TriplePoint Venture Growth (NYSE:TPVG) Q2 2022 Earnings Conference Call August 3, 2022 5:00 PM ET
Company Participants
James Labe – Chairman and Chief Executive Officer
Sajal Srivastava – President and Chief Investment Officer
Christopher Mathieu – Chief Financial Officer
Conference Call Participants
Finian O’Shea – Wells Fargo Securities LLC
Crispin Love – Piper Sandler & Co.
Kevin Fultz – JMP Securities
Casey Alexander – Compass Point Research & Trading LLC
Christopher Nolan – Ladenburg Thalmann
Ryan Lynch – Keefe, Bruyette, & Woods, Inc.
Operator
Good afternoon, ladies and gentlemen. Welcome to the TriplePoint Venture Growth BDC Corp. Second Quarter 2022 Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. After the speakers’ remarks, there will be an opportunity to ask questions and instructions will follow at that time. This conference is being record and a replay of the call will be available in an audio webcast on the TriplePoint Venture Growth website.
Company management is pleased to share with you the Company’s results for the second quarter of 2022. Today representing the Company is Jim Labe, Chief Executive Officer and Chairman of the Board; Sajal Srivastava, President and Chief Investment Officer; and Chris Mathieu, Chief Financial Officer.
Before I turn the call over to Mr. Labe, I’d like to direct your attention to the customary Safe-Harbor disclosure in the Company’s press release regarding forward-looking statements and remind you that during this call management will make certain statements that relate to the future events or the Company’s future performance or financial condition, which are considered forward-looking statements under Federal Securities Law. You are asked to refer to the Company’s most recent filings with the Securities and Exchange Commission for important factors that could cause actual results to differ materially from these statements.
The Company does not undertake any obligation to update any forward-looking statements or projections unless required by law. Investors are cautioned not to place undue reliance on any forward-looking statements made during the call, which reflect management’s opinions only as of today. To obtain copies of our latest SEC filings, please visit the Company’s website at www.tpvg.com.
Now, I’d like to turn the conference over to Mr. Labe.
James Labe
Thank you, operator. Good afternoon, everyone, and welcome to TriplePoint Venture’s second quarter 2022 earnings call. Against a backdrop of macroeconomic uncertainty, we continue to make strong progress executing against the plan that we laid out at the beginning of the year. Demand for our debt financing in the quarter was strong, and we maintained our focus working with our select leading venture capital investors and continuing with our disciplined approach of investing in what we believe are the highest quality venture growth deals.
During the second quarter, we achieved several key objectives, including growing our portfolio to record levels, over earning the dividend and generating strong portfolio yields. During the past few quarters, we have gradually been bringing up our portfolio leverage and in the second quarter, we are pleased to have hit our target leverage range. We exceeded our funding goals last quarter, funding more than $157 million of debt investments and have maintained strong momentum heading here into the second half of 2022.
Specifically, we’ve signed more than 803 million of new term sheets at venture growth stage companies at TPC, our sponsor. This is the highest for any quarter since our IPO. We also entered into new debt commitments of $260 million during the quarter and additionally, our pipeline is now grown to more than $2 billion for venture growth stage companies at quarters end.
Turning to the portfolio. Our earnings power remains strong. We generated NII of $0.41 per share in the quarter and exceeded our $0.36 dividend. A third of our portfolio companies have raised an aggregate of more than $1.7 billion of capital in the first half of this year. In terms of the overall venture capital market, it continues to hold its own. Here is a few stats of the fundamentals.
Private venture markets have remained highly active even amid this public equity volatility and venture capital investment levels remain well above pre-COVID averages for any quarter. U.S. venture capital firms invested more than $62 billion last quarter across nearly 4,500 transactions. Despite this challenging market environment, year-to-date venture capital funds have raised $122 billion, according to the NVCA and PitchBook and venture capital funds have now increased their dry powder to a record $290 billion since 2019. All this dry powder that’s looking to be deployed in the near-term bodes well for a portfolio companies and the equity available to them. For quality companies, they really couldn’t be a stronger pool of capital to access.
