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Hercules Technology Growth Capital (NYSE:HTGC)
Q3 2020 Earnings Call
Oct 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Hercules Capital third-quarter 2020 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker for today, Mr. Michael Hara. Thank you, sir.

Please go ahead.

Michael Hara -- Senior Director, Investor Relations

Thank you, A.J. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 2020. With us on the call today from Hercules are Scott Bluestein, CEO and chief investment officer; and Seth Meyer, CFO. Hercules' third-quarter 2020 financial results were released just after today's market closed and can be accessed from Hercules' investor relations section htgc.com.

We have arranged for a replay of the call at Hercules' web page 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 contained in this release that are not clearly historical are forward-looking statements.

These forward-looking statements are not a guarantee 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 and without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence caused by the COVID-19 pandemic and other factors we identified from time to time in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are reasonable, any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions are also -- 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 our website. And with that, I'll turn the call over to Scott.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thank you, Michael, and thank you all for joining us today. We hope that everyone is staying safe and healthy. Continuing with the theme of our Q1 and Q2 2020 earnings calls, I'm going to provide an overview of our performance in Q3 and then discuss key areas of the business that we continue to believe require additional focus. I would like to start by once again acknowledging and thanking our employees, management teams, and financial partners who continue to diligently perform their jobs with commitment and resiliency despite the challenging operating environment that we are all facing.

Being eight months into this pandemic, we continue to manage the business to maximize liquidity in short balance sheet strength and maintain substantial operational flexibility. Q3 was a very strong quarter on multiple fronts for Hercules Capital, particularly, origination activity, where we used our balance sheet strength and liquidity position to be aggressive on select high quality investment opportunities. Our world-class investment team and industry-leading originations platform closed a record level of Q3 commitments and fundings. We were able to maintain our strong liquidity position and balance sheet despite the write up of two previously impaired loans that were on nonaccrual.

Overall, our credit performance during the quarter was solid and we continue to feel good about how our credit book is positioned. Let me recap some of the key highlights of our performance for Q3. We originated more than $514 million of new debt and equity commitments, and delivered gross fundings of nearly $266 million. In Q3, our investment related activity reflected our focus on diversification and controlled growth.

Our unique and dual focus on technology and life sciences continues to provide us with a competitive advantage and the ability to deliver strong investment activity in any market environment when we see attractive opportunities. Our third-quarter fundings included 10 new and five existing portfolio companies. We saw strong performance from both our technology and life sciences teams, with respect to new debt commitments, although our funding and commitment activity was again skewed slightly more toward life sciences companies. We are continuing to see attractive proprietary investment opportunities across our existing portfolio and we expect to continue to be aggressive in terms of providing additional funding to those companies within our portfolio that are demonstrating strong growth and performance metrics.

Despite the fact that we are only through three quarters of 2020, Hercules Capital has managed to deliver over $1 billion of new commitments for the third consecutive year, highlighting the resiliency of our diversified business model and the scale that we have achieved. During the third quarter, we had a debt investment portfolio growth of $4.8 million at cost and $48.2 million at fair value. Early loan repayments were $191 million, which was up from $85 million in Q2, and above our guidance of $100 million to $150 million. The increase in early loan repayments during Q3, resulted in higher fee income as compared to Q2.

In Q3, we generated total investment income of $70.3 million and net investment income of $38.7 million or $0.34 per share, resulting in 106% coverage of the base cash distribution. Year to date, we have generated total investment income of $211.9 million, an increase of 7.4% year over year. In net investment income of $115 million, an increase of 11.4% year over year. Year to date, we have also grown the debt investment portfolio by $114 million at cost, despite $427 million of early loan repayments and the challenges associated with this pandemic.

We believe that this has been driven by the tremendous depth and talent across our investment team and our long-term commitment to the venture and growth stage lending space. On a cumulative basis since inception, we have now committed in excess of $11 billion of capital to venture and growth stage companies, an accomplishment that I would like to congratulate our investment team and all of our employees on achieving. Credit quality on the debt investment portfolio improved nicely in Q3, with a weighted average internal credit rating of 2.22, as compared to 2.30 in Q2. Overall, our Grade 1 and 2 credits increased to 64.4% in Q3 versus 59.7% in Q2.

