BDC Update: TriplePoint Venture Growth

March 22, 2024

Reminder

Much to our own dismay, we felt compelled to suspend our coverage of TriplePoint Venture Growth (TPVG) back on January 2, 2024 - see below. This followed a long period of being disappointed by how the BDC valued its investments. Some venture BDCs are prone to not discounting the value of the loans and junior capital to portfolio companies until something very dire happens, like a restructuring, a default or a bankruptcy.

The Vast Majority

By contrast, most BDCs write down ("unrealized depreciation") their investments on a quarterly cycle when aware of bad news that might affect the full collectibility of the capital advance. This gives investors a heads up as to the true value of the portfolio at any given time and hints as to which loans might ultimately end up on non-accrual. With so little information available about what are principally closely-held private companies, BDC valuations are a key element in aiding BDC Best Ideas preparation of short and long-term projections of earnings and net book value for the now-39 BDCs we track. In fact, we probably would abandon making long-term projections if not for the availability of these periodically updated valuations.

Wrong Footed

We believe these mis-valuations by the likes of TPVG and HRZN have likely left many investors dazed and confused in the last two years. At TPVG, at the end of 2021, the total portfolio had a cost of $837mn, but was valued at $865mn - a 3% premium. There was only one company on non-accrual and "underperforming assets" as a percentage of the total portfolio - going by TPVG's numbers - was a very "normal" 6.1%. Even after a very difficult 2022 as the venture industry went into its direst recession in a generation and TPVG booked ($46mn) in realized losses, management took only ($37mn) in unrealized depreciation. Underperforming assets moved up to a still-OK 10.6% and there was still only 1 non-performing company.

Dam Break

That unrealized depreciation was clearly inadequate as in the just-completed 2023 the problem credit chickens came home to roost. Realized losses amounted to ($75mn) and even then TPVG had to add ($38mn) in further unrealized depreciation. There were bankruptcies, restructurings and defaults all over the portfolio, causing Edwin Dorsey of the Bear Cave to pen a scathing critique in May 2023. The portfolio - instead of being valued at a premium - ended the year at a (6%) discount to cost. As is often the case in these melt-down situation, class-action lawsuits followed - all neatly summarized in a TPVG SEC filing on December 29, 2023. There are now 5 companies on non-accrual and one-fifth of all investment assets are deemed to be underperforming. Over at the BDC Reporter where we rate credit performance as either NORMAL or BELOW NORMAL, TPVG was shifted to the latter - never a good sign.

The Never-Ending Story

Unfortunately for everyone concerned, the bad news continues - as does the sense that TPVG only fesses up to credit problems at the very last minute. As of September 2023, two loans to women's clothing retailer Outdoor Voices were valued at par. A quarter later, the debt was placed on non-accrual and discounted (67%). Now - as covered both by the BDC Credit Reporter and the BDC Reporter from different perspectives - Outdoor Voices seems headed to the knackers yard. Yet, the back story of the company suggests trouble has been brewing for years and fundamental performance probably merited a big write-down many quarters ago.

Unreliable

The issue with Outdoor Voices is less the damage to TPVG - much of which is modest and in the rear view mirror - but in the valuation. If all investments are only going to be written down when trouble is already underway, the valuations of the portfolio companies are useless as a prognostication tool and give a false picture of investment collectibility - a key element in BDC investing. All this to say that we feel validated in our decision to suspend our coverage of TPVG. We can't tell you - nor apparently can the BDC's management - where the portfolio's creditworthiness stands and that makes projecting out future earnings and distributions highly speculative. Making these educated guesses about the future is already hard enough.

January 2, 2024

The Original

Back in November of 2023, BDC Best Ideas "suspended" coverage of Horizon Technology Finance (HRZN) principally because we no longer believed we could rely on management's portfolio company valuations. In a nutshell, we concluded that the quarterly filings had proven over several quarters - and in many different instances - to be out of whack with what ultimately befell the companies involved. As a result, we felt this important tool in predicting future net book value and investment income was so flawed as to make any attempt at predicting the future almost worthless.