Having stated all this, we can’t ignore the recent shifts and the impact in the venture markets due to this tech selloff that this has created disconnects between public and private company valuations. We continue to expect private market valuations of late stage growth companies to plateau or even reset as valuations have been leveling off. And the venture capital IPOs last quarter, they were almost non-existent.
Investors are prioritizing their existing portfolio companies with the goal of supporting them through profitability, particularly at this venture growth stage, which is a market in which we operate. Given the market choppiness, many companies have revised their plans for this year, but it’s important to note, they’re all still growing. For example, companies, which previously had ambitious yearly growth plans of maybe 100% or so, they have now revised their growth expectations, let’s say, to somewhere more like maybe 40%, 50% or 60% or so.
All of this resulting in more moderate cash burn rates and extended cash runways. Many venture investors have guided their portfolio companies towards revamped plans to maintain two or more years of cash on hand and a goal of achieving profitability sooner. We view this as a positive and favorable trend when it comes to debt repayment, as well as for our portfolio’s credit quality.
As we look forward, several of these market conditions serve as positive drivers behind both the increased demand for venture lending and opportunities for TPVG that we believe will continue to play out during the remainder of the year. Companies are turning towards debt and layering in as part of their go forward plans.
Following a record year for venture capital activity, many of the companies have raised equity recently at attractive valuations are now looking to add debt in this valuation sensitive market. Companies are increasingly evaluating debt financing solutions as a result of the longer timelines for public listings. Other companies out there are seeking additional runway in the form of debt because they plan out their timetable and future equity rounds and augment their financing strategy and capitalization plans. We’ve seen each of these scenarios in the second quarter and we expect the trend to continue in 2022 and beyond. These trends have helped create a sustained demand for venture lending and provides continuing advantages for us with our deal structures and opportunistic pricing.
We also continue to be more selective in our underwriting with a focus on lower total leverage and slightly higher pricing, which reflects the brand reputation and track record of the TriplePoint platform and are a 100% direct originations business. Prospective portfolio companies today, the high quality ones are also being more selective and they’re seeking a dependable and proven debt financing partner. When it comes to debt, they are not solving for rate or the largest deal, but more the best long-term partner and that is where TriplePoint out performs.
While seeking to capitalize on the strong deal flow, we will continue to be mindful of the times and maintain our strict credit discipline and as we say in almost every earnings call, stick to our knitting. Maintaining discipline in the current market is especially important. Sajal and I have worked together for 23 years and we are poised to further draw on our track record of operating through diverse market environments, along with TriplePoint’s experience cycle tested team and best position the company.
Based on our success managing through multiple cycles, we’ve learned that if you have the experience in the know-how, dynamic markets can be some of the most productive and advantageous times for capitalizing on venture lending opportunities. We believe the market could have a positive effect on the venture lending business and yield over the long-term.
We are also poised to benefit from TPC’s differentiated platform that has invested now in more than $14 billion in venture lending transactions. TPC’s investment team is the largest in our history. Our pipeline is at record levels and we are servicing more geographies. As a global platform with multiple vehicles, we are able to serve high quality portfolio companies, regardless of the transaction size or location.
To recap, we are very pleased with our strong second quarter performance and our progress executing against our plan. We expect the second half will be driven by continued patience, execution and performance. With our credit discipline remaining stringent, we continue to be excited by the opportunities ahead and anticipate some active quarters throughout the balance of the year given the strong pipeline and backlog. In seeking to capitalize and compelling opportunities, we have a cycle tested team and will remain disciplined and apply our tried and true underwriting standard to select the best deals and deliver strong returns to our shareholders.
With that, I’ll turn this over to Sajal.
Sajal Srivastava
Thank you, Jim, and good afternoon. We remain disciplined during the second quarter, generating strong results despite volatile markets and continue to execute against our 2022 plan to grow and diversify the portfolio while increasing our use of leverage. Regarding second quarter investment portfolio activity, TriplePoint Capital signed a record $803.6 million of term sheets with venture growth stage companies and we closed a record $259.9 million of debt commitments to 17 companies at TPVG.
Signed term sheets and closed commitments were up from Q2 2021 levels of approximately $251 million and $103 million, respectively. We also received warrants valued at $2.1 million in 16 portfolio companies and made $700,000 of direct equity investments in four companies. Of the 17 companies, we committed debt capital during the quarter, 13 were new portfolio companies and four were existing portfolio companies.
