TriplePoint Venture Growth BDC Corp. - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2014

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER:  001-36328

 

 

TriplePoint Venture Growth BDC Corp.

(Exact name of registrant as specified in its charter)

 

 

 

TriplePoint Venture Growth BDC Corp.

2755 Sand Hill Road, Suite 150, Menlo Park, California 94025

(Address of principal executive office)

 

(650) 854-2090

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of August 11, 2014 was 9,868,860.

 

 

Table of Contents

 

TriplePoint Venture Growth BDC Corp.

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statement of Assets and Liabilities as of June 30, 2014	3
	Consolidated Statement of Operations for the Three Months Ended June 30, 2014 and the Period from March 5, 2014 (Commencement of Operations) to June 30, 2014	4
	Consolidated Statement of Changes in Net Assets for the Period from March 5, 2014 (Commencement of Operations) to June 30, 2014	5
	Consolidated Statement of Cash Flows for the Period from March 5, 2014 (Commencement of Operations) to June 30, 2014	6
	Consolidated Schedule of Investments as of June 30, 2014	7
	Notes to Consolidated Financial Statements as of June 30, 2014	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Forward-Looking Statements	26
	Overview	27
	Portfolio Composition, Investment Activity and Asset Quality	29
	Results of Operations	32
	Critical Accounting Policies	34
	Liquidity and Capital Resources	37
	Recent Developments	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
SIGNATURES		42

 

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PART I—FINANCIAL INFORMATION

 

Item 1.                                 Financial Statements

 

TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(condensed and unaudited)

(dollars in thousands, except share data)

 

		As of June 30, 2014
Assets
Investments at fair value (amortized cost of $204,307)		$	205,718
Short-term investments at fair value (cost of $59,997)		59,996
Cash		7,048
Restricted cash		1,673
Deferred credit facility costs		2,729
Prepaid expenses		196
Total Assets		277,360
Liabilities
Revolving credit facility payable		68,500
Payable for U.S. Treasury bill assets		59,997
Base management fee payable		674
Income incentive fee payable		219
Accrued capital gains incentive fee		282
Payable to directors and officers		116
Other accrued expenses and liabilities		4,621
Total Liabilities		134,409
Commitments and Contingencies (Note 7)
Net Assets		$	142,951
Preferred stock, par value $0.01 per share (50,000,000 shares authorized; no shares issued and outstanding)		$	—
Common stock, par value $0.01 per share (450,000,000 shares authorized; 9,868,860 shares issued and outstanding)		99
Paid-in capital in excess of par value		141,859
Net investment income		3,423
Accumulated net unrealized gains		1,410
Dividend distributions		(3,840		)
Net Assets		$	142,951
Net Asset Value per Share		$	14.49

 

See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(condensed and unaudited)

(dollars in thousands, except share data)

 

		For the Three Months Ended June 30, 2014			For the period from March 5, 2014 (Commencement of Operations) to June 30, 2014
Investment Income
Interest income from investments		$	5,394		$	6,702
Other income		95			95
Total investment and other income		5,489			6,797
Operating Expenses
Base management fee		674			818
Income incentive fee		219			219
Capital gains incentive fee		7			282
Interest expense and amortization of fees		776			930
Administration agreement expenses		340			392
General and administrative expenses		619			733
Total Operating Expenses		2,635			3,374
Net investment income		2,854			3,423
Net realized gains		—			—
Net change in unrealized gains on investments		36			1,410
Net Increase in Net Assets Resulting from Operations		$	2,890		$	4,833
Basic and diluted net investment income per share		$	0.29		$	0.35
Basic and diluted net increase in net assets per share		$	0.29		$	0.49
Basic and diluted weighted average shares of common stock outstanding		9,849,599			9,847,936

 

See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(condensed and unaudited)

(dollars in thousands except share data)

 

		For the period from March 5, 2014 (Commencement of Operations) to June 30, 2014
Net Assets
Net assets as of March 5, 2014		$	25
Net increase in net assets resulting from operations		4,833
Dividend distributions		(3,840		)
Common stock issuance, net		141,933
Net assets as of June 30, 2014		$	142,951
Capital Share Activity:
Common stock outstanding as of March 5, 2014		1,668
Common stock issued		9,867,192
Common stock outstanding as of June 30, 2014		9,868,860

 

See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(condensed and unaudited)

(dollars in thousands)

 