Second Shoe Drops

At the same time as we were worrying about HRZN, we had similar concerns for TriplePoint Venture Growth (TPVG). However, given that we hadn't yet undertaken a deep dive into the BDC's IIIQ 2023 results, we only "PAUSED" rather than "SUSPENDED" coverage. See the Expected Return Table. Now there's a new development that is causing us to suspend coverage of TPVG.

Lawsuits

On December 15, 2023 and just on the eve of the new year, TPVG quietly posted to its website two documents relating to shareholder suits against the BDC. The gist of the cases is best illustrated from this extract from the 200 pages involved:

Defendants thus (a) failed to disclose material adverse facts concerning the decay in TPVG’s financial condition and prospects, including the material decay in TPVG’s investment portfolio; (b) misrepresented the true quality of TPVG’s various Portfolio Companies and loan book, as well as the viability of its overall investment strategy; and (c) overstated the quarter-end value of TPVG’s investment portfolio, the amount of TPVG’s actual quarterly net unrealized gains on investments, and the amount of TPVG’s actual quarterly net increase in net assets resulting from operations. After the truth began to emerge as discussed below in IV, TPVG’s stock price took a substantial hit.

Neutral

That's heady stuff - albeit standard for lawsuits of this kind. For our part, we have no opinion on the legal merit of the lawsuits brought by two different individuals but by the same law firm - Dechert. We've reviewed both documents and found much duplication as both cover the same period (May 2022-May 2023) and the same subject matter. We are not - or have ever been lawyers - so we can't opine on how "strong" a legal case is being made, or what the outcome might be. However, anybody with an interest in TPVG - and in BDC venture lending more generally - might want to pick up their iPad and settle in for a long read of at least one of these lawsuits, whose links are given above.

Take Away

However, the lawsuits do confirm without a shadow of a doubt that many TPVG portfolio companies have i) faced very serious - sometimes terminal - difficulties in recent quarters, and ii) resulted in very sharp changes in company valuations, often a good deal of time after the underlying businesses began to deteriorate. All the information seems to be from the public record and many of the companies involved were written about extensively in our sister publication - the BDC Credit Reporter. As a result, many of the narratives are familiar to us and confirm our research. Unfortunately, the lawsuits also mention several companies that we have not written about and - taken together - suggest TPVG has faced credit challenges on a wide scale.

Plenty

There is no comprehensive table/list offered of every troubled portfolio company but our scan down the pages suggests about 16-20 entities are involved. Some filed for bankruptcy and were restructured; some were liquidated; others were sold for partial proceeds and a few hobbled on. The very number of companies in an $870mn portfolio of 54 different businesses (as of 9/30/2023) is a problem for us. Furthermore, we're distressed that management seems to value its investment at very close to par - on many occasions - right up to some breaking point. To our mind, portfolio company valuations should reflect whatever problems being faced as they first occur.

Foreseeable Future

May 8, 2023

Disappointing

Of all the 19 BDCs that have reported IQ 2023 results through May 5, 2023, TriplePoint Venture Growth (TPVG) has made the worst impression. One quarter after fessing up to a major credit loss at Medley Health - see below - the venture-debt BDC saw several other portfolio companies either file for some sort of bankruptcy protection or get downgraded in their internal ratings.

Boo Hiss

Not helping the optics is that a publication called The Bear Cave - whose name tells you what they do - wrote an unfavorable report about TPVG;'s underwriting and the outlook for its portfolio. Then at least two analysts added fuel to the fire and downgraded the stock - even though its stock price has been in descent since late 2021. No wonder that TPVG was the Biggest Loser in percentage price terms last week, as discussed in the BDC Reporter.

Fallen

As of Friday, May 5, 2023, TPVG's stock price has dropped to $9.84. More than one-third of the BDC's market value has been lost since reaching a 52-week-high of $15.85 and more than 50% off TPVG's all-time high set in November 2021. A BDC that has consistently traded at a premium to book is now at a (15%) discount and very close to its very lowest level since November 2020.