During the second quarter, we funded $157.6 million in debt investments to 20 portfolio companies, which was well above our $50 million to $100 million guidance range for Q2. Q2 fundings represented an increase from $76 million in debt investments to seven companies in Q2 2021. The increase in fundings was related to the strong origination activity during the quarter where approximately two thirds of our fundings came from new debt commitments that closed in Q2, which reflects our efforts to drive utilization of our new commitments more efficiently.
To be clear, we funded companies with strong existing equity and cash reserves in many cases, topping off recent financings and extending their runway well into 2023 and 2024. We expect to see 50% to 75% of our existing unfunded commitments to be drawn given the strong existing cash balances and continued fundraising activities of our portfolio companies typically at the end of the draw periods, if utilized. The debt investments we funded during the quarter carried a weighted average annualized portfolio yield of 13.6% at origination, which is up from 13.2% in Q2 2021.
Our core portfolio yield during the quarter was 12.8%, an increase for the fifth quarter in a row and up from 12% in Q2 2021, as a result of both increases in the base prime rate and the increased spread of new investments. In addition, as a result of prepayment activity during the quarter, our overall weighted average annualized portfolio yield on total debt investments was 14.5%.
Our success growing our portfolio and increasing portfolio yield enabled us to generate earnings in excess of our dividend and once again, demonstrate the strong return potential of our business, both on an NII and ROE basis as we scale. As Chris will cover, approximately a third of the fundings for Q2 occurred during the last two weeks of the quarter and will contribute to income more materially in Q3. In addition, our performance during the second quarter doesn’t include the full impact of the prime rate change on June 16, which will contribute more significantly in Q3, along with the additional prime rate increase in July.
With regards to leverage, one of our major objectives for the year is to run at a higher leverage ratio on a more consistent basis. We are pleased to have increased our leverage ratio during the quarter, which we expect will result in continued strong net investment income in excess of our dividend in the third quarter and over the course of the rest of the year, as well as provide a buffer from the impact of prepay activity.
For Q3 and Q4, we continue to expect quarterly fundings in the range of a $100 million to $200 million on a gross basis. And since our portfolio companies continue to raise equity capital, our expectations remain that we will have on average one prepay a quarter through year-end in addition to the scheduled principal amortization of the portfolio. As I mentioned earlier, we demonstrated strong progress on diversifying the TPVG portfolio while scaling. In addition to achieving a record portfolio size at the end of Q2, we had 56 funded obligor as compared to 34 as of Q2 2021. In addition, our top 10 obligors represented approximately 35% of our total debt investments as compared to 51% as of one-year ago.
Our equity and warrant portfolio continues to grow well with 140 warrants in equity investments as of Q2 2022 as compared to 110 investments one-year ago and represents $107.9 million on a fair value basis, an increase of 71% from Q2 2021. During the quarter, our public warrant and equity holdings experienced $4.6 million of unrealized losses ending the quarter with a fair value of approximately $11 million. Investments in three of the nine companies are still subject to lockup. Our plan is to liquidate all of our public holdings over the course of 2022, as they recover in value. In fact, as of yesterday’s close, we are up another million
Moving on to credit quality. The overall health of our portfolio companies remain solid. As Jim mentioned, our portfolio companies not only raise $1.7 billion since the start of the year, but have also reduced operating burn to extend runway. We are pleased to report that 90% of our portfolio is ranked at our two best credit scores, which means that they are performing at or above expectations. In fact, during the quarter, one company with 2.5 million of principal balance was upgraded from Category 3 to Category 2 due to improved performance.
We downgraded two portfolio companies with a total principal balance of $28.4 million from Category 2 to Category 3, due to performance below expectations. We expect both companies to raise additional capital during the third quarter and to have sufficient runway, to enable them to improve performance over time. With regards to our other two existing category of three companies both demonstrated stable performance during the quarter with one raising additional capital.
