to be offering minimum $500 million transactions sizes to make sense or else you really don't move the needle for these companies. If you are small venture lender in the marketplace you cannot rightfully do that and maintain your rich status on diversified portfolio requirements.

We have the capabilities and wherewithal to actually do just that. So we are actively evaluating a lot of those opportunities, but we're also very cognizant of the what we consider to be potentially overvalued companies as well.

So it's a significant structural issue when you look at these investments to ensure that we realize the returns that we believe are warranted and what the returns the Company is willing to offer and in that process is a engagement of trying to find the happy point for the borrow in the lender to reach and I think a lot of our activities in Q4 are going to be related to just that..

Okay. And then just one last one if I can this quarter, we talked about it this happening but Sungevity that converted to equity to source spectrum there was an asset purchase with another player for the assets.

I just want to know if you guys could give any update on kind of the outlook at the business and I saw it had another write-down this quarter of the equity position so. Any sort of update you guys can provide would be great on that business..

So clearly we’re disappointed on the Sungevity transaction it's a testimony to the dangers of a president with a tweeting interest that wiped out the solar interest so that’s go a company with that - with a tweak that happened sometime in Q4 last year. That said, I would tell you that opposes the merger and emergence out of bankruptcy.

The new partners to which we are associated with in the new company. And the trajectory that companies on and the new management and strategy there pursuing we're actually quite encouraged by the future of that company. Now clearly have to execute but I think that the downsizing and rightsizing of Sungevity into the New Co, the New Company.

I think that we're probably more optimistic, but we're in the first inning. And but we are encouraged with what we're seeing and we're certainly encouraged by the cost cutting measures and the regarding to profitability that going to be happening here short order of the new company.

And so we're pretty optimistic that and 18 to 24 months from now we could see a sizable recovery of our investment and cost basis on that transaction..

Okay. Thank you for taking my questions..

And our next question comes from Aaron Deer of Sandler O’Neill. Your line is open..

Hi, good afternoon, guys..

Hi, Aaron, how are you?.

I am doing well, thank you.

Just a few questions may be first, I still trying to I guess reconciled just some your comments with respect to the anticipated loan yields that sounds like that your competitors are being hamstrung by their liquidity and size and that's actually causing something of a pullback in the competitive environment or improvement in the competitive environment.

Here you're guiding down on the yield by 75 basis points despite a seven – three Fed rate hikes over the past year.

Is there a shift in the types of companies you are financing? Or why does that's creating this downward pressure on the yield?.

We refuse to go do second lien or subordinated deals, we wanted to remain senior secured on transaction and we're looking and pursuing [indiscernible] the more higher quality companies are out there. And those high quality companies are still receiving pretty aggressive bank deals that are being done.

So I think banks remain fairly aggressive in their nature, and that's where we're not seeing a significant drop in competition. But as you'll see in our overall yield or core yields, we are now down to 12.1% and we’ll think that will trough those yields sometime in the next quarter or two.

I think that will end up crossing the overall portfolio somewhere around 11.5%, 11.6% is what our models are telling us right now and then we start bouncing off that low as we start onboarding new loans, but everything that we're seeing in the market will still continue to see further compression in yields..

Okay.

And then Mark I have a question on the – it looks like the G&A expense was up sharply from kind of where it's been running, was there anything non-recurring or unusual in there that's going to drop back out in the third quarter?.

No my comment would be – again, as the originators originated a lot of that our variable bonus time really kind of kicks in on the salary side of it, on the G&A side of it.

We would expect it to really kind of come down just a little bit, but overall we're trying to manage the G&A the best we can with the growing platform of adding future capacity for new hires et cetera So it's one of those that we would expect to maybe come down a little bit level off, but that's where I would expect that to come in..

I want to encourage you, look at what we said in Q4, we talked about expecting our SG&A to rise a couple million dollars in 2017 and we're still on that trajectory. We're controlling a little more, but we still expect that to continue because we're adding headcount.

I mean for example, we're actively looking to hire 10 to 12 additional brand new hires in the business as we continue to grow the platform because of loan demand that we are seeing in other areas. So we're very much actively looking to grow..

Okay. There is 10 to 12 new hires and those are all relationships managers not – that's….

No that’s just the volume, that’s both the operations center as well as across the board..

Okay.

