DBRS Morningstar Confirms TriplePoint Venture Growth BDC Corp. at BBB; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of TriplePoint Venture Growth BDC Corp. (TPVG or the Company), including the Company’s Long-Term Issuer Rating of BBB and Long-Term Senior Debt Rating of BBB. The trend on the ratings is Stable. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3, resulting in TPVG’s final ratings positioned in line with its IA.

KEY RATING CONSIDERATIONS
The ratings and Stable trend consider TPVG’s sound franchise strength that benefits from its position within TriplePoint Capital LLC’s (TPC) global venture lending platform. TPC has a strong reputation and long-standing relationships in the venture capital (VC) ecosystem that continues to have high barriers to entry. Further, TPC continues to grow its global platform through various investments vehicles by utilizing its co-investment capabilities, allowing TPC to allocate larger investments across several pockets of capital. The ratings also incorporate TPVG’s exposure to VC-backed, venture growth stage companies, which introduces elevated credit risk. Nevertheless, TPC has a long track record in this niche market with the necessary experience, relationships and infrastructure in place as the Company has demonstrated the ability to remediate problem loans via a workout or a sale process.

In 2021, the VC ecosystem produced a record setting year across various categories, including investment in high-growth startups, capital raised by VC funds and exit values created by VC-backed companies that either went public or were acquired. TPVG benefited from this robust VC environment, enjoying a strong level of origination activity in 2021, which was approximately double that of 2020. Earnings were solid for 2021 as TPVG generated net assets resulting from operations of $77 million, equivalent to a return on equity of 18.8%. The ratings confirmation also considers TPVG’s appropriately managed funding profile, as well as its prudently managed leverage ratio.

The Stable trend reflects our view that the U.S. economic recovery will likely continue, supporting continuing investment opportunities in the VC ecosystem. While VC-backed companies face supply chain issues and labor shortages, VC-backed companies have not seen a major reduction in revenues as prices can largely be raised without consequence in the current inflationary environment. Nevertheless, the potential for nontraditional investors in the VC ecosystem that are usually transient in nature rotating out of the sector or increased market volatility from geopolitical concerns that may put some negative pressure on portfolio valuations could pose some downside risks for 2022.

RATING DRIVERS
A demonstrated ability to generate sound financial results while maintaining solid credit fundamentals through the rising rate environment and evolving business cycle would lead to a ratings upgrade. In addition, over the longer-term, continued overall platform expansion that lowers portfolio concentration risk while maintaining solid asset quality performance would lead to a ratings upgrade.

Conversely, weak credit fundamentals with a sustained increase in non-accruals or a significant loss that materially reduces the Company’s cushion to regulatory leverage requirements would result in a ratings downgrade. If dividend distributions are not covered by net investment income for an extended period, the ratings would be downgraded.

RATING RATIONALE
TPVG has a sound franchise that benefits from its relationship with TPC, a leading provider of financing solutions for privately-held, VC-backed companies across all stages of development (seed stage, early stage or venture growth stage). TPVG’s investment portfolio is primarily comprised of investments in venture growth stage VC-backed companies, which are typically those companies beginning operational and financial preparations for a liquidity event, including an initial public offering (IPO) or private sale. All investments are directly originated through TriplePoint Advisers LLC (the Adviser), a subsidiary of TPC, and we view this favorably for credit performance, as originating venture growth loans requires specialized underwriting. Moreover, TPVG benefits from TPC’s long-standing relationships with select venture capital investors to ensure access to deal flow and high quality VC-backed companies. At the end of 2021, TPVG’s investment portfolio totaled $865 million at fair value (FV) with debt investments across 49 portfolio companies.

The Company has demonstrated solid earnings generation capabilities. Revenues are primarily from interest income and largely recurring in nature, with a still modest level of volatile fee income related to the termination of unfunded commitments and loan prepayments. For 2021, TPVG generated net assets resulting from operations of $77 million versus $35 million for the prior year. The Company's profitability metrics compares well to peers, including a return on equity of 18.8%, supported by robust yields from the investment portfolio.

TPC’s disciplined investment strategy and underwriting has been tested through several business and economic cycles that is supportive of the solid credit performance of the investment portfolio to date. The Company’s focus on venture growth companies, which is unique among BDCs, results in TPVG having a higher risk profile compared to traditional lending to larger commercial or sponsor-backed middle market companies. VC-backed companies generally are unprofitable with limited operating histories with credit events typically related to an event, such as a product failure or an inability to complete the next round of equity raising. Nevertheless, TPC has a long track record in this niche market with the necessary experience, relationships and infrastructure in place as the Company has demonstrated the ability to remediate problem loans via a workout or a sale process. We note that non-accruals have returned to more normalized levels as TPVG had only one investment on non-accrual status comprising 3.5% of investments at cost at YE21, improved from a peak of 9.3% at YE20. Further, the Company’s equity and warrants portfolio has generated substantial gains over-time that have largely offset credit losses.

TPVG has an acceptable funding profile, with a demonstrated ability to issue unsecured debt offerings via the private placement market. In February 2022, the Company completed a $125 million senior unsecured note issuance, its third private placement, that helps continue to diversify its funding profile and unencumber the balance sheet. TPVG’s debt profile is well-laddered by maturity, with the Company’s earliest debt maturity comprised of its credit facility in 2024. Liquidity is appropriately managed, with a good ability to fund new originations and unfunded commitments.

The Company’s capital is solid and leverage is prudently managed. At December 31, 2021, TPVG achieved its target debt-to-equity ratio at 1.08x (target range of 1.0x-1.2x) as the Company originated new investments to grow its investment portfolio. Leverage remains well-below the regulatory limit of 2.0x, with a good cushion to the regulatory cap. As of YE21, the Company’s buffer to the regulatory limit was estimated at $201 million, implying that TPVG could take a loss on 23% of its investment portfolio, at fair value, without breaching the regulatory limit. Subsequent to year-end, strong prepayment activity and the pay-down of borrowings under the credit facility resulted in TPVG’s proforma leverage to decline to approximately 0.9x. We note that leverage tends to fluctuate more so at TPVG compared to other BDCs due to more frequent prepayment activity in the investment portfolio.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277