Prepared remarks
Good afternoon. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to Trinity Capital's Second Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the call over to Ben Malcolmson, Head of Investor Relations for Trinity Capital. Please go ahead, sir.
Thank you, and welcome to Trinity Capital's Second Quarter 2025 Earnings Conference Call. Speaking on today's call are Kyle Brown, Chief Executive Officer; Michael Testa, Chief Financial Officer; and Jerry Harder, Chief Operating Officer. Joining us for the Q&A portion of the call are Ron Kundich, Chief Credit Officer; and Sarah Stanton, General Counsel and Chief Compliance Officer. Earlier today, we released our financial results, which are available on our Investor Relations website at ir.trinitycapital.com. Before we begin, please note that certain statements made during this call may be considered forward-looking under federal securities laws. Please review our most recent SEC filings for further information on the risks and uncertainties related to these statements. With that, please allow me to turn the call over to Trinity Capital's CEO, Kyle Brown.
Thank you, Ben, and thanks, everyone, for joining us today. To get started, we want to share some notable highlights from a strong Q2 for Trinity Capital as we continue to mature as a best-in-class alternative asset manager focused on the private credit space. We delivered $34.8 million of net investment income, a 30% increase versus Q2 of last year. Our net asset value grew 11% quarter-over-quarter to a record $924 million. Platform AUM increased to more than $2.3 billion. Our credit quality remained strong with nonaccruals staying steady and representing less than 1% of the portfolio at fair value. And Trinity paid a second quarter cash dividend of $0.51 per share, representing our 22nd consecutive quarter of consistent regular dividend. Many momentum building milestones occurred during the second quarter as well. In May, we received an investment-grade rating from Moody's, which allows us to obtain debt capital at more advantageous rates. Then in June, we received a greenlight letter from the Small Business Administration to launch an SBIC fund, which will potentially provide $275 million of investable capital. The fund will be managed under our RIA, which differentiates our platform and generates new management and incentive fees that flow directly to Trinity shareholders, creating the opportunity to provide future income beyond our direct lending portfolio. Trinity Capital continues to outperform across key metrics. Our return on equity and effective yield are at or near the top of the BDC space. Our NAV has grown 36% year-over-year. And since our IPO 4 years ago, the cumulative return on TRIN stock is 88%, outpacing our peer average of 67% and S&P's 565% total return in that same time frame. Our goal is to be the top-performing BDC, and we believe our ability to consistently deliver strong performance stems from our differentiated structure, disciplined underwriting and first-class team. Our 5 business verticals, sponsor finance, equipment finance, tech lending, asset-based lending, and life sciences position us to maintain a diversified and resilient portfolio across varying macroeconomic conditions. Each vertical is supported by specialized and elite teams of originators, underwriters, and portfolio managers, fostering an efficient, effective, and scalable operating model. Structurally, as an internally managed BDC, our employees, management, and Board members all hold the same shares as our investors. This alignment of interest ensures we are fully committed to delivering consistent dividends and growing returns. The internally managed structure also creates a premium valuation because shareholders own the management company, as well as the underlying assets. Furthermore, all management fees and incentive fees generated through our asset management activities under the RIA are passed on to our shareholders, which drives additional income streams, enhances valuation, and supports platform growth. From a talent attraction and retention perspective, we are deeply committed to cultivating a strong culture that draws the best people in the industry as we continue our growth trajectory. We invest in our platform and our processes for future scale as we build a company that earns trust in our employees, partners, and shareholders. Our unique culture is built on 6 core pillars: humility, trust, integrity, uncommon care, continuous learning, and an entrepreneurial spirit. Our aim has always been to create an organization that our employees, partners, and shareholders are proud of. We continue to thoughtfully raise both equity and debt to capitalize the business. During Q2, we raised $82 million of equity through the ATM program at an average premium to NAV of 11%. And subsequent to quarter-end, we issued $125 million of unsecured notes, providing further capitalization for our growth. All this gives continued validation that we can scale the platform while maintaining and increasing our earnings per share. We are experiencing tremendous momentum heading into the second half of 2025. In the first half, we funded $585 million, outpacing last year's record-setting first half