Grade 3 credits decreased slightly to 34.1% in Q3 versus 38.3% in Q2. Our rated 4 and rated 5 credits made up less than 1.5% of the entire debt portfolio fair value. During the quarter, we wrote-off two impaired loans that had been on nonaccrual. In Q3, we had five dozen investments on nonaccrual with a cumulative investment cost and fair value of approximately $23.5 million and $6.2 million, respectively.

Or 0.9% and 0.3% as a percentage of the company's total investment portfolio at cost and value, respectively. Again this quarter, I would like to provide an update on three specific areas of our business that we believe are important for our shareholders and stakeholders in this environment, and detail specific things that we are doing to best position the company. First, employee well-being and the continuity of our business. Our emphasis remains on the well-being of our employees and the continuity of our business operations while the pandemic continues.

To date, we have not experienced any material interruptions to our business or our ability to operate and we are currently assuming that the majority of our workforce will remain in a work-from-home setting through the rest of the year and perhaps longer. While certain of our offices have been able to reopen and with capacity restrictions, we are continuing to prioritize the safety and well-being of our employees, while doing our best to ensure that the business continues to operate in the normal course and without any material interruption. We have also opportunistically continued to make investments in our team and our systems to best position the company long-term. Liquidity and balance sheet strength.

We are continuing to prioritize liquidity. Despite record Q3 fundings, we ended Q3 with $465.1 million of liquidity, which provides us with substantial coverage of our available unfunded commitments of $243 million and the ability to fund our ongoing anticipated business activity. This continues to give us the ability to be aggressive on new deals and take advantage of any potential market dislocation when we believe that it is prudent to do so. Early payoffs and ordinary course principal payments, have always been a source of liquidity for our business and was again the case in Q3, where we received approximately $211 million of early payoffs and amortization.

At this time, we expect early payoffs in Q4 to be between $100 million and $150 million, although this number could change materially. Our balance sheet was strong heading into this crisis and it remains strong today, with near record liquidity and no near-term liability maturities in our debt stack. Subsequent to quarter end, we officially received our third SBA license, which provides us with an additional up to $175 million of flexible capital and extends our long-standing relationship with the SBA. Finally, portfolio and credit quality.

We continue to believe that it will take time to ascertain the true impact of this crisis and that a diversified balance sheet, both with respect to assets and liabilities will serve us well. Having ample liquidity remains an important factor for our portfolio companies that we continue to closely monitor. When looking at our entire outstanding debt investment portfolio, we estimate that approximately 81% of the portfolio currently has 12-plus months of liquidity, with another 11% with six to 12 months of liquidity currently on the balance sheet. Loans that have three months or less of liquidity, make up approximately 4% of our outstanding debt portfolio.

Of the loans with 12-plus months of liquidity, over 76% or approximately 60% of our entire debt portfolio, currently has 18-plus months of liquidity on balance sheet. Within our life sciences portfolio, we continue to have 13 debt investments, with a cost basis in excess of $25 million. Each of these 13 companies, currently have cash on hand to fund their businesses for approximately 12-plus months. In our technology portfolio, nine of our 10 largest investments at cost have cash on balance sheet for at least 12 months based on the most recent reporting that we have.

Capital raising across our portfolio remains strong. Since our last earnings call, 14 of our debt portfolio companies raised new capital, totaling over $1.7 billion. Since the beginning of COVID-19 in the United States, we have had 43 of our current debt portfolio companies raise a total of approximately $5 billion of new capital. Year to date, we have had 10 M&A events, six companies that have completed their initial public offerings, including four in the last 90 days, and three additional companies that are currently in registration.

Our top 10 debt investments continue to make up only 27% of our debt portfolio at fair value. While each of these companies will continue to be impacted to a varying degree by the current situation, all currently have at least 12-plus months of liquidity on balance sheet as of the most recent reporting that we have. Our debt portfolio continues to be overweight toward drug discovery and development and software companies, two sectors that we expect to perform better on a relative basis during this period and based on what we know as of today. Approximately 90% of our current life sciences debt investments at cost are in publicly traded companies.

These public companies have a weighted average public market capitalization of approximately $1.5 billion as of September 30th. Based on the public market capitalization for these companies, the weighted average ratio of public equity value to our debt at cost equals 39.9 times as of September 30th. In our technology portfolio, approximately 64% of our companies are classified as software or have a software driven contractual recurring revenue model. Of these companies, our estimated weighted average debt to annual recurring revenue attachment point as of the most recent reporting period continues to be less than 1 times, which we believe is conservative.