Alone

So far, of the 4 venture-debt BDCs that have reported IQ 2023 results TPVG is the only one to have taken on apparently serious damage from the unfolding crisis in the venture capital world. That makes them either a canary in the coal mine or suggests - as The Bear Cave argues in what we've read of their critique - that there's something unusually flawed about TPVG's investment underwriting. Neither alternative will be of any comfort to the BDC's shareholders.

Just Saying No

Of course, management is copping to none of this. They stand by the thoroughness of their due diligence, calling Medly Health's alleged fraud problems an exception to the rule. They point to their relatively long history of very low net losses. Most intriguing of all, TPVG suggests that even the troubled companies they are contending with should not result in outsized realized losses. Or, in other words, expectations for recovery are high and the unrealized losses taken in the first quarter have been modest. TPVG's NAV Per Share fell only (1.6%) in the most recent period. That's the worst result of any BDC that has published its results, but still low in absolute terms.

Cheap?

Clearly - as we've shown above - the market does not believe the BDC will be getting off that easy and may see the reported underperformers as the thin edge of the wedge. For our part, we don't yet have an opinion as we've not yet had the opportunity to undertake a deep credit dive into the 59 company borrower portfolio. However, with TPVG reporting Net Investment Income Per Share of $0.53 in IQ 2023 and the analysts actually increasing their EPS projections for this year to $1.9100 from $1.8000 just 90 days ago, a curious situation is developing. The BDC's nominal Price To Projected 2023 earnings is now just 5.2x. Even going by the analysts' lower earnings projection of $1.7800 in 2024, the PE is still 5.5x.

Way High

We're mostly focused on the BDC's dividend-paying power- having projected a $1.8000 payout in 2023 and beyond. At that number, the current yield is 18.2%. Admittedly the running rate for the payout through two quarters of 2023 is $1.6000 per share, but that still yields a 16.3% return. Despite all the market angst, we are not ready to reduce our expectations. Thanks to higher interest rates - and even without the benefit of any investment repayments - TPVG seems capable of maintaining a very high level of earnings and distributions despite its credit troubles. "Special" distributions will need to be made later in the year, or in 2024, to meet BDC tax rules.

Not Long

We should also find out how the most acutely troubled portfolio companies fare in a relatively short time. That means any recovery accruing to the BDC on bankrupt or defaulted investments will be re-deployed into a very lender-friendly and ever more conservative market, mitigating any income lost from realized losses. (Down the road, TPVG will probably harvest equity stakes for a gain that will offset realized losses but nobody but BDC Best Ideas seems to be looking very far down the road).

Viewpoint

The critical - and currently unknowable - element here is whether this quarter's increase in non-performing and underperforming assets (15% of the total if you believe TPVG) is just Chapter 1 of a long series of such losses or one of those bumps in the road that all BDCs face at one time or another and which good underwriting, diligent follow-up, and borrower hand holding softens the impact of.

Both Are Possible

This presents investors - both of the long-term variety and those in search of a shorter turnaround - with an opportunity - or a trap. At $9.84 a share - and sticking with all our prior assumptions - TPVG promises a total return over 5 years of 253%. That's far and away the top potential BDC gainer right now. That's a 51% annual return...

Who Dares Wins?

Even if assume TPVG will only ever return to its prior 52-week high (as opposed to the loftier heights in our projections) that would result in a 61% price gain. Over a 12-month period, with the $1.8000 dividend thrown in, the return would be 79%. This may only be an investment for the bravest of the brave (or the most foolish - if you're in a bear cave) but there is no denying that both the short and long-term rewards could be substantial.

March 2, 2023

No Change

Technically if a quarter comes and goes without our making any amendment to our dividend projections or terminal dividend multiple, there's no pressing reason to write a "BDC Update". We're investing for the long term and if we write an update for all 41 BDCs we track every quarter over many years these Updates are going to look like "War And Peace" in terms of length. However, we last wrote about Triple Point Venture Growth (TPVG) under unusual circumstances and we thought it might be useful to say a few words.