		For the period from March 5, 2014 (Commencement of Operations) to June 30, 2014
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations		$	4,833
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Fundings and purchases of investments		(203,019		)
Purchases of short-term investments		(59,997		)
Principal payments on investments		240
Net change in unrealized gains on investments		(1,410		)
Amortization and accretion of premiums and discounts, net		(111		)
Accretion of end-of-term payments		(1,417		)
Amortization of deferred credit facility costs		317
Change in operating assets and liabilities:
Payable for U.S. Treasury bill assets		59,997
Prepaid expenses		(196		)
Base management fee		674
Income incentive fee payable		219
Accrued capital gains incentive fee		282
Payable to directors and officers		116
Other accrued expenses and liabilities		2,853
Net cash used in operating activities		(196,619		)
Cash Flows from Financing Activities:
Borrowing under bridge facility		121,662
Repayment of bridge facility		(121,662		)
Borrowings under revolving credit facility		68,500
Dividend distributions, net		(3,455		)
Change in restricted cash		(1,673		)
Deferred credit facility costs		(1,278		)
Net proceeds from issuance of common stock		141,548
Net cash provided by financing activities		203,642
Net change in cash		7,023
Cash at beginning of period		25
Cash at end of period		$	7,048
Non-Cash Financing Activities:
Accrued deferred credit facility cost		$	1,768
Supplemental Information:
Cash paid during period for interest		$	484
Dividend distributions reinvested		$	385

 

See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

(condensed and unaudited)

(dollars in thousands)

As of June 30, 2014

 

Venture Growth Stage Company		Industry		Type of Investment		Outstanding Principal			Cost			Fair Value			Maturity Date
Debt Investments
Aerohive Networks, Inc.		Wireless Communications Equipment		Growth Capital Loan (9.25% interest rate, 6.00% EOT payment)		$	2,500		$	2,531		$	2,542		12/31/2015
				Growth Capital Loan (10.25% interest rate, 6.75% EOT payment)		7,500			7,549			7,738			12/31/2017
Aerohive Networks, Inc. Total						10,000			10,080			10,280
AirStrip Technologies, Inc.		Medical Software and Information Services		Growth Capital Loan (8.75% interest rate, 9.00% EOT payment)		5,000			5,098			5,105			10/31/2016
				Growth Capital Loan 8.75% interest rate, 9.00% EOT payment)		5,000			5,013			5,017			3/31/2017
AirStrip Technologies, Inc. Total						10,000			10,111			10,122
Birchbox, Inc.		E-Commerce — Personal Goods		Growth Capital Loan (10.75% interest rate, 8.00% EOT payment)		2,000			1,978			2,114			5/31/2017
				Growth Capital Loan (10.75% interest rate, 8.00% EOT payment)		3,000			2,959			3,170			6/30/2017
Birchbox, Inc. Total						5,000			4,937			5,284
Coraid, Inc.		Data Storage		Growth Capital Loan (10.00% interest rate, 6.00% EOT payment)		5,000			4,989			4,995			12/31/2016
				Growth Capital Loan 10.00% interest rate, 6.00% EOT payment)		10,000			9,700			9,697			6/30/2017
Coraid, Inc. Total						15,000			14,689			14,692
EndoChoice, Inc.		Medical Device and Equipment		Growth Capital Loan (11.75% interest rate, 8.00% EOT payment)		10,000			9,993			9,998			2/28/2018
				Growth Capital Loan 11.75% interest rate, 8.00% EOT payment)		10,000			9,973			9,972			2/28/2018
EndoChoice, Inc. Total						20,000			19,966			19,970
Harvest Power, Inc.		Biofuels/Biomass		Growth Capital Loan (12.00% interest rate, 9.00% EOT payment)		20,000			20,374			20,365			11/30/2016
Hayneedle, Inc.		E-Commerce — Household Goods		Growth Capital Loan (12.50% interest rate, 12.00% EOT payment)		15,000			14,892			14,885			8/31/2017
				Growth Capital Loan (12.75% interest rate, 16.00% EOT payment)		5,000			4,958			4,962			12/31/2017
Hayneedle, Inc. Total						20,000			19,850			19,847

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

(condensed and unaudited)

(dollars in thousands)

As of June 30, 2014

 

Venture Growth Stage Company		Industry		Type of Investment		Outstanding Principal			Cost			Fair Value			Maturity Date
HouseTrip Limited (1) (3)		Travel and Arrangement / Tourism		Growth Capital Loan (10.00% interest rate, 5.00% EOT payment)		$	9,760		$	9,525		$	9,526		5/31/2017
InMobi, Inc. (1) (3)		Advertising / Marketing		Growth Capital Loan (9.00% interest rate, 5.00% EOT payment)		3,000			3,019			3,024			3/31/2016
				Growth Capital Loan (2) (9.00% interest rate, 5.00% EOT payment)		2,000			1,995			1,994			6/30/2016
				Revolver Loan (9.00% interest rate, 6.00% EOT payment)		5,000			5,018			5,016			12/31/2015
				Revolver Loan (2) (9.00% interest rate, 6.00% EOT payment)		2,000			1,998			1,999			12/31/2015
InMobi, Inc. Total						12,000			12,030			12,033
Lattice Engines, Inc.		Business Applications Software		Growth Capital Loan (8.50% interest rate, 8.00% EOT payment)		5,000			5,082			5,089			12/31/2016
				Growth Capital Loan (8.50% interest rate, 8.00% EOT payment)		2,500			2,487			2,491			3/31/2017
Lattice Engines, Inc. Total						7,500			7,569			7,580
Mind Candy Limited (1) (3)		Entertainment		Growth Capital Loan (12.00% interest rate, 9.50% EOT payment)		10,000			9,578			9,576			6/30/2017
ModCloth, Inc.		E-Commerce — Clothing and Accessories		Growth Capital Loan (10.50% interest rate, 10.00% EOT payment)		1,000			1,029			1,031			6/30/2016
				Growth Capital Loan (10.50% interest rate, 10.00% EOT payment)		2,000			2,050			2,053			7/31/2016
				Growth Capital Loan (12.00% interest rate, 10.50% EOT payment)		2,000			2,013			2,015			8/31/2017
				Growth Capital Loan (12.00% interest rate, 11.00% EOT payment)		5,000			5,005			5,009			11/30/2017
				Growth Capital Loan (12.00% interest rate, 11.50% EOT payment)		5,000			4,956			4,959			2/28/2018
				Growth Capital Loan (12.00% interest rate, 7.50% EOT payment)		5,000			4,804			4,804			6/30/2017
				Equipment Financing (1) (7.50% interest rate, 15.00% EOT payment)		913			937			931			8/31/2016