The venture capital ecosystem continues to raise funds and make investments selectively as we have seen in the latest reports. Through the first three quarters of the year, venture capital funds raised a total of $56.6 billion and invested over a record $112 billion in the United States, according to data gathered by PitchBook and the National Venture Capital Association. That cash continues to put them in a strong position as the pandemic endures. This data also reflects the many portfolio companies that we work with that have raised capital during their most recent quarter.

Our focus continues to be on maintaining an appropriate level of liquidity, actively managing our credit book, and working with our companies and financial partners proactively. Our investment team has continued to be incredibly busy evaluating an active pipeline that currently exceeds $1 billion of potential investments. But our bar for new deals remains high and we continue to be selective and prudent with capital deployment. Finally, I would like to discuss our shareholder distribution.

With our debt investment portfolio at $2.28 billion at cost, our NII per share of $0.34 in Q3 generated 106% coverage of our quarterly based distribution of $0.32 per share. In addition to our seventh consecutive quarterly cash distribution of $0.32 per share, we are also declaring a supplemental distribution of $0.2 per share. In addition to our quarterly net investment income in Q3 covering our base distribution, we are also fortunate to have unrestricted earnings spillover of approximately $78.2 million or $0.68 per share subject to final tax filings. This provides us with additional flexibility with respect to our variable base distribution going forward and the ability to continue to invest in our team and in our platform.

In closing, these continue to be unique and challenging times for everyone. I would like to acknowledge and thank each of our dedicated and talented employees for maintaining their spirit, effort, and focus. We send our most sincere wishes to all of those who are being affected by this unprecedented pandemic and we hope for the well-being and safety of all. Thank you very much, everyone.

And I will now turn the call over to Seth.

Seth Meyer -- Chief Financial Officer

Thank you, Scott, and good afternoon, ladies and gentlemen. With another solid quarter behind us, we are continuing to think ahead and focus on strengthening our balance sheet, enhancing our liquidity position, maintaining a well diversified portfolio, and making investments in our people, processes, systems. As publicly announced yesterday, we received approval from the SBA for a new SBIC license providing us with $175 million of attractive financing for qualified investments. This increases our already significant quarter end available liquidity and ensures we are well-prepared to take advantage of any and all opportunities to expand the portfolio should they meet our stringent standards.

Today, I'll focus on the following areas: income statement performance and highlights; NAV unrealized and realized activity; leverage and liquidity; and finally, the outlook. With that, let's turn our attention to the income statement performance and highlights. Net investment income was $38.7 million or $0.34 per share in Q3, an increase of $3 million or $0.2 per share, compared to the prior quarter. Total investment income was $70.3 million, an increase of 3.5%, compared to the prior quarter.

The main driver for the increased total and net investment income during the Q3 was an increase in fee income driven by higher payoffs that Scott mentioned. Our effective in core yields in the second quarter were 12.6% and 11.3%, respectively, compared to 12.2% and 11.5% in the second quarter. The primary driver for the increase in the effective yield was again, related to the higher payoffs. The core yield decreased slightly due primarily to a reduction in expired commitments compared to the second quarter.

Turning to expenses. Our total operating expenses for the quarter decreased again to $31.6 million, compared to $32.3 million in the prior quarter. Interest expense and fees decreased slightly to $16.6 million from $16.7 million in the prior quarter, commensurate with the reduced use of the credit facility. SG&A expenses decreased to $15 million from $15.6 million in the prior quarter, the decrease was driven by lower legal and SG&A expenses.

The -- our weighted average cost of debt was 5.1%, a small increase compared to the prior quarter. Now let's switch the focus to NAV unrealized and realized activity. During the quarter, our NAV increased $0.7 per share to $10.26 per share. This represents an NAV increase per share of seven-tenths of a percent.

