TriplePoint Venture Growth (NYSE:TPVG) is the only BDC I have owned in the last five years, having increased my position during the pandemic selloff when the fund fell to an incredible discount to NAV; since then I have been swing trading the fund when I’m not collecting the dividend.
However, its underperformance in 2022 relative to BDCs and stocks broadly requires a deep dive as the company’s focus on lending to tech startups could indicate further weakness if tech does not recover anytime soon.
Pricing and NAV Trends
While TPVG has fallen significantly in 2022, its NAV has fallen just 8% from the start of 2022 to $12.69 at the end of 3Q22, indicating that the stock currently trades around par after starting the year trading at a 30% premium–that premium has held (and been much higher) since the pandemic, when TPVG briefly traded at a shocking 78% discount.
TPVG’s NAV has remained somewhat stable despite 2022’s decline, going from $12.85 at the end of 2019 to its current level just 1.2% lower.
Historical Performance and Dividends
TPVG’s real pull is its dividends, though.
At a 11.7% yield, TPVG’s payouts beat almost all of the larger BDCs, although its long-term total return lags behind Hercules Capital (HTGC), Ares Capital Corp (ARCC), and the broader stock market (SPY).
Perhaps more worrying, TPVG’s performance has underperformed almost all other BDCs over the last three years–after being the second highest performer going into 2022.
At the same time, TPVG has maintained its dividend since inception while also paying out some small specials, although Hercules Capital wins on dividend growth while the biggest loser has been PSEC, as has become tradition.
As an income machine, TPVG has done its job, although its real potential is realized by buying during times of market stress and selling in times of market exuberance.
Dividend Coverage and NII Trends
In 3Q22 TPVG’s 51 cents per share of NII gave the stock a whopping 1.4 dividend coverage while spillover income of 52 cents per share indicate even greater cushion and special dividend potential.
Additionally, NII per share has absolutely soared, rising 59% yoy, indicating that both a special dividend and a common dividend increase are very likely in the future. Arguably more important is TPVG’s IRR. Growth in NII at a time when the mark-to-market value of private equity, particularly in tech, has been in decline has given TPVG a much better ROI; the company’s IRR on average equity throughout the last few years has also been consistently over 10% on average.
TPVG’s income stream is not just safe, it is clearly set to grow significantly over the next year, and TPVG’s ability to secure income from debtors has not been challenged by 2022’s various macroeconomic risks.
Prepayments, similarly, are a non-issue. In 3Q22 TPVG had one small prepayment “that didn’t materially contribute to portfolio yield,” which was 13.8% (up 100 basis points qoq). For 4Q22 TPVG has seen three prepayments of $34 million versus gross quarterly fundings of $100-$200m.
I invest in TPVG both for income and for diversified exposure to private equity in tech. While this is available elsewhere (Blackrock’s tech closed-end funds for instance), TPVG’s unique focus on offering debt to growing late-stage companies provides this exposure without the very aggressive swings in valuation that result in massive losses during selloffs.
Compare TPVG’s ~1% NAV decline in 2022 to the 36% decline in the Invesco Global Listed Private Equity ETF (PSP), although it’s worth noting that TPVG’s YTD price decline is comparable due to the firm starting the year at a large premium that has now fully evaporated.
It isn’t just TPVG’s profits from growing tech that I like, but TPVG’s portfolio itself.
To start with, management has fully avoided the crypto bubble and shares my contempt for cryptocurrency, an essential characteristic for a tech investor. Here’s Sajal Srivastava:
“I would say we’re not seeing any specific sub-sector of tech as kind of toxic or not attracted [sic] capital. I mean, I’ll pick on crypto again, we’re not – we don’t have portfolio companies in crypto, but while the crypto market is quite challenged, there are a number of investors that see this as an opportunity and are looking at that as a sector to invest in. So I would say, from our perspective, our goal is to lend to companies in those sectors that are attracting follow-on financing from our select group. And I think that’s our primary focus, but I would say overall, the theme is those companies and sectors that are capital intensive or with burn rates that are higher than necessary or growth rates that are unnecessarily high because of the burn rate are less attractive. So I don’t think its sector specific. I think it’s more of financial discipline specific.”
News of an implosion in tech has exacerbated 2022’s selloff of the sector at the top level, while criminality and silliness at the bottom (Bored Ape Yacht Club is being sued, apparently) might make you think the sector is in real danger. But in TPVG’s corner of tech, things are great.
And a quick look at TPVG’s portfolio explains why. BlueVine, N26, Substack, Inmobi, and thrillist are all companies I’ve personally used and had great experiences with; many of TPVG’s other investments (Mynd, Mindcandy, Athletic Greens, Toast, Lola, dialpad) have received phenomenal customer feedback and reviews.
I have followed TPVG’s portfolio for many years and this has not changed; as the company has grown and lent to more firms, the quality of that portfolio has not been sacrificed as a result. We have seen weak portfolio quality and odd gimmicks result in slashed dividends at other BDCs–Prospect Capital’s attempt at p2p lending in the mid 2010s springs to mind. TPVG is avoiding such risks.
While TPVG is worth acquiring at current levels, it is a much better buy when it trades at a discount to its $12.69 NAV. However, even a small-ish premium of 20% would indicate frothiness in tech has returned, providing an exit opportunity. Thus buying TPVG up to $15.00 and selling at that level and above seems optimal for anyone wanting exposure to private equity and tech without the more aggressive swings in valuation that we see in VC/PE equity investing. And while PE debt sounds weird, TPVG’s 11.7% yield is anything but.