And then just a quick question on the externalization just in terms of the process, who are the advisors that the board is working with or not?.

We have not disclosed any advisors purposely. But you can safely assume that there are well recognized investment banks and had to go through a fairly meticulous RFP process and the banks were selected, but there are well recognized national banks..

Okay. Very good. Thanks for taking my question..

And our last question comes from Leslie Vandegrift with Raymond James. Your line is open..

Hi, good afternoon. So just a quick question on externalization, I know you said can't really get into the process yet and expected to end about in the third quarter, but in the Q and talked about the risks between the two structures, one of the internally managed risk that has been added is the size, the inability to scale up to size.

Is there a max size you're looking at if you stay internal?.

There answer is there's no arithmetic max size to internal. It has more to do with product offering and the ability to offer more attractively margin transactions. I think I’ve spoken about this many times in the past. The ability to complement an asset base lending transaction that may price somewhere neighborhood of 7% - 6.5%, 7.5% yield.

I don't think we should be doing that out of the existing fund today if you will because it lowers our overall yield and consumes that much more capital.

So the ability to have an affiliate relationship with a fund to be able to do transactions in a more attractive margin, lower margin transaction such as ABL would be highly complimentary and accretive to your shareholders at the Hercules we sign. That's the path we decided to take. So growth is a hard one to answer to me.

It is a function of the venture capital marketplace and continue access the equity and debt capital markets and as well as sustain the yields that we like to originate in the business to have the margins operate the business and generate ROE’s that we like to fund attractive for our shareholders..

All right. Thank you.

And then just one other quick question on that, in that same section the other risk on [San Antonio] that's discuss seems to be the risk of key personnel leaving and then specifically calls at senior management and just curious if there has been offers in senior management in [indiscernible] or if yourself consider that?.

I think that we are in a highly competitive environment and when you have the quality of the platform that we have and the high caliber of professional individuals that we have who are highly trained and eventual lending platform and world. The answer is just like our loan portfolio is being assaulted by those looking to take loans off our books.

You can imagine that our highly skilled and talented individuals are equally receiving similar offers, which is why you're seeing our compensation go up a little bit, on the SG&A level as well. But we don't have slavery in this country.

It was a free agent and we want to make sure that we offer an attractive compensation program that certainly allows us to motivate and retain critical individuals in organization..

All right. Thank you..

And our next question comes from Christopher Nolan of Ladenburg Thalmann. Your line is open..

Manuel, you can give in terms of Coin offerings, Bitcoin and so forth. Is that possibly starting to encroach on companies going public or is that starting to become a factor because it's hard to get more traction in the Wall Street Journal least..

Well Bitcoins are a lot like canaries in the coal mine. It all depends in how you want to interpret it and how you want to look at it. There is governments who believe that Bigcoins is a new future, commerce currency.

There are others who are dreadfully fearful of a Bitcoin on traceability of doing that as an example as you may or may not know when to ransomware occurs. The latest methodology of remunerating or compensating is the ransom holder is that they have to then pay using Bigcoins as a way of clearing.

So Bigcoins is getting credibility by nefarious activities that are going on in the marketplace. I had to obviously say we've looked at Bigcoins as a currency to also be prepared to look at it and use it. It is unclear whether or not, believe it or not, under the 1940 Act and the custodial requirements that we're required to use for capital.

If whether or not we're even regulatory able to use Bigcoins as a currency of choice, but we have to look at it. We are still evaluating it. But there are a lot of regulatory obstacles to make that a currency of choice..

Great, thanks for taking the question..

Thank you. End of Q&A.

And ladies and gentlemen, I’m showing no further questions from the phone line. I’d now like to turn the call back over to Manuel for closing remarks..

Well thank you everybody and thanks for joining us on the call today. As you all know, we took a lead to pursue many typical road shows, non-deal road shows in the coming months.

We will be at a Private Debt Investor conference in September and we will also be at KBW, Midtown, March – in October, in Manhattan and will also be at the Wells Fargo conference in – I believe it was November of this year as well and we'll be doing a European road trip tour as well with investors.

So you can expect to see a lot of us during the next two or three quarters in the marketplace. With that if you would like to meet with management, please free to contact your investment bankers or our own investment IR department, Michael Hara to schedule that. With that, thank you for your time, and thank you operator..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day..