 

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TRIPLEPOINT VENTRE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS
(condensed and unaudited)

(dollars in thousands)

As of June 30, 2014

 

Venture Growth Stage Company		Industry		Type of Investment		Outstanding Principal			Cost			Fair Value			Maturity Date
ModCloth, Inc. (continued)				Equipment Financing (1) (7.50% interest rate, 15.00% EOT payment)		$	305		$	312		$	310		10/31/2016
				Equipment Financing (1) (7.50% interest rate, 15.00% EOT payment)		147			147			147			3/31/2017
				Equipment Financing (1) (2)		20			20			20			6/30/2017
				(7.50% interest rate, 15.00% EOT payment)
ModCloth, Inc. Total						21,385			21,273			21,279
Simplivity Corporation		Database Software		Growth Capital Loan (2) (10.00% interest rate, 8.50% EOT payment)		7,000			6,777			6,773			6/30/2018
TechMediaNetwork, Inc.		General Media and Content		Growth Capital Loan (9.25% interest rate, 8.00% EOT payment)		2,500			2,489			2,492			3/31/2017
Virtual Instruments Corporation		Network Systems Management Software		Growth Capital Loan (9.50% interest rate, 9.25% EOT payment)		5,000			5,005			5,011			12/31/2016
				Growth Capital Loan (9.50% interest rate, 9.25% EOT payment)		5,000			4,987			4,992			1/31/2017
				Growth Capital Loan (9.50% interest rate, 9.25% EOT payment)		5,000			4,969			4,973			2/28/2017
Virtual Instruments Corporation Total						15,000			14,961			14,976
Xirrus, Inc.		Wireless Communications Equipment		Growth Capital Loan (11.50% interest rate, 8.50% EOT payment)		3,000			3,057			3,079			6/30/2016
				Growth Capital Loan (11.50% interest rate, 8.50% EOT payment)		5,000			5,078			5,118			12/31/2016
				Growth Capital Loan (11.50% interest rate, 8.50% EOT payment)		5,000			4,903			4,978			3/31/2017
Xirrus, Inc. Total						13,000			13,038			13,175
Total Debt Investments						$	198,145		$	197,247		$	197,970

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

(condensed and unaudited)

(dollars in thousands)

As of June 30, 2014

 

Venture Growth Stage Company		Industry		Type of Investment		Shares		Cost			Fair Value
Warrants
Aerohive Networks, Inc.		Wireless Communications Equipment		Common Stock Warrants		33,993		$	153		$	39
AirStrip Technologies, Inc.		Medical Software and Information Services		Preferred Stock Warrants		25,886		93			93
Birchbox, Inc.		E-Commerce — Personal Goods		Preferred Stock Warrants		49,829		566			1,487
Coraid, Inc.		Data Storage		Preferred Stock Warrants		157,710		317			317
EndoChoice, Inc.		Medical Device and Equipment		Preferred Stock Warrants		631,672		149			149
Harvest Power, Inc.		Biofuels/Biomass		Common Stock Warrants		67,935		77			77
Hayneedle, Inc.		E-Commerce — Household Goods		Common Stock Warrants		400,000		468			428
HouseTrip SA (1) (3)		Travel and Arrangement / Tourism		Preferred Share Warrants		212,804		93			93
InMobi Pte Ltd. (1) (3)		Advertising / Marketing		Common Share Warrants		40,250		30			24
Inspirato, LLC (2)		Travel and Leisure		Preferred Stock Warrants		1,994		37			29
Lattice Engines, Inc.		Business Applications Software		Preferred Stock Warrants		191,935		39			27
Mind Candy, Inc. (1) (3)		Entertainment		Preferred Stock Warrants		287,187		751			751
ModCloth, Inc.		E-Commerce — Clothing and Accessories		Common Stock Warrants		419,620		545			515
Nutanix, Inc. (2)		Database Software		Preferred Stock Warrants		45,000		77			77
One Kings Lane, Inc. (2)		E-Commerce - Household Goods		Preferred Stock Warrants		13,635		29			29
Shazam Entertainment Limited (1) (2) (3)		Multimedia/Streaming Software		Ordinary Share Warrants		2,669,479		134			134
Simplivity Corporation (2)		Database Software		Preferred Stock Warrants		252,890		299			299
TechMediaNetwork, Inc.		General Media and Content		Preferred Stock Warrants		36,117		16			16
Virtual Instruments Corporation		Network Systems Management Software		Preferred Stock Warrants		694,788		612			612
Xirrus, Inc.		Wireless Communications Equipment		Preferred Stock Warrants		2,159,631		325			302
Total Warrants								$	4,810		$	5,498
Equity Investments (2)
BirchBox, Inc.		E-Commerce — Personal Goods		Preferred Stock		2,839		$	250		$	250
MongoDB, Inc.		Software Development Tools		Common Stock		74,742		1,000			1,000
Nutanix, Inc.		Database Software		Preferred Stock		137,202		1,000			1,000
Total Equity Investments								$	2,250		$	2,250
Total Investments in Portfolio Companies								$	204,307		$	205,718

