Nov 7, 2013
Executives
Manuel Henriquez - Co-Founder, Chairman and CEO Jessica Baron - Vice President, Finance and CFO
Analysts
John Hecht - Stephens Aaron Deer - Sandler O’Neill & Partners Greg Mason - KBW Robert Dodd - Raymond James Douglas Harter - Credit Suisse J.T. Rogers - Janney Capital Jon Bock - Wells Fargo Andrew Kerai - National Securities
Operator
Welcome ladies and gentlemen to the Hercules Technology Growth Capital Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode.
After our prepared remarks, we’ll open up the question-and-answer session, and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded.
I would now like to turn the conference over to Jessica Baron, CFO. Please go ahead.
Jessica Baron
Thank you, Operator, and good afternoon, everyone. On the call today are Manuel Henriquez, Hercules’s Co-Founder, Chairman and CEO, and myself, Vice President of Finance and Chief Financial Officer.
Hercules’ third quarter financial results were released just after today’s market close. They can be accessed from the company’s website at www.htgc.com.
We have arranged for a replay of the call at Hercules’ webpage or by using the telephone number and passcode provided in today’s earnings release. I’d also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information.
Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and the final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including without limitation the risks and uncertainties, including the uncertainties surrounding the current market turbulence and other factors we identified from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions can also be incorrect.
You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to updated forward-looking statements or subsequent events.
To obtain copies of related SEC filings, please visit sec.gov or visit the website www.htgc.com. I’d now like to turn the call over to Manuel Henriquez, Hercules’ Co-Founder, Chairman and CEO.
Manuel?
Manuel Henriquez
Well, thank you, Jessica, and good afternoon, everyone, and thank you all for joining us today. I am very proud once again to report another very strong and record high quarterly results and achievements by Hercules for the benefit of our shareholders.
As usual, I will provide a quick agenda of the call. I’ll start off with a summary of operating performance and the Q3 results, discuss the current market conditions, including venture capital investment activities and of course, the all important exits relating to IPOs and M&A events, which led to a very strong third quarter performance for us all and then, lastly, finish off with an overview of the remaining investment activities for 2013 investment for Hercules.
I will then turn the call over for Jessica to go over much more specific details on our financial results and performances. So let me start off with giving you an overview of our summary performance and our achievements for the quarter.
Hercules continues to remain focused on selecting and working with some of the best venture capital-backed companies and innovative technology and life sciences companies in the industry. This continued commitment was once again evidenced by our strong quarterly results, outstanding earnings growth and also maintaining a highly liquid balance sheet to continue to make prudent investments for future earnings growth as we identify new and promising opportunities.
It was a great quarter all around. We had 16 announced or completed M&A events plus two completed IPOs during the quarter for total of 18 announced or completed liquidity event during the quarter representing another performance record for Hercules since our assumption and the best quarter we ever had in terms of liquidity event and also on track to be the best year for liquidity event in Hercules’s history as well.
Thanks to our continued success and ability to expand the Hercules brand and awareness with both innovative venture capital-backed companies and the venture capital community, we’re seeing the fruits of our labor paying off for the benefit of our shareholders as we continue to build out our portfolio. Our relentless focus on ensuring that we offer, our respective portfolio covers a highly customized financial solution that meets the growth capital needs by using venture debt to achieve their own growth was evidence by our result this quarter.
Our strong and expanding relationship with many top tier venture capital and private equity firms are also reflected in our results and the continued generous support and deal flow contribution from those private equity sponsors and venture capital sponsors to Hercules. We are very grateful to both our visionary entrepreneurs and the venture capital community for their continued faith, trust and support on Hercules, which are successful would not be possible unless their support would be there.
So thank you firstly for that as well. Now, let me turn some attention to some significant achievements during the third quarter.
We delivered record high total investment income of $41 million, representing a 72% year-over-year increase. We achieved a 9% increase year-over-year growth and Q3 NII of $22 million or basically $0.35 per share compared to consensus of approximately $0.29 per share exceeding estimates by approximately $0.06 per share driven in large part to the robust M&A assets that we witnessed during the third quarter.
We increased DNOI, excuse me, we saw an increase in DNOI of approximately 86% year-over-year to $23.2 million or $0.38 per share. Our Board of Directors increased our dividend for the fourth consecutive quarter.
We increased our dividend by additional $0.03 per share versus our previous dividend at $0.28 per share to $0.31 per share at dividend payout this quarter. Finally, on the IPO and M&A front.
Hercules continues to pick the right winners, as evidenced by our year-to-date results of 23 companies having announced or completed liquidity events. This compares favorably to the same period of 2020, excuse me, 2012 where we had 12 liquidity events realizing all of 2012 in that period of time.
In fact, the pace of exits continues throughout Q4 and we expect to continue for the next two quarters as we are aware of many of our portfolio companies are preparing themselves for M&A or IPO liquidity events. In fact, subsequent to quarter end, we had three additional events, excuse me, two additional events to take place, once completed IPO and completed IPO offering in October and we recently had another company filed under the JOBS Act the IPO registration statement.
We are expecting to potentially see an increase in M&A activities through Q4. This could lead to increase in earnings in Q4 and we’re going to see more our company to change the pace of liquidity and as we are aware of today through the second quarter of 2014 with what we know today as many of our companies are positioned themselves for future IPOs or M&A events that are going on.
However, those IPOs and M&A events are very difficult to predict and are generally market driven. We remained hopeful that many of these companies will pursue and complete this exit event.
However, many of this exit event are entirely and completely out of our control. As of today, we ended the quarter and, excuse me, as of today through November, we still have three portfolio companies in IPO registration all of which are under JOBS Act which is confidential filing filed with the SEC.
Now these results reflect our ongoing commitment to managing our growth and solid performance across our four industry vertical, life sciences, technology, clean energy and energy technology and special situations. We work diligently to potentially identify the right companies and the right timing to make investments in these certain verticals that we focus on today.
Now, turning my attention specifically to portfolio growth. As I indicated during our second quarter earnings call, we expected that Q3 2013 originations, which is generally by the way our slowest quarter in originations would be light.
And in fact, we indicated to our investors that we expect the third quarter to be light between $40 million to $60 million which in fact is what we end up achieving. Part of that decline in the portfolio was driven in part by the M&A activities that we became aware of.
And as I said earlier, as we don’t know exactly when that will take place, but when we have a very solid assurances of M&A activity that will be completed. We will include that in our guidance on portfolio activities on at least on a one quarter basis in advance.
Because of the strong M&A activity in Q3, we saw a very robust acceleration in earnings to $0.35 per share in earnings growth versus the estimate of $0.29 a share. In addition, we remain very steadfast and disciplined in our underwriting and funding of new companies during the quarter.
We have purposely been holding back liquidity as we remain very selective in making new investments and allocations given the uncertain economic events that are transpired during that period and leading into Q4 2013. We also remain concerned about the increase frothiness of valuations we are seeing in the market as further caution is wanted as we are evaluating new investment opportunities.
In addition, we anticipate the overall investment portfolio to once again step down or decline in Q4 by approximately $50 million to $70 million as we continue to hold back liquidity and we expect to see an increase in M&A activity going on in the fourth quarter. During Q3, 2013, new commitments were approximately $102 million, while funding in turn were approximately $69.
