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Hercules Technology Growth Capital (NYSE:HTGC)
Q2 2021 Earnings Call
Jul 29, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and thank you for standing by. Welcome to the Hercules Capital Q2 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Michael Hara, managing director of investor relations.

Please go ahead.

Michael Hara -- Managing Director of Investor Relations

Thank you, Laurie. Good afternoon, everyone, and welcome to Hercules conference call for the second quarter of 2021. With us on the call today from Hercules are Scott Bluestein, CEO and chief investment officer; and Seth Meyer, CFO. Hercules' second quarter of 2021 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' web page or by using the telephone number and pass code 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 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 the forward-looking statements, including, 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 be proved -- to be proved 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 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 well. Q2 2021 was a strong follow-up to our record-setting Q1. We delivered solid operating results, further strengthened and expanded our investment platform and continued to emphasize credit discipline despite the market frothiness.

The momentum we saw Q1 across our investment portfolio accelerated in Q2 with a record number of year-to-date portfolio company completed or announced exit events. Our investment team continued their momentum in Q2 and delivered record first-half 2021 performance for both gross new debt and equity commitments and fundings. We continue to conservatively manage the business by maximizing liquidity, staying disciplined on new underwritings, ensuring a strong balance sheet and maintaining substantial operational flexibility. The public and private equity markets continue to perform exceptionally well, and there continues to be an abundance of liquidity across our core markets.

Let me recap some of the key highlights of our strong performance for Q2. We originated over $440 million of gross new debt and equity commitments and delivered gross fundings of over $278 million. Combined with our record-setting debt and equity commitments and fundings in Q1, we established a new record for the first half of the year with over $970 million in gross new debt and equity commitments and total fundings of $634 million. We again saw strong performance from both our technology and life sciences teams.

Being able to have balance between our two core verticals has continued to be a significant competitive advantage for us in the market and a key differentiator of our business. Although an abundance of equity capital and loosely structured debt has continued to create challenges in terms of prudent new business origination, our investment team has continued to deliver while staying true to our historical credit discipline. We continue to believe that a disciplined approach to underwriting will serve us and our stakeholders well over the long term. Our expanding platform scale and brand reputation continue to give us exposure to an active pipeline that currently exceeds $1 billion of potential investments.

The quality of the companies in our pipeline remains strong. Since the close of Q2 and as of July 26, 2021, Hercules has closed $27 million of new commitments and has $402 million of pending commitments. Based on our current closed commitments and the strength of our active pipeline, we expect that 2021 will be a record year for Hercules Capital in terms of annual new debt and equity commitments. During Q2, we continued to see strength in terms of portfolio company exits and portfolio company liquidity events.

Year to date, we've had eight M&A events, 10 companies that completed their public offerings through either traditional IPOs or SPAC mergers and eight additional companies that have agreed to SPAC transactions. This, combined with continued very strong performance across our broader investment portfolio, again drove high levels of early payoffs. Early loan repayments were at the midrange of our guidance of $150 million to $200 million at nearly $170 million but decreased slightly from $192 million in Q1. For Q3, we expect prepayments to be between $200 million and $250 million based on the momentum that we are seeing across our investment portfolio, although this number could change materially as we progress in the quarter.

Even with the continued elevated levels of early payoffs, our strong fundings during the quarter produced net debt investment portfolio growth of $57 million after allocating over $30 million of new fundings to the initial private fund that is managed through our wholly owned registered investment advisor. Year to date, we have managed to deliver net debt investment portfolio growth of $139.3 million, which is a credit to our investment team and diversified investment platform. In Q2, we generated total investment income of $69.6 million and net investment income of $37 million or $0.32 per share. The increase in both total investment income and net investment income was primarily attributable to the higher level of fee income during the quarter as compared to the year before.

Our portfolio generated a GAAP effective yield of 12.7% in Q2 and a core yield of 11.5%, which was at the midpoint of our previous guidance for 2021. With net regulatory leverage at a very conservative 82.4% and continued robust liquidity across our platform, we remain very well-positioned. Credit quality on the debt investment portfolio again improved in Q2 with a weighted average internal credit rating of 1.93 as compared to 2.01 in Q1. This was our strongest internal credit rating in our history since our first publicly reported quarter in 2005.