by more than 20%. Our investment pipeline remained strong, including $849 million in unfunded commitments as of the end of Q2, well positioned for continued portfolio growth in the second half of 2025. Only 6% of unfunded commitments are considered unconditional, meaning 94% of our unfunded commitments are subject to ongoing diligence and approval by our investment committee. Underwriting and credit performance remain critically important to us. To touch on a few newsworthy topics in terms of tariffs, as mentioned in Q1, we continue to actively communicate with the entire portfolio, and we've seen a minimal impact to date. Understanding the effects of tariffs on both new and existing portfolio companies remains a core focus for us as we continue to build the business. The positive impact of the tariffs has been an increased demand for our equipment finance business, which concentrates on U.S. based manufacturing. Our dividend coverage increased quarter-over-quarter, and we expect to maintain this trend. We believe future rate cuts should have a beneficial impact for Trinity Capital since the majority of our deals are already at their full rate, and we could see an uptick in prepayments if rate cuts continue as borrowers look to refinance their debt at lower rates, which would generate additional fee income for the benefit of our shareholders and provide capital for future deployment. Additionally, lower rates would reduce our borrowing costs on our credit facility and future bond issuances. From the beginning, we've consistently stated that our objective is to outearn the dividend while growing the BDC, and we continue to deliver on that promise. Trinity Capital remains well positioned in the private credit market with a focus on late-stage venture-backed companies in the lower middle market. On the capitalization front, we're laying the groundwork for a managed account platform, and this initiative will expand our direct lending strategy, creating additional income streams for Trinity Capital shareholders. Overall, we are very bullish about the opportunities before us. We look forward to continuing to build a company that delivers outsized returns to our investors and demonstrates uncommon care for our people and our partners. And with that, I'll turn the call over to Michael Testa, our CFO, to discuss our financial results in more detail.
Thank you, Kyle. In the second quarter, we achieved total investment income of $69.5 million, a 27% increase over the same period in 2024. Our industry-leading effective yield on the portfolio for Q2 was 15.7%. The increase in total investment income this quarter reflects higher prepayment income from over $100 million of early debt repayments, as well as net portfolio growth in the second quarter. Net investment income for the second quarter was $34.8 million or $0.53 per basic share compared to $26.7 million or $0.53 per basic share in the same period of the prior year. Our net investment income per share represents 104% coverage of our quarterly distribution. Our estimated undistributed taxable income is approximately $63 million or $0.91 per share. We continue to reinvest this capital for the benefit of our investors, while maintaining a consistent and meaningful distribution. Our platform continues to generate strong returns for our BDC shareholders with a return on average equity of 15.9%, once again among the top in the BDC space. At the end of Q2, our net asset value was $924 million, up 11% from $833 million as of Q1. And our corresponding NAV per share increased to $13.27 at the end of Q2 as compared to $13.05 as of Q1. The increase in NAV per share reflects net appreciation on the portfolio and accretive equity ATM issuances. During the quarter, we enhanced liquidity and lowered our net leverage ratio by raising $82 million through our equity ATM program at an average premium to NAV of 11%. We opportunistically raised $2 million of gross proceeds from our debt ATM program, all at a premium to par. And as Kyle mentioned, subsequent to quarter end, we issued $125 million of 6.75% unsecured notes due in July 2030. This institutional bond issuance further diversifies our sources of capital, improves our cost of capital, and ladders out our debt maturities. We maintain a strong balance sheet with no debt maturities until August 2026. We continue to benefit from our co-investment vehicles, which provide approximately $1.9 million or $0.03 per share of incremental net investment income to the BDC in Q2. We syndicated $34 million to these vehicles during the quarter. And as of June 30, 2025, we managed over $300 million of assets across these private vehicles, providing incremental growth capital and accretive returns to our shareholders. Our net leverage ratio decreased to 1.12x as of quarter-end. With strong liquidity, well-diversified capital sources, including funding from both the BDC and vehicles managed under our wholly owned registered investment adviser, Trinity is well positioned to thoughtfully underwrite a robust pipeline, maintain strict credit discipline, and selectively deploy capital in high conviction opportunities. To discuss our portfolio performance and platform in more detail, I'll now pass the call over to our COO, Jerry Harder.