Principal repayments -- earlier principal repayments during the quarter was a good both amortization, as well as realized equity sales were strong. We had overall $132 of loan repayments taking place plus another $12 million on a cost basis of equity sales that were realized equates approximately $144 million of cash flows received during the quarter.
Again, I want to emphasize this strongly, we continue to be very selective in our new business and new investment activities. We are actively and currently working on rebalancing and repositioning our portfolio.
What that means is that we are actively purging marginal credits. We are reducing purposely our large exposure to large constant positions which had historically lower yields as we join attention to 2014.
The overall result of this activity was in net portfolio decline of approximately $67 million on a cost basis as of Q3 or a decline of $58 million on a value basis at the end of Q3. Early payoffs remain a tricky item to accurately predict.
We try our best to give our investors some perspective as the early payoffs but they remain a loose and difficult to predict and if and when we have an indication in growth payoffs we will share that with our investors as we typically have done from quarter-to-quarter. Now, we continued to high volumes in terms of new investment activities.
We remain cautious and selective about the vessels that we add to our portfolio and we care more about credit quality then we do about necessary earnings and portfolio growth, if those fiscal and verticals do not make sense. We find ourselves looking at a very frothy market in various industry sub segments of the market and we do not like the evaluation or the opportunities that we are seeing today.
This means that we are choosing to be very selective and waiting out in certain investments while other may see that opportunity to take advantage of that marketplace, we are not. We remain very discipline and committed not sacrifice the credit and not sacrifice the asset quality for portfolio growth as that mean delaying or missing earnings growth from one quarter or another, we will do that in order to protect and maintain a high level liquidity and a very strong balance sheet.
With that said, we finished the quarter with over $205 million of cash on our balance sheet compared to $130 million of cash at the end of Q2. This is in itself amplifies our focus on credit.
With the ample cash and access to balance sheet liquidity, we feel that we are well positioned to enter 2014. There are many issues that we are looking that need to get mitigate in the market for us to way back into the market in a meaningful way.
We will feel and continuing to make new investment activities, but we will not increase investment activities if we don’t believe the credit quality and the market opportunities are there. That said, we finished up with the end of third quarter with very strong and very solid unfunded commitments.
We have over $170 million of unfunded commitments to remind our shareholders what unfunded commitment means is that we have signed executed term sheet and in place bonus secured agreement, which represent in essence backlog of the ability to convert that unfunded commitment to earnings assets. That in itself is a backed up of potential future earnings that reside on our balance sheet today that we could unlock if and when those assets become funded interest assets.
I would like to remind our shareholders that the power of unfunded commitments in cash on our balance sheet will translate into significant future earnings growth. As an example if you look at the $200 million cash on our balance sheet and for the sake of illustration let’s assume that only $100 million of that cash is invested in interest earning assets.
If you assume the current yield of our portfolio on a normalized basis, excluding one-time events in our yields assuming a 40% yield in our existing share count today, $100 million invested at 40% will equate to approximately $0.20 to $0.22 in annual earnings alone and I will remind everybody we have over $200 million cash on our balance sheet and over $170 million of unfunded commitments that could quickly turn into earning assets if and when they would fund. Now let me turn my attention to credit.
Hercules has always been and will always be a credit organization not a market share driven organization. Our (inaudible) credit performance and credit outlook remains stable to very strong as we continue to rebalance and prepare for 2014.
We remain very diligently monitoring credit and we continue to take the necessary preempted steps to proactively dress any signs of troubled developing within our portfolio. I would like to remind our investors that we invest in unproven, innovative development-stage companies, who required future runs of equity capital and milestones in order to be meet to secure new lines of equity capital in the future to fund ongoing development and build out their business models.
Many of these companies may or may not be able to secure future lines of equity capital. With our experience, we work diligently to identify those that we believe have a greater lighter than not of secure future lines of equity capital would be self-evidence in our historical performance and credit worthiness of our portfolio over last almost 10 years.
As we’ve continue to outlined during the earnings call in 2002, we’re seeing a growing sign or to say early signs of credit concerns developing in a broader marketplace. This is other reason why we’ve been holding back liquidity purposely as we’re seeing macroeconomic variables in the marketplace that lead us into have some concerns on credit underwriting and want to take and continued pursue our growth strategy a slow and steady.
We refuse to pursue investment opportunities that don’t meet our underwriting or pricing parameters or criteria. This is reflected in our ability to maintain our effective normalized yield of 14%, which actually went up by 10 basis points during the quarter.
You’ll see from our financial statements that our overall yield was in fact significantly higher than that at 17.7%, which includes one-time fees, which Jessica will elaborate and will expand future during the Q&A. We generally remain on the sidelines early-stage technology companies.
We find many early-stage technology companies lack the merits of their business models and lack significant uncertainty of their potential next financing rounds of equity capital coming in. We find that early-stage investing right now remains an area of concern for ourselves, although does that -- that does mean that we’re not actively looking at early-stage companies, we are just simply highly selective on those early-stage companies that would invest in.
Patience and discipline is our mantra, especially as we balance our portfolio going into 2014. We remain very concerned about the accelerating and frothiness of valuation that we’re seeing in many of our companies today.
We’ve seen examples of private technology companies that are exceeding the valuation of the public peers and frankly we don’t understand that. Now, turning our attention to yields.
Unlike many other BDCs, Hercules continues to experience stable to slightly widening yield spreads. As we have seen, our yield increased by approximately 10 basis points, I’m proud to say that we maintain pretty consistently a yield of 40% and in fact culminating with a 40.3% yield at the end of, excuse me, Q3, 2013.
This is driven in part by our own making, by rebalancing our portfolio and as I said earlier, shutting away or divesting ourselves a large credit that are drawing up lower yields as we rebalance the portfolio and focus more attention to our mature-stage companies in certain vertical that we are focused on. As is said a minute ago, our overall GAAP yields were extremely strong, at nearly 18% or 17.7% to be specific.
Driven by exceptional strong M&A activities that witnessed during the quarter with 16 announced are completed M&A events, these one time fees and fee accelerations certainly helped meaningfully to contribute to a yield expansion that we saw in the quarter. However, unlike most BDCs, Hercules feels that’s important that investors look through that overall yield and look at the more normalized yields, take into account the step down of the one time fees which leads you to the 14.3% yield.
We do not however expect these yield trends to continue much beyond 2013, excuse me, 2013. Now, moving on to the balance sheet.
Over the last few years we have worked diligently to broadly diversify our many source of financings and strategically expand our source of funding for our balance sheet. We have moved our balance sheet almost entirely on the asset side to faulty re-loan and on liability side to all fixed-rate liabilities.
In Lehman’s terms, we’re well-positioned and rate sensitive to any movements and rates to the benefit of our shareholders. This is the theoretical focus on our cost of funding is been translated into a widening NIM or net interest margin which currently now exceeds 13.6%, up from 11.54% in Q2.
We are probably one of the few BDCs out there who has a NIM as wide as this and an effective yield as high as 17% or 14% overall. This is not purposeful.
This is done with a lot of hard work from our team are diversifying our balance sheet and widening our yield spreads as we originate and lower cost of funding overall for the benefit of our shareholders. In addition, Hercules is well positioned, as I said, with over 98% of our loans that are floating rate loans either based on LIBOR prime based floors.