In total, our Category 3 loans represent 8.4% of our total investment portfolio on a cost basis and 7.9% on a fair value basis. And we expect to upgrade these companies as they perform over the course of the rest of the year and/or raise significant additional capital. Our only Category 4 portfolio company Luminary Roli raised additional capital in Q2 and is heads down planning for another new product launch. Roli represents 1% of our total investment portfolio on a fair value basis.
During the quarter, we downgraded Pencil and Pixel also known as Modsy to Category 5 as a result of its formal M&A process falling apart at the last minute and the company selling its assets here in Q3. Our principal balance was $15 million and we marked our loan down to $2.25 million as of the end of Q2, which is our expected recovery amount. This was a sudden and isolated event related to specific facts and circumstances around Modsy and its M&A process.
When it was evident that the expected transaction would not happen, we explored the alternatives and concluded. This was the best outcome to minimize the loss and put the matter behind us. Our credit quality and performance has been exceptional since TPVG’s IPO. Cumulative net credit losses after factoring realized gains from our warrant and equity investments translate to an accumulative net loss rate of 0.9% based on commitments and 1.4% based on fundings since our IPO eight years ago, or 18 basis points a year. And we expect our existing public stock portfolio to more than offset the Modsy loss as and when we sell our holdings.
Our outlook for credit over the rest of the year continues to be quite positive given the strong cash positions of our portfolio companies and their extended runway, their continued fundraising efforts, the continued support of our select VC investors and of course, the efforts of our elite credit team to manage situations to good outcomes.
I thought it would be helpful to next share some of our thoughts with regards to originations and credit in this environment. At our core, we continue to focus on what I would describe as TriplePoint worthy companies, the high-quality companies with the best venture capital investors not just deals or volume for growth’s sake. We have been, and always will be patient as we look to deploy our capital and grow our portfolio. Our investment criteria have not changed and in most cases are more stringent. We are a financing source for growth. We encourage the prudent use of leverage, and we expect prospective portfolio companies to have recently raised equity capital and strong support and conviction from our select VCs and have meaningful existing cash runway.
We continue to believe that it is during volatile times when some of the best companies get funded, which is consistent with our 17-year track record of TriplePoint, and the more than 23 years that Jim and I have worked together. In summary, we’ve made substantial progress against our game plan for the year, despite the market volatility and are excited for what’s in-store over the remainder of the year. But make no mistake, we continue to be heads down focused on growing our portfolio in a patient in discipline manner, maintaining a solid credit profile, maintaining leverage, growing NII and NAV all while working with some of the most exciting venture growth stage companies backed by some of the industry’s best venture capital funds.
With that, I’ll now turn the call over to Chris.
Christopher Mathieu
Great. Thank you, Sajal, and hello, everyone. During the second quarter, we continued to generate substantial core interest income from our high-quality loan portfolio and continued to see strong and stable utilization rates on new debt commitments. We deployed capital using our attractive sources of leverage, which consisted of $390 million of fixed rate long-term investment grade notes, and a $350 million revolving credit facility that we renewed in July, while maintaining overall solid credit quality and increasing diversification in the portfolio.
I’ll now take you through the financial results for the second quarter of 2022. Total investment income was $27 million as compared to $20 million for the second quarter of 2021. This increase of 35% was largely due to the growth in the average portfolio size as well as higher portfolio yields. Our portfolio yield was 14.5% on total debt investments this quarter as compared to 13.9% for the second quarter of last year.
Onboarding yields continue to be strong and stable. Loan prepayments contributed 1.7% to the portfolio yield this quarter with a total of $50 million in principal prepayments and $3.1 million of accelerated income. While we were very successful in funding new investments, totaling $157 million, approximately 30% was funded in the closing weeks of the quarter, which bodes well for the strong topline investment income growth in Q3 and beyond.
Operating expenses were $14.8 million as compared to $10.9 million for the second quarter of last year. Operating expenses for the quarter consisted of $6.1 million of interest expense, $3.9 million of management fees, $3.2 million of incentive fees, and $1.6 million of general and administrative expenses.