 

Short-Term Investments								Cost			Fair Value
U.S. Treasury Bills (2)								$	59,997		$	59,996
Total Investments								$	264,304		$	265,714

 

See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

(condensed and unaudited)

As of June 30, 2014

 

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

Notes applicable to the investments presented in the foregoing table:

 

Unless otherwise noted, all of the investments in the foregoing table are in entities that are domiciled in the United States and/or have a principal place of business in the United States.

 

No investment represents a 5% or greater interest in any outstanding class of voting security of the portfolio company.

 

None of the portfolio companies have (i) been in payment default, (ii) extended the original maturity of its loan, (iii) converted from cash pay interest to payment-in-kind interest, or (iv) entered into a material amendment to its loan agreement related to deteriorating financial performance.

 

As of June 30, 2014, unless otherwise noted, certain of the Company’s debt investments and certain of the Company’s warrants, with an aggregate fair value of $192.1 million, were pledged as collateral for borrowings under the Company’s revolving credit facility.

 

Notes applicable to the debt investments presented in the foregoing table:

 

Interest rate is the annual interest rate on the debt investment and does not include any original issue discount, end-of-term (EOT) payment, or any additional fees related to the investments, such as deferred interest, commitment fees or prepayment fees.

 

The EOT payments are contractual and fixed interest payments due in cash at the maturity date of the loan, including upon prepayment, and are a fixed percentage of the original principal balance of the loan unless otherwise noted.  The EOT payment is amortized and recognized as non-cash income over the loan or lease prior to its payment.

 

Notes applicable to the equipment financings presented in the foregoing table:

 

At the end of the term of certain equipment financings, the lessee has the option to purchase the underlying assets at fair market value in certain cases subject to a cap, return the equipment or continue to finance the assets.  The fair market values for these financings have been estimated as a percentage of original cost for purposes of the EOT payment value.

 

Notes applicable to the warrants presented in the foregoing table:

 

Warrants are associated with funded debt instruments as well as certain commitments to provide future funding.

 

Specific notes applicable to specific investments in the foregoing table:

 

(1)  Investment is a non-qualifying asset under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”).  As of June 30, 2014, the percentage of non-qualifying assets as a percent of total assets was 12.1%.

 

(2)  As of June 30, 2014, these debt investments, warrants, equity investments, and short-term investments were not pledged as collateral as part of the Company’s revolving credit facility.

 

(3)  Entity is not domiciled in the United States and does not have its principal place of business in the United States.

 

 See accompanying notes to consolidated financial statements.

 

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TRIPLEPOINT VENTURE GROWTH BDC CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(condensed and unaudited)

 

Note 1. Organization

 

TriplePoint Venture Growth BDC Corp. (the “Company”), a Maryland corporation, was formed on June 28, 2013 and priced its initial public offering and commenced investment operations on March 5, 2014.  The Company is structured as an externally-managed non-diversified, closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).  As a BDC, the Company expects to qualify annually as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Company was formed to expand the venture growth stage business segment of TriplePoint Capital LLC’s (the “Sponsor”) investment platform. The Company’s investment objective is to maximize total return to stockholders primarily in the form of current income and, to a lesser extent, capital appreciation by primarily lending to venture growth stage companies focused in technology, life sciences and other high growth industries backed by the Sponsor’s select group of leading venture capital investors.  The Company is externally managed by TPVG Advisers LLC (the “Adviser”) which is registered as an investment adviser under the 1940 Act and is a wholly owned subsidiary of the Sponsor.  The Adviser is responsible for sourcing, reviewing and structuring investment opportunities, underwriting and performing due diligence on investments and monitoring the investment portfolio on an ongoing basis. The Adviser was organized in August 2013 and, pursuant to an investment advisory agreement entered into between the Company and the Adviser, the Company pays the Adviser a base management fee and an incentive fee for its services.  The Company has also entered into an administration agreement with TPVG Administrator LLC (the “Administrator”), a wholly owned subsidiary of the Adviser, and pays fees and expenses for services provided.