In addition, on our balance sheet not only do we have all of our outstanding liabilities with fixed rate -- interest rates, the earliest maturity of any outstanding liability on the balance sheet today excluding securitization is April 2016 which is our convertible debt offering which means we do not have any cash flows needs in early retire or service the debt beyond simple interest payments that are generally done semi annual or quarterly on our outstanding debt balance today. As I said earlier, we have very strong balance sheet with over $310 million available liquidity or drive power to make new investment of which $205 million of that is cash on hand on the balance sheet and $105 million of that is available credit facilities.
Now, let me turn my attention to leverage. There seems to be lot of confusion when I look at Hercules and understanding our leverage, part of that is driven by exemptive order from the SEC.
And I apologize because the exemptive order when you look at the SBIC, the combination of that is very significant. So let me take a step and try to provide some clarity here on behalf of our shareholders.
Today, our net cash GAAP leverage is approximately 57%, by using the word net GAAP cash leverage is an essence looking at the overall balance sheet leverage and deducting $205 million of cash divided by our net assets of $643 million that will yield approximately 57% leverage. On a more simplistic way, our GAAP leverage, excluding the impact of the $205 million of cash on the balance sheet, we have approximately 89% GAAP leverage that excludes the cash benefits on the balance sheet.
Now, as I said a minute ago, because we’re an SBIC funding with two licenses with DSPA and we have SEC exemptive order. We are able to exclude from our total leverage pool $225 million, which is first regulatory leverage of one to one test, because our ability to exempt the $225 million of SBIC leverage quickly, thereby, able to pro forma a leverage it self to 1.34 to one .
That is 1.34 to 1 ratio compared to 1 to 1 rest of the BDC industry that may not have an SBIC exception. However, it reaming our focus that rather than tapping the full 1.34 leverage that we prefer to approach leverage points of between 1.2 to 1.35, depending on market condition and as I said earlier on a GAAP basis.
We are 0.88 today on the adjusted for cash we only had a 0.57 leverage basis today. Plenty of room to further leverage our balance sheet and in fact we were approximately $290 million if we associated to comp in additional leverage to grow our earnings further if the market opportunities were there in the marketplace today.
Now Q3 was an outstanding period and truly help drive further awareness of the potential value that can be a loss of Hercules existing one portfolio and equity positions. Hercules today has approximately 160 in one position and 37 unique equity positions in various technology and life sciences company today.
Q3 represented a pivotal accomplishment for Hercules. As we experience a very robust M&A and IPO exit market and healthy gains from our equity and warrant portfolio.
Thanks to an improved venture capital market exits in both M&A and IPO we are quite thankful for those markets finally aligning in the right direction. During the quarter we realized valuation and many of our companies and ended up the quarter with approximately $7 million of realize gains during the quarter as evidence in our P&L statement.
As I said in the beginning opening remarks year-to-date Hercules had 23 completed M&A events and IPO events this year. A record by all accounts on Hercules and during the period and second quarter we had one company also achieve an IPO and M&A event at the same time and that was Omthera that completed IPO and then quickly thereafter it was required by AstraZeneca for $400 million.
As evidence further of this robust exist environment. In the first month of the fourth quarter i.e.
October we had already one company complete a IPO filing and we had three completed M&A event. Virident completed its M&A event realizing a $7.5 million gain for benefit of our shareholders.
And Lance completed its sale for $2 million gain and Purcell Systems completed its sale for $6 million -- $600,000, excuse me, gain for the quarter as well. As I said, we had two completed IPOs in the quarter so far in third quarter 2013.
Further evidence of some of the IPOs that occurred in the third quarter were Acceleron and BIND Therapeutics and of course, ADMA, as I said earlier, completed its IPO completed recently. Now, turning my attention to the exits in the portfolio.
We have 161 physicians that are currently valued at $34 million as of 9:30, 2013. I would like to remind our investors that we realize exits in one portfolio anywhere between 1X to its highest 14X.
We do not think those are exist multiples that should be used. However, we also like to remind our shareholder, we never expect more than 50% of our warrant portfolio would have monetize.
Our historical trailing multiple on our warrants realized is just under 4X multiple on assorted base over the last nine years. Now, let me turn quickly my attention to the venture capital marketplace and provide you a quick update on the venture capital activities.
Q3 venture capital fund raising was actually surprisingly strong. In Q3, the venture capital firms raised $4.1 billion by 60 venture funds.
Year-to-date the venture capital industry has raise an impressive $16.2 billion to the third quarter of the year. Now, turning my attention to investment activity, vis-à-vis outflows by venture capitals into new technology and life sciences companies.
During the third quarter, venture capital firms invested an impressive $8.1 billion to over 800 companies, basically matching the same level in the prior quarter and the same levels we saw in 2012. Year-to-date, venture capital firms have invested approximately $23.1 billion, which compares favorably to that of the 2012 activity on a whole year of $32 billion.
So we are in a very good run rate on new investment activities by the venture capital and 2,400 companies have thus far received venture capital funding. This data by the way has been provided to us by Dow Jones VentureSource, which is the reference of data that we always focused on and use in our presentations.
Turning my attention to the venture capital access. M&A events were quite robust in the quarter.
$9.7 billion to 111 companies that completed M&A exits during the quarter, up 11% in terms of the dollar size and 25% up in number of deals. This is very important since Hercules had 16 of those events where portfolio companies of Hercules during the quarter.
I feel they were equally impressively strong. We had 25 completed IPOs during the quarter in 2003, of which two were Hercules portfolio companies.
After we left behind right after the quarter, we had one portfolio company also go public, making basically three companies that achieved IPO events here very recently. Now turning my attention to the closing remarks of my presentation.
Now, I will turn my attention to the outlook for 2014. We expect our investment portfolio to decline by approximately $50 million to $70 million.
This is in fact driven by both rebalancing as well as continued M&A activities that we are aware of. However, I’d like to remind everybody that is much as we like to see the M&A events be completed and the impact on earnings, those M&A events are elusive and they may or may not close.
That said, we think that if the M&A events close, the portfolio should led go by $50 million to $70 million during the quarter. On a more macro level, we expect normal amortization and normal repayments to be approximately $100 million to $135 million of activities that we’re aware of and expecting to see during the quarter itself.
As of November 4th, our pipeline remains robust. We have over $1.2 billion of transaction in the pipeline.
However, a strong robust pipeline does not necessarily claim to or translate into earnings assets, because we remain very selective and very choosy on who we want to partner with and provide capital too. That said, I want to once again remind investors, we have over $170 million of unfunded commitments.
These unfunded commitments may turn into earnings assets at any one point in time. Many of our unfunded commitments must be or achieve milestones in order to make those commitments binding on our behalf.
That said, we close -- since the quarter ended, we’ve now closed approximately $27 million of transaction and funded close to $20 million of the transaction. We have $92 million of in-house signed term sheets that we’re in the middle of completing due diligence on and expect to complete.
With respect to remainder of the year and fiscal 2013, we expect 2013 to be a record year on many fronts including fundings and new commitments. New commitments for 2013 are expected to be between $600 million and $750 million.