The increase in overall operating expenses primarily driven by an increase in the portfolio assets and increase in the use of attractive leverage and the growth in pre-incentive fee income. We earned net investment income of $12.7 million or $0.41 per share compared to $9.4 million or $0.30 per share in the same period of 2021. Total unrealized losses included $16.8 million of mark-to-market adjustments on the loan portfolio, of which $13.2 million directly related to the Pencil and Pixel loans that was just covered by Sajal, as well as mark-to-market adjustments applied to our portfolio of fixed rate loans given the rise in the prime rate this quarter. $4.6 million also was from fluctuations in FX rates and $2.7 million from fluctuations in the public equity investments in our portfolio.
As of the second quarter end, the company’s total net assets were $404 million or $13.01 per share compared to $403 million or $13.03 per share as of June 30, 2021. On July 27, our Board of Directors declared a distribution of $0.36 per share from ordinary income to stockholders of record as of September 15, to be paid on September 30. With over earning the dividend again this quarter, we increased spillover income which remains significant and totaled approximately $14.3 million or $0.46 per share at the end of the quarter, supporting additional, regular and special supplemental distributions in the future.
As we continue to experience strong portfolio activity, we expect to maintain net investment income at levels that cover current, regular quarterly distributions consistent with our long-term track record. I’d also note that NII to dividend coverage was strong at 113% for the second quarter.
Now let’s move to our unfunded investment commitments. We continue to experience strong and stable utilization of our new commitments during the quarter. Given the robust pipeline that we mentioned earlier, we ended the quarter with $234 million of unfunded investment commitments with an additional $96 million dependent upon the portfolio company, reaching certain milestones. Of these amounts a $100 million of this total will expire during 2022, 77% of these unfunded commitments have contractual floating rate, interest rates all of which have a prime rate floor set to 3.25% or higher. This compares favorably to the outstanding loan portfolio at quarter end which had 59% contractual floating interest rates, which is up from 52% in the prior quarter.
Now just a quick update on our term notes, our credit facility, and overall liquidity. With the completion of three separate five-year fixed rate investment grade loans over the last two and a half years and against the backdrop of a continued rising interest rate environment, our fixed rate borrowings account for 79% of our outstanding leverage at the end of the quarter, while 59% of our debt investments are at floating rates and stand to benefit from increasing interest rates over time.
With our latest fixed rate term debt offering completed in Q1, we have three steps to the latter of term debt maturities with the maturities to occur in 2025, 2026 and 2027. As of June 30, there was an aggregate of $500 million of debt outstanding, $395 million outstanding on our fixed rate investment grade notes and a $105 million outstanding on our revolving credit facility.
Earlier in the second quarter, given the strength and diversity of our portfolio and the reasonable level of leverage we maintain, DBRS reaffirmed the company’s investment grade BBB Long-Term Issuer rating in April. In July, we amended our revolving credit facility. The amendment extends the revolving period from November of 2022 to May of 2024 and the scheduled maturity date from May of 24 to November of 25.
The total commitment remains the same at $350 million. And all the syndicate lenders continued with this long-term partnership. We appreciate the continued support of our leading and diversified banking group with this attractive revolving facility and our favorable investment grade notes outstanding, we remain well positioned to capitalize on the demand for our debt financing solutions.
We ended the quarter with a 1.24x gross leverage ratio at a 1.13x leverage ratio net of cash on hand. With the attractive cost effective credit facility, we will continue to use the line to grow the portfolio. As of quarter end, the company had current liquidity of $288 million consisting of $43 million in cash and $245 million available under our revolving credit facility. In addition to this current liquidity, the existing seasoned and diversified portfolio provides stable cash flows, which bodes well for sustained liquidity through 2022. For example, during the next two quarters alone, we have more than $25 million in expected cash flows from contractual principal payments in the portfolio, excluding any loan prepayments and proceeds from the sale of public equity securities in our portfolio that may also occur.
So this completes our prepared remarks, and we’d be happy to take questions from you on the phone. So operator, could you please open the lines at this time.
Question-and-Answer Session
Operator
Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Finian O’Shea from Wells Fargo. Please go ahead.
Finian O’Shea
Hi, everyone. Good afternoon and thanks. First question on portfolio company fundraising [your] numbers sounded very good, I think, $1.7 billion in the first half. I’m seeing if you could unpack that a bit and if it reflects the sort of median venture debt borrower. Was this number – the fundraising number concentrated or fairly well spread out and overlying your key borrowers? And then sort of second part, what did you see in terms of the magnitude of valuation change in these new fundraising rounds?
