Prepared remarks
Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Hercules Capital Third Quarter 2025 Financial Results Conference Call. Please be advised that today's conference may be recorded. I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.
Thank you, David. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 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 Q3 2025 Earnings Call. Hercules finished the first three quarters of 2025 with another strong quarter of record fundings and operating performance while preserving our balance sheet strength and robust liquidity, which enables us to focus on high-quality originations and disciplined underwriting. Our platform momentum continued in Q3 with over $846 million in originations, resulting in record originations of $2.87 billion for the first three quarters of 2025, putting us on track to surpass our previous full-year record of $3.12 billion. In Q3, our record fundings totaled $504.6 million, contributing to $95.9 million in net debt portfolio growth and a new record of over $557.8 million in net debt portfolio growth for the first three quarters of 2025. The substantial new business generated during the third quarter led to continued solid net debt portfolio growth, driving Hercules to achieve record total investment income of $138.1 million and net investment income of $88.6 million, equating to $0.49 per share during Q3. Despite operating in a declining rate environment, we managed to achieve 122% coverage of our quarterly base distribution of $0.40 per share and maintain $0.80 per share of spillover income. Our strong Q3 performance included new records such as total gross fundings for a third quarter at $504.6 million, an increase of 85.5% year-over-year, total investment income of $138.1 million, an increase of 10.3% year-over-year, and period-ending assets under management of approximately $5.5 billion, up 20.7% year-over-year. The first three quarters of our performance featured several new records: total investment income of $395.1 million, net investment income of $254.7 million, total gross new debt and equity commitments of $2.87 billion, total gross fundings of $1.75 billion, and net debt investment portfolio growth exceeding $557.8 million. Our results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency, and scale of the Hercules platform, and our unwavering commitment to doing what we believe is in the best interest of our shareholders and stakeholders. Our market approach revolves around three core themes: disciplined credit underwriting, managed and controlled portfolio growth, and maintaining balance sheet strength and flexibility. We believe that this strategy will best position the company to keep delivering strong relative operating results regardless of the market environment. As noted in our Q2 2025 earnings call, we have been seeing a more favorable new business landscape broadly and anticipating strong new business in the second half of the year, even though Q3 is typically slower for our ecosystem. After a slow start to Q3, our investment teams were able to capitalize on several opportunities, resulting in record funding performance for the quarter. We maintain our expectation that origination activity will stay strong through year-end, and we have already achieved record new commitments and fundings for the year. Recently, Hercules hit a significant milestone by crossing the $25 billion mark in total cumulative debt commitments since our first origination in October 2004. This accomplishment underscores the enduring strength of the Hercules platform and reinforces our commitment to prioritizing the best interests of our shareholders and stakeholders while treating our employees fairly and providing reliability to our borrowers and their investors. Although the new business environment remains supportive, we continue to see some frothiness in specific parts of the venture and growth stage lending markets. Having operated in this asset class for over 21 years across various credit cycles, we recognize the necessity of being disciplined and adhering to the underlining rigor that has positioned Hercules as a market leader. We have maintained a conservative and defensive balance sheet while delivering strong originations and record funding performance for Q3. Throughout Q3, we sustained our high first lien exposure, which remained above 90% and is at the high end among our BDC peers. As guided, GAAP leverage rose modestly to 99.5% in Q3, up from 97.4% in Q2, without utilizing our ATM during the quarter. Our Q3 GAAP leverage stayed within the lower end of our typical historical range of 100% to 115% and below the average of our BDC peers. We concluded Q3 with over $1 billion in liquidity across our platform and no significant near-term debt maturities, positioning us very well. In Q3, we originated over $846 million in total gross debt and equity