But we remain cautious given what we were seeing in the marketplace, the process of evaluation that if the space achieves we may end up at the lower end of the range at $600 million and $650 million range, as we continue to hold back liquidity as a credit quality is not there. We are very encouraged and very happy to see the pickup in venture capital activity.
We continued to be very happy to see the venture capital support the Hercules continue to receive in the marketplace and the monetization of our legacy warrant and equity positions in our portfolio. We’re continuing to execute across all our business lines.
We are seeing very stable yields. We are seeing very stable credit outlook.
We are well positioned for changes in the interest rate environment and we most recently have been expanding our offices in New York and Virginia. And continue to hire during this period of time, as we prepare our portfolio for growth further in 2014 and align our self well for 2014 as evidenced in our balance sheet and all the activities we’ve been doing.
With that, I will turn the call over to Jessica.
Jessica Baron
Thanks Manuel and thank you everyone for listening today. I would like to remind everyone that we filed our 10-Q as well as our earnings release after the market closed today.
I will briefly discuss our financial result for the quarter ended September 30, 2013. Turning to our operating result, we delivered total investment income or revenues of $41 million, an increase of 72% when compared to the third quarter of 2012.
Year-over-year growth was driven by increased interest income from higher average outstanding balances of the portfolio and an increased fee income attributable to the early repayment of debt investment, which what Manuel as well mentioned with a $102 million during the quarter. Note that our period and debt investment balance on a cost basis is $910 million.
This is a decline of $57 million during the third quarter of 2013. However, this balance of yielding debt assets reflects the year-over-year increase of close to 28% from $711 million as of September 30 of ‘12.
The all in GAAP effective yields on our debt investments during the third quarter was 17.7%, excluding the income acceleration impact from early payout through one-time events. The affected deals for the quarter was 14.3%, as Manuel mentioned by approximately 10 basis points relative to the previous quarter.
We expect yields on annualized basis including acceleration of one-time events trend higher much beyond Q3, assuming some of the anticipated early payoffs occur as scheduled. Interest expense and loan fees were approximately $8.7 million during the third quarter of ‘13, as compared to $6.1 million during the third quarter of 2012.
The increase is primarily related to interest and fee expenses related to the additional $85.9 million of baby bonds issued in late September of 2012, and the $129.3 million of asset-backed notes issued in December of ‘12. This was partially offset by the decrease in interest and fees related to our refinancing of approximately $50 million of SBA debentures that transpired over the course of last year.
Our weighted average cost of debt, comprised of interest and fees, was approximately 6% as of the third quarter of 2013 versus 6.7% during the second quarter of 2012. The lower weighted average cost of debt is primarily attributed to the $102 million of notes as of quarter end, which are attributed to the securitization which bears interest at 3.32%.
Operating expenses excluding interest expenses and loan fees for the quarter totaled $10.8 million, as compared to $6.5 million in the third quarter of 2012. This increase is primarily due to additions of net 11 employees during the 12 months period ended on September 30 of ‘13 and due to the year-over-year increase of $3.7 million in quarterly variable compensation.
Q3 of ‘13, net investment income was $21.6 million compared to $11.4 million in the third quarter of 2012, representing an increase of approximately 90%. Net investment income per share was $0.35 for Q3 of 2013, as compared to $0.23 for the same quarter ended 2012.
We recorded approximately $9.3 million of net unrealized appreciation from our investments. Of this total, $15.2 million of appreciation was due to market or yield adjustments in fair value determinations.
$3.5 million of depreciation was primarily attributable to collateral based impairments on debt investments and $2.4 million of depreciation was related to the reversal of previous quarter unrealized depreciation in conjunction with the sale of warrants and equity investments. Our net realized gains for the third quarter was approximately $7.1 million.
We recorded $7.8 million of gains, primarily, from the sale of investments in three portfolio companies, and this was offset by the liquidation of the investments in eight portfolios companies for gross realized losses of approximately $700,000. We ended Q3 of 2013 with total investment assets, including warrants and equity at fair value, of approximately $983.4 million, an increase of $209 million, or 27% from a year ago.
And as mentioned before, that’s down by $67 million from our investment portfolio balance of $1.04 billion as of June 30, 2013. This current quarter decline was a result of significant debt investment payoffs, totaling $102 million combined with normal amortization of $30 million and the sale of warrant and equity positions, including our 2012 investment, which had a cost basis of $9.6 million.
I will remind everyone that amortization typically commences after 9 to 12 months of interest-only period on a term loan and is scheduled to occur over a 36 to 42 month timeframe. Given the recent growth of our investment portfolio, apart from earlier payments, we currently have scheduled $35 million to $40 million for normal principal amortization to occur per quarter.
Moving on to credit quality. As Manuel mentioned, our loan portfolio of credit quality remains solid.
The weighted average loan rating on our portfolio was 2.13 as of September 30th, reflecting a very slight increase from 2.11 reported at the end of Q2. We had seven debt investments on non-accruals at the end of the quarter with the cost basis of $15.9 million and a full fair value of $3.1 million, representing less than 23% of the total investment portfolio.
Now, to liquidity, liquidity at the end of the quarter, we had approximately $310 million in available liquidity, which included $205 million of cash and $105 million in credit facility availability. At September 30th, our total debt-to-equity ratio, excluding our SBA debentures as Manuel mentioned was 88.6%, lower than 92.9% as of June 30th due to net asset value growth and approximately $8 million of paydowns on our securitization notes.
Again remind you that our $225 million of debentures are excluded for regulatory leverage calculation purposes. This exemption effectively allows us to leverage beyond the 1-to-1 debt-to-equity ratio up to 1.34 to 1.
Our net leverage, which is calculated as total debt of $570.1 million less $205 million of cash divided by total equity of approximately $643.4 million as Manuel mentioned was 66.7% at the end of September. Our net asset value as of September 30th was $643.4 million, or $10.42 per share compared to approximately $121.8 million or $10.09 per shares as of June 30th of ‘13.
Finally, we increased our quarterly dividend by $0.03 or by greater than 10% from $0.28 to $0.31 to be paid to our shareholders in November. In closing, as Manuel mentioned, we will continue to take a cautious and steady approach to on-boarding assets in the Q4 as well as throughout 2014.
We are currently expecting note and portfolio declines for the fourth quarter to be down $50 million to $70 million. We remain committed to our strategy of controlled growth and intend to continue to apply our stringent underwriting standards, which have resulted in our exceptionally low historical loss rates as we enter the final quarter of 2013.
Operator, we are now ready to open the call for questions.
Operator
(Operator Instructions) And our first question in queue is from John Hecht of Stephens. Your line is open.
John Hecht - Stephens
Guys, congratulations on a great quarter and dividend hike. Just regarding the revenue side of the quarter, of the interest income how much of it was OID and fee-oriented on the interest income side?
Jessica Baron
That component of our revenue has been really consistent over the past several quarters on a normalized basis. It’s less than 10% of that total line item.
John Hecht - Stephens
Okay. If repayments stay high like you expect them through Q4, would the fee income line and that type of contribution revenues be consistent, or how should we think about that?
Jessica Baron
Yeah. It’s typical -- it’s once again a function of where the company is in its life of the loan with respect to Hercules.
