허큘리스 캐피털(HTGC) 2026년 3분기 실적 발표: 사상 최대 핵심 이익 및 안정적인 신용 건전성

핵심 요약

• 2026년 3분기 총 투자수익은 전년 동기 대비 1.5% 증가한 1억 4,010만 달러를 기록했습니다. 순투자수익은 8,730만 달러(주당 0.47달러)였습니다.
• 코어 투자수익은 조기상환 관련 수익 감소에도 불구하고 전년 동기 대비 6.1% 증가한 1억 3,570만 달러로 사상 최고치를 기록하며 2분기의 1억 3,440만 달러를 상회했습니다.
• 순투자수익은 분기 기본 배당금의 118%, 기본 배당금과 추가 배당금을 합한 금액의 100%를 충당했습니다. 미분배 이월 이익은 1억 6,780만 달러(주당 0.88달러)였습니다.
• 허큘리스는 3분기에 7억 1,000만 달러의 신규 대출 및 지분 투자를 약정하고 5억 7,200만 달러 이상을 집행했습니다. 2026년 첫 9개월 동안 신규 약정액은 사상 최고치인 34억 4,000만 달러, 자금 집행액은 사상 최고치인 19억 3,000만 달러를 기록했습니다.
• 신용 상태는 안정적으로 유지되었습니다. 가중평균 내부 신용등급은 2분기 2.17에서 2.12로 개선되었으며, 4등급 및 5등급 신용 자산은 포트폴리오 공정가치의 2% 미만을 나타냈습니다.
• 경영진은 4분기 조기상환 규모를 2억~3억 달러로 예상하며, 3분기 대비 총 투자수익과 순투자수익이 증가할 것으로 전망하고 있습니다.

주요 재무 데이터

사업 및 운영 성과

허큘리스 캐피탈(Hercules Capital)의 대출 투자는 총 137개 기업에 분산되어 있으며, 합산 공정가치는 46억 5,000만 달러에 달합니다. 포트폴리오는 생명과학과 기술 분야로 거의 균등하게 분할되어 있으며, 단일 하위 세부 섹터가 전체 투자 포트폴리오의 25%를 초과하지 않았습니다. 선순위(First-lien) 익스포저는 약 89%였습니다.

3분기 약정액은 생명과학 54%, 기술 46%로 생명과학 비중이 높았습니다. 자금 집행 비율은 생명과학 48%, 기술 52%였습니다. 허큘리스는 이번 분기 7개의 신규 차주 관계를 포함해 총 32개 기업에 자금을 집행했습니다.

2026년 첫 9개월 동안 신규 약정액은 전년 동기 대비 20% 증가한 34억 4,000만 달러, 자금 집행액은 9.9% 증가한 19억 3,000만 달러를 기록했습니다. 해당 기간 총 투자수익은 4억 3,080만 달러, 순투자수익은 2억 6,840만 달러였습니다.

허큘리스 캐피탈 및 자문사 운용 펀드 전체의 운용자산(AUM)은 전년 동기 대비 17.7% 증가한 약 65억 달러에 달했습니다. 허큘리스 어드바이저(Hercules Advisor)의 투자 가능 자산은 23억 달러를 넘어섰으며, 배당금 및 비용 정산을 통해 BDC의 3분기 순투자수익에 전년 동기 대비 11% 증가한 680만 달러를 기여했습니다.

신용 지표는 소폭 개선되었습니다. 1등급 및 2등급 투자 비중은 포트폴리오 공정가치의 2분기 65.4%에서 68.6%로 증가한 반면, 3등급 익스포저는 32.7%에서 30.0%로 감소했습니다. 2건의 대출이 미수이자 계상(nonaccrual) 상태로 남아 있었으나, 이는 원가 기준 포트폴리오의 0.4%, 공정가치 기준 0.3%를 차지합니다. 발생주의(accrual) 상태인 모든 대출 투자는 예정된 원리금 상환이 정상 이행되고 있습니다.

대출 투자의 약 98%는 최저금리(floor) 조건이 부과된 변동금리 대출이었습니다. 프라임 금리 연동 대출의 거의 60%가 분기 말 기준 계약상 최저금리에 도달해 있었습니다. PIK(현물지급) 수익 비중은 2분기 8.3%에서 약 7.5%로 감소한 반면, 허큘리스는 분기 중 1,850만 달러의 누적 PIK 이자를 현금으로 회수했습니다.

경영진 가이던스

경영진은 4분기 코어 수익률이 11.8%~12.0% 사이를 유지할 것으로 예상합니다. 회사는 파이프라인과 현재 거래 활동을 바탕으로, 향후 몇 분기 동안 코어 수익률의 추가적인 중대한 저하는 현재로서 예상하지 않는다고 밝혔습니다.