The main drivers for the increase or the net change in unrealized depreciation of $52.8 million, including the reversal of prior unrealized losses of $37.8 million, mainly due to the recognition of $48.5 million of realized losses and out earning the dividend paid in the quarter. Our $52.8 million of unrealized appreciation was driven by the mark-to-market portfolio on our equity and warrant portfolio, as well as, yield adjustments on our debt portfolio. The key drivers for unrealized depreciation were approximately $9.5 million of mark-to-market appreciation, including reversals of prior depreciation due to sale and or write-off in the equity and warrant portfolio, and $43.3 million of appreciation on the loan portfolio, which included $35.9 million of reversal of prior depreciation largely attributable to the recognition of a loss on one portfolio company that had previously been impaired and was on nonaccrual. Excluding the reversal of prior impairments and other depreciation on loans paid off, the loan portfolio experienced a $7.5 million yield based appreciation.

Net realized losses in the third quarter were $48.5 million, comprised of $47.5 million from the two loan positions that Scott mentioned previously, $2.3 million of net losses from the write-off or expiration of certain legacy warrants, offset by $1.3 million of net gains from the disposal of equity positions. The realized losses reduced our loans on nonaccrual to less than 1% of the investment portfolio on a cost basis, as both loans were previously on and on nonaccrual. Next, leverage and liquidity. At the end of the quarter, our GAAP and regulatory leverage was 111.4% and 102.9%, respectively, which increased compared to the prior quarter due to the increased fundings in the quarter.

Netting out cash on the balance sheet, our GAAP and regulatory leverage was 109% and 100.6% respectively. We continue to manage the business with a targeted leverage ceiling of approximately 125% on a regulatory basis. We ended the quarter with liquidity of more than $465 million, our liquidity continues to be enhanced by our normal course monthly principal and interest collections, as well as, early payoffs. As a reminder, our early payoffs and normal amortization provide us with significant monthly inflows that we can use to delever when and as needed.

Finally, on the at -- the outlook points. Our core yield guidance of 11% to 12% continues to apply for the remainder of 2020. For the fourth quarter, we expect SG&A expenses of $15 million to $16 million which is slightly lower than my prior guidance. We expect our fourth-quarter borrowing costs to increase modestly due to the significant funding in the third quarter.

Although very difficult to predict, as Scott communicated, we expect $100 million to $150 million in prepayment activity in the fourth quarter. And then finally as mentioned earlier, we've received the approval of the SBA new license, providing us $175 million of attractive financing for qualified investments. This will not only help us increase our available liquidity, but also contribute to our decreasing weighted average borrowing costs. In closing, we delivered a solid quarter in Q3 and going forward we will continue to focus on things that we believe will position us best, given the current operating environment.

I will now turn the call over to the operator to begin the Q&A part of our call. A.J., over to you.

Questions & Answers:


Operator

Thank you. [Operator instructions] First question comes from the line of Crispin Love from Piper Sandler. Your line is now open.

Crispin Love -- Piper Sandler -- Analyst

Hi, good evening, guys. Thank you for taking my question. So first, the credit quality grades improved nicely in the quarter with look with what looks to be a migration of Grade 3 to the Grade 2 bucket for -- and a lot of instances. Can you give a little bit more detail on where you saw improvements in credit quality and if that's industry related? And I've been on the other side, if there's any other industry that are still struggling, are you watching a little bit more closely?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. First, thanks for the question. With respect to the migration, the biggest driver of the shift in Grade 3 loans actually had to do with the fundraising elements that we talked about. I think as you know, we're a little bit conservative in how we grade the portfolio.

So we will downgrade a loan to a rated 3 credit if it is approaching a capital raise. And again this quarter, we saw some pretty significant activity on the capital raising side across the portfolio, including with respect to a couple of rated 3 credits. And as a result of those companies completing those raises, we upgraded certain of those credits to rated 2 loans and that's what drove the majority of that migration in the quarter. And that's also what led to the change from 2.30 to 2.22 in the quarter, really no specific credit trends that I can speak to in the quarter.

You know there's obviously, certain sectors in our portfolio and sort of in the macro environment that we're continuing to watch and monitor a little bit more closely. I think in terms of how we feel about the environment, you can continue to look at how we're positioning the portfolio. We're continuing to be very aggressive in certain areas that we think are relatively speaking, insulated. We obviously, have made a significant push on the life sciences side into drug discovery, drug development companies.

That's always been a focus for us, but we saw substantial activity there in Q3. And we also continue to be fairly aggressive in terms of funding on the technology side businesses that have a software component, where the revenue continues to be contractual and long-term recurring in nature.