Overall, our Grade 1 and 2 credits increased to 81.5% in Q2 versus 79.6% in Q1. Grade 3 credits decreased to 18% in Q2 versus 19.5% in Q1. Our rated-4 and rated-5 credits made up 1.4% of the entire debt portfolio fair value. In Q2, we had three debt investments on nonaccrual with a cumulative investment cost and fair value of approximately $23 million and $7.7 million, respectively, or 1% and 0.3% as a percentage of the company's total investment portfolio at cost and value, respectively.

During Q2, Hercules had net realized losses of $14.3 million, primarily due to the write-off of one legacy equity investment that had a fair value of 0. Excluding the write-off of that fully impaired position, we had record gross realized gains of $47.9 million from the sale of equity and warrant investments during Q2. As a result of continued strong performance across our portfolio, the exceptionally strong equity capital markets and robust exit and IPO activity, our Q2 net asset value per share increased by over 3% to $11.71. This is the highest net asset value per share that we have reported since Q3 2008.

We ended Q2 with strong liquidity of $610 million, which provides us with substantial coverage of our available unfunded commitments of $327 million and the ability to fund our ongoing anticipated business activity. Overall, we believe that our balance sheet is exceptionally strong and well-positioned. As Seth will discuss, we will continue to look for ways to optimize our balance sheet and further drive down our overall cost of debt capital. The venture capital ecosystem continued to exhibit exceptional strength in Q2 after a record Q1.

For the first half of 2021, venture capital funds raised a total of $74.1 billion and invested over $150 billion in the U.S., according to data gathered by PitchBook and the National Venture Capital Association. That compares to $81 billion and $164.3 billion, respectively, for all of 2020. We declared our 10th consecutive quarterly cash distribution of $0.32 per share, as well as a supplemental distribution of $0.07 per share, as previously discussed on our Q1 2021 earnings call. Inclusive of Q1, we have declared $0.78 of distributions to our shareholders year to date, which is a 22% increase over the same period last year.

As of Q2 2021, we have generated record undistributed earnings spillover of approximately $160.2 million or $1.38 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 platform. Year to date, we have continued to add talent to our team with several new hires. We have also continued to enhance our infrastructure and platform.

We will continue to make these investments to best position us for sustained long-term success. In closing, I am grateful and thankful to each of our talented and dedicated employees who continue to demonstrate tremendous strength, commitment and perseverance during what continues to be a challenging time for many. Being able to deliver record new commitments year to date is a credit to each of them and the great work that they do. I would also like to once again thank each of our portfolio companies and their institutional investors that have chosen to make Hercules Capital their preferred financing partner.

I will now turn the call over to Seth.

Seth Meyer -- Chief Financial Officer

Thank you, Scott, and good afternoon, ladies and gentlemen. The investment team delivered another strong funding and commitment quarter, resulting in first-half records for both dimensions. We were able to grow the loan book by $57 million at cost during the quarter. We delivered total investment income of $69.6 million and once again had NAV appreciation per share triggered by the strength of our portfolio and the broader market.

Our early payoff levels reduced to $168 million, which was within the guidance range. Net of the private credit fund allocations, the healthy loan growth helped our total investments grow to $2.5 billion at cost. As usual, I would like to focus on the following areas: the income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity, and the outlook. Turning to the income statement performance and highlights.

Net investment income was $37 million or $0.32 per share in Q2, an increase compared to the prior quarter attributable to two consecutive solid quarters of growth following the portfolio decline in Q4 2020 as a result of the record loan payoffs. Total investment income was $69.6 million, an increase compared to the prior quarter. The main driver for the increase was fee income despite lower payoffs, largely due to the vintage and size of the onetime and unamortized fees associated with the loans that paid off. Our effective and core yields in the second quarter were 12.7% and 11.5%, respectively, compared to 13.2% and 11.6% in the first quarter.

The effective yield was down due to the lower early repayments, and the slight decline in the core yield was due to a modest decrease in coupon interest. Turning to expenses. Our gross operating expenses for the quarter decreased to $33.8 million to $35.1 million in the prior quarter. Net cost recharge -- net of cost recharge to the RIA, our operating expenses were $32.6 million.

Interest expense and fees decreased to $16.7 million from $17.5 million in the prior quarter. The second-quarter figures were again elevated due to the acceleration of fee recognition for the payoff of the former SBA license debentures at par value and paydown of the securitizations due to the reinvestment period ending. SG&A expenses decreased to $17.1 million from $17.6 million in the prior quarter. The decrease was driven by lower compensation expenses related to the decrease in fundings relative to our record Q1 and quarterly payroll taxes, which normally run higher in the first quarter.

