Christopher Nolan: Okay, thanks, Scott.
Scott Bluestein: Thanks, Chris.
Operator: Thank you. One moment, please. Our next question comes from the line of Ryan Lynch of KBW. Your line is open.
Ryan Lynch: Hey, good afternoon. First question, I wanted to kind to circle back around to some of the previous comments you made regarding just the level of activity you’re experiencing thus far in 2024 because it’s been quite remarkable. If I look at the gross debt and equity commitments you did in all of 2023, it was $2.2 billion. If I look at the investments, you’ve closed and pending commitments you’ve done in the first 45 days of 2024, it’s $1.1 billion. So, it’s half of the amount you did in the entire year of 2023. I’m just curious, I know you said — you provided some commentary on why there was a pickup. I’m just curious, in addition to what you said, is there any change in the size of average position you were looking at?
Are you targeting larger businesses and larger companies in this marketplace? Is that part of the reason that you’re seeing such a big uptick in commitments? Or is it purely just that much activity and that much higher quality, favorable activity occurring in 2024?
Scott Bluestein: Sure. Thanks, Ryan. Couple of things there. First, I just want to point out the $1.1 billion is not just through 45 days. Right? $551 million of that has actually closed through the first 45 days, and then that next $500 million is signed as of the 45th day. So, we would expect that that $505 million, which is signed, if it gets through our diligence process to, you know, sort of get to the closing side of things over the next 30 days to 60 days. So, don’t think of that $1.1 billion as something that we’ve done in 45 days. I would think of it as something that we would expect to do over the first 90 days to 115 days of the year. So, still incredibly impressive. But I just wanted to point that out. In terms of the second part of the question, it’s primarily just based on activity.
There is certainly a component of, we are looking at, as we’ve signaled the last several quarters, larger, more scaled, more stable businesses. That is an intentional shift that we’ve made. We continue to be of the view that a lot of the smaller companies that received financing historically are going to struggle to receive equity support on a go-forward basis. So, when we think about things from a risk-adjusted return perspective, we want to focus right now and we’re going to continue to focus on larger, more scaled, more stable businesses. And we think that that’s the best thing to do for our shareholders long term. If you look at it in terms of average dollars per deal, the numbers are up slightly, but it’s not really materially increased from where it was throughout 2023.
Ryan Lynch: Okay, understood. And then on the guidance you gave regarding the advisor, I think you said and correct me if I’m wrong, $2.5 million to $3 million of RAA expense reductions and then $1 million to $1.5 million from the RIA for dividend. So, that’s $3 million to $4.5 million of total value that’s going to come back to the BDC from either expense reductions or dividends. That’s a pretty big jump from certainly what you were doing in kind of the beginning of 2023 and even from the most recent, this fourth quarter, in just total value that the RIA is generating. Can you talk about what’s really driving that sizable increase in value coming back to BDC shareholders recently?
Seth Meyer: Sure. Thanks, Ryan. So, $2.5 million to $3 million is not actually outside of the scope of what we’ve been doing on a per-quarter basis. We had a little bit lower allocation on the fact that our total SG&A costs went down in the fourth quarter, as discussed previously on the variable comp accruals. And so, there’s nothing abnormal about that, although the portfolio does continue to grow, that we’re managing in the private funds, and therefore, it absolutely is driven and connected to that. Originations are the biggest portion of our expense allocation on a per-quarter basis. So, the variable comp that is associated with originating new deals is something that also gets tacked and allocated to those deals that are allocated or originated by the RAA managed funds.
So, there’s a direct relationship there. What comes up and is new is this a $1 million to a $1.5 million per quarter of the dividend flow coming into Hercules capital, the BDC, and then ultimately to our shareholders that we had guided from the very beginning that this would eventually come as soon as the RIA managed to overcome the original establishment costs, as it was getting started and generating enough of a carry and a management fee to start paying the dividend to the BDC. So absolutely in line with what the original guidance is. It just looks like a lot right now because we had a lower allocation in Q4, and these are the initial dividend flows that are occurring.
Ryan Lynch: Okay, makes sense. I appreciate the time this afternoon and really great quarter, guys.
Scott Bluestein: Thanks, Ryan.
Operator: Thank you. One moment, please. Our next question comes from the line of John Hecht with Jefferies. Your line is open.
John Hecht: Hey, guys, thanks for taking my questions and congrats. First question is, you’ve grown a lot. You’ve got very, very low nonperforming assets. And your leverage is, in the context of your targets, pretty low. I’m just wondering for this year, should we think about some sort of desire to increase leverage, or how do we think about your target leverage ratios as you grow this year?
Scott Bluestein: Thanks for the question, John. No change in terms of our guidance for leverage. You’ve been following us for a long time, so you’ll appreciate the comment. We’ve always sort of run the balance sheet conservatively. Right now, we’re running it conservatively and we’re taking a defensive posture. So, we’re running it at even lower leverage than we typically do. I think our expectation is, given our funding goals for 2024, that leverage will increase slowly throughout the year, but we would expect to continue to manage the business from a balance sheet perspective, conservatively, with low leverage and long liquidity.
John Hecht: Okay. And then maybe can you talk about LTV and spreads on recent transactions and how that, you know, maybe has changed over the course of the last few months?
Scott Bluestein: Sure. LTV is pretty consistent with our historical underwriting. The range for us, if you look at our publicly reported data over the last several years, has been on the very low end 5%, on the very high end 20%. The majority of deals that we’re doing currently are in that sort of low teens from an LTV perspective. And I think that’s what we’re going to continue to target short to medium term here. And then in terms of spreads, you know, we’re not seeing a lot of pressure right now on spreads. Seth just updated our guidance in terms of core yield. We expect to continue to be in that very high 13%, low 14% from a core yield perspective, and we’ve done a great job or the Seth’s done a great job in terms of managing the liability side of the balance sheet to maintain those spreads, which have continued to increase over the last several years as the rate environment has improved in our favor.
John Hecht: Great. Thanks very much, guys. All my other questions have been answered.
Scott Bluestein: Thanks, John.
Operator: Thank you. I’m showing no further questions at this time. Let’s just turn the call back over to Scott Bluestein, CEO, for any closing remarks.
Scott Bluestein: Thank you, Valerie. And thanks to everyone for joining our call today. As a final note, we will be participating in the UBS Financial Services Conference on February 26 to the February 29 in Miami. If you are interested in meeting with us at this event, please contact UBS directly or Michael Hara. We look forward to reporting our progress on our Q1 2024 earnings call. Thanks, everybody.
Operator: Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.