허큘리스는 4분기 조기상환액이 2억~3억 달러 수준으로 정상화될 것으로 예상하지만, 경영진은 시기와 금액이 변동될 수 있다고 당부했습니다. 예상되는 회복세는 총 투자수익과 순투자수익의 전분기 대비 증가를 뒷받침할 것으로 기대됩니다.

경영진은 4분기 신규 약정이 분기 후반에 집중되어 강세를 보일 것으로 예상합니다. 10월 26일 기준, 허큘리스는 분기 말 이후 2억 1,960만 달러의 신규 약정을 체결하고 8,920만 달러를 집행했습니다. 또한 서명된 구속력 없는 의향서(term sheet)에 따른 5억 7,170만 달러의 대기 약정액을 보유하고 있습니다.

4분기 총 판매관리비(SG&A)는 2,750만~2,850만 달러로 예상되며, 이 중 약 450만 달러가 RIA에 배정됩니다. 허큘리스는 또한 분기 RIA 배당금으로 약 200만~250만 달러를 예상하고 있습니다. 이자비용은 최근 사채 발행에 따라 증가할 것으로 전망됩니다.

리스크 및 주시 영역

허큘리스는 일부 은행 및 비은행 대출기관의 공격적인 가격 책정과 딜 구조를 언급했습니다. 경영진은 적절한 주주 경제성을 제공하지 않는 거래를 추진하기보다 인수 심사 규율을 유지할 것이라고 밝혔습니다.

저금리 기존 채권이 현재 금리 환경에서 차환되면서 가중평균 부채비용이 상승했습니다. 분기 말 이후 허큘리스는 3분기 중 발행한 3억 2,500만 달러 규모의 6.3% 5년 만기 채권에 이어, 2029년 만기인 6.7% 무담보 채권 4억 달러를 추가 발행했습니다.

경영진은 M&A 밸류에이션 및 거래 시점 관련 불확실성을 지속적으로 모니터링하고 있습니다. 대출 포트폴리오 내 5개 기업이 인수 의향서(LOI)를 체결한 상태이지만, 최종 계약서 체결 및 규제 당국의 승인이 남아 있어 거래 완료까지 수 분기가 소요될 수 있습니다.

포트폴리오 신용 지표는 안정적으로 유지되었으나, 허큘리스는 자본시장 변동성으로 인해 강화된 모니터링을 유지했습니다. 경영진은 또한 제한된 수의 소프트웨어 기업에 미치는 차질을 언급하면서도, 자사 소프트웨어 포트폴리오에 대한 벤처캐피털 지원의 광범위한 위축은 관찰되지 않았다고 덧붙였습니다.

애널리스트 Q&A 하이라이트

• 코어 수익률: 경영진은 코어 수익률이 11.8%~12.0% 범위에서 안정화될 것으로 예상합니다. 지난 18~24개월 동안 신규 실행 수익률에 대한 경쟁 압력이 있었음에도 불구하고, 조기상환 및 만기 종료에 따른 수익 구조는 전반적으로 일관되게 유지되고 있습니다.
• AI 익스포저: 허큘리스는 순수 AI 기업이나 직접적인 GPU 파이낸싱은 추진하지 않고 있습니다. 허큘리스의 전략은 전력, 에너지, 네트워킹, 통신, 방산 기술 및 우주 기술 등 AI 도입을 가능하게 하거나 이로 인한 수혜가 기대되는 섹터에 집중하고 있습니다.
• 신용 전망: 경영진은 현재의 계약상 원리금 지급 상태와 일관된 LTV(담보인정비율), 투자자본 대비 부채 비율 및 관련 모니터링 지표를 제시하며 전망이 안정적이라고 설명했습니다.
• 포트폴리오 배분: 허큘리스는 생명과학과 기술 분야 간 약 50 대 50 비율을 지속적으로 목표로 하고 있으며, 하위 세부 섹터 및 개별 차주 전반에 걸쳐 추가적인 다변화를 도모하고 있습니다.
• 수익률: 경영진은 ROE가 아마도 저점에 도달한 것으로 판단하고 있으며, 조기상환 활동이 회복됨에 따라 개선될 것으로 예상합니다.
• 소프트웨어 포트폴리오: 허큘리스는 소프트웨어 차주 기업들 사이에서 자금 유입과 M&A 활동이 지속되는 것을 관찰해 왔으나, 모든 기업의 자금 조달 접근성이 동일하지는 않다는 점을 경영진은 강조했습니다.

실적발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Good afternoon. My name is Leslie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations.

Michael Hara

Thank you, Leslie. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 2026. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; Seth Meyer, President; and Andrew Olson, CFO.

Hercules financial results released just after today's market close and can be accessed from Hercules Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date and Hercules assumes no obligation to update any such statements in the future.

And with that, I'll turn the call over to Scott.