Net of the cost recharge to the RIA, the SG&A expenses were $15.9 million. Our weighted average cost of debt was 5.4%, which represents a small decrease compared to the prior quarter. Both quarterly figures were elevated driven by the additional fees associated with early debt retirements from both our securitizations and the SBA debenture loan repayments. The second-quarter adjusted cost of debt, excluding fee acceleration, was consistent with the prior quarter at 5.1%.

Let's now switch the focus to the NAV unrealized and realized activity. During the quarter, our NAV increased $0.35 per share to $11.71 per share. This represents an NAV per share increase of 3% quarter over quarter. The main driver for the increase was the net change in unrealized appreciation of $60 million after reversal of prior net unrealized appreciation of $29.3 million, mainly due to investments disposed or written off.

Our $60 million of net change in unrealized appreciation was driven entirely by the mark-to-market of our equity and warrant portfolio. Our debt portfolio was relatively stable with a $1.5 million appreciation, was mainly from the reversal of prior unrealized appreciation. In addition, we had recognized a $1.5 million depreciation on an escrow receivable from one portfolio company that paid off this quarter. The net realized loss in the quarter of $14.3 million comprised of $47.86 million of net gains from the disposal of equity positions, offset by $62.1 million of realized loss pertaining to one legacy equity position that had previously been fully impaired at a carrying value of $0.

Moving to leverage. Our GAAP and regulatory leverage was $87.7 million and 83.8%, respectively, which decreased compared to the prior quarter due to the partial repayment of the two securitizations, which are now in natural runoff. Netting out leverage with cash on the balance sheet, our GAAP and regulatory leverage was 86.4% and 82.4%, respectively, putting us in a very strong position heading into the next quarter. We continued to utilize our third SBA license, drawing down an additional $16.2 million of debentures at an attractive annual interest cost of 0.71%.

We have access to an additional $121.3 million of SBA funding for qualified investments. As a result, we ended the quarter with strong liquidity of $610 million. This excludes capital raised by the funds managed by our wholly owned RIA subsidiary. As a reminder, our liquidity continues to be enhanced by our normal course monthly principal and interest collections, as well as early payoffs.

Finally, the outlook points. Our core yield guidance of 11% to 12% continues to apply for Q3 2021. For the third quarter, we expect SG&A expenses of $16.5 million to $17.5 million, consistent with the prior quarter. Although we expect our underlying third-quarter cost of borrowing to decrease modestly, interest and fees will increase with the accelerated fee recognition of $1.5 million due to the previously disclosed early redemption of $75 million of 5.25% 2025 notes completed on July 1 at par value.

The $1.5 million increase in fee recognition is a one-time event and will impact our Q3 NII. In addition, we expect our two securitizations, which are now in natural runoff, to continue to trigger an increased capitalized fee recognition. With respect to the February 2022 convertible bond maturities, we expect to settle any converting holders with cash for the principal component of the note and shares for the option value. This will allow us to pay the principal in cash irrespective of the number of conversions while managing leverage and dilution appropriately.

Although very difficult to predict, as Scott communicated, we expect $200 million to $250 million in prepayment activity in the third quarter. For the third quarter, we expect a similar level of RIA expense allocation to what we saw in Q2. In closing, we're pleased with the first half of 2021 and looking forward to building on another successful quarter. I will now turn the call over to Laurie to begin the Q&A portion of our call.

Laurie, over to you.

Questions & Answers:


Operator

[Operator instructions] Our first question is from Crispin Love of Piper Sandler. Please ask your question.

Crispin Love -- Piper Sandler -- Analyst

Thanks. Good afternoon. So one on the spillover. So you have the record $160 million or $1.38 per share there.

So can you talk a little bit about what your plans are with that? And can you remind me if you have any restrictions there with how much spillover you can have? Is it 90% of NII or net change in assets? And then when would you need to do something if there are restrictions?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thanks, Crispin. I'll take the first part, and then Seth can speak to the second part in terms of restrictions. So I think we've kind of consistently said, obviously, we're very pleased by the fact that we have such a large spillover.

And it continues to provide us with significant flexibility both in terms of being able to continue to invest in the platform and in our team but also with respect to evaluating and reevaluating our distribution policy on a quarterly basis. Our quarterly base distribution is variable. The board evaluates on a quarterly basis what we think makes sense based on the facts and circumstances as of the time. And then at the beginning of this year, in Q1, we announced the $0.28 supplemental distribution for 2021, which will be distributed $0.07 per quarter in each of the four quarters of 2021.

