Good afternoon. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital Fourth Quarter and Full Year 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.

Thank you, Angela. Good afternoon, everyone, and welcome to Hercules conference call for the fourth quarter and full year 2025. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date, and Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott.

Thank you, Michael, and thank you all for joining the Hercules Capital Q4 and Full Year 2025 Earnings Call. 2025 was another year of record operating performance, record originations, platform expansion and strong and stable credit for Hercules Capital. We were once again able to set several new financial and performance records. And deliver strong platform growth, demonstrating the stability and consistency of the Hercules platform. Hercules crossed the finish line in record fashion by delivering another strong quarter of record commitments, which led to annual records for new debt and equity commitments, gross fundings, net debt portfolio growth and both total and net investment income. Our momentum continued in Q4 with record originations of $1.06 billion, which drove record annual originations of nearly $4 billion and record annual gross fundings of $2.28 billion. Our record fundings led to a new record net debt portfolio growth in 2025. The strong new business activity throughout the year helped to deliver new annual records for both total investment income and net investment income. Our performance in 2025 and our continued confidence in the trajectory of business, put us in position to once again declare a new supplemental distribution program for our shareholders. Despite operating in a declining rate environment, we were able to achieve 120% coverage of our quarterly base distribution of $0.40 per share in the fourth quarter and maintain $0.82 per share of spillover income. In addition to not making any changes to our quarterly base distribution, we are maintaining the same quarterly supplemental distribution as last year. Driven by the growth of both the BDC and our private credit funds business. Hercules Capital is now managing more than $5.7 billion of assets, an increase of more than 20% from where we were at year-end 2024. Let me recap some…

Thank you, Scott, and good afternoon and evening, ladies and gentlemen. 2025 was another very strong year for Hercules Capital with record operating performance and an acceleration of the growth of the Hercules platform. Our strong business momentum and performance results throughout the year continued into the fourth quarter. We delivered strong growth across both the BDC and our wholly owned private credit fund business, which continues to provide us with significant capital flexibility and the capacity to take advantage of market opportunities as they arise. We continue to maintain strong available liquidity of approximately $526 million as of quarter end in the BDC and more than $1 billion across the platform including the adviser funds managed by our wholly owned subsidiary, Hercules Capital -- Hercules Advisor LLC. As mentioned by Scott, after quarter end, we strengthened our liquidity position by issuing $300 million of institutional 5.35% unsecured notes. Finally, based on the performance of the quarter, Hercules Adviser delivered a quarterly dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.4 million resulted in approximately $6.5 million in NII contribution to the BDC for the quarter. For 2025, Hercules Adviser delivered $23 million in NII contribution to the BDC, an increase of approximately 33% year-over-year. With those points in mind, I'll review the income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity, and finally, the financial outlook. Turning first to the income statement performance and highlights. Total investment income in Q4 was $137.4 million, supported by our year-to-date debt portfolio growth. Core investment income, a non-GAAP measure, increased as well to a record $133.3 million. Core investment income excludes the benefit of income recognized because of early loan prepayments. Net investment income was $87 million or $0.48 per share in Q4,…

[Operator Instructions] We'll take our first question from Brian McKenna with Citizens.

So I appreciate all the detail on the current backdrop for software and AI and that you think AI will actually be a net positive for your business and portfolio over time. With all that said, given the dislocation we've seen across the public markets, is there an incremental opportunity here on the deployment front to take advantage of some of this volatility? And if so, where would you be looking to lean into?

Sure. Thanks for the question, Brian. So I hope that we emphasized that in the prepared remarks. We absolutely think that there is an interesting opportunity here for us to play offense and our teams right now across both the tech vertical and the life sciences vertical are looking to do that. Hercules has typically performed its best in periods of volatility, and we've tried to position our balance sheet to be able to do the same this time. Our liquidity position is incredibly robust. Our balance sheet is conservative with low leverage, long liquidity and robust liquidity. And so we do plan to be aggressive with respect to taking advantages of what we see are some pockets of real deployment opportunities. Our Q1 quarter-to-date numbers are as strong as we've ever announced on a Q4 call. If you look at the -- not just the pending, but what's already closed quarter-to-date, we're well north of $1.2 billion, $1.3 billion in commitments for Q1 and a large part of that is us being aggressive in taking advantage of some of the market dislocation that we think is creating some of these unique opportunities that we can be aggressive on.

And then just switching gears a little bit. On the RIA, it's great to hear all the momentum there. And it really feels that business has inflected. But how should we think about fundraising and growth for that platform in 2026? I know you mentioned the $1 billion of fundraising, if you will, in 2025. And then -- just where does fundraising stand for Fund IV? Will that get wrapped up this year? Could you actually commence fundraising in for the next fund? And then are there any other opportunities from a new product perspective?