commitments, achieving record gross fundings of over $504 million. We reported total investment income of $138.1 million and net investment income of $88.6 million, or $0.49 per share. We reached 122% coverage of our quarterly base distribution of $0.40 per share, ensuring we are well-positioned for dividend coverage in a declining rate environment. With record growth in our debt investment portfolio during the first three quarters of 2025, and with nearly 75% of our prime-based loans, which constitute about 82% of the portfolio, at their floors, we believe we are generating sufficient core income to cover our base distribution of $0.40 per share. Our return on equity for Q3 was 17.4%, and our portfolio yielded a GAAP effective yield of 13.5% in Q3, with a consistent core yield of 12.5%. Our balance sheet's moderate leverage and low borrowing cost remain well positioned to support ongoing growth objectives, allowing us to prioritize high-quality originations rather than pursuing higher-risk, higher-yielding assets or loosening deal structures for short-term growth. Our origination strategy in Q3 concentrated on disciplined capital deployment while being selectively aggressive on opportunities where we felt a competitive advantage. In Q3, about 54% of our commitments and 50% of our fundings were directed towards life sciences companies, with approximately 46% of commitments and 50% of fundings targeting technology companies. We funded debt capital to 24 different companies in Q3, including seven new borrower relationships, and have added 27 new borrowers to the Hercules portfolio year-to-date. We also increased our capital commitments to several portfolio companies during the quarter, with available unfunded commitments at approximately $437.5 million, down from $471.5 million in Q2. More than half of our gross fundings for Q3 took place in the last month of the quarter, with this momentum continuing into early Q4. Since the end of Q3, as of October 28, 2025, our investment team has closed $554.4 million in new commitments and funded $237.4 million, with pending commitments of an additional $425.5 million in signed non-binding term sheets. We expect this number to grow as we advance through Q4. Our active pipeline remains strong, and as of October 28, 2025, we have already surpassed our previous annual records for gross new commitments and fundings, showcasing the continued growth of our platform. While Q4 typically sees robust originations in the venture and growth stage markets, we are committed to upholding a high standard for new originations in light of recent market observations. Many companies in our ecosystem are attempting to access the credit markets without scale and solid equity support, and the number of deals we are screening and passing on is at record levels, as we witness transactions being completed without robust structures and beyond prudent underwriting metrics for our asset class. We do not anticipate many of these deals to perform well over time. As we've consistently maintained, we will stay disciplined and focused on the long term while optimistic about our pipeline and expectations for funding activity in the coming quarters. Lending to cash flow-negative growth-stage companies necessitates patience, caution, and experience. We are pleased with the exit activity in our portfolio during the quarter. In Q3 and the early part of Q4, we observed four M&A events involving two life sciences and two technology portfolio companies. This brings our year-to-date total to ten M&A events and one IPO through October 30, 2025. Based on current market conditions and improving corporate sentiment, we expect exit activity to accelerate toward year-end. Early loan repayments in Q3 were slightly higher than anticipated at approximately $262.3 million. Despite this increase in early loan prepayments, we achieved significant net debt portfolio growth, supported by strong funding levels in the quarter, placing us in a favorable position for continued core earnings growth into the remainder of 2025 and 2026. In Q4 2025, we expect prepayments to be lower, within the range of $150 million to $200 million, although this may change as we move through the quarter. The credit quality of our debt investment portfolio remained strong and relatively stable quarter-over-quarter. Our weighted average internal credit rating of 2.27 increased slightly from the 2.26 rating in Q2 and remains well within our typical historical range. Our grade 1 and 2 credits accounted for 64.5%, compared to 62.9% in Q2, while grade 3 credits dropped slightly to 32.7% in Q3 from 34.7% in Q2. Grade 4 credits rose to 2.8% from 2.4% in Q2, and we did not have any grade 5 credits. In Q3, only one additional company moved to non-accrual status, bringing our total to two portfolio companies with debt instruments on non-accrual, with investment costs and fair value of approximately $52.2 million and $47.2 million, representing 1.2% and 1.1% of our total investment portfolio at cost and value, respectively. After the quarter ended, we successfully worked through and resolved the new loan added to non-accrual in Q3. We received net proceeds on that debt position that were about 56% higher than our Q2 fair value mark, resulting in a small realized loss on that loan but an approximate realized IRR of 13.2%. Regarding our broader credit book and outlook, we are generally satisfied with what we're observing at the portfolio level, as our monitoring processes remain enhanced due to the volatility in the markets and the ongoing government shutdown, now in its fifth week. We believe that our conservative underwriting and ensuring appropriate structural alignment will continue to serve us effectively. At the end of Q3, our weighted average loan-to-value across our entire debt portfolio was around 16%, and there has been no significant credit deterioration since our last earnings call. Our net asset value per share in Q3 was $12.05, a 1.8% increase from Q2 2025, marking the highest net asset value per share reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC and over $1 billion overall, positioning us well with healthy liquidity, a low cost of debt relative to peers, and four investment-grade corporate credit ratings, including a Moody's investment rating upgrade to Baa2. This situation allows us to compete effectively for quality transactions, which we see as the prudent approach in the current environment. With an increased focus on PIK across the private credit markets, we want to provide more details on PIK income for Hercules. In Q3, PIK constituted about 10.5% of total revenue, unchanged from the first half of 2025. Approximately 85% of our PIK income in Q3 resulted from original underwriting, rather than credit or performance-related amendments. Nearly 90% of our Q3 PIK income came from loans rated as 1, 2, or 3, with only one loan rated 4 generating PIK income. Furthermore, even without considering our Q3 PIK income, the business generated cash net investment income with 111% coverage of our base dividend. We will selectively utilize PIK during underwriting to enhance income for certain credits we view as stronger and more stable, and we expect this practice to persist moving forward. Venture capital investment activity in Q3 reflected the robust deal flow and originations we experienced. 2025 is demonstrating a healthy pace, with $80.9 billion in Q3 and $250.2 billion invested over the first three quarters, as reported by PitchBook-NVCA. The $250.2 billion of investment activity is the second highest year historically, surpassing the $236.1 billion from 2022. While aggregate data is strong, it remains concentrated, with over 67% of year-to-date VC equity investment directed towards AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies reached $20 billion, with both the number of IPOs and capital raised improving during the quarter. Consistent with that, capital raising across our portfolio remains robust, with 18 companies raising over $1.3 billion in new capital. Over the first three quarters of 2025, 64 companies within our portfolio have raised over $5 billion in new capital, totaling over $6 billion year-to-date. Thanks to our strong sustained operating performance, we concluded Q3 with undistributed earnings spillover of $146.2 million or $0.80 per share outstanding. For Q3, we are maintaining our quarterly base distribution at $0.40 and a supplemental distribution of $0.07 per share for a total of $0.47 in shareholder distributions. Our Q3 net investment income covered our base distribution by 122% and our total distribution, including the supplemental $0.07, exceeded 104%. Based on our recent and anticipated near-term operating performance, we are confident in our quarterly base distribution and our capacity to continue providing supplemental distributions next year. This marks our 21st consecutive quarter of offering supplemental distributions alongside our regular base distribution. In closing, our scale, institutionalized lending platform, and ability to adapt to a rapidly changing competitive and macro environment continue to drive our business forward and our operating performance to record heights. In Q3, Hercules achieved its 10th consecutive quarter of over $100 million in quarterly core income, which excludes the prepayment fee benefits. Despite the declining rate environment we are operating in, we reached 122% coverage of our quarterly base distribution in Q3. Our ongoing success stems from the dedication, efforts, and skills of our team of over 115 employees and the trust our venture capital and private equity partners place in us daily. We are grateful to the many companies, management teams, and investors who continue to choose Hercules as their partner. I will now hand the call over to Seth.