Our plan would be to evaluate at the end of this year a further potential supplemental distribution program for 2022. And we will, of course, on a quarterly basis, reevaluate what base distribution level we think is most appropriate.

Seth Meyer -- Chief Financial Officer

And Crispin, on your second part of your question, you had asked on what the limitations are. As a registered investment company, we're required to distribute 90% of our earnings basically over a year. So if we accumulate on the ordinary income earnings that are greater than 90% of an annual earnings, then we're reaching that ceiling that you're talking about. So we would have to distribute it.

And then on the capital gain side, we have to distribute about 98% of it. But that measurement period is really from November to October. And so we need to see what that position would be after October.

Crispin Love -- Piper Sandler -- Analyst

OK. That's helpful. And then I heard your comments on the prepayments that they're expected be higher in the third quarter, $200 million to $250 million, in that range. And so what are the key changes that you've been seeing recently versus the last few quarters to cause it to increase a little bit there? And would you expect the overall portfolio or at least the debt portfolio to decrease given these elevated prepayment levels?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So it's too early, Crispin, in the quarter for us to really opine as to whether we think the portfolio will be up or down. We're just starting Q3 now. Per our disclosure, we have $403 million of pending signed commitments already.

So that's a very, very healthy start to Q3, and the pipeline gets very strong. In terms of what's driving the elevated prepayments for Q3, I think a couple of things. So one, we've sort of consistently spoken about the quality and the health of our portfolio over the course of the last several quarters. Our portfolio right now is performing at a level that we frankly haven't seen in some time, and a lot of these companies are incredibly well capitalized.

Right now, we have, per our disclosure, eight companies in the pending IPO/SPAC sort of position. And so we expect at least a good portion of those to be completed in the Q3 time frame. And then we're also aware of several M&A potential events and capital raising events in Q3, which we expect to lead to elevated prepayments. So it's all being driven by positive things.

And I think the credit, as I said in my comments, really goes to our team who is doing an incredible job picking and selecting and winning mandates and financing opportunities with just some great companies that are incredibly healthy and have a lot of optionality.

Crispin Love -- Piper Sandler -- Analyst

Great. Thank you for taking my questions.

Operator

Our next question is from Devin Ryan of JMP Securities. Please ask your question. 

Kevin Fultz -- JMP Securities -- Analyst

Hi. Good afternoon. This is Kevin Fultz on for Devin. My first question, can you talk about your overall satisfaction so far in utilizing the private credit funds to expand the investment platform and pursue new opportunities?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So Kevin, I think we're very pleased with what we've seen so far. The effort continues to be fairly early in terms of its evolution. We raised the first funds -- in Q1, we started our investment activities in Q1.

So we're now essentially two quarters into it. If you look at the amount of capital that we've been able to allocate to the private vehicle, inclusive of Q1 and Q2, we're at roughly $80 million, which is frankly ahead of our initial expectations. And I think in terms of overall, how it's benefiting Hercules Capital, it's essentially doing what we expected it to do. I think, first, it is increasing the overall pie that we are able to pursue from a debt perspective.

Number two, it is allowing us to pursue some larger, later-stage transactions and spread the funding over a couple of different vehicles. And then number three, it is helping us be more aggressive in a couple of very specific parts of the market where frankly, we were constrained in the internally managed BDC model. And so I think when we look at it sort of two quarters in, we are incredibly pleased by the performance to date.

Kevin Fultz -- JMP Securities -- Analyst

OK. That's helpful. And then obviously, we've talked about how prepayments are going to be elevated in the next quarter. Just curious how you view your target leverage range.

I know in the past, you've communicated 1.25. Is that kind of still where you're looking to get the portfolio longer term?

Seth Meyer -- Chief Financial Officer

Yes. That's our ceiling, our target ceiling that we've self-imposed on ourselves of 1.25 leverage to equity. And we would see, as prepayments start to stabilize again, that we would try to target to get back above 1-to-1, for sure.

Kevin Fultz -- JMP Securities -- Analyst

OK. Thank you for that, man. Thanks for taking my questions. Congrats on a strong quarter.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, Kevin.

Operator

Our next question is from Finian O'Shea of Wells Fargo Securities. Please ask your question.