 

The Company has one wholly owned financing subsidiary, TPVG Variable Funding Company LLC (the “Financing Subsidiary”), a bankruptcy remote special purpose entity established for utilizing the Company’s revolving credit facility.  This subsidiary is consolidated in the financial statements of the Company.

 

Note 2. Significant Accounting Policies

 

Basis of presentation and principles of consolidation

 

The accompanying financial statements of the Company and related financial information have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiary.  The consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair representation of financial results as of and for the periods presented.  All intercompany account balances and transactions have been eliminated.

 

Use of estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires estimates and assumptions to be made that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Changes in the economic environment, financial markets, creditworthiness of portfolio companies and any other parameters used in determining these estimates could cause actual results to differ from those estimates.

 

Investments

 

Investment transactions are recorded on a trade-date basis.  The Company applies fair value to all its investments.  Fair value is a market-based measure considered from the perspective of the market’s participant who holds the financial instrument rather than an entity specific measure.  When market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Adviser believes market participants would use in pricing the financial instruments on the measurement date.

 

The availability of observable inputs can vary depending on the financial instrument and is affected by a variety of factors.  To the extent the valuation is based on models or inputs that are less observable the determination of fair value requires more judgment.  The Company’s valuation methodology is approved by the Company’s Board of Directors (the “Board”) and the Board is responsible for the fair values determined.  As markets change, new types of investments are made, or pricing for certain investments becomes more or less observable, the Board may refine its valuation methodologies appropriately.

 

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Cash and cash equivalents

 

The Company places its cash with financial institutions and at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.

 

Deferred credit facility costs

 

Deferred credit facility costs represent fees and other expenses incurred in connection with the Company’s revolving credit facility.  These amounts are amortized and included in interest expense in the consolidated statements of operations over the estimated term of the facility.

 

Other accrued expenses and liabilities

 

Other accrued expenses and liabilities include interest payable, accounts payable, unfunded commitment liabilities, and commitment deposits received.  Unfunded commitment liabilities reflect the fact that the Company is a party to certain delay draw credit agreements with its portfolio companies, which requires the Company to make future advances at the borrowers’ discretion during a defined loan availability period. The Company’s credit agreements contain customary lending provisions which allow the Company relief from funding obligations for previously made commitments in instances where the underlying portfolio company experiences materially adverse events that affect the financial condition or business outlook for the portfolio company. In certain instances, the borrower may be required to achieve certain milestones before they may request a future advance.  The unfunded obligation associated with these credit agreements is equal to the amount by which the contractual funding commitment exceeds the sum of the amount of funded debt unless the availability period has expired. The fair value at the inception of the agreement of the delay draw credit agreements approximates the fair value of the warrants received to enter into these agreements, taking into account the remaining terms of the agreements and the counterparties’ credit profile. The unfunded commitment liability included in the Company’s consolidated statement of assets and liabilities reflects the fair value of these future funding obligations.

 

Paid-in Capital

 

The Company records the proceeds from the sale of its common stock on a net basis to capital stock and paid-in capital in excess of par value, excluding all offering costs.

 

Income Recognition

 

Interest income, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with the Company’s debt investments, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective interest method. Loan origination fees received in connection with the closing of investments are reported as unearned income which is included as amortized cost of the investment; the unearned income from such fees is accreted over the contractual life of the loan based on the effective interest method as interest income. Upon prepayment of a loan or debt security, unamortized loan origination fees and unamortized market discounts are recorded as interest income. End-of-term (EOT) payments are contractual and fixed interest payments due in cash at the maturity date of the loan, including upon prepayment, and are a fixed percentage of the original principal balance of the loan unless otherwise noted.  Interest is accrued during the life of the loan on the EOT payment using the effective interest method as non-cash income.  The EOT payment generally ceases accruing to the extent the borrower is unable to pay the remaining principal and interest due.

 

Other income includes certain fees paid by portfolio companies and the recognition of the value of unfunded commitments that expired during the reporting period.

 

Realized/Unrealized Gains or Losses

 

The Company measures realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. The Company reports changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the consolidated statement of operations.

 

Management Fees

 

The Company accrues for the base management fee and incentive fee. The accrual for incentive fee includes the recognition of incentive fees on unrealized capital gains, even though such incentive fees are neither earned nor payable to the Adviser until the gains are both realized and in excess of unrealized depreciation on investments.

 

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Federal Income Taxes

 

The Company intends to elect to be treated, and intends to qualify annually thereafter, as a RIC under Subchapter M the Code, for U.S. federal income tax purposes, beginning with the Company’s taxable year ending December 31, 2014. Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. Additionally, a RIC must distribute at least 98% of its ordinary income and 98.2% of its capital gain net income on an annual basis and any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which the RIC previously paid no U.S. federal income tax to avoid a U.S. federal excise tax.  The Company intends to distribute sufficient dividends to maintain the Company’s RIC status each year and does not anticipate paying any material federal income taxes in the future.