So, of course if there was a loan originated in 2013, it would have a substantial one-time fee which would hit the -- once again the fee line. It might be a deal that had a very large warrant coverage, or a warrant that had a very high intrinsic value on day one which would result in the high OID component.
So I guess…
John Hecht - Stephens
Yeah.
Jessica Baron
….the net that I’m trying to tell you is that it’s difficult to predict without knowing more about the portfolio companies which will be paying us off. As Manuel mentioned, looks like you’re saying it wrong.
We will be expecting that there will be more repayments from our larger lower margin credit and usually those don’t have high OID components, because when we originated those investments we didn’t go into the position looking for a high warrant returns. So, we don’t have a high warrant coverage necessarily in those investments.
So, based on that part you could see that there would be a higher generation of fee revenue relative to interest acceleration as a result of the early pass that will happen in the quarter. And those are more mature credits as well in our portfolio relative to really pay us that it’s happened in previous quarters.
John Hecht - Stephens
Okay. That’s good color.
Thank you. And then, when you were talking about funding versus commitments, the relationship with them kind of normalizing, what do you think is driving this and what is the general time to convert a commitment to funding in this part of the cycle here?
Manuel Henriquez
Well, the answer to your question is yeah. I think if you look at our data in this quarter, we had approximately $100 million or so of funding of $69 million -- sorry $100 million or so of commitments and about $69 million of funding.
So the ratio is still trending slightly lower than historical levels. Historical levels will benefit industries on this call, has been averaging to 75% to 80% and we’re still seeing, although up from Q2, 65% level we are at 69%.
So, I don’t think that’s going to change to quite meaningful and we’re purposely driving that right now by having much more risk than against in our credits by having these milestones involved. And so, what we want to see is a much more high validation of the business models and traction before we commit meaningful more capital to these companies and really align ourselves with their quest and their achievements with our risk litigation strategy.
And that’s some of the things that we’re doing here.
John Hecht - Stephens
Okay. That’s great.
And then final question is a little bit related to modeling and there was the -- Jessica, you highlighted the part of the increase to the comp line was related to additional hires. I assume some was also performance related given the strong quarter, can you give us a good normalized number coming out of this quarter, or should we just use that as a going forward number?
Manuel Henriquez
No, I think that number this quarter is certainly inflated. I would argue that the number this quarter is probably inflated on a normalized basis by probably about $1.5 million or so.
We actually normalize it. Although, we had net 11 new hires over that period of time, those hires are in various levels of the organization.
So they have various levels of SG&A contribution or impact I should say. But this quarter, clearly as you rightly pointed out given the elevated liquidity events and strong achievement, incentive compensation was increased in the quarter.
And so I would just back-off probably $1.5 million or so, on an unrealized SG&A from this quarter.
John Hecht - Stephens
All right. Thanks guys.
Jessica Baron
Yeah.
Operator
Thank you. Our next question in queue is from Aaron Deer of Sandler O’Neill & Partners.
Your line is open.
Aaron Deer - Sandler O’Neill & Partners
Hi, everyone.
Manuel Henriquez
Hi, Aaron.
Aaron Deer - Sandler O’Neill & Partners
Manuel, I just want to kind of follow-up on your comment. You sounded like you’ve taken a fairly cautious approach to your investments and particularly in light of your kind of look for step down here in the fourth quarter.
But with the new hires that you’ve been making and it seems like you’ve been very active on that front. I got to think that as they ramp up that that should be able to offset some of this prepayment activity.
And so I’m just curious what’s your outlook heading into 2014, can you get back to the kind of strong double-digit growth pace that we saw this year, or is that kind of off the table at this point kind of given your current outlook?
Manuel Henriquez
Well, this is one of the funny things of running a public company. I have investors calling me up that I am growing too fast and lot of investors calling I am not growing fast enough.
So, I have learned as a public company that I cannot beat everybody and we have to do what’s confident and important for us. So your question is important one.
So we don’t expect new hires contributions to not really come on line for six to nine months. And the reason being is that we like to have new hires get emerged in our credit culture and understand the parameters by which we underwrite.
And we rather have them take that six to nine months, a specific period of time to really understand what we are doing and understand the credits that we are looking for or say investment opportunities that we are looking for. And so I don’t expect most of the new hires to come on line from a contribution point of view, and to your point on seeing me for portfolio growth are purposeful not until probably the second half of 2014.
Aaron Deer - Sandler O’Neill & Partners
Okay. That’s helpful.
And then where in terms of -- you mentioned that the number of new hires during the quarter. Where does the actual -- in terms of your front line determine that business, where does that number stand relative to a year ago?
Manuel Henriquez
I don’t have it in front of me. But I’m going to go up off of top of my head here.
I believe that number should be probably -- well, a year ago we had some lower middle market guys in that team that we since then have materially vacated lower than a market and moved to such situations. So, on a net-net basis, we are probably, relatively even.
However, we will see differences that we are been adding purposeful into our technology group. We are positioning ourselves to really look at technology in the second half of 2014.
We actually think that this wave of M&A event that is going on right now and we’ll eventually call out to field a bit and then give rise to a new crop of more promising companies and a much more realistic valuations of companies turning into the second half of 2014. So we’re expecting some pretty significant contributions on growth on our book, on the technology side sometime in 2014, the second half of 2014 as we are expected to see some meaningful technology contribution.
Aaron Deer - Sandler O’Neill & Partners
Okay. That’s great.
And then just one last question for me. The prepaid -- these have been a big contributor of weight and I’m just wondering, given to the extent that there’s been competitive pressures and stuff, has there been any change in how you’ve been with the terms on recent loans with respect to prepayment penalties or recently booked ones are the same kind of prepaid penalties that loans had say booked two years ago?
Manuel Henriquez
Yes. Nothing has changed which is why we are maintaining the liquidity that we do.
We are not -- we are new entrance into this market. We’ve rather just wait on the sidelines and have them take their fill because the greatest thing about venture debt investing is just because opportunities exists does not mean you should fill the order.
And in this business if you don’t know what you’re doing, you can quickly originate $200 million of assets and 12 month later have a $75 million loss in your hands.
Aaron Deer - Sandler O’Neill & Partners
All right. Okay.
Great. Thanks for taking my questions.
Operator
Thank you. Our next question in queue is from Greg Mason of KBW.
Your line is open.
Greg Mason - KBW
Great. Good afternoon and great quarter, guys.
Wanted to talk a little bit -- little more color on the prepayment kind of fee income in the quarter. In the press release, you gave good color that 17.7% but excluding that was 14.3%, could you put any kind of dollar basis on that 3.4% yield difference that’s kind of one time this quarter from the accelerations?
Jessica Baron
I am sure the accelerations were about $4.5 million of revenues driven by the company that paid us off during the quarter and there were some one-time fees also, which made up the balance of about $2 million.
Manuel Henriquez
So, Greg, we got to be careful because the problem is on a GAAP accounting. Some of the fees can be reconstructed into interest income, so you don’t have a balance there.
So when you look at our fee income of approximately $4.8 million, you have a normalized fee income that is so called one-time fees that’s pretty consistent at a $1.5 million $2 million level that’s pretty consistent. So any delta above that is going to be driven by prepayments fees that are coming in acceleration of certain income fees that are on the balance sheet.