Fin O'Shea

Hi. Good afternoon. Scott, can you talk about with all the new venture capital fundraising and investing, what sort of areas all that money is going into? Is it mostly the late stage, growth stage? Or is it finding its way into other more traditional private equity areas? Or anything -- any color you'd give on that front.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. It's been pretty widespread, Fin. If you just look at the numbers, it's pretty incredible in terms of what we're seeing, following a record 2020 where you had $81 billion raised and $164 billion invested. Year to date, just through the first half of this year, we're already at $74 billion raised and then $150 billion invested.

We tend to look at it in sort of three different buckets: early stage, expansion stage, and then established later stage. And we've seen outperformance in terms of VC equity capital being invested in each of those three buckets, although the greatest area of increase has been in that later stage, established bucket part of the market.

Fin O'Shea

OK. That's helpful. And just a follow-up on G&A, I think Seth guided flat or consistent G&A, again, which is great. How would we feel comfortable with that given what's going on in your part of the labor market and your plans to grow the business with record fundings? Like how does it stay where it is?

Seth Meyer -- Chief Financial Officer

So at the moment, we have a very stable base of employment, which has been very good to the COVID environment. Our costs are not dramatically different as a result because we were a very high-tech organization, well prepared to work remote. And so we didn't really have to make investments in that dimension. The investments that Scott mentioned in his dialogue that we continue to make are really projects that are underway that seek to replace systems and other processes at a lower cost.

And at the same time, we continue to add people and resources behind that. So it is really a invest smartly and reinvest the savings into the growth of the main element of our business to human capital. Anything you'd add?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Yes. And the only thing I would add, as Seth just said, if you look at a lot of the investments that we're making right now in terms of the platform and the infrastructure, a lot of it is really sort of driven toward increasing efficiency and additional use of technology. And a lot of those things that we are doing, we think long term, will actually have a savings for the company. And so that is offsetting some of the increase in the employment-related costs that we're just seeing given the result of the labor market.

Fin O'Shea

Great. Thank you so much.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thanks, Fin.

Operator

Our next question is from Kenneth Lee of RBC Capital Markets. Please ask your question.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my question. Just one around your funding mix. Wonder if you can just share some thoughts around that and perhaps further expand upon comments about potential to further optimize the balance sheet there.

Thanks.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So as we saw in Q1, the fundings were near evenly split again between technology and life sciences. In Q1, I think the mix was almost exactly 50-50. It was pretty close to 50-50 once again in this quarter.

We look at it both from a commitment perspective and from a funding perspective. So if you look at the $441 million of commitments or the $279 million in fundings, it was pretty evenly split once again between our technology and life sciences focus.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. And then in terms of the originations over the near term, just wondered if you could just talk a little bit more about what factors could either drive origination volumes, either higher or lower, over the course of the rest of the year.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So the pipeline right now is incredibly robust. As I mentioned on the call and in our subsequent release in the press release, we closed $27 million of commitments quarter to date through the first 26 days of the quarter. We have $403 million of pending signed term sheets which, again, assuming diligence and the closing process holds true, we would expect to close in the Q3 time frame.

Overall, we continue to be very pleased by the quality of the companies that we are looking at. I think the variables that could change that pipeline up or down really just get back to sort of more of the macro discussion in terms of the vibrancy of the ecosystem. Over the last 12 to 18 months, we've obviously seen just a tremendous trajectory both in terms of public equity and the private equity markets from a VC perspective. If that continues to be healthy and robust, we would expect the trajectory to sort of remain based on sort of where it is right now.

If those markets shift to the downside, we actually think it could be beneficial to us in terms of increasing the pipeline because as I've mentioned a couple of times now over the last few calls, from a competitive perspective, right now, our biggest competitive threat continues to be the equity markets, either on the public side or on the private side.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. Very helpful. Thanks.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Thank you, Ken.

Operator

Our next question is from Christopher Nolan of Ladenburg Thalmann. Your line is now open. Please ask your question. 

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Hey, guys. The increase in diluted share count, that's related to the 2022 convertible notes being in the --

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

That's correct.

Seth Meyer -- Chief Financial Officer

Yes.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

And does that assume a full conversion? Because I guess the strike price of that is roughly $16 or so.

Seth Meyer -- Chief Financial Officer

Yes. The strike price now is at $16.21. When we originally issued, it was at $16.41. It's been adjusted per the mechanics of distributions over a set amount.

And it is correct, your assumption, on what is causing us to provide the dilution impact of the shares.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

OK. So taking the full dilution now, there shouldn't be anything further in the next quarter?