Crispin Love -- Piper Sandler -- Analyst

OK. Thanks. And then on the record quarter of originations and fundings, you mentioned that you had activity with 10 new borrowers and then five existing. Are you starting to see more opportunities with new companies, compared to earlier in the year as we're moving along of during the pandemic? And would you expect that to continue with -- with more opportunities with new borrowers or is it kind of just kind of tough to forecast that?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

I think it is difficult to forecast out, just given the continued volatility in the markets. But what I can tell you is, that our pipeline -- you know since the beginning of the year has remained very strong. I mean our pipeline on a quarterly basis has been approximately $1 billion. In some cases, north of $1 billion and so there is no lack of deals and no lack of activity in terms of what our team is evaluating and screening early on in the pandemic.

So when you look at sort of late Q1 and then certainly in Q2, we were very selective and really only focusing on a certain profile of company. We did continue to be selective in Q3, but we actually saw a handful of companies where we had legacy relationships. Later stage company that we actually didn't think we're going to be looking for secured debt financing. But in a couple of cases, despite having a very strong balance sheets, we saw opportunities for a well backed companies, strong balance sheets that wanted to put some additional capital and runway extension on the balance sheet and we were able to take advantage of that in Q3.

The pipeline right now remains strong. You know the team is off to a really solid start in terms of Q4 activity. If you look in the press release, we disclosed that we've already closed about an additional $85 million of commitments. We have another $50 million of commitments that are signed, that are going through diligence that we expect to close near-term.

So we continue to feel good about the amount of activity that we're seeing, but we will absolutely continue to be selective and prudent and really just try to focus on the best deals that we see.

Crispin Love -- Piper Sandler -- Analyst

All right. Thanks for taking my questions and congrats on a great quarter.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thank you.

Operator

Next question comes from the line of John [Inaudible] from Jefferies. Your line is now open.

Unknown speaker

Hey, hey, Scott, Seth. Thanks very much. You know, Scott. Just kind of hearing you talk about the credit quality and credit grade and you know, a lot of statistics around the visibility to the liquidity of the company -- the investment level and then just sort of commitment pipeline.

Those both seem really strong and it gives you a good visibility into capital deployment and credit quality. It makes -- it seems like it maybe as good as it's been for a while. I'm wondering, can you -- do you -- I mean is there some attribution of that to maybe competitive positioning or is it just good fundamental trends kind of in the market your lending to? Or how do you -- how do you attribute that?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

So I think and I've said this consistently in my remarks, over the years and I'll say it again. I think a lot of it just has to do with the quality and talent that we have as an organization. This is a -- this is a very deep experienced investment team. This team has been together for a long time.

We've got great leadership. We've got great oversight. And it's a very deep, diversified, broad team. And I think that goes a long way in terms of driving the results that we've had over a very long period of time and I think it's going to be critical in terms of the continued success and sustainability of the business.

You know I will also tell you that, if the fundamentals of our ecosystem continue to be very strong, despite the realities of what's going on at a macro level. You know when you look at the year-to-date VC investment activity, you're at $112 billion through three quarters, right. That's a record number and you're -- you still got a full quarter to go. You're also seeing tremendous activity at the D.C.

level in terms of fundraising. So there's just a lot of liquidity that's still flowing into these companies and not all of these companies are going to be able to sort of skate through this unharmed. But certainly having a strong balance sheet and being able to weather a storm from a liquidity perspective, we believe is essential in terms of continued success.

Unknown speaker

OK. And then you know, we haven't -- I just haven't asked about [Inaudible] Charlotte can see some of the details but maybe, can you give us an update on Gibraltar and what's going on there?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. You know, so can't say a lot because it's obviously, a -- excuse me, a portfolio company but they do put out their own statements from time to time. It's a company that continues to perform very well. We're very pleased with the performance and the growth that they've seen.

This environment is actually pretty conducive for strong credit-oriented ABL lenders and that's exactly what Gibraltar is. So very pleased with their performance. Obviously, you can see the fair value that we have as of the end of Q3 and continue to believe that that's a long-term holding that we're going to be very happy with going forward.

Unknown speaker

OK. And the last question is just -- I mean, Q3 you had a really strong funding quarter. If I recall, usually Q3 was the seasonally weak quarter just because people tended to take a month off in Q3 for vacation. You know, is seasonality changing because of the COVID and people being locked down? And how do you think about cadence of investing in the near-term?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

You know, it's a great question. You're absolutely correct. I mean, if you look at our business and I think 15 of the last 16 years, Q3 has historically been our slowest quarter in terms of capital deployment. That obviously changed.