Scott Bluestein

Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2026 Earnings Call. In the third quarter of 2026, Hercules delivered another strong quarter of operating performance, platform growth, strong seasonal originations and stable credit. Our focus in Q3 remained consistent with what guided us during the first half of 2026. Disciplined and conservative new underwriting, maintaining a strong and flexible balance sheet, and being proactive in terms of managing credit. We were also able to further accelerate our efforts to expand the broader Hercules platform.

Hercules Advisor LLC, our wholly owned registered investment adviser, surpassed $2.3 billion in investable capital during Q3. The milestone follows the closing of new commitments across several vehicles from a wide range of sophisticated global institutional investors, including insurance companies, pensions, asset managers, foundations and endowments and family offices. As of the end of Q3, our balance sheet and liquidity position is strong. Our asset base is diversified, our credit performance remained stable and our investment portfolio continued to generate net investment income in Q3 that comfortably covered our base shareholder distribution by 118%.

Coming off a record-breaking first half for originations. Our platform experienced healthy seasonal deal flow in Q3. For the first 3 quarters of 2026 we delivered record originations of $3.44 billion, an increase of 20% year-over-year and record fundings of $1.93 billion, an increase of 9.9% year-over-year. The combined business activity in the first 3 quarters helped to deliver new records for total investment income and net investment income for the first 3 quarters of the year. Driven by the continued growth of both the public BDC and our credit funds business, Hercules Capital is now managing approximately $6.5 billion of assets, an increase of 17.7% from a year ago.

We continue to manage our business and balance sheet conservatively while maintaining the flexibility to take advantage of market opportunities as they arise. This includes continuing to enhance our liquidity position as we did both during the quarter and subsequent to quarter end, remaining disciplined on new underwritings, staying focused on asset diversification and maintaining our higher-than-normal first lien exposure, which was approximately 89% in Q3.

Let me now recap some of the key highlights of our performance for Q3. In Q3, we originated total new debt and equity commitments of $701 million. and gross fundings of over $572 million. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while emphasizing diversification across the asset base. Our Q3 new commitment activity was weighted slightly towards life sciences companies, while our fundings were weighted more towards our tech portfolio.

In Q3, approximately 54% of our commitments and 48% of our fundings were to life sciences companies, while approximately 46% of our commitments and 52% of our fundings were to tech companies. We funded debt capital to 32 different companies in Q3, of which 7 were new borrower relationships. During the quarter, we were able to opportunistically increase our commitments and fundings to several portfolio companies that have continued to demonstrate strong performance. Being able to continue to support our portfolio companies as they scale and expand their businesses is an important part of our model and a differentiator of our expanded platform capabilities.

Our available unfunded commitments decreased to $397.6 million from $408.2 million in Q2, still maintaining a more defensive positioning of the portfolio. Early loan repayments in Q3 were $148.3 million, which came in below the lower range of our guidance for the quarter. Approximately came from M&A or balance sheet cash, which we believe speaks to the continued strength of our broader investment portfolio. Despite the market volatility this year, year-to-date through September 30, 2026, we have had over $946 million early loan repayments, and we expect 2026 to be our strongest year on record for early loan repayments across the debt portfolio.

For Q4 2026, we expect prepayments to normalize and be in the range of $200 million to $300 million. Although this could change as we progress in the quarter. Our expectation is that both total investment income and net investment income will increase in Q4 and driven partly because of the expected normalization of prepayment activity during the current quarter. We anticipate strong originations in Q4, and we expect the originations to be more back-end weighted. Since the close of Q3 and as of October 26, 2026, our investment team has closed $219.6 million of new commitments and funded $89.2 million. We have pending commitments of an additional $571.7 million in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q4.

Based on our performance to date and the current pipeline activity, 2026 is on pace to be another record year for the company in terms of both new commitments and new fundings, exceeding the previous records that we achieved in 2025. In the current environment where cost of capital is higher than it has been in several years.

Capital is more difficult to raise and originations are larger and more complex, scale, experience and platform strength matter more than ever. Hercules is benefiting from this dynamic. Across our existing portfolio, we are still seeing an abundance of attractive opportunities to provide new capital to existing portfolio companies that are meeting or exceeding expectations and we expect this to again be a driver of our Q4 investment activity.

We are also continuing to observe that a handful of lenders, both bank and non-bank remain aggressive in terms of deal structure and pricing for new opportunities. We will remain disciplined and not chase the market in cases where we do not believe it makes sense for our shareholders. This strategy has always served us well.

Let me now provide an update on our portfolio and credit performance for Q3. Our asset base remains intentionally diversified with approximately 50% of our assets in our Life Sciences vertical and approximately 50% of our assets in our technology vertical. No single subsector makes up more than 25% of our total investment portfolio and our debt investments are spread across 137 different companies with a combined fair value of $4.65 billion. In addition, we have warrants in L key companies and equity investments in 73 companies. Combined, our warrant and equity investments make up approximately 4% of our investment portfolio.

