Hercules Capital (HTGC) Q2 FY26 earnings call: guidance and Q&A

Asked about the deployment backdrop, appetite for venture debt, and expected seasonal slowdown in Q3, especially August.

Management expects Q3 to be seasonally lower but still robust. The market is very robust with a strong pipeline, but the focus is on disciplined funding of high-quality deals.

“We do expect Q3 as it typically is to be seasonally lower than our other quarters in terms of capital deployment. Having said that, we still expect a pretty robust Q3 in terms of new originations.”

asked by Crispin Love · answered by Scott Bluestein

Inquired about the "balance sheet cash" driver for prepayments, specifically if it was from recent equity rounds or idle cash.

The majority of balance sheet cash prepayments were directly attributable to companies raising new equity financing and choosing to retire debt.

“The vast majority of the ones that came from balance sheet cash were directly attributable to companies that raised new rounds of equity financing and just chose to retire the debt as a result of those capital raises.”

asked by Crispin Love · answered by Scott Bluestein

Asked about the next phase for growth, whether it would involve expanding origination into new areas or primarily growing the RIA and leveraging G&A efficiency.

Growth will come from both the BDC and the private credit funds business (RIA), which is currently growing faster. The company will stick to its specialized market, exploring new product initiatives and geographies, and leveraging expanded platform capabilities to stay with companies longer.

“I think the growth from Hercules will come from both the BDC and our private credit funds business... we're not going to have strategy drift. We know what we're good at, and we're going to stick to what we're good at.”

asked by Finian O'Shea · answered by Scott Bluestein

Inquired about the slight bump in Grade 3 credits, specifically if it relates to equity funding liquidity timelines and the mix of sponsor vs. VC-backed companies.

The increase in Grade 3 was immaterial ($130M). Loans are moved to Grade 3 for underperformance or proactively when companies are in the market for equity capital. The majority of Q2 downgrades were proactive for companies seeking equity. Rated 4 and 5 credits remain below 2%.

“The majority of the downgrades in Q2 were the latter category. So companies that we know are now in the market looking to raise equity capital, we proactively moved them down.”

asked by Finian O'Shea · answered by Scott Bluestein

Asked about increased competition from banks, given regulatory capital requirements for venture loans, and if it's related to cash management business.

Banks are being very aggressive in new originations, which has been observed in the past but typically doesn't last. This aggressiveness could be correlated with companies raising record equity levels and the associated deposits.

“We definitely observed over the last quarter or so that the banks pretty broadly are being very aggressive in new originations... A lot of that could have to do with the fact that a lot of these companies are raising record levels of new equity.”

asked by Christopher Nolan · answered by Scott Bluestein

Asked Seth about how Hercules ensures proprietary processes and confidential client information are not used to train AI models.

The company applies strict governance and controls, being specific about what data is allowed into the AI machine and where it resides. Limits are placed on employee input to prevent proprietary or borrower information from being used by external AI tools.

“We're very specific on what we allow to go into the AI machine. We're very specific on where we let that data reside. And so we have very careful controls.”

asked by Christopher Nolan · answered by Seth Meyer

Asked to reconcile the strong equity capital raising by portfolio companies with the opportunity to originate more debt, questioning if there's tension.

Management does not view it as tension. Venture debt supplements, rather than replaces, equity capital. High equity capital activity correlates with higher funding and commitment activity for Hercules, as debt is used to extend equity runways.

“Growth stage lending or venture debt is not designed to replace equity capital. It's designed to supplement equity capital.”

asked by Melissa Wedel · answered by Scott Bluestein