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Hercules Capital (NYSE: HTGC) reported record first-quarter 2026 originations and total investment income, while management said credit quality remained stable and liquidity was strong despite heightened market volatility and uncertainty tied to the Middle East conflict, private credit redemptions and questions about artificial intelligence disruption.
Chief Executive Officer and Chief Investment Officer Scott Bluestein said the company delivered “another strong quarter of record originations, record total investment income, and stable credit performance” in a period marked by equity and credit market volatility.
Hercules originated $1.81 billion of new debt and equity commitments during the quarter, with gross fundings of more than $706 million. Net debt investment portfolio growth totaled $298 million.
Total investment income reached a record $141.5 million. Net investment income was $88.1 million, or $0.48 per share.
Bluestein said net investment income covered the base shareholder distribution by 120% and covered the full distribution, including a $0.07 supplemental payout, by 102%. Hercules has paid a supplemental distribution for 23 consecutive quarters. The company ended the quarter with undistributed earnings spillover of $149.1 million, or $0.80 per ending share outstanding.
First-quarter activity was weighted slightly toward life sciences companies, reflecting what Bluestein described as a more defensive posture. About 56% of commitments and 60% of fundings went to life sciences, while roughly 44% of commitments went to technology companies.
Hercules funded 34 companies during the quarter, including 13 new borrower relationships.
Managed assets increased to approximately $6.1 billion, up 21.8% from a year earlier, driven by growth in both its publicly traded BDC and private credit funds business. The company reported 65 investment and credit professionals, more than 25 finance and accounting professionals and 120 full-time employees.
Hercules expects originations to moderate in the second quarter and be more back-end weighted. As of May 1, the investment team had closed $79.2 million of new commitments and funded $32.3 million.
The company also reported $506.1 million of pending commitments in signed non-binding term sheets.
Chief Financial Officer Seth Meyer said Hercules ended the quarter with $454.5 million of available liquidity in the BDC and more than $1 billion across the broader platform, including adviser-managed funds.
During the quarter, Hercules issued $300 million of 5.35% unsecured notes due in 2029 and raised about $52 million through its at-the-market equity program.
GAAP leverage increased to 115.4% from 104.4% in the prior quarter, while regulatory leverage rose to 99.7% from 88.6%. Bluestein said the GAAP leverage level was at the high end of Hercules’ typical historical range but still below the average of its BDC peers.
Meyer said the weighted average cost of debt remained stable at 5.1%. Net investment income return on average equity increased to 16.9% from 16.4% in the fourth quarter, while return on average assets was 8.1%.
Bluestein said portfolio credit performance remained stable. The weighted average internal credit rating was 2.11, compared with 2.20 in the fourth quarter.
Grade 1 and 2 credits increased to 70.5% of the portfolio from 66.6%, while Grade 3 credits declined to 28.6% from 31.7%. Loans rated 4 and 5 fell to a combined 0.9% of the portfolio, which Bluestein said was the lowest level reported since the second quarter of 2022.
Hercules reported one loan on non-accrual, with an investment cost of approximately $10.7 million and a fair value of $3.7 million, representing 0.2% and 0.1% of the total investment portfolio at cost and value, respectively.
Bluestein said 100% of debt investments on accrual were current on scheduled principal and interest payments based on the company’s most recent reporting.
Early loan repayments totaled $225.8 million in the first quarter, at the high end of the company’s guidance. Hercules expects second-quarter prepayments to rise materially to a range of $350 million to $500 million, driven largely by merger-and-acquisition activity.
Bluestein said the higher prepayment outlook reflected known M&A events that had either already occurred or were expected to occur during the quarter. He described the activity as a positive indicator of portfolio quality and said it should give Hercules flexibility to redeploy capital.
The company said it saw four new M&A events in the portfolio during the first quarter and early second quarter, including one life sciences company and three technology companies. Two portfolio companies filed registration statements for initial public offerings, and one completed an IPO in April.
Management addressed investor questions about software exposure and AI-related disruption. Bluestein said underwriting in venture and growth-stage markets differs from traditional lending. Hercules generally targets less than 1x debt to annual recurring revenue, less than 20% loan-to-value and debt-to-invested equity of less than 30% for software loans.
He said Hercules is active in software but is prioritizing deal structure over incremental yield, adding that teams are focusing on tighter structure, stronger covenants and better overall underwriting rather than pursuing additional basis points of yield.
Payment-in-kind (PIK) income declined to about 9.1% of total revenue from 10.5% in fiscal 2025. Bluestein said roughly 91% of first-quarter PIK income came from terms included in the original underwriting, not credit-related amendments, and more than 98% came from loans rated 1, 2 or 3. He said the company is intentionally deprioritizing PIK on new investments and prefers cash income when possible.
Hercules announced leadership changes effective May 18. Meyer will become president of the company. Andrew Olson, who previously worked at Hercules and most recently at Revelation Partners after prior experience at SVB Capital, will succeed Meyer as CFO.
Hercules Capital, Inc. is a specialty finance company organized as a business development company (BDC) that provides tailored debt financing solutions to high-growth companies. Through its external management structure, Hercules Capital extends senior secured loans, subordinated debt and growth capital designed to support research and development, expansion initiatives and working capital needs.
The firm primarily partners with venture capital and private equity sponsors to finance innovative enterprises across various developmental stages. Its investment portfolio is concentrated in technology, life sciences and sustainable and renewable technology sectors.
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