Thank you, Scott, and good afternoon, everyone. The strong momentum we reported in the first half of the year has continued into the third quarter. As Scott mentioned, business activity for the quarter and year-to-date has been exceptional and record-setting for our platform. Fundraising and investment deployment in our RIA managed funds have also been robust, enhancing the platform and increasing our efficiency. We maintain a strong available liquidity of $655 million at the end of the quarter in the BDC, with over $1 billion across the platform, including adviser managed funds by our wholly owned subsidiary, Hercules Adviser LLC. Based on our quarterly performance, Hercules Adviser delivered a third-quarter dividend of $2.1 million, which, when added to the expense reimbursement of around $4.1 million, resulted in approximately $6.2 million in net investment income contribution to the BDC in Q3. With that context, let's take a look at the usual areas of the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, followed by the financial outlook. Total investment income in Q3 reached another record of $138.1 million, driven by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, also reached a record at $127.9 million. Core investment income excludes benefits from income recognized due to loan prepayments. Net investment income was $88.6 million or $0.49 per share in Q3. Our effective and core yields were 13.5% and 12.5%, respectively, compared to 13.9% and 12.5% in the previous quarter. By the end of the quarter, nearly 60% of our prime-based loans were at the contractual floor, meaning future rate reductions will have a limited effect. Third quarter gross operating expenses totaled $53.6 million, compared to $52.2 million in the previous quarter. After accounting for costs recharged to the RIA, our operating expenses were $49.5 million. Due to business growth and increased leverage, interest expenses and fees rose to $27.2 million. SG&A saw a slight decrease to $26.4 million, which was above my expectations considering business growth. After accounting for the RIA recharges, SG&A dropped to $22.3 million. Our weighted average cost of debt rose slightly to 5.1%. Our return on average equity increased to 17.4% for the third quarter, while our return on average total assets rose to 8.7%. Regarding NAV, unrealized and realized activity, our NAV per share increased by $0.21 to $12.05 per share during the quarter, an increase of 1.8% quarter-over-quarter. The primary driver was the appreciation of the debt portfolio, as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized depreciation was mostly due to $28.6 million of net unrealized appreciation on debt investments, $11.3 million of net unrealized appreciation from valuation movements in publicly traded equities and warrant investments, and $0.8 million of net unrealized appreciation related to escrow and other investment-related receivables. This was partially offset by a $5.1 million reversal of previous quarter appreciation upon realization and $2.6 million of net unrealized depreciation from movements in privately held equity, warrants, and investment funds. Hercules also reported a small net realized loss of $1.8 million, mainly due to equity investment losses. On leverage and liquidity, our GAAP and regulatory leverage increased to 99.5% and 83.6%, respectively, compared to the previous quarter due to balance sheet growth financed by leverage. After excluding cash on the balance sheet, our net GAAP and regulatory leverage stood at 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. This figure does not include capital raised by the funds managed by our wholly owned RIA subsidiary. Including these amounts, the Hercules platform has more than $1 billion of available liquidity, which positions us well to support our existing portfolio companies and explore new opportunities. Looking ahead to the fourth quarter, we anticipate our core yield to remain between 12% and 12.5%. Nearly 98% of our debt portfolio is floating with a floor, and almost 75% of our prime-based portfolio is at the contractual floor. While predicting is challenging, as Scott noted, we anticipate $150 million to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter due to debt portfolio growth. For the fourth quarter, we anticipate SG&A expenses in the range of $25 million to $26 million and an RIA expense allocation of approximately $4 million. Lastly, we foresee a quarterly dividend from the RIA of about $2 million to $2.5 million. In conclusion, the measures we implemented in the first half of the year to strengthen our balance sheet continue to support our growth and scaling of our platform. I will now hand the call over to the operator for the Q&A session.
Questions and answers
We'll take our first question from Brian McKenna with Citizens.
Great. I appreciate all the detail on the business and the underlying trends and all the momentum. And I also heard your comments around the expectation to continue paying supplemental dividends moving forward. So if I look at the supplemental dividend as a percent of excess earnings above the base dividend, this has totaled about 75% to 80% for the last two years. So I don't want to make too many assumptions, but say you hold the line on earnings for next year, $2 of NII, you assume a similar ratio. That implies about $0.30 of supplemental dividends for the full year. So I just wanted to run that math by you and even just some bigger picture thoughts on kind of where the supplemental dividend can go into next year.