Approximately 98% of our debt investments are floating rate investments with a floor. And as of the end of Q3, nearly 60% of our prime-based loans are at their contractual rate floor. The decrease in the percentage of loans at their contractual floor was driven by the most recent Fed rate increase, which will be accretive to total investment income. Consistent with our historical experience, as of the end of Q3, the average loan duration across our debt portfolio was approximately 22 months.

There has been a recent focus on loan vintages across the private credit space. So we wanted to provide some additional color on how that looks at Hercules. Approximately 60% of our active loan book was funded between 2025 and 2026. Approximately 82% of our active loan book was funded between 2024 and 2026. That number rises to 90% if you include 2023 originations. In other words, the vast majority of our portfolio was underwritten and funded after the 2021, 2022 peak in market valuations.

In Q3, PIK continued to decline as a percentage of total revenue, falling to approximately 7.5% from 8.3% in Q2. Approximately 85% of our Q3 PIK income came from PICC that was part of the original underwriting, or PIK by design. More than 83% of our Q3 PIK income came from loans that were rated 1, 2 or 3 We collected approximately $18.5 million in cash payments on accrue PIK during Q3. Year-to-date, as of September 30, 2026, we have collected $45.8 million in cash payments on accrued PIK income.

Credit quality of the debt investment portfolio was stable quarter-over-quarter. Our weighted average internal credit rating in Q3 improved to 2.12 compared to the 2.17 rating in Q2 and remains well within our normal historical range. Our Grade 1 and 2 credit increased to 68.6% compared to 65.4% in Q2. Grade 3 credits decreased to 30% in Q3 and versus 32.7% in Q2. Our rated 4 credits decreased to 1.1% from 1.8% in Q2 and our rated 5 credits were at 0.3% versus 0.1% in Q2. Our rated 4 and 5 credits continue to make up less than 2% of the portfolio fair value.

In Q3, the number of companies with loans on nonaccrual remain the same with two loans on nonaccrual with an investment cost and fair value of approximately $18.8 million and $13.2 million, respectively, or 0.4% and 0.3% as a percentage of our total investment portfolio at cost and value, respectively. As of the most recent reporting that we have, 100% of our debt investments that were on accrual are current with respect to the payment of scheduled principal and interest. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, but our portfolio monitoring remains enhanced given the continued volatility in the capital markets. All the exit activity that we saw in our portfolio remained strong during the quarter and through the first half of the year, we are continuing to see that in certain parts of the market M&A valuation and process timing remain less certain.

This is something that we will continue to monitor over the coming quarters. In Q3, we had 3 portfolio companies announced in M&A events. Year-to-date, we've had 13 M&A events and 2 IPOs in our portfolio. Additionally, we currently have 5 debt portfolio companies that are under LOI to be acquired, and our teams are monitoring those transactions closely. Venture capital investment activity in Q3 continued to demonstrate robust levels of investing. Investment activity came in at $98.4 billion for the third quarter according to data gathered by PitchBook and BCA.

The VC market in the first 3 quarters of 2026 reached unprecedented levels with $515.8 billion deployed already exceeding the entire 2025 full year figure by nearly 61%. AI continues to define the venture landscape, capturing 83% of the first 3 quarters of 2026 deal value. Fundraising for the first 3 quarters of 2026 totaled $108.5 billion. already surpassing 2025 levels at $78.3 billion. The capital was heavily concentrated among a few established managers.

The first 3 quarters of 2026 MA exit activity remains strong with exit value at $465.3 billion compared to $128.5 million for all of 2025. Consistent with the aggregate data for the ecosystem, during Q3, capital raising across our portfolio continue to be strong with 25 companies raising over $2 billion in new capital. Year-to-date, as of Q3 2026, our portfolio companies have raised a total of $11.3 billion in new capital, surpassing all of 2025 by a wide margin. We remain confident in the strength and stability of the Hercules platform and our ability to continue to generate strong operating results irrespective of the market backdrop.

Our Q3 net investment income covered our base distribution by 118%. This is our 25th consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. With the expansion of our platform capabilities over the last several years, and our expectation for continued market volatility, we continue to expect a robust new business environment for the remainder of 2026. Our platform scale, balance sheet and liquidity allow us to play offense during market volatility, which should position us to see a robust pipeline of high-quality companies throughout the year.

I will now turn the call over to Andrew.

Andrew Olson

Thank you, Scott, and good afternoon, ladies and gentlemen. Q3 2026 was another solid quarter for Hercules Capital contributing to record year-to-date results through the first 9 months of the year, with total investment income of $430.8 million and net investment income of $268.4 million. During the quarter, we delivered total investment income of $140.1 million and net investment income of $87.3 million. Strong investment activity, coupled with lower investment portfolio growth of $252.9 million during the quarter, with year-to-date net debt investment portfolio growth totaling $380.7 million.