Sure. So we continue to be very pleased by the growth of our private funds business. We're not going to disclose additional details outside of what we disclosed on the call, but I can tell you that we absolutely expect to continue to raise additional capital throughout 2026. We expect Fund IV to have a final close in 2026 and discussions are already well underway for what will be the next vehicle as part of our private funds business. I think the key thing that I would continue to emphasize, given our unique ownership structure, the larger that business becomes, the more we're able to raise, the more we're able to deploy, the better it is for HTGC shareholders and stakeholders, and that has been and will continue to be our primary focus with that business.

That's helpful. And congrats on all the momentum into '26.

Thanks, Brian.

We'll take our next question from Crispin Love with Piper Sandler.

First, just looking at your investment portfolio composition, about 35% is made up of software companies across application software and system software. Can you drill a little deeper within those cohorts. What areas in your portfolio are you most confident in? And then on the other side, any areas in your portfolio where you're more cautious just given the AI disruption theme out there.

Yes. So look, I appreciate the question, Crispin. So system software is very different than application software, which is why we break it out. Think of sort of system software as companies that are providing software to more sort of general IT companies, so cybersecurity, for example, whereas application software would be software companies that are providing solutions for more general users, I would tell you that across the board, we generally feel pretty good about what we're seeing in our software portfolio. Our view, as I discussed in the prepared remarks is that there should be no ambiguity that AI is a disruptive technology. That does not mean that it has to be a destructive technology for all software businesses. Software companies that are focused on providing core mission-critical solutions, software companies that are embracing artificial intelligence, software companies that are utilizing and building AI agentic solutions into their software offerings, we think are actually going to do pretty well. They'll become more value add for some of their customers. There are software companies that aren't doing that, and we think that those companies will be negatively impacted. That will take place over several years. The way we structure our investments, the way we underwrite with low LTVs, low attachment points and shorter duration than you typically see in software private credit, we think will position us relatively well.

And then just on share a little bit on your views on M&A and IPO activity into '26. You did call out an expectation more strategic M&A, just -- what's your view on tech M&A as well as the IPO pipeline for tech companies? And has that been impacted at all just from recent volatility.

Yes. So it's interesting. If you look at the M&A data that we track in sort of each of the last 4 years, so '22, '23, '24 and '25. We've had roughly 1,000 venture-backed M&A exits per year. The dollar volumes are up pretty considerably. So last year, 934 M&A exits, about $84 billion of M&A exits. In '25, roughly the same number, so about 1,029 M&A exits, but that number ballooned to about $141 billion of transaction value. Our current expectation is that M&A will continue to be robust in '26. We think that there will be a lot of strategic activity with acquisitions from larger competitors that are picking up some smaller competitors that are distressed from a valuation perspective. And we think that's a net positive for our business. We generally expect the IPO market to remain muted. The number of IPOs that have been done have declined in each of the last 4 years, although the dollar volume has increased considerably, and that's just a function of the number -- the IPOs that are getting done tend to be the larger, much larger ones, which is moving that dollar value up despite the number of IPOs remaining flat and we don't expect that to change in 2026.

We'll take our next question from John Hecht with Jefferies.

Congrats on just continued momentum. And I guess my question -- my first question is kind of tied to that. Scott, maybe I know the venture capital companies like to use debt for a portion [indiscernible] the dilution. The last time I checked it [indiscernible]. It's still a relatively small component of the overall pie for them in terms of capital raising for their portfolio companies. Is the structure of the industry changed [indiscernible].

Hey, John, I think we're losing you. Okay.

It looks like John did disconnect. We'll move on to our next questioner. We'll go next to Finian O'Shea with Wells Fargo.

So a couple of things tied together. On one, and you've had a lot of records this quarter, perhaps even more than usual. But looking at a few other items, ATM has been light for a while. Adviser dividend sounds like a stable guide. The Hercules dividend holds up, but sort of same base dividend. So you keep a lot of supplemental, which tells us less long-term stability on that part. Sort of tying this all together, is Hercules like is the expectation to sort of run in place this year as repayments are high, perhaps the impressive growth you've achieved in the past few years we'll take a bit of a breather, I'll leave it there.