Sajal Srivastava
Hi, Fin. It’s Sajal here. I’ll take the first cut. So just packing through, so in Q2, we had 13 companies raise about $900 million, so a pretty diverse pool in terms of – so it’s not one or two companies raising the lion share. So I think, again, that’s a great data point in terms of the spreading of the capital raise across the portfolio. And then the other really interesting statistic is the majority of the rounds have been at or above upticks in valuations. So again, I think it’s a testament to the quality of our companies that they’re able to raise and that they’re able to raise at either existing valuations or premium to prior round valuations.
Finian O’Shea
Okay. That’s helpful. And then, is there any category in venture that VCs are backing away from? I know that’s usually how problems start when they do is a certain line of business goes out of vogue. Is this sort of a broad drawdown cost cutting extend the runway type thing? Or are you seeing VCs sort of pivot away from any sub-industry or anything like that?
Sajal Srivastava
Yes. It’s an interesting dynamic. I would say we’re not seeing any specific sub-sector of tech as kind of toxic or not attracted capital. I mean, I’ll pick on crypto again, we’re not – we don’t have portfolio companies in crypto, but while the crypto market is quite challenged, there are a number of investors that see this as an opportunity and are looking at that as a sector to invest in. So I would say, from our perspective, our goal is to lend to companies in those sectors that are attracting follow-on financing from our select group. And I think that’s our primary focus, but I would say overall, the theme is those companies and sectors that are capital intensive or with burn rates that are higher than necessary or growth rates that are unnecessarily high because of the burn rate are less attractive. So I don’t think its sector specific. I think it’s more of financial discipline specific.
Finian O’Shea
Okay. Very well. Thank you.
Operator
The next question comes from Crispin Love from Piper Sandler. Please go ahead.
Crispin Love
Thanks, and good afternoon, everyone. For your new debt investments, they came in a little bit better than I think your initial expectations were for the second quarter. And I appreciate the reaffirm guide that you gave for the second half, but just as we’re looking at the third and fourth quarter, would you expect the third quarter to be closer to the lower end of that $100 million to $200 million guide that you gave, just given that strong activity that we saw at the end of the second quarter, if there was any pull forward there in originations that closed in the second quarter versus the third, or do you think you could still get to the midpoint for the third quarter? Just any color there would be great.
Sajal Srivastava
Great question, Crispin. So I’d say, the third quarter is generally a seasonal quarter, right. Given the summer and vacation schedule, although I think from our perspective, given the backlog, we would expect to come in consistent with that range, consistent with prior quarters probably towards the lower end, and then Q4 tends to be the busier quarter and so mid-to-high end of that range, your perspective. As we look to Q2, I would say there’s a little bit of pulling from Q3 into Q2. I also think given the expectation of rates and rate increases and the frequency of it, I definitely think there was motivation on both sides, lender and obligor to get deals done faster. I think we were using that as an opportunity to close given the – but again, given with floating rate, it was less relevant, but I think again, companies were looking to lock in capital. So I’d say, that was how we look at the Q2 activity.
Crispin Love
Great. Thank you. I appreciate that color, Sajal. And then just – can you give a little bit more detail on the liquidity among your portfolio companies, then if you have any metrics on hand about how much liquidity some of those companies have to last six months a year longer, or just any other qualitative info you can share? I think Jim might have said something about two years of cash on hand, but I didn’t really catch what that was. So if you could clarify that as well, that’d be awesome.
James Labe
Yes. No problem. It’s a good question and a salient one to ask these days. So I don’t think I mentioned it in the prepared remarks, but as a last quarter, just over two-thirds of our companies had 12 months more cash in terms of cash runway, yes. It is something that we are continuing to monitor and as a very wise practice these days.
Crispin Love
Great. Thank you. I appreciate the color.
Operator
The next question comes from Kevin Fultz from JMP Securities. Please go ahead.
Kevin Fultz
Hi. Good afternoon, and thank you for taking my questions. Now just question around loan to value trends in the portfolio. Clearly there has been a significant pullback in private company valuations. I’m just curious if you have a sense how LTV ratios have changed in the portfolio and where that currently stands and also if you could remind us where you underwrite new deals on the LTV basis?