Dramatics

Back in December 2022 we first indicated we'd be buying TPVG for our Model Portfolio only to learn of a major realized loss at the BDC (Medly Health) which hammered its price and net book value before we reached the Buy button. We proceeded to purchase the stock anyway (at $11.90 a share) for the Model Portfolio, but not before adjusting the expected annual distribution to $1.8800 from $2.0000. See below.

Up To Date

Now TPVG has reported its latest results and spent a good deal of time on its conference calling Medly Health a bad debt outlier and admitting to a ($28mn) write-off. Nonetheless - as we expected when we forged ahead - the BDC continues to perform well. We won't get into all the positives and negatives, but they are discussed in the BDC Reporter's Daily News Feed. For our purposes, we see that TPVG has increased its IQ 2023 distribution to $0.4000, which annualizes at $1.6000. That's below the $1.8800 we've projected for the year and through 2027.

Back Loaded

We're having this issue with several BDCs: early in the year distribution announcements coming in lower than what will be needed to hit our full-year projected payout numbers. This is partly due to the fact that higher rates are likely to see earnings - and thus - distributions - climb later in 2023. Also, BDC managers are holding back an unusually high percentage of earnings from being distributed to boost their net book values and enhance liquidity. That's fair enough, and our projections try to take these factors into account.

Key

The $64,000 question, though, is whether the $1.8800 payout - which represents a 21% increase over TPVG's 2022 total distribution - remains valid? The answer is yes. We are taking comfort from guidance by management that they are expecting earnings to increase through the year and the fact that just the IVQ 2022 Net Investment Income Per Share annualized comes to $2.3200. The annualized IQ 2023 dividend is running at only 2/3rds of the IVQ 2022 earnings annualized.

Critical

Getting the distribution number right is important. At today's stock price of $12.20, the $1.6000 payout yields 13.1%. The Best Ideas yield - using the $1.8800 projection - is 15.4% - quite a difference. More importantly from a valuation standpoint, maintaining that $1.8800 payout through 2027 to set the Target Price of $25.38 is why the total return for the BDC remains so high: 189% over 5 years. That's the highest total return in the Expected Return Table.

Explaining Ourselves

We'll freely admit both the projected dividend and the Target Price are high, but mostly on the terminal multiple side, which we've set at 13.50x. Crazy you say? We would point out that TPVG - when enjoying investor favor back in 2021 - traded up to 13.4x its payout in that year as the stock price reached $19.25. At the moment TPVG trades at just 7.9x its 2022 payout and only 6.5x our projected $1.8800 payout.

Arms Crossed

Clearly, Mr. Market is not currently giving TPVG the benefit of the doubt given the many uncertainties ahead, less than two years after being wildly optimistic. That's fair enough, and a common situation across the BDC ecosphere. However, can we envisage a scenario where TPVG's earnings motor along at the high level in our projections from some combination of recurring income and realized gains? Would investors then line up, pushing up the multiple causing the stock price to reach a new high, even if that seems unimaginable now? The answer is also yes.

Intellectually Honest

We could prune back our projections just so TPVG does not stick out like a sore thumb and cause us to defend ourselves like this, but we prefer to make an honest assessment of distributions and terminal multiples and let the valuation go where it will. All this is just pro-forma in any case and not offered as a promise that in 2027 the stars will align and TPVG will trade at its maximum value.

Nutshelled

All the above is to say that we are making no change to the TPVG numbers in the Expected Return model.

December 13, 2022

Promise Kept

In BDC Best Ideas most recent weekly Snapshot dated December 9, 2022 we singled out TriplePoint Venture Growth (TPVG) as a long term investment opportunity. Moreover, we indicated we'd be adding TPVG to the Best Ideas Model Portfolio in the week ahead. On Tuesday December 13, 2022 we did just that:

Dramatics

Do you know the feeling of choosing a stock only to see its price immediately plummet? Well, that's what happened in this case. On Monday, December 12 TPVG closed at $12.72 and opened Tuesday as $12.70, as per normal. Then in the first hour, the price dropped to $11.82 on a very high volume. Thankfully, we had not yet pulled the trigger and "benefited" from the drop.