Yes, sure. Thanks for the question, Fin. And the answer is unequivocally no. I think if you take our prepared comments and you look at just the quarter-to-date data for Q1, we have tremendous conviction in the growth opportunity for the platform this year. And we are positioning the business to be able to take advantage of that. A couple of things specifically that you referenced on the ATM. I think we've been very clear on this. We have no interest in using the ATM for the purpose of diluting our shareholders until and unless we actually need that capital. And so in periods where we don't need to use the ATM, we are not going to use the ATM facility just to raise additional capital. We ended the year with $1 billion of liquidity across the platform, over $525 million of that in the BDC, the rest in the private fund business. We've already funded close to $250 billion -- sorry, $250 million of deals in Q1 and we have well north of $1.4 billion in closed and pending commitments quarter-to-date, which would be the strongest quarter in the history of Hercules Capital, and our pipeline is not showing any signs of slowing down. We also just gave prepayment guidance that was flat from last quarter, so $150 million to $200 million. So our full expectation assuming we can deliver on those numbers is that you will see continued strong growth from Hercules Capital over the course of 2026.

I appreciate that. Just a follow-up on sort of another one on the RIA. And I know you tend to hold your cards close here, but I'll give it a shot. Some of your peers are starting to offer or plan to offer venture debt in the nontraded wealth channel. Do you think that's the right -- do you think the sort of product venture debt is right for that market? And then if sort of different question, if these are successful, do you think that's a sort of significant headwind to terms and spreads and so forth in the market?

Yes. So again, I appreciate the question, respectively, I can't speak to what our competitors are doing. And so I'm not going to take a position whether I think that's good or bad. I can just tell you what our focus has been, we think that the best path for capital raising for this asset class in the private fund side of the business is the institutional market. We have 4 active private credit funds right now that are investing. They are 100% institutional with very large institutional well-capitalized investors and that has, and that will continue to be our focus with respect to raising capital in that channel for this asset class.

And we'll take our next question from John Hecht with Jefferies.

Thanks for letting me back in the queue. Sorry about that. So the question to go back to it was, Scott, I mean, there's been tremendous growth in the venture industry overall. Your momentum, obviously, it's correlated to that. But I'm wondering kind of structurally, are the venture capitalists using debt more as a component of funding their businesses or are you just -- is the momentum of growth just tied to the total industry growth?

So I think it's a function of both, John, I appreciate you jumping back in the queue to ask the question. So there is no question that the overall growth in the ecosystem, the growth in terms of the dollars being invested from the VC partners that we work with, has created more of a market opportunity, more of a TAM for us. So that is sort of what is contributing to the growth in our business. I would also say that there is a component of the first part of what you said, which is that certain companies are utilizing more debt than they typically would have used and that could be for a variety of reasons. Number one, because there's a valuation disconnect and they don't want to raise around at a lower valuation. It could be because they can't raise equity capital, so they're trying to raise as much debt and as much leverage as they can. I would tell you, when we sort of said this in each of our last few calls, with venture or growth stage lending, you have to be disciplined, you have to be patient, you can't chase the market. And I think our teams, while not perfect, I think have done a pretty good job on that. So if you look at our metrics in terms of debt to invested equity, debt to paid-in capital, all of our metrics and all of our ratios are largely flat over the last several years, which at least gives me comfort that we're not chasing some of that aggressiveness in the market as leverage has gone up for many of these companies.

A second question maybe for Seth. Just in terms of deal structures, kind of the minutia there. Anything going on or worth calling out with respect to the call it, the fees that are part of the deals and the structures around that or kind of warrant coverage, and are those factors changing given some of the recent dislocation.

Yes, John, I'm happy to take that one. So no real change. We're generally pretty consistent in terms of how we structure these deals. I would tell you, and we've always said this, it's not a one-size-fits-all model. So I think our teams work very closely with our management team partners and our VC partners to try to put together custom-tailored solutions that work well for the companies. But generally speaking, the deals are going to have an upfront facility fee, they're going to have a cash coupon with floor protection. The vast majority of our venture and growth stage loans will be based off of prime. Vast majority of our loans are going to have some form of end-of-term economics. And then in about 80% of the deals that we do, we will get some form of equity upside, whether it's from warrants or from an RTI, which gives us the right to invest in a subsequent equity round. So depending on the profile, depending on the stage, those metrics, those sort of tools that we have may change. But generally speaking, the deals are going to look pretty similar in terms of those different levers.

Our next question comes from Doug Harter with UBS.

Can you just talk about how you look to balance taking advantage of kind of the opportunity from dislocations today versus kind of continuing to be patient in case things get worse before they get better?

