TriplePoint Venture Growth BDC Corp. is facing a bitter cocktail of scarce investment exit options, a shortage of new lending opportunities, and a few bad credit picks.
The company last week explained its multifold problems to investors, reporting more stress in borrower companies and difficulty raising capital as venture fund investors reduce how much capital they are willing to deploy. Generally, it’s a tough period in the venture capital market cycle, investors heard.
“We believe the increase in stressed assets is directly related to challenging conditions in the venture capital equity fundraising market, and in the market for M&A transactions, by both public and private companies,” said Sajal Srivastava, co-CEO of TriplePoint Capital on the Aug. 2 earnings call. “Venture capital-backed companies that have had success raising capital in the past are having a difficult time in the current environment, and will continue to experience such challenges, unless market conditions improve,” he added.
Brighter days
As recently as 2021, the venture-stage debt provider was considered a “SPAC factory” — referring to the trend of its borrower companies merging with publicly listed special purpose acquisition companies (SPACs) and listing shares.
For lenders, this approach spelled quick repayments of loans and a return of capital to invest into new investments, but now this door has closed. With M&A activity also depressed, the churn into new investments is at a slower cadence, and with capital increasingly scarce for these early-stage companies, many players have turned to belt-tightening.
“The environment for many venture growth stage companies has changed — from business plans of growth at all costs, transitioning into plans of conserved cash at all costs,” said co-CEO Jim Labe on the same call.
Some of the lender’s woes were not linked to the industry’s overall problems, but to idiosyncratic events, and a few bad credit picks mean the lender is likely to face significant credit losses.
Indeed, TriplePoint said six investments were on non-accrual, or no longer paying cash interest. These investments totaled $102.6 million on a cost basis as of June 30. A quarter earlier, the number of such investments was three, and two quarters earlier, it was one. The lender’s total investments were roughly $1 billion at quarter-end, including debt and equity.
Back pedal
One of the company’s problem loans was due to the bankruptcy last month of the Dutch e-bike maker VanMoof. TriplePoint Venture had $22.5 million of principal in loans to the company.
During the shareholder call, TriplePoint management called the development with VanMoof “surprising” and a “disappointing outcome” as the company was considered a leader in e-bikes, and had already raised $180 million in equity.
“Despite meaningful historical revenues, and launching a new line of e-bikes this year, the company was unable to attract additional capital or strategic partners. We are early in the process and actively working to maximize our recovery,” said Srivastava.
Investments in Underground Enterprises, an online wine marketplace which ceased operations in May, and Health IQ (HiQ) were also downgraded to Level 5, the lowest category in the lender’s own credit risk ratings system. TriplePoint cited Health IQ’s challenges in “execution and strategic efforts,” and said it was pricing the investment based on expectations for an “extended restructuring and recovery process,” shareholders heard.
Meanwhile, investments in RenoRun, Underground Enterprises, and Demain ES, which operates as Luko, joined the list of non-accrual investments in the quarter.
The lender added one new investment during the quarter, namely a loan to Tempus Ex Machina, Inc., which is a sports data and analytics provider backed by Andreessen Horowitz and Silver Lake.
New investment activity offered a glimmer of hope, with venture capitalists saying they were experiencing a pickup, which is expected to continue into 2024. The fintech, software, enterprise, cybersecurity, health tech and travel sectors had been resilient, TriplePoint said on the call.
“We’ve been through many of these cycles in the past,” said Labe. “We believe an upturn in the market is dependent on the return of stability in the public market and technology company multiples specifically, as well as technology companies digesting and adapting to today’s new environment.”