Sure. Thanks for the question, Brian. So a little bit premature for us to provide any specificity with respect to the supplemental distribution for next year. That's something that we will announce on the Q4 call in the middle of February. What I can say is, I think your math is pretty accurate and that's sort of how we think about the supplemental distribution, and that's part of the discussion that we'll have with the Board as we approach those year-end conversations. We are very optimistic based on the trajectory of the business and our expected operating performance near term, that we will be very comfortably able to maintain the base distribution and continue to provide a supplemental distribution. What that ultimate supplemental distribution is will be determined by the Board at the end of the year. But again, I don't think your math is too far off.
Okay. That's helpful. And then maybe just switching gears a little bit to credit quality. I mean if you just look at all the trends across the portfolio, I mean, they're really strong across the board. And I appreciate the detail on the one non-accrual that was added during the quarter and then that obviously got resolved here post quarter end. But when you look at the portfolio, you look at your business, I mean, does anything stand out in terms of what the biggest driver of this strong credit quality is? It seems like as your platform continues to reach new levels of scale here, the underlying quality of the portfolio has gotten that much better as well. So any thoughts here would just be appreciated.
Yes. Again, appreciate the recognition, Brian, and the question. And I think the answer that I'll give today is the same answer that I would give at any point in our 21-year history, and it's attributable to our investment team and our credit team. I think we have the best team in the business on the investment side. The team is incredibly experienced. The team has been together for a long time. That team knows how to pick the right companies. We're not perfect. We've made mistakes before. We will likely continue to make mistakes, but the credit for our performance is attributable to the quality of our investment team.
Question on the adviser. Was there a change in expense allocation that line looked a bit stronger than normal this quarter? And I guess, if not, am I right? Was there some one-off that drove a higher number?
Yes. No. Thanks, Fin. There's no change in the allocation per se, but it does change as the level of originations occur. And as the AUM continues to go up in the funds, it will continue to increase, but no fundamental change at all in the allocation.
Is it correct to say that it varies? In the past, we described it as a percentage of other general and administrative expenses. I believe it is closely related to origination. Is the growth of the RIA continuing, and do you expect similar guidance for the next quarter regarding the allocation? Is it increasing?
I would say this, Fin. So it is two parts. It is the base of the amount of AUM compared to the entire platform. That is part of the allocation. And then the amount of originations will create a little bit of volatility to that calculation every single quarter.
Sure. Thanks, Fin. No real change. I would sort of note three specific things. Number one, we are continuing to see pretty broad-based strength across our existing portfolio with respect to performance milestones and the achievement of specific things that we underwrite to. As those companies perform, they unlock additional capital availability and that's why you saw higher than typical funding for the portfolio in Q3. The second thing that I would note is that, frankly, we saw some better opportunities to deploy capital into the existing portfolio in Q3? And then the third thing that I would note is we still had very strong pure new business origination. We added seven new companies, which is on the low end of what we typically do, but it was still strong for Q3. We focused on the new business, new borrower side on quality scaled originations. And my comments on sort of the pipeline activity and what we saw in terms of frothiness in the market, I think, speaks to the fact that with respect to some of the new deals we saw during the quarter, we were just passing or bidding very conservatively on the vast majority of those transactions.
I have a credit question as well, but just asked a little bit differently. In recent weeks, definitely been a pickup in credit anxiety just given some loans at banks, some being fraud-related and then it seems that private credit and BDCs have been swept up in the media surrounding all this. So first, can you just share your views on this and kind of what you've been seeing, your outlook and then just how competitors have been behaving?
Sure. So pretty broad question, but I'll respond to it with the following. I think what has made Hercules unique and what has allowed us to outperform virtually every competitor in the BDC market for the last several years is the fact that we have been incredibly consistent and conservative with respect to underwriting credit. We don't loosen our standards or get more aggressive in very strong markets. We don't change our stripes if others are doing things that we don't think are prudent. And I think that consistency, that cautious approach has served us well and will continue to serve us well. The second thing that I would note is that we have not seen any material deterioration in the credit performance of our portfolio over the last quarter, and that would include quarter-to-date post quarter end. We are continuing to see relative strength in terms of the numbers and the metrics that we monitor on a pretty continuous basis. And our outlook with respect to credit remains positive.