Sure. Thanks, Doug. So it's a balance, right? I think our team right now is being pretty targeted. So we've identified a handful of what we think are very attractive, strong opportunities, and we're going after those opportunities as aggressively as we think is prudent. At the same time, we are making sure that we are maintaining a significant amount of dry powder. I think the $300 million raise that we closed last week, I think, is sort of evidence of that, that we are trying to position ourselves to be aggressive now but not overly aggressive where we utilize all of our available liquidity. We do think that over the course of the next several quarters, more and more opportunities will come to fruition, and we want to make sure that we're positioned to take advantage of that. So we're being aggressive, we're picking our spots, but I would describe it as targeted. And we expect that to continue certainly over the remainder of Q1 and well into Q2 as well.

Appreciate that. And I guess as you think about the ability to be targeted here, can you get wider spreads in these deals in this environment? Or is it you're able to kind of finance and pick kind of cleaner companies or better credits and get the same returns. So just how to think about the risk return trade-off where you're able to kind of pick something up in this environment?

I think it's the latter, Doug. We're focused right now on credit. We're not focused on chasing yield. So I think we're getting relatively speaking, the same overall economics, but we're deploying capital into what we think are better overall more stable scale credits. That's been our focus for the last several years. I think we've tried to emphasize we're not chasing yield, we think that the deals that are getting done outside of sort of the typical yield spot or just a much more challenging difficult stories. And I think we're doing a pretty good job staying away from that. So I would think about it as we are maintaining our underwriting yields, but we're targeting better quality, more mature, more scale, more sophisticated businesses that we think have more staying power.

We'll take our next question from Ethan Kaye with Lucid Capital Markets.

Most of mine have been asked and answered. I just have 1, hopefully quicker 1 on software. So you talked a bit about kind of a more enhanced or sharper portfolio monitoring approach, given AI disruption risk, I guess, what are the red flags or like warning signs that you're looking out for that could maybe indicate whether AI disruption is materializing? It sounds like maybe you haven't seen them yet in the portfolio, but any color you can provide on what specifically you're looking for, I think, would be helpful.

Sure. I think it's just -- it's aggressive, active, consistent discussion, conversation and monitoring. One of the benefits that we have of operating at scale, right? And for us, that scale is $5.7 billion of AUM. It's a debt portfolio north of $5 billion. It's 127 different companies. It's $4 billion of committed capital last year. We have access to a lot of different companies, a lot of executives, a lot of venture capital partners. And so we are constantly having conversations with our portfolio ecosystem, which I think gives us a pretty good insight as to what our customers, what the investors are hearing and seeing on the ground. We also have very robust documentation. We require monthly financials. We require monthly compliance certificates and bring down of reps and warranties. Our investment teams are having conversations with the vast majority of our companies on a biweekly basis where we're touching base, hearing what they are hearing from their customers, and I think that puts us in a position to sort of avoid the red flag scenario where we can work with our companies to identify the yellow flags where if we start to see deterioration in KPIs, if we start to hear from a good portion of our companies in a particular software vertical that there's some pushback we can react pretty aggressively and pretty quickly.

We'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Scott, in your comments, it sounds like the venture debt market is a little bit more active than the venture equity market. Is that more a function of just these portfolio companies are now focusing more on cash flow generation rather than growth?

Yes. Chris, I think the venture equity market, certainly in 2025, was incredibly robust. Second strongest year on record. The only year where more equity dollars were invested was 2021, which is sort of the peak of COVID. In 2025, $339.4 billion invested in about 15,000 different venture capital companies. So from the data that we have that we track, the aggregate data is pretty robust. The one data point that is not as robust is VC fundraising. That has declined in each of the last 4 years, but it's really declined and reverted back to what it was pre-COVID where historically, the venture capital firms would raise somewhere between $30 million and $60 billion per year. There was obviously the large spike '21 through '24. And then last year, that number reverted back down to about $66 billion. So that's the one data point that was down. But in terms of the equity dollars being invested, those numbers are very robust. They've increased in each of the last 3 years. And as I mentioned, 2025 was the second strongest year on record since we've been tracking it.

As a follow-up question, in the news, it's been reported that a new tax law in California could tax unrealized gains. And I think it applies only to billionaires. But how does that apply to the conversations that you're having with your portfolio companies?

It actually doesn't. So we're not interested in the equity exit. I mean we wanted to be successful and such, and we certainly want these founders to be successful. But our main goal is getting our debt repaid, making sure that they're operating to the plan in between granting them the money and getting it back. So we're not focused on that at this time.

I'm showing no further questions. I would now like to turn the call back to Scott Bluestein, for any closing remarks.

Thank you, Angela, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q1 2026 earnings call. Thanks, and have a great rest of the day.

This does conclude today's Hercules Capital Fourth Quarter and Full Year 2025 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.