Thank you, Michael. At the end of the second quarter, the composition of our portfolio on a cost basis was composed of approximately 76% secured loans, 17% equipment financings, 4% equity, and 2% warrants. The portfolio remains well diversified by investment type, transaction size, industry, and geography. We are currently invested in 20 distinct industry categories. Our largest industry exposure is finance and insurance, representing 15% of the portfolio at cost and diversified across 17 borrowers, including both term loans and asset-based warehouse facilities. As of the end of Q2, our largest single portfolio company debt exposure represents 3.3% of our debt portfolio on a cost basis. Our 10 largest debt investments collectively represent 23.1% of our total portfolio on a cost basis. Turning to credit. The quality of our portfolio remained consistent quarter-over-quarter with approximately 99.1% of our portfolio performing on a fair value basis. Our average internal credit rating for the second quarter stood at 2.9 based on our 1 to 5 scale, where 5 represents very strong performance. This rating is consistent with prior quarters, reflecting both the addition of high-quality originations during the quarter and strong portfolio management of existing investments. Quarter-over-quarter, the number of portfolio companies on nonaccrual improved from 5 to 4. During Q2, 1 new company was added to nonaccrual status, while 2 prior nonaccrual investments were realized and rolled off. As of June 30, nonaccrual credits had a total fair value of approximately $15.6 million or 0.9% of the total debt portfolio, consistent with the preceding quarter. At the end of Q2, 81% of our total principal outstanding was secured by first position liens on enterprise equipment or both. For loans covered by enterprise value, the weighted average loan-to-value was 20%, with 58% of our portfolio companies maintaining a loan-to-value below 15%. In the second quarter, our portfolio companies collectively raised over $1.3 billion in equity capital, demonstrating the continued strength of our portfolio and our portfolio's ability to attract funding in the current macro environment. These metrics underscore the strong credit profile of our portfolio with borrowers generally well-capitalized and positioned to finance their operational growth, including servicing of their debt obligations. In closing, we want to emphasize that credit quality and disciplined portfolio management remain top priorities for Trinity Capital. Our team operates with a shareholder mindset, consistently striving for outcomes that serve the best interest of both our investors and our partners. Before we conclude the call, we'd like to open the line for questions.
Questions and answers
We'll take our first question from Casey Alexander with Compass Point.
Kyle, you made a comment that tariffs were driving more interest in equipment finance. But this quarter was much more heavily slanted towards secured loans than equipment finance. Is that something that you see occurring over the rest of the year?
Hey, Casey, thanks for the question. No, I think that's more of just the timing. Our tech lending group had a great quarter. They won a lot of deals, performed very well. And equipment financing was in line with our expectations and also had a really significant quarter in terms of term sheets accepted. So more of a timing issue, Casey, and you can expect them to continue their growth going forward.
Yes. A little bit of additional color, Casey. This is Jerry. Year-to-date, our deployments have been 26% equipment. That's a little bit higher than we set out in our AOP, but within what we would expect. And as Kyle mentioned, pretty strong quarter for commitments for that vertical.
Okay. Secondly, look, this is clearly a great quarter. It's being reflected in the stock right now. But I'm obliged to ask, there was a relatively meaningful increase in the watch list at fair value quarter-over-quarter. Now you define those as need for additional capital or underperforming relative to the business plan. And those can be 2 very different things because need for additional capital can simply be a timing issue. So can you give us a feel for how much of that $97 million is portfolio companies that are lining up for additional capital versus how many are underperforming their business plans?