 

Dividends and Distributions

 

Dividends to common stockholders are recorded on the date the Board declares a dividend.  The Board determines the amount of dividends to be paid each quarter based on a variety of factors including estimates of future earnings.  Net realized capital gains, if any, are intended to be distributed at least annually. The Company will calculate both its current and accumulated earnings and profits on a tax basis in order to determine the amount of any distribution that constituted a return of capital to the Company’s stockholders and that while such distributions are not taxable, they may result in higher capital gains taxes when the shares are eventually sold.

 

Organizational and Offering Costs

 

The Company incurred approximately $4.3 million in underwriting fees and $1.75 million in offering costs in completing its initial public offering.  Underwriting fees and organizational and offering costs in excess of this amount were covered by the Adviser.  None of the expenses borne by the Adviser in connection with the Company’s initial public offering above the $1.75 million threshold are subject to recoupment from the Company. Following the Company’s initial public offering, it expects to be responsible for its ongoing organizational and offering expenses, including underwriting fees. The $4.3 million of underwriting fees and the $1.75 million of offering costs that the Company paid were charged against the equity proceeds the Company received.

 

Per Share Information

 

Basic and diluted earnings per common share are calculated using the weighted average number of common shares outstanding for the period presented.  For the period presented, basic and diluted earnings per share are the same since there are no potentially dilutive securities outstanding.

 

Note 3. Related Party Agreements and Transactions

 

Acquisition of Initial Portfolio

 

On March 5, 2014, the Company acquired from the Sponsor and certain of its subsidiaries, a select portfolio of investments in venture growth stage companies originated through the Sponsor consisting of funded debt and direct equity investments, future funding obligations and warrants associated with both the funded debt investments and future funding obligations. This initial portfolio included 23 secured loans with an aggregate outstanding principal amount of approximately $119.2 million, two equity investments of approximately $2.0 million and warrants to purchase shares in 15 portfolio companies of approximately $3.2 million. The valuation of this initial portfolio was conducted by the Board in consultation with the Adviser and consideration of valuations performed by a third party valuation firm.

 

The funding for the acquisition of this portfolio was achieved through a credit facility (the “Bridge Facility”) with Deutsche Bank AG, New York Branch (“Deutsche Bank”).  The fees and expenses associated with entering into the Bridge Facility were covered by the Sponsor.  The Bridge Facility, along with the interest expense incurred thereon, was repaid in full on March 11, 2014, with a portion of the proceeds from the initial public offering.

 

Investment Advisory Agreement

 

Prior to the commencement of operations, the Board approved an investment advisory agreement (the “Advisory Agreement”).  Subject to the overall supervision of the Board and in accordance with 1940 Act, the Adviser manages the day-to-day operations and provides investment advisory services to the Company. Under the terms of the Advisory Agreement, the Adviser:

 

·                  determines the composition of the Company’s portfolio, the nature and timing of the changes to the Company’s portfolio and the manner of implementing such changes;

·                  identifies, evaluates and negotiates the structure of the investments the Company makes;

 

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·                  executes, closes, services and monitors the investments the Company makes;

·                  determines the securities and other assets that the Company purchases, retains or sells;

·                  performs due diligence on prospective investments; and

·                  provides the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.

 

Pursuant to the Advisory Agreement, the Company has agreed to pay the Adviser a fee for its investment advisory and management services consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee and incentive fee is ultimately borne by the Company’s stockholders.

 

The base management fee is calculated at an annual rate of 1.75% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. For services rendered under the Advisory Agreement, the base management is payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets at the end of its two most recently completed calendar quarters.  Such amount is appropriately adjusted (based on the actual number of days elapsed relative to the total number of days in such calendar quarter) for any share issuance or repurchases during a calendar quarter.  Base management fees for any partial month or quarter are appropriately pro-rated.

 

The incentive fee, which provides the Adviser with a share of the income it generates for the Company, consists of two components — investment income and capital gains — which are largely independent of each other, with the result that one component may be payable even if the other is not payable.

 

Under the investment income component, the Company pays the Adviser 20.0% of the amount by which the Company’s pre-incentive fee net investment income for the quarter exceeds a hurdle rate of 2.0% (which is 8.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which the Adviser receives all of such income in excess of the 2.0% level but less than 2.5% and subject to a total return requirement. The effect of the “catch-up” provision is that, subject to the total return provision discussed below, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, the Adviser receives 20.0% of the Company’s pre-incentive fee net investment income as if the 2.0% hurdle rate did not apply.  The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income is payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations since the effective date of the Company’s election to be regulated as a BDC exceeds the cumulative incentive fees accrued and/or paid since the effective date of the Company’s election to be regulated as a BDC. In other words, any investment income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations since the effective date of the Company’s election to be regulated as a BDC minus (y) the cumulative incentive fees accrued and/or paid since the effective date of the Company’s election to be regulated as a BDC. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of the Company’s pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation since the effective date of the Company’s election to be treated as a BDC.  The Company elected to be regulated as a BDC on March 5, 2014.

