On February 2024, I issued my first piece on TriplePoint Venture Growth (NYSE:TPVG) recommending investors to avoid this speculative BDC investment. There were a couple of reasons, but the most important ones were related to the investments in relatively early-stage companies and heavily indebted balance sheet, where the combination of these two implied just too high risk.
Since then, TPVG’s share price has gone down by circa 30%, while the BDC market has delivered positive total return performance. After TPVG released its Q1, 2024 earnings deck, I wrote an immediate follow-up article to see whether the massive price correction could provide investors an opportunity to take at least some smaller stake to benefit from an improved risk and reward profile. However, the fundamentals were so bad, that even after considering the lower share price, the investment case was still just not there. Since then, TPVG’s market capitalization level has continued to drop (i.e., currently being 18% below May 3, 2024 date when my previous article was circulated).
Let’s now review the Q2, 2024 earnings report seeing what has changed and whether the price has become low enough to make an opportunistic addition in portfolio.
Thesis review
The Q2, 2024 results continued to deteriorate, showing no signs of a recovery. The total investment income landed at $27.1 million compared to $35 million in Q2, 2023. Similarly, the net investment income for Q2, 2024 came in at $0.33 per share, which marks a massive decline relative to the same period last year when the NII per share was $0.53. Even more, by measuring the NII per share results on a quarterly basis (comparing to Q1, 2024 figure of $0.41 per share), we will arrive at a very similar conclusion – i.e., the business is facing really strong headwinds.
Plus, if we look deeper into the figures, we will notice that the net realized loss position has remained elevated, whereas during the recent quarter TPVG was forced to write down $18.8 million of asset value. There was also a minor chunk of the portfolio that was subject to positive effects from equity realization, but in terms of the absolute figures, it really did not move the needle (i.e., the gains from equity and warrant monetization landed at $1.3 million).
As a result of the weakening NII generation and huge realized and unrealized losses, the NAV per share continued to drop reaching $8.83 per share, which is significantly below the result achieved as of year-end, when the NAV per share stood at $9.21.
Given the negative trajectory of NII generation and struggling portfolio investments, the Board decided to cut the quarterly dividend by 25% to $0.30 per share in an attempt to preserve the liquidity and avoid the situation in which TPVG would have to divest portfolio or assume debt just to fund the dividend. Based on Q2, 2024 NII per share result and the recently reset dividend, the forward dividend coverage level now is at 110%.
In my opinion, this is still too aggressive, leaving the meaningful margin of safety for TPVG to avoid another dividend cut.
Theoretically, there are two positive drivers that could support this level and help TPVG slowly recover from this situation.
First, as during Q2 the Management reduced the unfunded commitments and continued to experience notable repayment activity, the balance sheet has now landed at a much more acceptable level. Namely, the gross leverage ratio has now decreased to 1.15x, which is even slightly below the sector average. Having low leverage is very critical to avoid the magnified consequences of incremental write-downs.
Second, the overall investment activity has increased for already the fourth quarter in a row. In Q2, TPVG managed to allocate $52 million in new commitments at a weighted average yield of 15.5%, which is about 120 basis points higher than the yield levels achieved in the previous quarter. On top of this, the signed term sheets for additional investments have increased by 44% over the previous quarter and new debt commitments by as much as 420%. Such activity is definitely welcomed as it sends a clear signal that TPVG has indeed come closer to a moment, when the net investment statistic will become positive again, which, in turn, would allow expanding the NII generation.
However, while the new investments over Q2 have been more attractive, the repayment activity still largely offset these positives. In other words, during Q2, TPVG faced $51 million of loan prepayments due to large equity capital raises and acquisitions. Hence, the net effect is still neutral or even slightly negative, as the previously made investments are higher yielding than those which TPVG can access now.
Moreover, the comment in the recent earnings call by Jim Labe – Chief Executive Officer & Chairman – does not send too encouraging signal on this front:
While we’re seeing a modest increase in investment activity, we do not believe this marks an inflection point. The imbalance continues between the levels of venture capital investment activity and the continuing limited exit opportunities through IPOs, merger acquisitions for venture capital-backed private technology companies. Private company valuations have not fully reset and we expect the valuation overhang in venture growth stage companies to continue to be worked through over the coming quarters.
The bottom line
As we can see from the analysis above, there are no meaningful signals that render the investment case attractive. The cash generation levels are still on a structural decline and the portfolio growth dynamics do not bode well. Even after the recent dividend cut, the margin of safety on the dividend coverage front is just too low in the context of all of these risks.
Having said that, I would be careful of going short TriplePoint Venture Growth because the P/NAV discount is very steep, and the leverage has become more balanced. Plus, as TPVG holds equity and / or warrant stakes in 94 portfolio companies, the increased M&A activity from the Fed interest rate cuts could potentially allow TPVG to monetize these positions, thereby accessing the well-needed liquidity.
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