Hey, Casey, this is Ron Kundich, I'll take that. Look at the list right now, I think it's a combination of the two things. These companies, well, let me step back. It's not a one-way street. These companies hit the watch list and oftentimes pop off the watch list. There were two big adds to the watch list this quarter. Those companies are actively raising capital from their investors. We're in negotiations with them as to how we can help with perhaps a modification of our loan. It is a catchall. Company performance oftentimes leads to companies' needs for capital. The two things are related more often than not. So that's kind of how I would describe that, Casey. If you have any follow-ups, feel free, but...
We'll take our next question from Doug Harter with UBS.
I was hoping you could give us some more thoughts or color around the expected pacing of raising third-party capital. You mentioned separately managed accounts. Just how should we think about the potential growth of that pool of capital?
Yes, thank you, Doug. We have been working on establishing our managed account business for over a year now, and some of this process required SEC approval. We are continuing to build our assets under management and have been anticipating SEC approval to convert our private fund into a nontraded BDC that we will manage. We are nearing the completion of that process and are hoping to launch and begin growing that entity soon. The groundwork has been laid for quite some time, and we are starting to see some initial results, which we are very excited to roll out and expect to see more progress in the upcoming quarters. Additionally, this is a significant aspect of our future. As an operating company capable of generating income beyond just the loans we issue, we are strongly motivated to expand this business and create new management and incentive fees because it directly benefits our shareholders and enhances our earnings per share. This, in turn, allows us to generate new dividend income and higher dividends. So, it is crucial for our future. The groundwork has taken a while to establish, and now we are beginning to execute on it, which we are very excited about.
Yes. One thing I would add, this is previously announced, but we did get our greenlight letter from the SBA, as Kyle mentioned in the prepared remarks. And so that sets off a sequence of events to create that SBIC fund, which will be a managed account under our RIA as well.
We are raising $87.5 million of equity, unlike most BDCs that downstream their own equity to gain extra leverage. This approach enhances their return on equity. Our plan involves leveraging this equity to generate $275 million of new capital, along with management and incentive fees that will begin to contribute to Trinity. We aim to finalize this fund by the end of the year and start deploying it next year. This process is currently underway, and we are very excited about the potential benefits it will bring.
We'll take our next question from John Hecht with Jefferies.
Congratulations on another good quarter. Can you provide more details about the SBIC? Specifically, how is the interest rate structured? If I remember correctly, this type of debt has an adjustable rate linked to a segment of the treasury curve. Additionally, what are the characteristics of the assets involved, and how do they compare to the rest of the portfolio in terms of contribution and economics?
Hey, John, it's great to hear from you. Thanks for your question. The SBIC fund is beneficial for our limited partners from whom we are raising funds, and it offers significant advantages for Trinity as well through new management and incentive fees. The main advantage is the 2x leverage; for every dollar of equity we raise, we can secure $2 in debentures backed by the SBA, which is currently fixed at around 5%. This results in a very low cost of capital for the duration of the fund, leading to impressive returns for our limited partners. Additionally, this offers a compelling value proposition for us since this cost of capital is considerably lower than what we can obtain at the BDC level at this time. This creates a new source of capital that is inexpensive and provides us with additional liquidity. We plan to start drawing down and deploying this capital next year, while also generating current management and incentive fees in the process. This will be our third SBIC license for Trinity Capital and our first since going public, and we believe it will be a valuable asset that could enhance future returns for our shareholders.
And I would add, the mandate of that fund will be a co-investment vehicle alongside the BDC. Not every deal that we do within a BDC will fit into an SBIC fund. For example, deals in foreign jurisdictions won't apply. But largely, it will co-invest alongside the BDC.
It will just be programmatic. So, it will just take a little piece of every deal we do.
Is there anything we should consider regarding prepayments or repayments if interest rates decrease? You've mentioned some sensitivities of the business to lower rates, but are there additional impacts we should be aware of? While we understand that lower rates will assist borrowers in reducing their cost of capital, is there anything specific from a portfolio standpoint that we need to take into account?