They are deferred but the problem with that is some of the deferral acceleration is actually recorded interest income as well.
Jessica Baron
Right.
Greg Mason - KBW
Okay. Great.
I appreciate that color. And then talking about the dividend increase in the press release and you’ve talked about this in the past that you want to have a variable dividend and I’m just curious, is the increase this quarter related more to lot of the prepayment fees and strong earnings and likely the third and fourth quarter?
But again with the portfolio kind of reduction that you are seeing from the repayment that may have some pressure when that rules off. How are you thinking about more of the longer run of the $0.31 dividend that you guys announced this quarter?
Manuel Henriquez
Well, you are absolutely correct. Our policy has always been since I think 2007 -- the variable dividend policy and our preference is always cover our dividend.
There was strong earnings growth in the last two quarters and our spillover that we’ve in 2012 to 2013 I think that we’re accumulating a sufficient number of undistributed earnings that can translate the future dividend as well. And you are right.
The one-time fee certainly helps contribute to that, continues increase in dividend. As you witnessed the $0.35 NII earned income or DNOI over that number and only paying $0.31, that we’re accumulating potential dividend spillover to 2014.
As to the coverage dividend in 2014, clearly as the portfolio has been harvested, the earning assets are slightly going down. But I feel very strong that our team, as we continue to call through many opportunities that decline in portfolio will probably been up here in the next two to three quarters with our typical origination activities.
We’re purposely being choosy, right now. To give you an example, if we so choose to lower our dividend yields -- excuse me -- if we just so choose to lower our origination yield to be very aggressive here for the sack of this discussion, illustrate to say the 10% we could easily go on deploy $200 million of assets relatively quickly.
We’re choosing not to chase down our yields and we’re choosing to focus on credit quality and we certainly will not do an abundance of secondary lending, which I frankly don’t understand and eventually lending world. Why would you ever do secondary lending and let your debt?
That’s called equity in my book.
Greg Mason - KBW
Great. I appreciate the color.
And one last question. In the subsequent events you’ve said you’ve basically had about $10 million of gains so far in the fourth quarter.
How much of that is already baked into the fair values at 930? That’s all my questions.
Manuel Henriquez
All of is baked in.
Greg Mason - KBW
Okay. Great.
Thanks Manuel. Appreciate it.
Manuel Henriquez
Thank you.
Operator
Thank you. Our next question is from Robert Dodd of Raymond James.
Your line is open.
Robert Dodd - Raymond James
Two questions. Going back to that competitive question, we talked before about not doing or having this information to the second lien et cetera.
I mean, how much of this discussion you had in terms of sitting on the sidelines, et cetera? Is the new entrance where a fair number of those guys are been selling debentures of second lien size and that’s not something you do?
Anyway, versus the more senior bank that you can compete with having that growth targets less input capital at the door. I mean there are anymore differentiation you can give us between who is driving the competitive issues?
Manuel Henriquez
We certainly welcome all the new entrants into the asset class because they are helping us get rid of bad credit. So I think it’s great.
And as I said in all seriousness, just because the venture debt lending asset class has a 14%, 15%, 16% yield on it, does not mean that you know how to do this business. This is a very, very difficult business to do and requires a high level of expertise on origination team.
You have to have virtualization in your origination teams. You can have a generous look at our life science’s deals that turn around the next morning to a technology deal.
You could try that but after been doing this long as I have you will probably end up losing money relatively quickly. You have to understand the ebbs and flows of these various industry verticals.
You have to have a technology perspective of what’s going on in these sub verticals you are investing in. And frankly I mean this in all sincerity, I do not understand second lien- lending and venture debt.
Unless the company is a significant mature company, you are being convinced to do second-lien lending behind the bank that will have extensive period and you’re not getting paid for that risk profile with your desperation for assets to work. You are basically kicking the can of the inevitable which is a principal loss that will probably happen.
You need to be very judicious and others want to sit here and do second-lien lending, we will wait on the sidelines, let them take their fill and do all the second-lien lending they want, we will not pursue that strategy and we think that strategy is deadly flawed.
Robert Dodd - Raymond James
Appreciate that. The third question, on the -- currently you built the fourth quarter down 50 to 70, you said that’s predicated on the assumptions of various M&A activities do happen in the fourth quarter which case you got fee income with a rhythm.
Any color you can give us on -- given those are very, very hard to predict, what would you expect the portfolio to be if they don’t have?
Manuel Henriquez
It’s such a great question in terms of the magnitude. They literally -- it can be up to a $50 million swing in the portfolio, in other words, I indicated that $50 million to $70 million, it could be down in the portfolio in the fourth quarter.
And two of these M&A that I am aware of as an example do not occur. You can see the portfolio basically flat to slightly down by $10 million or $15 million.
This is driven in large part by four particular credits that we are aware of that are actively engaged in M&A transactions. And as we all know M&A deals are closed and so it’s very significant impact because if they don’t close, earnings will also be back to more modest level of historical earning rates.
And if they close, they’re probably slightly higher than our normalized earnings rate that they are. And so it has a significant impact.
And we do not control the M&A transactions whether diligence or many variables that impact that. So I will say that considerably anywhere between $40 million to $60 million of portfolio performance in the fourth quarter is directly attributed to these three or four companies that may or may not execute a completed M&A on that.
Robert Dodd - Raymond James
Okay. That’s very helpful.
Thank you.
Operator
Thank you. Our next question is from Douglas Harter of Credit Suisse.
Your line is open.
Douglas Harter - Credit Suisse
Sorry about that. You had mentioned something about -- some concerns about increased sort of like standards on the credit quality.
Could you just give us a little detail on that Manuel, of what you are seeing in the market?
Manuel Henriquez
Yes. I mean one example as we just talked about is the senior second-lien lending, what you especially known as senior stretch.
You have interest-only period in some cases basically a bullet. We do a bullet loan in venture lending world, I don’t understand why don’t we just call it equity and realize that you’re getting paid less for that risk profile that you’re doing.
So some new entrants into the asset class are obviously eager to put money to work and certainly try to get their hands on these yields. And doing so, they will do so where likely we consider to be a little silly transactions.
And you know that’s fine. I mean look at -- I flawed them.
I think it’s important that we have new players into the asset class. It helps validate the asset class.
I think that these players are also very savvy. And so it’s only a matter of time before they will realize some losses.
They’ll recalibrate the origination activities and we now have very good players in the marketplace. So it’s done all that.
We’re just choosing not to follow everybody down that rabbit hole.
Douglas Harter - Credit Suisse
I guess, following up on one of that, the benefits of having additional players in the space. How do you think that that will ultimately play out in terms of available liquidity or better terms in terms of financing?
Manuel Henriquez
I think really what it does is -- I mean, this is why I welcome these other players. I think, it’s important because as other players are out there originating, it’s expanding the awareness of the asset class to rating agencies.
It’s expanding the asset class awareness for the Wall Street players out there. So it allows us to kind of expand more of the awareness out there.
Now, that said, more does not necessarily make it better. As we’ve seen in history, some times more will start driving margins to lower margins out there.
And eventually, there is a point of diminishing return where the venture lending industry, if margins are too sharp and you start experiencing losses. You’re not going to be able to recover your principal.