Seth Meyer -- Chief Financial Officer

Correct.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

And then I guess, Solar Spectrum, I mean, just the write-down, is there any takeaway? Was that sort of a one-off? Is there something related to supply chain or China that you might be able to share with us in terms of the demise of that investment?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Yes. Sure. So there's nothing new there, Chris. That's the legacy Sungevity/Solar Spectrum position.

That company has been on our books going back now five or six years. It was fully impaired down to a carrying value of 0 several years ago when that company went through bankruptcy. We obviously continued to work on the investment. What caused us to take the realization this quarter and move it from unrealized to realized is the fact that the company has officially now been dissolved.

So from a GAAP perspective, we're able to take that realization. It has no impact at all on net asset value. And then I would just add that as we, from a fiduciary perspective, continue to look to create value from all of our positions, as part of the sort of final dissolution of that company, we did structure a new deal where we were able to transfer the legacy assets, which we do believe continue to have some value, into a newco. And that newco, per our public disclosure, is now right in the middle of a publicly disclosed reverse merger.

So we are hopeful that on a go-forward basis, we will continue to have some possibility of realization of downstream.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. And Scott, just a quick follow-up on the industry. Are you seeing companies being taken out at an earlier stage than before just because the whole VC tech sector is so hot for so long?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

We haven't really seen any disproportionate allocation to early stage versus late stage from an M&A perspective. We're continuing to see vibrancy in each of the area that we focus on. 90% of our business is really in that expansion and established stage part of the market. We do very little in the early stage.

But we've continued to see very healthy and robust M&A and IPO exit activity in each of those two core areas, and we've seen it across industries. So when you look at our portfolio from a sector perspective, we're not seeing a disproportionate amount in any particular technology or life sciences industry. We're seeing it pretty broad-based, which I think just speaks to the overall amount of liquidity that's in the ecosystem.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. Thank you for taking my questions.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. 

Operator

Our next question is from Casey Alexander of Compass Point. Please ask your question.

Casey Alexander -- Compass Point -- Analyst

Yeah. Hi. Good afternoon. A couple of questions.

It looks like based upon the capital gain statement that there were some meaningful sales of some of the publicly traded equity positions in the quarter, can you go over any of the more significant sales that were made in the quarter?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. So we did have a record approximately $47 million of gross realized gains from distributions of our public equity and warrant positions in the quarter with the most meaningful -- excuse me, the most meaningful dissolution was DoorDash. We did sell a portion of that position, not the entirety of the position. As of the end of Q2, we continue to hold approximately 200,000 shares of DoorDash, which, depending on which day we're using for the closing, has a value of approximately $35 million to $40 million.

And then we had some smaller exits and sales during the quarter, but that was the most meaningful sale.

Casey Alexander -- Compass Point -- Analyst

OK. Great. That's very helpful. Secondly, there was quite a lift in the unfunded commitments during the quarter.

And oftentimes, that's just a measure of timing between the commitment and the actual funding. Is there some likelihood of some of those increased unfunded commitments coming into funded status and, therefore, offsetting some of the prepayments that you see coming during this quarter?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Yes. It's a great question, Casey, and it's really a difficult one to answer. When we look at that unfunded number, what we really focus on is the percentage of sort of fundings to commitments. And as you know from following us for a long time, historically, we tend to be in that sort of 60% to 75% range from a fundings to commitment perspective.

If you look at the business in Q2, our ratio was approximately 65%, so on the lower end of that range but certainly within the range. The increase in Q2 is really being driven by three particular things. Number one, we have continued to go after some larger, later-stage deals, which is, by definition, the amount of unfunded is going to be a little bit larger. Number two, our team has done a really, really great job of identifying some companies in the market right now that are very well capitalized.

So to get those deals on board, we're funding a little bit less than we typically would and then just making that unfunded piece available for a little bit longer. And then the last piece is we have a lot of portfolio companies right now that are achieving preset performance milestones, which tends to unlock and make available some of those legacy unfunded commitments. So that's what's driving the increase. We continue to have liquidity that is more than sufficient to cover those unfunded commitments.

Based on the overall strength of our portfolio right now, I think it's difficult to tell you what percentage of those we think will actually become funded. But I can assure you that we're in conversations with all of these companies and doing what we can to try to get them and incentivize them to draw that capital.