Well, on the prepayments year-to-date are kind of in line with our expectations and historical expectations for prepayments. Lower rates are going to be really interesting for us. Unlike most BDCs, the majority of our portfolio is really kind of either at floor rates for our floating rate loans or 1/4 of the portfolio is equipment financings, which are really fixed once we deploy it. So, the majority of our portfolio is really set to see some upside because the cost of our capital will go down, of course, with our revolving line of credit and then future debt issuances will be lower in theory. And so there's some really interesting upside just from a return perspective if rates do go down. And then the answer to your question is yes, if rates go down, companies may look to refinance their debt into lower cost of capital. And of course, that gives us the ability to kind of pick and choose maybe who we want to stay with and create new facilities for. And then it will also give us the ability to pull forward fees and closing exit fees, et cetera, which could generate some nice returns in the meantime. So, it's looking pretty positive if that ends up happening for us. And that was a couple of years in the making planning and making sure we are set up for that eventuality.
Okay. That's great. And then just one quick final question. Anything that we should be thinking about in terms of seasonality in the third and fourth quarter for originations or repayments?
We have nearly $1 billion in unfunded commitments, primarily related to equipment financing as companies grow and require more capital. Much of our momentum going into the third quarter comes from signed term sheets, contributing to the unfunded commitment total. We're currently well-positioned for deployment and expect a strong deployment quarter in Q3.
We'll take our next question from Sean-Paul Adams with B. Riley Securities.
Can you provide a little bit more detail on NextCar and space perspective and if there's any kind of near-term plan given their upcoming maturity dates?
Yes. Sorry, Sean-Paul, this is Ron again. NextCar has been on the list for several quarters now. As you might know and recall, we're partnering with another BDC on that fund on that loan. All I can tell you is broken record, but there are ongoing discussions with the company regarding a loan modification. The company continues to receive backing from their investors, which is good. And hopefully, more to report next quarter on that one. I think you asked about space perspective, obviously, on the nonaccrual list this quarter. We expect to finalize that transaction during Q3. There will be more to report later, but that's what I've got for you right now.
We'll take our next question from Christopher Nolan with Ladenburg Thalmann.
What are your thoughts regarding the recent tax changes?
Chris, we can't hear you maybe a little bit longer.
Apologies. Can you hear me now?
Got you.
Okay. Given the tax changes, is that going to benefit the equipment financing business?
I think you're speaking about tariffs, right?
Actually, no, I'm talking about the accelerated depreciation when you can start taking 100% in year 1.
Yes, in theory, that's correct. Most of our equipment deals are structured as financings; we do not own the equipment, the company does. More depreciation is a factor to consider, especially for some of these companies that are still in growth mode and may be venture-backed. Additionally, many of the companies in our portfolio are in the lower middle market or are public companies with strong EBITDA, which will definitely benefit. We've observed a significant increase, over 20% year-to-date, in equipment financing requests and overall company plans for capital expenditure spending. I believe some of this is related to recent tax changes.
Should we expect the percentage of equipment financing to increase in relation to its share of the portfolio?
We have it baked in at about 1/4 of our deployments or thereabouts, and they continue to hit that or achieve higher than that. As our other 4 verticals continue to grow as well, you have continued to see kind of more diversification across the platform. And yes, equipment continues to be about 1/4 of our overall deployment.
And a follow-up question. Are you considering expanding into revolving facilities for your portfolio companies?
So our ABL business does provide some receivable financing. And that's a really great and exciting business for us that continues to grow. So, we are doing some of that and have been doing some of that for a couple of years. Our assets there are enterprise-type customers and receivables where we're providing in advance against those receivables, and they're in bankruptcy remote SPVs, high-quality assets, short-term receivables. That's a great business for us. We continue to see that grow. We expect that to continue to grow going forward, but it is just one of our 5 verticals.