And you’ll have, in essence, what’s called a death spiral and you’ll simply run out of money because you’ll start generating losses much faster than you can generate realized gains. And I’ve seen this cycle play out more than once in my career.
And when it gets frothy, as we say, as we’re doing right now, we’ll simply go on the sidelines. We have plenty of earning power.
We have plenty of liquidity in our balance sheet. We care about the spreads and we’re going to be judicious.
We’re not going to simply go originate to originate. This is not what we do.
Douglas Harter - Credit Suisse
And I guess, along that, in your past experience, how long has it sort of taken the frothy markets for other players to recognize some losses and the opportunities to start improving?
Manuel Henriquez
Sure. As I said on my remarks, those in ventures need to realize that venture lending is investing in companies that are development stage companies.
These companies generally run out of money every nine to 14 months. And their business models are completely predicated upon achieving milestones and securing new rounds of financing.
If they don’t achieve new rounds of financings, those companies are either going to be liquidated or sold off in some form of merger or shut down with much relatively recoverable. So anybody can go on originate $100 million to $200 million in assets and have a loan pool of $200 million that’s doesn’t take a lot of efforts.
It’s stealing that effort and really understanding the ability to manage a multiple -- a multifaceted portfolio with various level of the maturity in different stages of the company development, which is quite taxing, quite difficult to do. Size matters in this asset class.
And it’s an important part of the asset class because if you are small and you take a $5 million or $7 million hit, you start hitting away your net asset value relatively quickly and then you are going to start diluting your shareholder wasting shares below net asset value and we are also limiting your ability to get an additional debt on your balance sheet because you start with credit performance. So discipline is quite important in this asset class.
Douglas Harter - Credit Suisse
Great. Thank you for your insight, Manuel Henriquez.
Operator
Thank you. Our next question in queue is from J.T.
Rogers of Janney Capital. Your line is open.
J.T. Rogers - Janney Capital
Good afternoon, Manuel. First question I don’t know if I miss this in your early discussion number.
What is the aggregate warrant exercise price of the 116 companies?
Manuel Henriquez
$35 million. Sorry the -- the overall face value of that, the nominal value of the whole pool.
J.T. Rogers - Janney Capital
Yes.
Manuel Henriquez
Just probably $70 million or so.
J.T. Rogers - Janney Capital
Great.
Jessica Baron
$73.2 million.
Manuel Henriquez
Especially number is $73.2 million.
J.T. Rogers - Janney Capital
Okay. Great.
And then switching gears a little bit, looking at credit let’s say there are six new non-accruals during the quarter. Want to know what’s driving that.
It seems like their focus in the internet consumer and the communication and networking industry is in and a lot of those investments are 2012 investments. I was wondering if there is anything -- if there is any sort of theme or those are at all connected.
Manuel Henriquez
No, they are very connected and it’s a very important question you just asked which is the other thing that’s missing from your question was the size, the average of those deals and they are all generally in the sub $1 million, $2 million range i.e. early stage.
This is why our own portfolio is the leading indicator of what we are seeing in the market place and this is why we purposely are shying away from early stage technology today. There is an interesting evolution going on in the venture industry right now and the chasm of death is a series B, series C, round of financing right now.
And that is an area that is currently lacking a venture capital funding which is why we are waiting out the cycle right now. That’s exactly -- those three categories that you mentioned are the areas that we are purposefully avoiding and state is purposely avoiding.
J.T. Rogers - Janney Capital
Okay. And then just so and one of the I guess one of the larger ones was PointOne, it looks like that’s something that you guys have invested in, in the past and then was actually I must say was something different earlier in the year was new this quarter.
Wondering if you have any detail there?
Manuel Henriquez
PointOne is an old legacy investment. In fact we talked about PointOne at (inaudible) on Q2.
To get refresh everybody’s memory, PointOne was a company that was a merger between two portfolio companies. It’s in a Telco space and actually went through a bankruptcy filing in order to climb themselves from certain liabilities and certain regulatory issues and has reemerged and the buyer now is building that company backup again.
We had had a pretty meaningful recovery on that write-down that investor from Q2 to Q3, so it’s actually recovery. That said, we probably have and I don’t have the exact numbers in front me, probably net loss of that position, somewhere about $2 million in or about, but we could say that data point after the call, if you like, but yeah, that’s sort of investment and old investments that’s been in our books for quite sometime and we will be fully out of that credit at the end of Q4.
J.T. Rogers - Janney Capital
Okay, great. Well, thanks for taking my questions.
Operator
Thank you. Our next question in queue is from Jon Bock of Wells Fargo.
Your line is open
Jon Bock - Wells Fargo
Excellent quarter guys, congratulations. One quick question as it relates to warrant valuation and then well in the past, you talked about there were times where you would de-emphasize the value of the warrant in order to increase the cash coupon one would receive and that was effectively lower the all-in OID, and then the subsequent amortization to that OID, if that -- if an M&A if that occurred.
Where do you stand on the valuation of the warrant today? Is it frothy in your opinion or is it something that is now carrying some additional value based on economic improvement?
Manuel Henriquez
So here is an opportunity where I can one of my favorite words, its both, and here is why. My legacy or our legacy warrant portfolio is clearly benefiting from the frothiness in the market place as translated into an increasing net asset value driven by warrant appreciation unrealized values.
So we’re getting the benefit of the legacy warrant portfolio, experiencing a lift and that frothiness. However on new assets, we don’t like the frothiness because the propensity to see upside on those warrants is becoming much more jaded or much more opaque.
And so we will actually shift away from increasing warrant coverages to other economic incentives on underwriting that help ameliorate the concern of a more volatile OID. So yes, you were seeing a declining OID on U.S., it’s originations that we’re doing purposely in that model.
Jon Bock - Wells Fargo
And I guess with the increasing velocity, I mean it would appear that the OID was a major benefiter -- that acceleration of the OID was a major benefit to earnings but if we believe that the new assets that are being put on the books generally larger, generally not carrying those substantive warrant valuations. You know how should we think about the true contribution of the not so steady amortization of OID in the future could that perhaps buy us earnings a bit lower?
Manuel Henriquez
Well, not necessarily because if anything OID actually clouds earnings a little bit. So new assets are going to be originated or actually have the lower OID or going to have a clean and crisper yield if you will.
So actually being a cash yield components, we have lower warrant coverages as you’re going to actually translate into cleaner OID -- I’m sorry -- a cleaner effective yield which has a lower OID component to it.
Jon Bock - Wells Fargo
Got it. So maybe what will be the difference then will be between one with the less of a warrant coverage versus more -- I mean obviously it differs amongst the industry but what can that be worked on a true basis point basis for your -- for new investments in general?
Manuel Henriquez
Well, you know, I will happy to answer that question but I won’t because that’s competitive advantage on how we structure price deals that others are not necessarily pursue in the marketplace. And so we are able to kind of use those benefits of our experience and history to kind of oscillate to be contribution of yield components in different stages of market evolution.
And right now, what I will say is that we are looking for a less OID contribution on effective yields that we historically would look to.
Jon Bock - Wells Fargo
Okay, okay, fair enough. And then, just because of the substance in liquidity justify if I read correctly with $50 million of net portfolio decline as a result of payoff which do bring earnings upside et cetera, flush with liquidity could you walk through the reasoning and perhaps the use of the ATM over the next let’s say three to nine months?