Great. I appreciate the color there. And then just given recent rate cuts and the forward curve, can you just share how you expect net investment income to be impacted over the intermediate term? It's held up well so far and just what that could mean for NII per share and where you might see a leveling off and stabilization.
Yes. I think -- so Crispin, this somewhat subtle guidance or statements that we made, the difference between at quarter-end, approximately 60% of our prime-based portfolio at its contractual floor. And then both Scott and I mentioned that as of today, meaning after the rate cut this week, approximately 75% or almost 75% of our prime-based floor. So further decreases will be muted. We do provide the table in the presentation and the Q as far as what we expect further rate cuts are, for instance, a 50 basis point rate cut, we guide to about $0.05 of NII per share annually impacting, and that reflects the fact that the majority of our portfolio is at its contractual floor. So we can't be more specific than trying to model out the existing portfolio. But at the moment, it's pretty muted.
And I would just add to that, Crispin, we did reiterate, and this is guidance that is inclusive of the Fed activity this week. We did reiterate our core yield guidance for Q4 of 12% to 12.5%. So I think that speaks to our comfort level with respect to what we can continue to originate on the front-end side of the business.
Scott, I would like to get more details on your comment regarding the frothiness in the market. Are you referring to the structure of deals or their valuation? Could you elaborate on what you've observed that led you to be more cautious about those aspects?
Sure. I think it's two things. It's mainly structure and funding amounts and not necessarily tied to yield. What we've seen over the last several quarters is that a handful of market participants have been incredibly aggressive with respect to underwriting deals that from a leverage perspective or from a commitment to value perspective, exceed what we think are prudent underwriting parameters. The second thing that we've seen recently, and this would probably be over the last quarter or two, there continue to be a handful of deals getting done in the market where there's just not a lot of structure in terms of how those deals are being put together. We think structural integrity is critical to success long term in this business. We, as a firm, have zero interest in driving short-term portfolio growth by booking credits that will not age well. And so we're just operating the way we've historically tried to operate with a conservative approach to credit, being aggressive where we see spots of opportunity, and we think that's going to serve our shareholders and stakeholders incredibly well going forward.
Another good quarter. Congrats. First one, I mean, I guess these are sort of both kind of industry level kind of questions. Number one is, there's just increasing concern on legacy software companies because if they weren't developed with AI in mind, then they could get disrupted very quickly. I'm wondering your perspectives on that. And if you could talk about your portfolio of that type and how it is kind of positioned for the AI revolution?
Sure. Thanks for the question, John. One of the more interesting aspects of our business and depending on how you look at this, it's either a positive or a negative is the fact that our duration on the portfolio side is really short. Over the last 21 years, our duration on the loan book has been somewhere between 15 and 24 months. Right now, the duration is right around 18 months. So for us, when we talk about legacy companies, these are not companies that are generally very old in terms of borrowers for Hercules. And when we think about the question that you just asked, we think that's a significant positive because our portfolio is turning every, generally speaking, one and a half years. We do not have a lot of legacy companies that really haven't been able to benefit from the AI revolution that we've seen over the last year or two. We built in AI analysis into our underwriting, the deals that we have booked over the last 12 to 24 months, how these companies are using AI, how these companies can be impacted positively or negatively from AI has been a part of our underwriting thesis. So I think it's certainly something that we're watching closely, and our credit teams are doing a great job at monitoring that. But we feel pretty good about how our portfolio is positioned with respect to what we're seeing across the AI landscape right now.
Okay. And then another kind of industry-level question. I mean you guys have seen several quarters of very strong commitment and deployment activity. Is this just a function of a growing TAM where I mean, just the venture business is growing and you're just capturing your share? Or is it that you are increasing your share? Or is it a greater propensity for the borrowers to seek debt as a solution as opposed to equity? Or is it some combination? Just interested in your thoughts about the changing marketplace.