You know, this year I think 2020 is different in many ways. And you know, whether we can attribute the strong funding and commitment performance that we saw in the quarter to what's going on with COVID or not, I think it's hard to say. But what I can tell you about our performance in Q3, you know, we think about what we said on the Q1 call, if you think about what we said in the Q2 call, we were really focusing on strengthening our liquidity position. Making sure that we had the strongest possible balance sheet because we knew that there would be a time when when the market would come back and there would be opportunities that we thought were attractive and we wanted to be able to take advantage of them.

That's what happened in Q3. Our team did a great job and had been pursuing a couple of companies for a long time. These were companies and deal that we really liked and we used our balance sheet to to win those deals. And you saw that in our numbers and whether that will happen again in Q4, I think it's probably too early to say at this point.

But we're obviously pleased with the fact that we've already done $85 million of commitments through the first 27 or 28 days of October, and we've got another $50 million of commitments that are signed up that we expect to close near-term here.

Unknown speaker

OK. Thanks very much for the color, guys.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, John.

Operator

Next question comes from the line of Finian O'Shea from Wells Fargo. Your line is now open.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi, good afternoon. Thanks for taking my question. First one, Scott, can you update us on the strategic initiatives you're pursuing on the RIAA. I think you've had a no action letter permitting you to do that for a little while now but just an update.

We haven't seen anything yet, obviously, on how you're thinking about setting up something like that.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thanks. So we're not going to make any public comments in terms of the activity outside of what we've already disclosed in terms of the 8-K that we did put out. You are absolutely correct that we did receive a no action exempt or relief from the SEC to be able to create a registered investment advisor as a wholly owned subsidiary of the public BDC.

We have gone ahead and we've done that. And now we're we're in the exploration stage, where we're going to explore a variety of attractive opportunities that we think will be available to us. There's really nothing that we're prepared to speak to that would provide any more specificity or clarity to that. You know, I think in general, I would say that what we're doing here is very consistent with what Seth and I have been communicating publicly to our shareholders, stakeholders, and analysts since Q1 of 2019, which is that we are actively looking for ways to expand and diversify and grow the Hercules Capital business.

But that we are absolutely committed to doing it in a way that is beneficial to our shareholders. And that's exactly why we pursued the structure that we announced in the 8-K that you're referencing and that's what we're spending our time right now focused on.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Sure. That helps. Thank you. Then, I just have a small follow on.

Any high level commentary on the exit this quarter. Obviously, those two names were already marked down, but obviously, that's a pretty big write-off to exit those names. Was that at all related to the challenges that COVID might bring? Funding might be more strict or was this just kind of a garden variety exit that you guys do once in a blue moon? Any commentary there would be appreciated.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So a couple of things. So number one, and we've always said this. We never look at realized activity, whether it's realized gains or realized losses on a quarterly basis.

We look at it over a pretty long-term horizon. And when you think about our credit performance now over 15-plus years, we have net cumulative realized losses of $65 million. So our our annual loss rate as of Q3 is 4 basis points and that's a number that we're obviously very proud of. We had realized gains in the portfolio in Q1, we had realized gains in the portfolio in Q2, and you will obviously see where we end up at the end of the year, but we tend not to focus on a quarterly basis.

With respect to the two situations that we referenced, both of those loans were previously impaired. Both of those loans were previously placed on nonaccrual. One of the companies did not have anything to do with COVID. It was a company that had been on nonaccrual for two-plus years.

It's sort of -- it's a drug discovery, drug development asset. We made the decision that we were actually going to foreclose on the asset. So we've taken possession of the asset and we'll look to monetize that when the market becomes a little bit more favorable. The other one in our view was 100% linked to COVID.

It was a business that was materially negatively impacted by COVID. It was one of only a small number of loans in our portfolio that we believe fit that criteria. And because of the fact that in that case the sponsor chose not to fund it, if the company was forced into an exit scenario and the results were obviously not favorable to us. But there's really nothing else that I can add in that regard.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK. Thanks so much.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thanks, Fin.

Operator

[Operator instructions] Next question comes from Devin Ryan from JMP Securities. Your line is now open.