Sajal Srivastava
Sure. So we target LTVs under 25% at time of origination as of Q2, as in the 10-Q, I believe we’re between 7% and 8%, LTV for the portfolio, which is relatively flat to where we were as of Q1. So no material change in terms of portfolio LTV and as mentioned, the majority of the fundraising of our portfolio companies year-to-date have been at or flat or at upticks in valuations. So I’d say – as Jim said, listen, I think the reality of where the public multiples are and fundraising activity of the rest of the year, we expect our portfolio companies to continue to be able to raise, but I think again, raising flat is – flat is the new up and up is amazing, but I’d say, we continue to expect to hold in that range of that 7% to 9% over the next couple of quarters.
Kevin Fultz
Got it. That’s good to hear and I’ll leave it there. Congratulations on a nice quarter.
Operator
The next question comes from Casey Alexander from Compass Point. Please go ahead.
Casey Alexander
Yes, good afternoon. We’ve seen the volatility of the equity markets and a lot of things get pushed down in values in the equity markets. And your onboarding yields are going up, which suggests that maybe you have a little bit more leverage in your negotiations with companies coming in. Does that include – are you getting a better basis on the equity slices that you’re taking alongside of the debt investments that you’re making, and would it be your expectation that the vintage that you’re lending to right now would generate higher ROEs than maybe we had been used to over the past few years?
Sajal Srivastava
Yes. Casey, great question. Absolutely. So I would say, absolutely as we look to the companies that are getting funded in this environment, right. They’re getting benchmarked off of current multiples. The insight we’re hearing from the VCs is, hey, let’s use current multiples as the basis for our entry point, but as we look to exit, hey, we’re expecting five year average from the 13x to 19x or six year averages as our exit multiple. So I would say absolutely, we are expecting on a balance basis this class to generate higher return, given where valuations are and new round valuations are being set.
As we look to how we structure our deal, obviously it’s yield and – the yield from the coupon side and the debt side and the balance of the equity kicker side. So we’re never going to subsidize one – like, that’s not a reason to charge less to get more equity kickers, but I would say as Jim mentioned, we’re looking to push both up. So we’re definitely looking to – there is a premium for capital in this environment and you want to pick great companies and there is a cap to what our total returns could be, but we are definitely – companies are willing to pay a premium to be with a high quality trusted dependable partner and we’re seeing it on both the debt side of pushing the yields up and on the equity kicker percentage of total ownership of these companies.
James Labe
And I can only add that’s historically what we’ve seen as well, and it’s opportunistic times.
Casey Alexander
Okay. Thank you for that. Secondly, just because I have a bad attention span, can you guys review what your guidance is for the third quarter, fourth quarter originations and sort of how you expect prepayments to offset that?
Sajal Srivastava
Yes. Sure, Casey. So we got it to a $100 million to $200 million of gross fundings per quarter for Q3 and Q4 consistent with prior guidance. Again, given seasonality a little bit of pulling of originations in Q3 to Q2, Q1, sorry, Q3 to be at the lower end of the range. Q4 to be at the higher end of that $100 million to $200 million range from a funding – gross fundings perspective. We continue to expect to have one prepay a quarter, and I think that’s our – those were your questions.
Casey Alexander
But did you say also, do you expect in the second half of year sort of regular amortization totaling around $50 million?
Sajal Srivastava
We currently – we always have regular amortization not the second half of the year isn’t – more unique, but I believe correct, the portfolio cash flows and Chris jump in for the second half of the year are in excess of $60 million.
Casey Alexander
Great. All right. Thank you for taking my question. So I appreciate it.
Operator
The next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.
Christopher Nolan
Hey guys. Pencil and Pixel, given your comments, is that a third quarter realized loss?
Sajal Srivastava
Chris, do you want to take that?
Christopher Mathieu
So yes, so we fully hit the NAV in Q2, but it’ll flip from an unrealized loss to our realized loss in Q3. No impact on Q3 just geography.