Yes. I think it's two things, John. First and foremost, it is our view that we are absolutely taking market share. There's been some changes in the venture and growth stage ecosystem over the last handful of years. And I think we believe that we have on a controlled managed basis been able to take some significant market share, which is probably the single biggest driver of the increase in commitments. I think the second element is if you look at where our platform is today in terms of scale, in terms of liquidity, in terms of diversification with respect to funding sources, all of those things have helped position us to be able to take advantage of a larger TAM with respect to potential opportunities. And then the third thing is, I think we've done a really nice job at selectively hiring new employees onto the platform that have opened up some new markets, some new geographies, some new focus areas for us, and those things have all been very accretive, which have helped drive those numbers.
Following up on John Hecht's question, but in a different way. The Wall Street Journal today had a very interesting article talking about how JPMorgan is tokenizing which is a digital representation of asset ownership in a blockchain ledger for its private equity funds. And I know John was talking about AI, but turning that around to blockchain and how you're able to track ownership of assets and so forth. What does that represent in terms of a change in how you guys might do business, barriers to entry that venture BDCs typically had over other BDCs and so forth. Any comments would be interested to hear.
Yes. I can't comment specifically on the JPMorgan announcement because we obviously haven't dug into that yet. I can tell you that philosophically, our approach to blockchain and crypto and all sort of related esoteric assets has not changed. We do not intend to invest on the lending side directly in those types of businesses. We think there are opportunities for us, and we've done a handful of them alongside more of the infrastructure side of things and companies that are using technology to sort of facilitate the growth of those industries and currencies, et cetera. But in terms of investing directly in those areas, it's not something that we're going to do. We are not, Chris.
I was just wondering if you could talk maybe just about the unrealized gains this quarter. It looked like $29 million or so came from the debt portfolio. How much of that is just, I guess, kind of credit-specific events, things were written up? I mean it sounds like there was a positive outcome on nonaccrual. I'm not sure if that was included in there. Just how much is kind of credit specific versus kind of mark-to-market, I guess, within the portfolio?
Thanks, Paul. So $33 million approximately of unrealized depreciation during the quarter; $28.6 million of that appreciation came from the debt side. That was a combination of credit and yield related. I did make the comment about that one specific credit that went on nonaccrual in Q3 and was very quickly resolved shortly after the quarter. Just to give you some context of the magnitude of that change, that was a position that had a cost basis of approximately $41.5 million. In Q2, that had a fair value of $24.6 million and we wrote that up to a fair value in Q3 of $38.4 million, which reflects the actual proceeds received and ties into that $14 million outperformance relative to the fair value mark in Q2 and that I mentioned in the prepared remarks.
Got it. So roughly half of the kind of debt depreciation this quarter was due to that nonaccrual?
Correct.
Okay. And then just one kind of maybe more of a technical question on how PIK works within venture loans in your portfolio. When a borrower is on PIK, is it typically a PIK toggle structure? And what is kind of like the general rule in terms of the limit, like how much of the spread, I guess, are they generally able to defer under those arrangements?
Sure. Thanks for the question. So first, I would just reiterate a couple of the key points that I mentioned in the prepared remarks. I think it's critical in terms of how we evaluate PIK. About 85% of our PIK income during the third quarter was attributable to PIK that was part of the original underwriting, not the result of a credit or performance-related amendment or issue. With respect to when we utilize PIK in a new underwriting, it is generally going to be a small part of the company's overall interest, and it will generally be structured as a toggle, where the company will have the option subject occasionally to certain specific milestones or performance achievements to maybe turn 1% of cash interest into 1.15% or 1.25% of PIK. There are very few deals where we have PIK that exceeds 1% or 2%.
And I am showing no further questions on the line at this time. I would now like to turn the call back to Scott Bluestein, for any closing remarks.
Thank you, David, and thanks to everyone for joining our call today. We will also be attending the Citizens Financial Services Conference in New York on November 18. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2025 earnings call. Thanks, and I hope everyone has a great rest of the day.
This does conclude today's Hercules Capital Third Quarter 2025 Financial Results Conference Call. You may now disconnect your lines and have a wonderful day.