Final question. Congratulations on getting the investment-grade rating. If you guys decide to do, let's say, another BDC vehicle like a nontraded BDC, is the investment grade for the management? Or is this specifically for the TRIN publicly traded BDC?
Chris, it's Mike. Yes, right now, that investment-grade rating is for the platform. So, if we do raise another BDC nontraded, we'd have to go and get additional ratings for that vehicle. But again, that additional rating would look to the same assets, if it co-investment, you're looking at the same assets. So, the validation you get from Moody's looking through into the platform and the assets, you get some benefit there.
We'll take our next question from Paul Johnson with KBW.
In terms of just the funds within the RIA complex, kind of where are you at, I guess, from a deployment standpoint at this point? Are these funds fully deployed here in terms of leverage and it's more based on kind of fundraising here on out? Or where do you kind of stand there?
Yes, we're continuing to ramp the RIA. In Q3, we raised additional capital, leading to an increase in deployment compared to Q2. About 12% of any new funding we secure is being allocated to the RIA.
In the RIA, Paul, just to put a standpoint, it's an incredible opportunity for us to increase our revenues and earnings per share, but it's also a great tool for us to manage our debt-to-equity ratios at TRIN. And that's really important because what we need and what we want are better ratings, which then drive down the cost of our debt capital over time on future bond issuances and provides us with great liquidity so that we can really manage where we're raising money or whether we need to raise additional equity or debt at TRIN. So it's just a great tool overall, not just from an earnings perspective, but to really make the TRIN BDC more and more efficient.
And where would you guys like to be, I guess, in terms of contribution from the RIA to TRIN's overall business?
As an internally managed BDC, we own the same shares as our investors. Successfully raising more capital off balance sheet in managed funds significantly increases earnings per share for our shareholders and reduces our need to raise equity and debt. There will be a balance between the capital we raise on balance sheet and off balance sheet, but it will always come down to whether we can grow and if that growth is beneficial for our investors. It makes no sense to grow in a way that harms our investors. So, the key questions are whether we can continue to grow the business, attract and retain the best talent, and maintain our relevance in the market while ensuring we do not dilute our investors. If we cannot meet those criteria, there is no reason to grow. The main question is whether we can grow and what the best way is to achieve that growth in a way that benefits our investors.
Okay. And then one question I just have too, is it looks like the majority of your portfolio is kind of at or approaching the floor in its rate and its interest rate. But I guess when a loan is at the floor where it's been there kind of for some time as rates kind of start to move lower, how likely are those loans to be refinanced or prepaid early, either getting refinanced by another lender or they're just getting taken out by the equity early? Or is it a lot more just kind of dependent on the overall exit environment in terms of getting those loans repaid?
Yes, this is Jerry. Let me address that for you. Generally speaking, our borrowers, aside from interest rates, will look to scale and grow in order to qualify for lower-cost financing from a bank. This is often the case with the refinancings we see, as portfolio companies essentially graduate from the Trinity type of debt. I don't believe that a couple of points in interest rate change provide enough incentive for companies, though there are times when it does, and we'll notice those instances. As Kyle mentioned, this gives us a beneficial perspective because we have the first opportunity to see what this new portfolio or company can accomplish with fresh debt, which may be an area we want to engage in. Therefore, we are not particularly concerned about those interest rate-driven refinancings since the savings for the company tend to be incremental. If a company qualifies for bank debt, that’s great, and they should pursue that option.
And there are no further questions on the line at this time. I'll turn the call back to your CEO, Kyle Brown, for any closing remarks.
Well, on behalf of Trinity Capital and our team, thank you for joining us today. We appreciate your continued interest and investment in Trinity Capital, and we look forward to sharing our third quarter results on our next earnings call scheduled for November 5. Have a great day. Thanks. Bye.
And this does conclude Trinity Capital's Second Quarter 2025 Earnings Conference Call. Thank you for your participation, and you may now disconnect.