Christopher Nolan
Got it. And given the cautious comments, you guys just sort of painted on the market and given also your comments that you expect earnings to exceed the dividend, what’s your thoughts in terms of leverage? Do you want to take some risk off and decrease the leverage? Are you going to increase it? What are the thoughts around that?
Sajal Srivastava
Yes. I think, Chris, our perspective is we’ve been jumping up and down over the years from a leverage ratio perspective. And so one of our – after getting the investment grade rating from DBRS, we said to our investors that we wanted to take advantage of that rating and the low cost to fix rate debt and run at a higher leverage, just to, as we said demonstrate the earnings profile of this business, when you have a 13% yielding portfolio at scale really should drive great NII and ROEs. But then as we said, given prepayment activity, that’s always, what’s kind of dropped our leverage down. And so I think, our goal is, we’d like to run at higher leverage, but the reality is with prepayment activity with portfolio amortization, it’s generally hard to do that, but again, we wanted to demonstrate to our investors, our ability to do what we said and to attempt to run at a slightly higher leverage ratio.
Christopher Nolan
Great. And I guess my final question is how many of your companies have bank loans or some sort of bank financing, which is ahead of your debt investments and because growth capital loans, I’m not sure if that’s first lien senior secured on top of banks or…
Sajal Srivastava
We disclose in our 10-Q that, and we qualified as those companies that have term loans from banks or term loans plus revolvers, and it’s approximately 25% as the end of Q2, which is the same as where it was at Q1.
Christopher Nolan
Great. Okay. Thanks guys.
Operator
The next question is from Ryan Lynch from KBW. Please go ahead.
Ryan Lynch
Hey, good afternoon. I’m trying to get a little more clarity on the total nature of the roughly $27 million of total realized and unrealized losses in the quarter. What of that is contributed to kind of markdowns and valuation [indiscernible] equity investments that spreads versus write-downs related to credit. I know you had the $13 million write downs from Pencil and Pixel. I’m just curious, are there any other credit write-downs that specifically impacted or contributed to that total $27 million?
Christopher Mathieu
Yes. So there was one other kind of, I’ll call it, category that I mentioned where we hit the fixed rate loans that we have in the portfolio with what we call a market rate adjustment. So for those, it was about a kind of in the aggregate for those loans about a $2.5 million unrealized adjustment for those given the double increase in prime rate during Q3. I’m sorry, Q2.
Ryan Lynch
That was just spread related versus anything credit…
Christopher Mathieu
Yes. That’s correct. Yes, they’re white credits, they’re performing at or better than expectation is just the fact that they were fixed rate deals rather than any kind of credit impairment or issue.
Ryan Lynch
And the other thing I just want to talk about, I want to make sure I’m understanding this correctly. I believe – and correct me if I’m wrong. You said 50% to 75% of your unfunded commitments you expect to be drawn. I was kind of curious to get what the timeframe was around that just because I do the math on that, it’s like $170 million to $250 million of additional funding that you would expect.
When I look at your balance sheet today, it looks like you guys are kind of at your – your leverage target is right around $9 million – those target potentially fluctuate. And then $60 million of total amortization in the back half of the year, and then you’ll have some prepayments as well, but that’s a large number. So it depends on when – when the timeframe you expect those to be funded. Is my number correct? And then also kind of what was the timeframe you expect those to fund?
Christopher Mathieu
Yes. So I can start. I guess the first point is that we do have a kind of a scheduled maturity for the various portfolio companies we have. Generally, we give them six to 12 months to drawdown on the availability of the commitment. I think I had mentioned $100 million of our unfunded commitments would expire if not drawn by the end of the year. And then the rest of that kind of is spread out ratably over 2023. So it’s not a near-term expectation that there would be heavy draws even for those that do draw, but that’ll be over the next nine to 12 months as well.
Sajal Srivastava
And then on top of that, about a third of the unfunded commitments are milestone based. So again, the portfolio companies have to achieve those milestones in order to access that capital and not all of them have actually done that.
Ryan Lynch
Okay. All right. I appreciate the time this afternoon.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim Labe for any closing remarks. Please go ahead.
James Labe
Great. Thank you. As always, we’d like to thank everyone here for listening and participating in our call today. We absolutely look forward to talking with you all again, next quarter. Thanks again, and have a nice day. Goodbye.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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