Despite the robust net portfolio growth, we continue to maintain a prudent leverage profile, conservative balance sheet and ample liquidity given the pipeline momentum that we carried into the fourth quarter. During the third quarter, we raised $325 million of 5-year institutional 6.3% unsecured notes and repaid $325 million of unsecured notes that matured in September 2026. Further, subsequent to quarter end, we raised an additional $400 million of 6.7% notes due in 2029.

Lastly, solid contributions from both the BDC and our wholly owned RIA managed private credit fund business continued to provide us with significant capital flexibility and investment capacity. Hercules Advisor delivered another quarterly dividend of $2.1 million to HTGC which when combined with the expense reimbursement of approximately $4.7 million resulted in $6.8 million in NII contribution to the BDC for the quarter, an 11% increase from a year ago. Year-to-date through Q3, the BDC has received nearly $21 million in total NII contribution from Hercules Advisor, a 22% increase from a year ago. Inclusive of the adviser funds Hercules had approximately $6.5 billion of assets under management as of quarter end, an increase of 17.7% year-over-year.

All in all, it was another productive quarter for the Hercules platform. With that as a backdrop, let me take you through our results in greater detail across 4 key areas: The income statement, changes in net asset value, balance sheet, leverage and liquidity, and finally, our financial outlook. Beginning with the income statement. Total investment income in Q3 was $140.1 million, an increase of 1.5% year-over-year and a decrease quarter-over-quarter, reflecting a moderated level of unscheduled early principal repayments of $148.3 million, down from the record $572.1 million in Q2.

Core investment income, a non-GAAP measure, which excludes the benefits of accelerated prepayment revenue was a recorded $135.7 million compared to $134.4 million in Q2 and up 6.1% on a year-over-year basis. Net investment income was $87.3 million or $0.47 per share in Q3 and resulting in 118% coverage of our quarterly base cash distribution and 100% coverage of our total base plus supplemental distribution. With an anticipated increase in prepayment activity during the fourth quarter, we expect an increase in total investment income and net investment income in Q4 relative to Q3 levels.

Our undistributed earnings spillover was $167.8 million or $0.88 per share, providing continued support for our shareholder distribution. Our GAAP effective yield and core yields were 12.3% and 11.9%, respectively, compared to 13.4% and 12% in the prior quarter. The decrease in effective yield was driven by the lower prepayment-related revenue during the quarter and core yield for the quarter was within our guided range, reflecting continued portfolio turnover which we expect to maintain in the fourth quarter.

Third quarter gross operating expenses were $57.5 million compared to $61.1 million in the prior quarter. Net of costs we charge to the RIA, our net operating expenses were $52.8 million. The decrease in operating expenses were largely driven by lower variable compensation expense and excise tax, partially offset by higher interest expense. Interest expense and fees increased to $33.2 million compared to $31.1 million in Q2, reflecting higher borrowings to fund the net portfolio growth and higher cost of debt.

Our weighted average cost of debt increased to 5.4% compared to 5.2% in Q2, primarily reflecting the refinancing of our maturing lower coupon notes with new issuances. As we continue to refinance legacy fixed rate debt in the current rate environment, we remain disciplined in managing our overall cost of capital and liability mix. As of now, we do not have any maturing liabilities in the next 18 months outside of the January notes, which we intend to repay with some of the recent $400 million raise completed in October.

SG&A decreased $24.3 million, primarily due to lower compensation expense and excise tax. Net of cost we charge to the RIA -- the SG&A expense was $19.6 million. Our ROAE or NII over average equity was 15.4% for the third quarter compared to 16.8% in Q2. We and ROAA or NII over average total assets was 7.4% compared to 8.3% in Q2, driven primarily by a reduction in the outsized prepayment income we experienced in the prior quarter. Now let's switch the focus to change our net asset value, along with unrealized and realized activity.

During the quarter, our NAV per share increased by $0.11 to $12.26 per share or nearly 1% quarter-over-quarter, driven primarily by net unrealized appreciation of investments and ATM accretion. Our $8.2 million of net underlined appreciation during the quarter was driven by approximately $9.8 million of net appreciation on debt investments, $8.1 million on FX-related appreciation $2.6 million of net reversals due to realizations and $0.8 million on warrants, partially offset by approximately $13.1 million of depreciation on publicly and privately held equity and investment funds.

Hercules had net realized losses of $1.9 million in Q3 and comprised of $8 million of gains on equity and warrant investments, offset by $7.9 million of realized foreign currency losses and $2 million of losses on debt investments. The realized foreign currency loss was related to the repayment of our euro-denominated credit facility, which had a minimal impact on net asset value during the quarter as it represented previously recorded unrealized depreciation.

The loss was driven by a paydown of the facility, which was converted into a forward contract to hedge the currency exposure related to euro-denominated debt investments. Those investments continue to carry unrealized appreciation from foreign currency movements and the net impact of the transaction was accretive.