Manuel Henriquez
Look if I can progress -- if I can forecast nine months out, I’ll be a genius. So we have let’s not forget we have a lovely Congressman still have to draw a debate, the debt ceiling and everything else here in early January or mid-January to February.
So we are excited, it happened first time around. So this is one of the reasons why I am keeping a high level of liquidity.
They did a good job the first time and I am not necessarily betting I can do a job the second time. So I’m maintaining a high level of liquidity for that reason.
However, that said, our reason on maintaining high level of liquidity is that, we think that the market is a little bit frothy. We want to see a little shakeout going out in the marketplace.
We are still going to be originating but I want to make sure that people heard what I said in the previous question. Although we are giving indication of $50 million or $70 million down in the fourth quarter that is contingent upon these effective M&A events that just concluded or not.
If they don’t get concluded, you’ll see obviously lighter fee income being realized and you’ll see the portfolio balances being maintained at a higher level. So there will be a positive or negative impact attributed to those M&A events taking place.
I also want to call your attention to that we have to be mindful of $170 million of unfunded commitments that we have. A substantial part of that unfunded commitment could be triggering in Q1 and Q2 of next year that could immediately become funded assets and also now recouped relatively quickly all the lagging down of portfolio that happened in last two quarters.
So we’re not blind to that backlog of unfunded commitments that we have and relatively quickly translates your earnings assets and we were right back where we were, if not higher than what we were because of those assets -- those unfunded commitments being the only assets.
Jon Bock - Wells Fargo
Okay, great. Thank you very much.
Wonderful quarter, testament to your platform and franchise.
Manuel Henriquez
Thank you for that.
Operator
Thank you. Our next question is from Andrew Kerai of National Securities.
Your line is open.
Andrew Kerai - National Securities
Congrats again on a great quarters, echo it again. Certainly impressive and thank you for taking my questions.
One question I have for you guys. Last quarter you had kind of talked about the yield benefit from encouraging kind of assuming your older, lower margin, later stage investments.
And you said that it was supposed to kind of commence in Q3, if you could just try to give us an update on that and if that hasn’t been kind of played out, kind of within the third quarter?
Manuel Henriquez
Yes. I think if you look at our schedule investment in our 10-Q in Q2 and schedule investment in Q3 and obviously you’ll see that further evidenced in Q4 of schedule investment when we filed that later on -- early on in 2014.
You will see us continue to sit purposeful be purging out some of those later stage credits because there is such a hunger for assets out there that we rather see some of the lower margin -- lower yielding credits go away which are much more prone to cyclical changes in economy, because they have a much more lower nature -- so they have much more lower middle market tendencies that they were experiencing higher cyclicality on changes in the broader economy. So with that said, there is an eagerness out there to kind of observe those assets.
And we’re more than eager to have those assets to part our balance sheet as we look to deploy in other venture lending platforms or other venture lending deals that are out there. So typically the longer market credits for us are usually anywhere between 200 to 400 basis points lower.
It’s fairly typical. And as we give rid of those you’ll see our attractive yields just kind of bounce up a little bit.
And that process should be relatively completed probably by the end of Q4 if the M&A events happen, if they slide still by the end of Q1 that should probably be reaching at Apex.
Andrew Kerai - National Securities
Okay. Thank you.
That’s helpful color. So I mean so some of the investments that are moving out of the portfolio are actually sort of your intentional approaching is that a liquidity events that you’re realizing as well?
Manuel Henriquez
No. its actually -- as I said in my remarks, they are rebalancing.
We are purposely rebalancing and those people may mainly knew the story. We have the ability to toggle within industry sectors and we will shift within the industry sectors when we see certain economic variables are moving in one direction and other.
We also will ship within stage of developments. So if you think we’re going to a very robust economy, we’ll go earlier stage and we’ll go higher technology.
If you think we’re going to a cyclical economy, we’ll have a questionable growth outlooks in other concerns and economy. We’ll ship more life sciences in later stage in nature and we will literally toggle the portfolio.
And within the 15, 18 month period of time, we can kind of reshape the portfolio to really risk mitigate in that environment because of the amortization.
Andrew Kerai - National Securities
Okay. Thank you.
That’s certainly helpful. And then just one question about -- you guys certainly documented your feelings about sort of -- the early stage private -- sort of private tech marketplace and some of the frothiness in that market.
So you had a competitor of yours who kind of came out and said, basically, that they were seeing little bit of over heating in the later stage life sciences market. Just wondering your thoughts on that and if you’re kind of -- if you are seeing maybe some overheating from some additional capital being deployed in later stage life sciences companies as well?
Manuel Henriquez
You know, look -- I know who made that comment. They are good guys.
It’s an issue of size of your fund. I mean, clearly you can’t chase $20 million deal when you have a fund size of XYZ.
Andrew Kerai - National Securities
Sure.
Manuel Henriquez
So, size matters. They are good guys.
They are good operators. Its an issue of -- they have to club off to get deals done versus we can do a $1 million to $40 million transaction on our own balance sheet holds and that makes a significant difference.
So the statement was actually -- not factually incorrect. I do agree with your comment on the later stage deals with larger credit, the 50 -- $40 to $50 million credits.
We are definitely seeing the royalty finance guys coming down and doing deals. Royalty finance is not a new phenomenon that’s been there forever.
Our team is well versed and navigating those waters and our team is quite good at what they do. And when it gets frothy, you know we are not embarrassed to say we’re going to sidelines.
We looked at the set of ways to goes by early.
Andrew Kerai - National Securities
Thank you. No, that’s certainly helpful.
I mean, I appreciate the commentary around that as well. And then my last question just to know how should investors kind of think about the potential for special dividend here over the near term, just kind of given in Europe, you know the math distribute sort of excess spillover income here over the next several quarters?
Manuel Henriquez
The dividend question is really not upon the buyer. It’s really a Board of Directors question.
Our Board of Directors is clearly focusing on that issue. We are running various models to look at.
What is the best solution as to whether or not we just spill over, we do special. We distribute it.
There is a lot of variables in that equation. We have not made any decision on that.
You will see from our history that we have had spill over dividends, I think twice in our history. So we have a tendency to guide more towards the dividend spill over and sprinkle that dividend commensurately over the remaining -- the next fiscal year but we have not made any decision on that front.
Our Board of Directors is clearly well attuned to that and certainly studying that many as options we have.
Andrew Kerai - National Securities
Great. Thank you for taking my questions and congrats again on a great quarter.
Manuel Henriquez
Thank you so much.
Operator
Thank you. And with that, I am showing no further questions in queue.
I would like to turn it back to Manuel Henriquez, CEO for final comments.
Manuel Henriquez
Well, thank you everybody. We appreciate you joining us on the call today.
As usual, we will be doing non-deal roadshows here in the future. If you would like to have us participate and attend a non-deal roadshow, New York, Boston, or any part of the countries let us know.
We are very grateful for your continued contribution and support to Hercules and thank you for your attention today. Thank you, Operator.
Operator
Thank you. And once again, thank you ladies and gentlemen for joining today’s conference.
You may now disconnect. Have a great day.