 

Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter where it incurs a loss, subject to the total return requirement described in the preceding paragraph. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company may pay the applicable incentive fee even if it has incurred a loss in that quarter due to realized and unrealized capital losses subject to the total return requirement. The Company’s net investment income used to calculate this component of the incentive fee is also included in the amount of the Company’s assets used to calculate the 1.75% base management fee. These calculations are appropriately pro-rated for any period of less than three months and adjusted for any share issuance or repurchase during the current quarter.

 

Under the capital gains component of the incentive fee, the Company pays the Adviser at the end of each calendar year 20.0% of the Company’s aggregate cumulative realized capital gains from inception through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.  For the foregoing purpose, the Company’s “aggregate cumulative realized capital gains” does not include any unrealized appreciation. It should be noted that the Company accrues an incentive fee for accounting purposes taking into account any unrealized appreciation in accordance with GAAP. The capital gains component of the incentive fee is not subject to any minimum return to stockholders. If such amount is negative, then no capital gains incentive fee is payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.

 

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The base management fee accrued and payable, income incentive fee accrued and payable, and capital gains incentive fee accrued are included in the Company’s consolidated financial statements and summarized in the table below. The Adviser has agreed not to include the U.S. Treasury bills owned as of March 31, 2014, or as of June 30, 2014, in the determination of gross assets for purposes of determining its base management fee. There were no realized capital gains during these periods and, thus, no capital gains incentive fee was earned or is payable.  The Company did have unrealized appreciation during these periods, and, as a result, accrued capital gains incentive fees for both the three months ended June 30, 2014, and the period from March 5, 2014 (commencement of operations) to June 30, 2014.

 

Management and Incentive Fee (dollars in thousands)		For the Three Months Ended June 30, 2014			For the period from March 5, 2014 (commencement of operations) to June 30, 2014
Base management fee accrued and payable or paid		$	674		$	818
Income incentive fee accrued and payable or paid		$	219		$	219
Capital gains incentive fee accrued		$	7		$	282

 

Administration Agreement

 

Prior to the commencement of operations, the Board approved an administration agreement (the “Administration Agreement”).  The Administration Agreement provides that the Administrator is responsible for furnishing the Company with office facilities and equipment and provide the Company with clerical, bookkeeping, recordkeeping services and other administrative services at such facilities. Under the Administration Agreement, the Administrator performs, or oversees, or arranges for, the performance of the Company’s required administrative services, which includes being responsible for the financial and other records which the Company is required to maintain and preparing reports to the Company’s stockholders and reports and other materials filed with the SEC and any other regulatory authority.  In addition, the Administrator assists the Company in determining and publishing net asset value, overseeing the preparation and filing of the Company’s tax returns and printing and disseminating reports and other materials to the Company’s stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, the Administrator also provides managerial assistance on the Company’s behalf to those companies that have accepted the Company’s offer to provide such assistance.

 

Payments under the Administration Agreement are equal to an amount equal to the Company’s allocable portion (subject to the review of the Board) of the Administrator’s overhead resulting from its obligations under the Administration Agreement, including rent and the allocable portion of the cost of the chief compliance officer and chief financial officer and their respective staffs.  In addition, if requested to provide significant managerial assistance to the Company’s portfolio companies, the Administrator is paid an additional amount based on the services provided, which shall not exceed the amount the Company receives from such companies for providing this assistance.

 

The Administrator engages a sub-administrator to provide certain administrative services.  For the three months ended June 30, 2014, and for the period from March 5, 2014 (commencement of operations) to June 30, 2014, expenses paid or payable by the Company to the Administrator under the Administration Agreement were approximately $0.3 million and $0.4 million, respectively, of which approximately $97,000 and $120,000 was paid or payable to third party service providers, respectively.

 

Note 4. Investments

 

The Company measures the value of its investments at fair value in accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or “ASC Topic 820,” issued by the Financial Accounting Standards Board, or “FASB.” Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The Valuation Committee of the Board is responsible for assisting the Board in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, the Board, with the assistance of the Adviser and its senior investment team and independent valuation agents, is responsible for determining in good faith the fair value in accordance with the valuation policy approved by the Board. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. The Adviser considers a range of fair values based upon the valuation techniques utilized and generally selects a value within that range that most represents fair value based on current market conditions as well as other factors the Adviser’s senior investment team considers relevant. The Board makes this fair value determination on a quarterly basis and any other time when

 

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a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below.

 

Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

Level 2—Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.

 

Level 3—Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and it considers factors specific to the investment.

 

Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or liability, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.

 

With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below:

 

· The quarterly valuation process begins with each portfolio company or investment being initially valued by the Adviser’s professionals that are responsible for the portfolio investment;

 

· Preliminary valuation conclusions are then documented and discussed with the Adviser’s senior investment team;

 

· The Valuation Committee then reviews these preliminary valuations;

 

· At least once annually, the valuation for each portfolio investment will be reviewed by an independent valuation firm. However, the Board does not intend to have de minimis investments of less than 1.0% of the Company’s gross assets (up to an aggregate of 10% of the Company’s gross assets) independently reviewed; and

 

· The Board then discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith, based on the input of the Adviser, the respective independent valuation firms and the Valuation Committee.