Moving on to discuss our capital position. While funding strong net portfolio growth, we maintained a conservative and liquid balance sheet. GAAP and regulatory leverage increased to 111.1% and 96.1%, respectively, compared to 103.9% and 88.5% in the prior quarter, as net portfolio growth was funded with borrowings given lower prepayment activity. Netting out leverage with cash on the balance sheet -- our net GAAP and regulatory leverage was 109% and 94%, respectively.

We ended the quarter with $506.6 million of available liquidity in the BDC and subject to existing terms and covenants. Inclusive of capital raised by funds managed by our RIA subsidiary, the Hercules platform had more than $1 billion of available liquidity as of quarter end. The strong liquidity, together with our conservative leverage positions us very well to support our existing portfolio companies and source new opportunities.

As previously mentioned, subsequent to quarter end, Hercules Capital issued $400 million of 3-year institutional 6.7% unsecured notes due in 2029. Also during the quarter, we raised $39.2 million via the ATM, selling 2.3 million shares to support our net debt portfolio growth while maintaining a prudent leverage profile. Our intent is to remain disciplined and thoughtful about how and when we use the ATM, given our long-term focus on maximizing shareholder value and the numerous nondilutive capital sources that we have access to.

Overall, the current market continues to offer a very favorable capital deployment environment for Hercules, and we want to ensure that we are well positioned to opportunistically take advantage of that for the long-term benefit of our shareholders. We will continue to maintain a nimble catalyst structure, allowing us to compete aggressively on quality transactions, which we believe is prudent in the current environment.

Lastly, let's look ahead to the fourth quarter. For the fourth quarter, we expect our core yield to be in the range of 11.8% to 12% and including the recent change in benchmark interest rates and portfolio turnover. As a reminder, 98% of our debt portfolio is floating for the floor. Although very difficult to predict, and following the $148.3 million of prepayment activity in the third quarter, we expect prepayment activity to normalize to a range of $200 million to $300 million in the fourth quarter. We expect our fourth quarter interest expense to increase given recent offerings.

For the fourth quarter, we expect gross SG&A expenses of $27.5 million to $28.5 million and RIA expense allocation of approximately $4.5 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter.

In closing, Hercules delivered another strong quarter in Q3 2026, marked by record core investment income and net debt portfolio growth. Our balance sheet, liquidity position and credit discipline continue to position us well to scale our platform and capitalize on opportunities as we close out the year.

I will now turn the call over to the operator to begin the Q&A part of the call. Operator, over to you.

Operator

[Operator Instructions] We will take our first question from Finian O'Shea with Wells Fargo.

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Finian O'Shea

Hey, everyone, good afternoon. So on core yields, you gave a lot of color on the call. It sounded like toward the end, a little bit more compression adjusted for base rates. Correct me if I'm wrong there. But sort of what are the drivers of the headwind at this point? Is it the capital market, you going upmarket and what it would kind of -- what sort of change would allow us to stabilize.

Scott Bluestein

So our guidance for core yield in Q4 was 11.8% to 12%. And our core yield in Q3 was 11.9%, so right in the midpoint of that range. And based on everything that we are seeing through today, -- we have a high degree of confidence that our core yields will be in that 11.8% to 12% range. So really not seeing or expecting any further compression with respect to core yield. And I think at this point, just based on our outlook, our pipeline I think we also feel fairly confident that we actually don't expect to see any more material degradation with respect to core yields over the coming quarters. .

Finian O'Shea

Okay. And then just a small follow-up. Forgive me if you hit on this. The G&A comp expense was a pretty good tailwind this quarter. Is that [indiscernible] -- or is -- were the recent couple of quarters more on the high end of kind of what we should model on that side.

Andrew Olson

Yes. I think the current quarter was slightly lower than what we had seen in prior quarters. That was mostly just driven by some adjustments to the overall originator compensation throughout the year and excise tax. So I would expect it to kind of normalize back to what you've seen kind of an average of the prior couple of quarters.

Operator

Our next question is from Merrill Ross with Compass Point Research & Trading.

Merrill Ross

far looking at the trend in the expenses allocated to the RIA, it seems to run counter to the fact that you talked about growth in AUM. And so I'm just wondering what -- what is the driver kind of what the quarterly step down bases the assets are calling in the RIA.

Andrew Olson

Yes. I think there's kind of 2 factors. So the AUM is growing overall, though it does take time for deployment to kind of ramp up. So there's an investment that's made in as we're initially launching them. So although AM is growing, we're kind of still continuing to invest in those vehicles. I think the second point is the kind of the allocation overall will somewhat move in line with what you see in the G&A a portion of that is driven by originator compensation, so variable compensation on the originator side as we allocate deals, we'll also allocate a portion of the variable compensation and tax expense.

So they're a little bit correlated, although we expect future quarters as that business continues to mature, for there to be more of a meaningful allocation of expenses and ultimately, dividends coming from the private side.

Operator

Our next question is from John Hecht with Jefferies.