Surveyed

We checked the news and the website for some clue about this shocking drop on a day when the sector was mostly. We found nothing and - as indicated above - bought in at $11.90.

Real Time

At this point, we expected to close up and publish this article. However, something happened that changed our plans. As we multi-tasked and went off to work through our daily regimen of reviewing BDC credit developments - we finally discovered what caused the TPVG super slump. Portfolio company Medly Health filed for Chapter 11 on Friday...As of September 30, 2022, TPVG had $34mn invested at cost in the online pharmacy's debt and $0.6mn in preferred. An excellent article in Petition which came out today details the company's troubles, which include chronic non-profitability and fraud - to hit the two key worries.

Wait! There's Worse

There is said to be $101mn in debt outstanding held by various TriplePoint group entities, including TPVG. To keep Medly afloat a Debtor In Possession (DIP) loan is envisaged of $8mn.

Pocket Change

A stalking horse buyer has been arranged - MedPharmaca Holdings Inc - with a sales date of January 19, 2023 - i.e. just around the corner. The purchase price has been set at $18.5mn so we can expect big losses ahead for the TriplePoint Group and TPVG even if that should go through - which is not guaranteed. Let's be honest - given that low purchase price, the non-profitable nature of the model, and the alleged fraud - a near complete loss for TPVG is possible.

Warning

To their credit, TPVG's management did flag that trouble was afoot at Medly on their last conference call. Here is the entirety of what was said, both in the prepared remarks and in the Q&A:

We downgraded 1 portfolio company, Medly Health in online digital pharmacy with a total principal balance of $34.3 million from category 2 to category 3 due to reductions in its operating plan, changes in its senior team and the overall liquidity position. On November 1, we were made aware of recent preliminary negative development at Medly, which we believe may result in a future downgrade of their outstanding loans here in Q4...

Paul Conrad Johnson Keefe, Bruyette, & Woods, Inc., Research Division – Associate

Got it. Appreciate it, Sajal. Last question just on Medly Health, obviously, because of the mention of negative events post quarter end. I haven't seen where it was marked for this quarter, if it potentially reflected any of that or if it's been marked down from 2Q. But I was wondering if you could provide any other details on the company, size of the company, nature of the just decline in the performance. If it was something more exogenous to the company or if it was driven internally with the management change that you mentioned. Any information there would be helpful.

Sajal K. Srivastava TriplePoint Venture Growth BDC Corp. – Co-Founder, President, CIO, Secretary, Treasurer & Director

Yes. I'll start. So I'd say this was a company we did downgrade in Q3 for the criteria that I mentioned in terms of kind of the business pivot and focus, the change in team and kind of liquidity. And so roughly $30 million loan position that we have marked down here in Q3.

The developments that we mentioned today, this is something we just recently learned. So our team is actively monitoring the situation. And so given that we're just only recently made aware of this information, we're actively monitoring it for any further developments. But I would say that it's still in development.

Damage

Let's say - for sake of argument - that this turns out to be a complete write-off. TPVG will book a realized loss of about ($35mn). That's about 7.8% of the BDC's net book value per share, or about ($1.0) a share. Investment Income lost will amount to just over ($4mn) on an annual basis and ($3.5mn) on a Net Investment Income basis, or ($0.10) per share. That might reduce the projected 2023 NIIPS to $1.70 from the $1.80 currently estimated - a (5.6%) drop.

Adjusting

For our part, we're going to reduce our sanguine projections for TPVG's distribution from 2023-2027 by (6%) to reflect this larger-than-expected loss. We don't believe this big setback reflects a broader underwriting weakness at TPVG. We'll need a couple more such stories to throw our hands up but - at this point - one could argue that the BDC's managers - for all their due diligence upfront and monitoring thereafter - missed some signals. Judging by the conference call minutes, only in the past few weeks did a moment of clarity occur. This is not TriplePoint's finest hour.

The $1,000 Question

Should we cut and run based on this real-time negative development? We don't think so. Bad things happen to good BDCs when you're a lender.