Casey Alexander -- Compass Point -- Analyst

That's a great answer. I just wonder, in that last portion of it where a number of companies have hit milestones, historically, that does give them a need to draw. Is that draw being -- is that need to draw on those unfunded commitments running into competition from equity markets and this abundant sources of capital?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Yes. There's no doubt that our portfolio right now, just from an overall liquidity perspective, these companies are better capitalized and more liquid than we've seen in some time. And that is causing some companies to either defer or delay the drawing of fundings that are available today. How long that lasts? I think TBD, but that is certainly something that we've seen over the last quarter or two as the health of our portfolio has increased.

Casey Alexander -- Compass Point -- Analyst

Right. Great. Got it. OK.

Thanks so much for taking my questions. I appreciate it. 

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thanks, Casey.

Operator

Our next question is from Ryan Carr of Jefferies. Please ask your question. 

Ryan Carr -- Jefferies -- Analyst

Hi. Good afternoon, guys. Congrats on a great quarter. Just a quick question on the timing of the originations and repurchase -- or repayments in the quarter.

Can you give us a sense for what month in the quarter you saw that activity on both sides and whether it picked up or declined at any point?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Yes. So we typically model sort of 20, 20 and then 60 in terms of the funding cadence over the course of a quarter. And that -- obviously, that can change quarter to quarter. But the majority of our fundings and commitment activity typically close in the last month of the quarter, and that's been the case for the last 15-plus years.

We're really not seeing that change. The team is typically busy in each of the months during the quarter, but we see things sort of escalate from an activity perspective the last month of the quarter. And the prepayments are variable, right? There's no way to sort of tell you when those things will happen. A lot of these prepayments are tied to M&A.

A lot of these prepayments are tied to SPACs that have been announced and are just sort of in the SEC queue waiting for ultimate sign-off and closing. Those things could happen this month. Those things could happen next month. The $200 million to $250 million is our best guess from an overall quarterly prepayment perspective based on what we know as of today.

Ryan Carr -- Jefferies -- Analyst

Got it. Thank you very much.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. 

Operator

Our next question is from Ryan Lynch of KBW. Please ask your question.

Ryan Lynch -- KBW -- Analyst

Hey, good afternoon. You talked about the market, the venture market really kind of having an abundance of liquidity and capital in that space. And I think that's what's driving the high level of prepayments that you all are experiencing and are going to experience in the third quarter. Just wondering, it doesn't seem like anything in the near term is probably going to change that liquidity that's kind of floating around that marketplace.

And so what I'm wondering is, it feels like prepayments could be heavy for the foreseeable future in your portfolio. And so is there anything that you all can do or are trying to pursue on the origination side to boost originations to help offset those potentially strong prepayments for the foreseeable future? Except, obviously, I know you guys don't want to loosen up anything on your credit standards. But are there any different sort of strategies or areas or sectors that you guys are looking at to kind of boost that?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure, Ryan. So a couple of things. So first part of your question, I think the answer is yes. We do expect to see elevated levels of prepayment, certainly short to medium term.

And I think we've been pretty clear on our guidance as it relates to that. If you just look back over the last three or four quarters now, we've been in that $150 million to sort of $250 million range, and it's been pretty consistent. In Q4 of last year, we did see a pretty large spike in prepayments. We expect to see another spike now in Q3, again, based on the overall strength of the portfolio.

In terms of what we're doing, a couple of things. So number one, the private credit fund that we have now raised is giving us the ability to do some different things. And we're not going to talk publicly about the types of things that we're able to do there outside of what we've already disclosed. But we do anticipate that that private credit fund business is going to allow us to continue to increase the pie that's available for our team to go after and look at.

And then we are obviously continuing to be able to do things within our portfolio for the companies that are performing at an elevated or high level to try and restructure and amend those deals in a way that makes it more palatable for those companies to end up staying with us versus paying us off. I think overall, though, I will tell you, despite the fact that the prepayments are difficult to replace, I think it speaks to the quality our team. I think it speaks to the great work that our team does, both on the technology side and on the life sciences side. And frankly, if we, right now, in this market, had a portfolio where we weren't seeing prepayments, I think that would speak to actually a lack of credit quality, which is just not something that we would want to see.

Ryan Lynch -- KBW -- Analyst

Yes. That makes sense, yes. And the prepayments are a sign of really good underwriting on the specific credits. With the specific prepayments you guys were looking at in the third quarter that has the potential to hit, would you say -- how would you characterize those? Are those kind of normal course from a vintage standpoint? Are they earlier or later vintages just because depending on how long those have been in your portfolio, those could potentially -- if they're newer loans, those could have much higher fees relative to the dollar amount level.