John Hecht

You guys made comments on the core yield -- but I'm wondering like on the current deal flow, has there been any changes with respect to spreads, the prepayment fees or the other fee components. And I think over the last 6 months, has there been any change on that?

Scott Bluestein

Yes, John, nothing that's material. Prepayment economics remain largely consistent with what we've seen historically. -- end-of-term economics remain largely consistent. I would say, over the last 18 to 24 months, as we've noted, there has been competitive pressure across the ecosystem that has taken onboarding yields down. But based on the current pipeline and based on everything that we're seeing in our business today, we feel very confident that the core yields are going to stabilize in that sort of 11.8% to 12% range. and we're not seeing anything in terms of the new deals that we're looking at that would lead us to a different conclusion.

John Hecht

Okay. That's very helpful. And then I mean Obviously, 1 of the key themes of things attack our AI innovation but also the build-out of AI infrastructure -- how do you think about that? How do you kind of position Hercules for that intermediate term type of explosive activity. .

Scott Bluestein

Sure. So I think we're approaching the space broadly the same way that we've been approaching the space now for several quarters. We're not investing in what we would consider to be sort of pure-play AI-related companies. We're not participating in any direct GPU financing facilities. What we are looking to do is to essentially invest in companies in sectors, in verticals that we think are going to be drivers of AI adoption. So power, energy, networking communications. We're also looking to invest heavily in sectors that we think will benefit from increased AI capabilities, Defense Tech and Space Tech.

And that's why if you look at our SOI, you've seen some pretty significant movements in a couple of key areas. And I think that's really indicative of how we're looking to approach the space, broadly speaking.

Operator

Our next question is from Crispin Love with Piper Sandler.

Benjamin Graham

This is Ben Graham in for Crispin Love. You obviously mentioned credit quality continues to be solid. And I'm just wondering if you could discuss a little deeper your outlook there, specifically sort of the forward indicators that you're watching most and how they're behaving?

Scott Bluestein

Sure. So I think we gave some commentary on that in the prepared remarks. Based on everything that we're seeing as of today, our credit outlook remains stable. 100% of our debt portfolio companies that are on accrual status are current with respect to contractual payments of principal and interest. We're not really seeing a slowdown with respect to capital raising across our portfolio. .

And a lot of the key metrics that we use in terms of LTV ratios, in terms of funded debt to paid-in capital or invested capital ratios our ML ratios are very consistent this quarter from what we saw in Q1 and in Q2. And obviously, too early to speak to Q4 because we haven't run those numbers yet, but we're not seeing anything in the data that we have that would tell us that our credit outlook is not going to be consistent with what we just discussed on the call today for Q3.

Benjamin Graham

Awesome. I appreciate the color there. And then quickly, I'm just wondering if you could also share a little bit about where you're most interested in putting incremental capital today, at least broadly if you're leaning more towards life sciences and tech or how large could life sciences get versus tech here?

Scott Bluestein

Sure. So Ben, I appreciate the question. We're not going to give any guidance with respect to particular sectors that our focus points for us because, obviously, we want to do that, and then we'll talk about it after we've done it. What I would say to you is our focus on the asset side continues to be centered around asset level diversification.

We want the asset book at Hercules to be as diversified as possible because we think that allows us to outperform irrespective of the market environment. Right now, we're running our book with a target asset allocation of 50-50. So we want 50% of our exposure to be in Life Sciences. We won approximately 50% of our exposure to be in technology. Within each of those two core verticals, we also want significant sector diversification. So if you look at our SOI, there's a tremendous amount of sector granularity. We manage and monitor our top 5 and our top 10 companies as a percentage of the portfolio pretty closely. So our emphasis and our priority is on diversification, not necessarily with respect to any specific sector or not.

Operator

Our next question is from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan

Scott, in your comments on the broader BC market. You talked about scarcity of capital as I recall. Is that more for credit or equity in venture?

Scott Bluestein

Yes. So that was more of a reference to just private credit. So not a reference to the BC market. To the contrary, we're continuing to see tremendous strength in terms of capital raising across the venture capital ecosystem. And I touched on a couple of these data points in the prepared remarks, but just to sort of double back on them. Year-to-date through Q3, venture capital firms have already invested over $500 billion of capital.

That is the strongest year on record, and that is obviously excluding Q4. We're also seeing some pretty strong momentum and a rebound in terms of fundraising across the venture capital ecosystem and that data is consistent with what we're seeing in our own portfolio, where through Q3, our companies have already raised over $11 billion of capital. The comment about capital being more expensive and a little bit more difficult to raise was a reference to private credit broadly, not a reference with respect to the venture capital ecosystem.

Christopher Nolan

Great. And as a follow-up on that broader industry. The turmoil in Europe, how is that affecting the innovation space? Are you seeing companies starting to migrate out of Europe as a result of that or any observations?

