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Here’s a high-yield velvet-rope investing opportunity… sans the velvet rope.
Rarely is venture-capital investing associated with income investing: You do one or you do the other, and never the two shall meet.
Nevertheless, many income investors long for exposure to high-tech new-economy investing. The potential is obvious: These young guns are the fastest-growing companies. A study produced by the National Bureau of Economic Research, titled “Who Creates Jobs? Small vs. Large vs. Young,” found that the fastest-growing companies are those less than five years of age.
But what’s an income investor to do? Investing in new technology is interesting, but it appears impractical if income is the goal.
Fortunately, income and new technology need not be mutually exclusive.
Hercules Technology Growth Capital (NYSE: HTGC) gives investors new-technology exposure, while offering significant income and income growth. Hercules Tech yields 8.5% based on its $1.24 annual dividend payout, which has been increased every year since 2010, and is up 55% over the past four years.
You could call Hercules Tech a venture-capital bank. Hercules Tech controls a portfolio of 90 new-tech investments valued at $991.3 million. Its business model is predicated on lending to new businesses. But it’s really a business development company (BDC), hence the high dividend payouts to investors.
Since 2005, the dollar value of Hercules Tech’s investment portfolio has grown at an 18.8% average annual rate. Past financing successes include , Trulia (NYSE: TRLA), and Facebook (NASDAQ: FB). Hercules Tech’s current portfolio is diversified across new-energy technology, media content, Internet, consumer products, and drug discovery.
Roughly 90% of Hercules Tech’s portfolio is focused on first-lien secured loans. Because Hercules Tech has venture-capital characteristics, over 70% of its debt is enhanced with an equity feature, typically warrants – derivative securities that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.
Most of Hercules Tech’s warrants are immediately exercisable upon issuance and generally remain exercisable for the lesser of five to seven years or one to three years after completion of an initial public offering. Hercules Tech targets a total annualized return of 12% to 25% on these warrant investments.
These warrants are hidden gems embedded with potential wealth. Hercules Tech owns 117 warrant holdings carried on the books at $23 million. But if these warrants were actually exercised, Hercules Tech would realize $79 million in equity value. If the next Facebook, Google (NASDAQ: GOOG), or Amgen (NASDAQ: AMGN) lurks within the investment portfolio, the payoff on one of these warrants could be big.
Because Hercules Tech is a BDC acting as VC fund, it’s a retail investor’s version of the velvet-rope investment. To invest in most VC funds you must be an accredited investor, which requires a large up-front initial investment. The better VC funds even demand initial investments measured in millions of dollars.
But with Hercules Tech, you can invest in a Silicon Valley VC exposure for the price of a single share of stock… and you get an 8.5% yield to boot.
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