 

Debt Investments

 

The debt investments identified on the consolidated schedule of investments are loans and equipment financings made to venture growth stage companies focused in technology, life sciences and other high growth industries which are backed by a select group of leading venture capital investors.  These investments are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indices for these types of debt instruments and thus the Adviser’s senior management team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.

 

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To estimate the fair value of debt investments, the Company compares the cost basis of each debt investment, which includes original issue discount, to the resulting fair value determined using a discounted cash flow model, unless another model is more appropriate based on the circumstances at the measurement date. The discounted cash flow approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to these debt investments, in order to determine a comparable range of effective market interest rates. The range of interest rate spreads utilized is based on borrowers with similar credit profiles. All remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.

 

This valuation process includes, among other things, evaluating the underlying investment performance and the portfolio company’s current financial condition and ability to raise additional capital, as well as macro-economic events that may impact valuations.  These events include, but are not limited to, current market yields and interest rate spreads of similar securities as of the measurement date..Changes in these unobservable inputs could result in significantly different fair value measurements.

 

Under certain circumstances, an alternative technique may be used to value certain debt investments that better reflected the fair value of the investment, such as the price paid or realized in a recently completed transaction or a binding offer received in an arm’s length transaction, the use of multiple probability weighted cash flow models when the expected future cash flows contain elements of variability or estimates of proceeds that would be received in a liquidation scenario.

 

Warrants

 

The fair value of the warrants is primarily estimated using a Black Scholes option pricing model. Privately held warrants and equity-related securities are valued based on an analysis of various factors, but not limited to, the following:

 

·                  Underlying enterprise value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding. Valuation techniques to determine enterprise value include market multiple approaches, income approaches or approaches that utilize recent rounds of financing and the portfolio company’s capital structure to determine enterprise value.  Valuation techniques are also utilized to allocate the enterprise fair value of a portfolio company to the specific class of common or preferred stock exercisable in the warrant.  Such techniques take into account the rights and preferences of the portfolio company’s securities, expected exit scenarios, and volatility associated with such outcomes to allocate the fair value to the specific class of stock held in the portfolio.  Such techniques included option pricing models, including back solve techniques, probability weighted expected return models and other techniques as determined to be appropriate.

 

·                  Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on comparable publicly traded companies within indices similar in nature to the underlying company issuing the warrant.  Increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value.

 

·                  The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.  Increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value.

 

·                  Other adjustments, including a marketability discount on private company warrants, are estimated based on the Adviser’s judgment about the general industry environment.  Changes in this unobservable input could result in a significantly different fair value.

 

·                  Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or initial public offerings, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants.  Increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value.

 

Under certain circumstances alternative techniques may be used to value certain warrants that better reflect the warrants’ fair values, such as an expected settlement of a warrant in the near term, a model that incorporates a put feature associated with the warrant, or the price paid or realized in a recently completed transaction or binding offer received in an arm’s length transaction. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.

 

These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the estimated fair value of investments which do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a single estimate may then be determined.

 

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Equity Investments

 

The fair value of an equity investment in a privately held company is initially the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third party round of equity financing subsequent to its investment. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. The Company may also reference comparable transactions and/or secondary market transactions of comparable companies to estimate fair value. These valuation methodologies involve a significant degree of judgment. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. These assets are recorded at fair value on a recurring basis. There is no single standard for determining the estimated fair value of investments which do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a single estimate may then be determined.

 

The following is a summary by investment type of the fair value according to inputs used in valuing investments listed in the accompanying consolidated schedule of investments as of June 30, 2014.

 

Investment Type		As of June 30, 2014
(dollars in thousands)		Level 1			Level 2			Level 3			Total
Debt investments		$	—		$	—		$	197,970		197,970
Warrants		—			—			5,498			5,498
Equity investments		—			—			2,250			2,250
Total investments		$	—		$	—		$	205,718		205,718

 

During the three month period ended June 30, 2014 and for the period from March 5, 2014 (commencement of operations) to June 30, 2014, there were no transfers in or out of any levels.

 

The following table presents additional information about Level 3 investments measured at fair value for the three months ended June 30, 2014, and for the period from March 5, 2014 (commencement of operations) to June 30, 2014.  Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.  As a result, the net unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

 

Level 3		For the Three Months Ended June 30, 2014
Investment Activity								Equity			Total
(dollars in thousands)		Debt Investments			Warrants			Investments			Investments
Fair value as of March 31, 2014		$	137,272		$	4,377		$	2,000		$	143,649
Fundings of investments, at cost		59,500			1,279			250			61,029
Principal payments received on investments		(240		)							(240		)
Amortization and accretion of fixed income premiums and discounts, net		1,244			—			—			1,244
Realized gains		—			—			—			—
Net change in unrealized appreciation included in earnings		194			(158		)	—			36
Net change in unrealized appreciation on Level 3 investments still held as of June 30, 2014		$	197,970		$	5,498		$	2,250		$	205,718

 

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