So I'm just wondering, should we expect anything different from a fee level relative to the vintage of those prepayments you guys are expecting in the third quarter?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

No. Based on what we know right now, we would expect it to be pretty consistent in terms of vintage and what you would expect to see from an acceleration perspective on a percentage basis.

Ryan Lynch -- KBW -- Analyst

OK, understood. I appreciate the time this afternoon.

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Sure. Thanks, Ryan. 

Operator

Our next question is from Sarkis Sherbetchyan of B. Riley Securities. Please ask your question. 

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Hey, good afternoon, and thanks for taking my question here. I just want to get some incremental color on the comment you made regarding the abundance of capital creating challenges. I just want to see if you can expand on this thought some more. And specifically, if you can kind of relate it back to the prior comments on a questioner regarding the private credit funds.

So do you see the private credit fund as an opportunity to kind of work around some of the abundance of capital challenges you're seeing right now?

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

So on point one, with respect to the abundance of liquidity in the market, some loosely structured deals, I think the comment really speaks for itself. Over the last several quarters, we've seen some people get very aggressive from a structure perspective, from an underwriting perspective to get fundings on the board. And fundamentally, that's just not something that we've ever done. We've got a 15-year track record of being a disciplined underwriter of credit, and I think our team has done a very good job of sticking to that.

We tend to look at pretty closely the deals that get done in the market that we see, that we lose or that we pass on. And right now, the amount of deals that are getting done that our team passes on is really at an all-time high. And I just think that speaks to, I don't want to say desperation, but I think it speaks to the fact that there are a lot of lenders out there right now that are just really trying to sort of get points on the board, irrespective of the quality of the credits. And that's something that we may not be perfect at, but I think we're going to continue to try to be very focused on maintaining that disciplined approach because we're in this for the long term.

And whether we have a strong quarter or two really doesn't change the calculus in terms of how we think about the trajectory of the business. And then in terms of the private credit fund, I think the answer is, again, yes, that private credit fund was put in place and it was raised to really do two things: number one, to be accretive to HTGC's shareholders over the long term and as a wholly owned subsidiary of the public BDC, and we expect that to continue to be the case; and then number two, we expect that it will be able allow us to increase the pie and the size of the opportunity that we can go after in the market. So there are -- without getting into specific industries or sectors or types of businesses, but there are companies now, there are industries now, there are opportunities now that our team, both on the tech side and the life sciences side, can go after aggressively that we would not have gone after 12 months ago. And so I think long term, we continue to be very optimistic that having the private credit fund business, which continues to grow and expand, will just continue to increase the overall pie for us.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Yes. And just another question on kind of the advisor sub, right? I guess at what size or scale do you think Hercules gets the dividend stream from the advisor? I think on the last call, you mentioned that the time line might be, at the midpoint of next year, you might start accruing dividends. Just want to get a sense for whether it's 12 months from now or 24 months from now, any color you can give there.

Seth Meyer -- Chief Financial Officer

Yes. Absolutely. So Sarkis, we're thinking in the 12- to 18-month period, we should have enough scale that the expenses that we're allocating to the RIA, which immediately benefit the BDC and ultimately the shareholders, are then going to be overcome by the amount of management fee and carry that the RIA is earning. As far as the scale of that, we're not disclosing a lot of the details of the RIA right now.

So I can't give you a number that we think that that would match up with as far as the total investment. But you can see the allocations that we've done so far to the fund in the disclosures. And TBD, you'll see as we continue to make further allocations and investments in that fund in the next 12 to 18 months is when we think we can generate dividends.

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

Thanks. I'll take the rest off-line

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Great. Thanks, Sarkis. 

Seth Meyer -- Chief Financial Officer

Thanks, Sarkis.

Operator

And there are no further questions at this time. I will turn the call over back to Scott Bluestein, CEO and chief investment officer, for his closing remarks

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 Q3 2021 earnings call.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Michael Hara -- Managing Director of Investor Relations

Scott Bluestein -- Chief Executive Officer and Chief Investment Officer

Seth Meyer -- Chief Financial Officer

Crispin Love -- Piper Sandler -- Analyst

Kevin Fultz -- JMP Securities -- Analyst

Fin O'Shea

Kenneth Lee -- RBC Capital Markets -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Casey Alexander -- Compass Point -- Analyst

Ryan Carr -- Jefferies -- Analyst

Ryan Lynch -- KBW -- Analyst

Sarkis Sherbetchyan -- B. Riley Financial -- Analyst

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