Scott Bluestein

Yes. So we haven't seen any impact to date. What I would tell you is a lot of what's happening in Europe is fairly recent. So it's something that we are watching closely. I would tell you that Europe and the international markets broadly continue to be a focal point for us, but it continues to be a relatively small part of our business. 90-plus percent of our business is centered around the U.S. There are a couple of core geographies that we do focus on in the international markets, and we've been very successful in that regard.

So I think we're going to continue to invest in certain international geographies but it will be limited to those geographies where we feel comfortable and confident in the long-term outlook for those specific areas.

Operator

Our next question is from Chris Muller with Citizens Capital Markets.

Christopher Muller

Congrats on a nice quarter here. So ROEs have come down understandably over the last couple of years, but we're now in a rising rate environment. So is it fair to think that ROEs are either at or near a trough, especially if the forward curve plays out with another couple of hikes?

Scott Bluestein

Yes. I think when we look at the modeling that we're doing internally, just based on the rebound that we expect in prepayments, as an example, in Q4, we would expect ROE to start to head north and I think, generally speaking, our outlook tells us that ROEs have probably reached a floor. .

Christopher Muller

Got it. And that's a good dovetail and then my follow-up. So early repayment fees, looking at that versus NII last quarter, I guess, how much of the $0.03 decline in NII was due to the elevated repayment fees last quarter?

Andrew Olson

It's nearly all of it. I mean we had net portfolio growth during this quarter. And so some of the origination activity that occurred last quarter was back weighted. So I would say it was nearly all of the net degradation was prepayment related.

Scott Bluestein

And I would just point out, Chris, if you look at Q3 prepayment activity and associated noncore income, it was 1 of the slowest quarters we've had in several years. So as Andrew said, almost the entirety of that decline was attributable to the fact that prepayments went from $57.1 million to $148.3 million quarter-over-quarter. .

Christopher Muller

Got it. So that normalizing will be a nice tailwind to earnings, too.

Operator

Our next question is from Paul Johnson with KBW.

Paul Johnson

What was the write down driven by in the equity portfolio. Is it just like a single investment driving that? Or are there multiple companies, I guess, behind the equity right now in this quarter?

Andrew Olson

It was a little bit broad-based. There was a conversion of debt to equity that we transferred over a portion of unrealized that was not net new unrealized depreciation. So it's just more of a conversion equity. But the rest of it was all just kind of broad market. So there wasn't any 1 individual position that made up a material portion. .

Paul Johnson

Got it. Okay. And then in terms of like the capital raise in the portfolio this quarter, what do you say as you've seen so far in terms of like the venture capital support for the software companies in your portfolio? I guess, did any of that capital raising include any of the software companies and what has kind of been your observation there in terms of the support .

Scott Bluestein

So I can't speak to the Q3 data. specifically because I actually don't have that breakout in front of me, but I can tell you year-to-date, we have absolutely seen capital inflows to our software portfolio. That does not mean that every software company is able to raise money because that would be inaccurate. -- but we are not seeing venture capital firms, at least in our portfolio companies turn from software broadly. I would also point out that if you look at our M&A activity year-to-date, we've now had 13 exits more than a handful of those exits have come from our software portfolio and our 2 biggest exits year-to-date have come from our software portfolio as well.

So continuing to see activity across the software portfolio, there are a handful of companies that we continue to monitor aggressively with enhanced monitoring, just given some of the disruption that we've seen across the ecosystem. But I would not say that we have seen a general pullback at least in our portfolio from venture capital interest in software companies.

Paul Johnson

Got it. Okay. That's very helpful. And then in terms of my last question. Just in terms of the LOIs, I think you mentioned the 5 companies under LOI this quarter. I'm just curious how many of those like historically, those typically converted realization event for the BDC?

Scott Bluestein

Yes. I tell you historically, the majority of our companies that end up under NLI, those transactions end up closing. -- can't tell you though, when they will close. So it could be Q4 events could be Q1, could be Q2. We've had LOIs that get signed you have a 90-day process. You signed definitive documentation and then there's HSR or regulatory approval, and it can take 6 to 9 months from there. So we would expect a high degree -- a high percentage of those 5 companies to end up closing transactions, but when they'll happen is very much up in the air. .

Operator

Thank you. I'm showing no further questions. I would now like to turn the call back to Scott Bluestein, for any closing remarks.

Scott Bluestein

Thank you, Leslie, and thanks to everyone for joining the call today. We will be attending the Citizens Financial Services Conference in New York on November 17. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2026 earnings call.

Our scale, institutional lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our continued success is attributable to the tremendous dedication, efforts and capabilities of our 120-plus employees and the trust that our venture capital and private equity partners place with us every day. We're thankful to the many companies management teams and investors that continue to make Hercules their partner of choice. Thanks, everyone, and have a great rest of the day.

Operator

This does conclude today's Hercules Capital Third Quarter 2026 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.