DBRS Morningstar: TriplePoint Venture Growth BDC Corp. Trend now Stable, Ratings Confirmed at BBB

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. At the same time, DBRS Morningstar has revised the trend on the ratings to Stable from Negative. 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
In confirming the ratings and revising the trend to Stable, DBRS Morningstar recognizes TPVG’s sound operating performance through the challenging economic environment due to the Coronavirus Disease (COVID-19) pandemic. TPVG benefits from its position within the larger TriplePoint Capital LLC (TPC) global venture lending platform, which continues to grow via private capital vehicles, allowing TPC to allocate larger investments across its varying vehicles. TPC’s industry expertise and long-standing relationships with banks, investors and venture capital (VC) sponsors position it well within the VC ecosystem, which continues to have high barriers to entry. Supporting TPVG’s current ratings level, earnings are consistent and growing. The Company’s 2020 earnings were up 11% versus the prior year, reflecting record net investment income and strong realized gains through equity and warrant investments that more than offset unrealized losses. The ratings confirmation also considers TPVG’s appropriately managed funding profile, as well as its prudently managed leverage ratio.

The Stable trend considers our view that the major drivers of uncertainties related to the pandemic are behind us, contributing to the broader market certainty and investor conviction. Most businesses have adapted to social distancing practices and periodic restrictions on activities to address recent waves in virus cases. During 1Q21, the VC market maintained its momentum from the second half of 2020, as VC investment, exit and fundraising activity all surpassed results for the same prior year period. Consistent with our moderate economic scenario published March 17th, 2021, expectations are for a strong economic recovery in 2021, buffered by government stimulus and central bank actions that should produce robust origination pipelines for BDCs.

RATING DRIVERS
DBRS Morningstar sees TPVG’s ratings as well placed at the current level, which balances the Company’s strong relationships and growing platform with the underlying risk of its investments. Over the longer-term, continued overall platform expansion that lowers concentration risk, combined with strong earnings and credit fundamentals, would lead to a ratings upgrade.

Conversely, weak credit fundamentals with elevated non-accruals over a prolonged period would result in a ratings downgrade, particularly if this drove a deterioration in the capital buffer to regulatory requirements.

RATING RATIONALE
TPVG has a strong 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). The Company’s investment portfolio is focused on investments in venture growth stage VC-backed companies, which is typically when these companies begin operational and financial preparations for a liquidity event that includes an initial public offering (IPO) or private sale. Through TriplePoint Advisers LLC (the Adviser), a subsidiary of TPC, all investments are directly originated, which we view favorably for credit performance, as originating venture growth loans requires specialized underwriting. Further, the Company benefits from a strong origination network, as well as its long-standing relationships with select venture capital investors to ensure access to high quality VC-backed companies. As of YE20, the Company’s investment portfolio totaled $634 million at fair value (FV) with debt investments across 33 portfolio companies.

At the onset of the pandemic, we had concerns regarding the Company’s niche focus on providing financing to high-growth VC-backed companies, given expectations for significant challenges in the VC markets. TPVG has generally navigated the environment well, which we attribute to its selectivity in originations and long-standing relationships in the industry. Furthermore, the VC ecosystem has been broadly resilient, with record investment in high-growth startups, record capital raised by VC funds and the second-highest year for VC-backed exits in 2020. The IPO window rapidly re-opened through the second half of 2020 after the initial market correction at the onset of the pandemic, leading to significant VC exits. TPVG’s portfolio of venture growth portfolio companies has also proved largely resilient through the pandemic, executing strategic plans to extend their cash runways and raising capital to strengthen their liquidity positions.

TPVG has sound earnings generation capabilities as the Company has been profitable on an annual basis since inception. Although TPVG recorded a large unrealized loss on investments in 2020, TPVG still generated solid earnings, with a return on equity of 8.7% that compares favorably to peers. For 2020, TPVG generated net assets resulting from operations of $35 million, up 11% year-over-year. Results benefited from record net investment income and strong realized gains on investments by monetizing certain equity investments. This more than offset unrealized losses on its investment portfolio primarily driven by reversals of previously recorded unrealized gains, as well as both market-related and credit-specific fair value adjustments. Performance is also supported by robust yields from the investment portfolio and interest income that is largely recurring in nature.

We consider TPC’s disciplined investment strategy combined with underwriting that has been tested through several business and economic cycles as supportive of the solid credit performance of the investment portfolio to date. Although lending to VC-backed companies generally carries a higher risk profile than lending to larger commercial or sponsor-backed middle market companies, TPC has a long track record in this niche market that allows for selectivity in originations given the high level of inbound deal flow. However, credit risk is elevated given the youthful age of the venture growth companies that TPVG lends to, most of which are not profitable and are highly reliant upon future rounds of fundraising to complete a successful exit strategy. Furthermore, the Company has an equity and warrants portfolio that have generated sizable gains over-time, providing an offset to losses from other companies in the investment portfolio. At YE20, TPVG had two sizable investments on non-accrual status, or 9% of investments at cost. While non-accruals have been elevated in recent periods and high compared to the peer group, we expect the ratio to normalize in the coming quarters. In fact, on a pro-forma basis, the Company’s non-accrual ratio declines to approximately 5% following the sale of one investment in early 2021.

TPVG has an acceptable funding profile, which has been enhanced in recent years with unsecured debt issuances, helping diversify its funding profile and unencumber the balance sheet. The Company has also demonstrated market access, even during periods of significant market stress. In fact, TPVG tapped the institutional market with a private placement issuance in 2020 and a senior unsecured debt issuance in March 2021. Liquidity is appropriately managed, with a good ability to fund new originations and contractual commitments. We note that debt maturities are well-laddered, with no near-term maturities.

TPVG’s balance sheet strength is solid, including a demonstrated ability to raise equity, as well as a prudently managed leverage ratio. The Company raised equity in 2020 via a public offering. As of December 31, 2020, the Company's debt-to-equity ratio was 0.66x, below its managerial target of 1.0x, and significantly below the regulatory limit of 2.0x.

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. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents, and S&P Global Market Intelligence. 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.

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