Unknown speaker

Hi, this is Kevin [Inaudible] on for Devin. Congratulations on a strong quarter. In regards to record Q3 and new debt and equity commitments, can you speak to how you're able to [Inaudible] such a strong quarter, despite a largely virtual environment that has significant challenges in performing due diligence?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thank, Kevin. So two things and I would reiterate what I said when John asked the question a little while ago. I think the credit really goes to our investment team.

The team has worked around the clock and has been incredibly productive, despite the fact that most of us continue to be remote. You know thankfully, we are a technology driven company. We've got great systems and we've got great infrastructure in place. So we've been able to communicate, not just with our existing portfolio companies and each other, but also with new companies.

And in this environment, you know, there are a lot of things that you can do from a virtual perspective that allows you to do diligence in the ordinary course. The other thing that I would mention which I think is important, we did 10 new deals and we did five deals for our existing portfolio companies. So you're going to continue to see a very strong mix of fundings for new deals and portfolio companies. Obviously, on the portfolio company side, we already have the relationship and we've done that in-person diligence historically.

And when you look at the new deal that we did in several of the cases, these were companies that we had looked at and evaluated historically and we had deep relationships with the teams and with the investors. So a little bit -- a little bit of a head start in terms of diligence that I think allowed us to be a little bit more creative than some others might have been able to be in this environment.

Unknown speaker

OK. Great. Thanks very much. You've answered all my questions.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, Kevin.

Operator

Next question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is now open.

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

Hey, guys. So am I correct that the two credits which were exited this quarter were Motif and [Inaudible]?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

That's correct.

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

OK. And then on the two new nonaccruals and OptiScan, any detail they can share with us?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. OptiScan is actually -- it's a small convertible note that's a company that we've had. It's not a secured debt position. It's a -- it's a convertible note position.

We've been an equity holder in that company for some time. They filed Chapter 11, so we made the decision to put that convertible note on nonaccrual in the status. And with respect to intent again, that's a company that's obviously been impacted by COVID. It is one of the small number of portfolios in our company that's being materially impacted by COVID, but we've been working very closely with the investors there and with the management team there.

And we did make the decision to put it on nonaccrual but we're actively working on some strategic alternatives with that company as we speak.

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

Great. And as a follow-up question. The portfolio yields seem to be holding up relatively well. Is this better than you expected or worse? I mean and what do you attribute that to?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

You know, I think it's in line with what we expected. If you look at the guidance that Seth has given, I think, since Q1, we've guided folks to 11% to 12% core yield. Last quarter we were at 11.5%, this quarter we're at 11.3%. So really, right in the middle of our core yield guidance.

Right now, 98-plus percent of our entire portfolio is at its contractual interest rate floor. So as we've said, there really is no further yield degradation or interest rate degradation that we expect to see. And in situations where we have opportunities to make accommodations to our companies as long as they are performing, we're obviously trying to take advantage of getting some additional yield where appropriate to help keep that core yield within our target range of 11% to 12%.

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

Great. And then what's the spillover income for the quarter?

Seth Meyer -- Chief Financial Officer

What -- for the quarter? So we have $0.68 per share that is spillover, that's cumulative though. For the quarter, we paid out our earnings.

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

Great. That's it for me. Thanks, guys.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, Chris.

Operator

Next question comes from the line of Ryan Lynch from KBW. Your line is now open.

Ryan Lynch -- KBW -- Analyst

Hey, good afternoon, and thanks for taking my questions. First one, I just wanted to step back and just talk about the broader venture capital ecosystem. It's been a pretty surprising 2020, how strong that ecosystem's been. You know, you guys provide a slide that venture capital investment activity has already surpassed what it did in 2019.

In fund raising, it's basically already at -- a hit in 2019. Just, what do you attribute the strength of this market, despite you know, obviously, the tough economic backdrop?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

You know, I think when you look at the venture market going back 20-plus years, it's always proven to be very resilient. You know there were certainly a couple of periods where you saw significant pullbacks. But you know, since -- sort of the pullback that you saw for 12, 13, 14 years ago, you've seen very consistent steady growth in a couple of different market environments. I think the other thing that you're seeing now is when you think about what's going on at sort of a global level, there's just a tremendous transition to technology-enabled solutions at all levels of corporations.

And so the demand for technology, the demand on the life sciences side, for innovation and new drugs, and new therapies doesn't really get impacted by COVID, right? And so that's why you're continuing to see a tremendous amount of VC capital and public equity capital flow into these types of businesses.

Ryan Lynch -- KBW -- Analyst

OK. Makes sense. And then this quarter, I mean historically, you've got unfunded commitments have -- bounce around but generally been around $150 million. In this quarter, it jumped out to $243 million of unfunded commitments.

Is there any change in kind of the nature of how you guys are making commitments? Or are you guys making new investments with larger commitments sizes? Or is that just more a greater volume or greater number of commitments that were just made recently that -- that's making that number a little bit higher than what you were working at then?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Hey, Ryan. I think it's the latter. You know certainly, no material change in terms of how we're underwriting or how we're thinking about things. If you look at the business over the last five years, our unfunded commitments as a percentage of our total assets, has always been somewhere between 6% and 12%.

Right now, it's about 9.5% or 9.8%, so still very much in line with where it has been. The change quarter over quarter was really driven by a few of those companies that I had referenced earlier, where these were larger, later stage, more substantial companies that have very strong balance sheets. So when we were structuring those deals, we used probably a little bit of a higher percentage of unfunded commitments than we typically do. But it's certainly not indicative of any general material change in terms of how we're underwriting or thinking about credit longer-term.

Ryan Lynch -- KBW -- Analyst

OK. Those are all my questions. I appreciate the time this afternoon.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Great. Thanks, Ryan.

Operator

[Operator instructions] The last question comes from the line of Casey Alexander from Compass Point. Your line is now open.

Casey Alexander -- Compass Point -- Analyst

Hi, good afternoon. Just a couple of questions. One, I think the press release refers to the fact that you did sell some of your equity positions during the quarter. Were there any of the larger positions liquidated during the quarter? And are you doing that to sort of reduce the volatility of the portfolio?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

You know, we did not sell off any of the larger, more substantial equity positions. The few modernization that we had in Q3 which is a handful of smaller, less substantial names.

Casey Alexander -- Compass Point -- Analyst

OK. Great. The the new SBI subsidiary, you know requires a funding commitment of $87 million of equity, how do you plan to do this? Because I'm not sure I remember how you did in the past. Will you do a portion of an equity and then take down some debentures against that? Or we fund the whole equity, invest that and then start to take down the debentures? What's your plan there?

Seth Meyer -- Chief Financial Officer

The former, Casey. So you had it right at the beginning. So what we'll do is, as we want to draw down the debentures, we'll put in additional equity into the SPV and draw down what we need as we need it. So we have that ability to kind of lever it up.

Casey Alexander -- Compass Point -- Analyst

All right. Great. Lastly and I probably wouldn't ask this question if you were an externally managed BDC but you know, your discussion about a remote working environment. Has the Hercules team learned to work smarter? Could that result in a reduced real estate footprint for the company and some operating efficiencies over the longer-term?

Seth Meyer -- Chief Financial Officer

So TBD, I mean we're still trying to all figure this out, and as I think all organizations are. And like other organizations, we have long-term lease commitments and we'll evaluate it as we see what the duration of this eventually emerges. But I wouldn't commit to any efficiencies at this time related to leasing and square footage and things like that. That could emerge over time.

We certainly see other organizations that are taking that decision, but at this time we have not.

Casey Alexander -- Compass Point -- Analyst

All right. Great. Thanks for taking my questions. I appreciate it.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, Casey.

Operator

[Operator instructions] We do not have any questions at this time, sir. Please continue.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thank you, operator, and thanks to everyone for joining our call today. We look forward to reporting our progress on our next Q4 and year-end earnings call. Also, we will be virtually attending the JMP Securities financial services and real estate conference, and the Jefferies Annual European BDC Summit in November. If you are interested in meeting with us at any of those events, please contact JMP Securities or Jefferies for their respective events or Michael Hara.

Thank you and have a great day.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Michael Hara -- Senior Director, Investor Relations

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Seth Meyer -- Chief Financial Officer

Crispin Love -- Piper Sandler -- Analyst

Unknown speaker

Finian O'Shea -- Wells Fargo Securities -- Analyst

Christopher Nolan -- Ladenburg & Thalmann -- Analyst

Ryan Lynch -- KBW -- Analyst

Casey Alexander -- Compass Point -- Analyst

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