1 Unique Investment Opportunity to Think About
It’s no secret that venture capitalists can make big money. But it’s also no secret that they have to take a lot of risks by investing in smaller companies. Besides, being a backer of even an early-stage business would require a substantial amount of money to begin with. Unless you are already an ultra-high-net-worth individual, it’s not easy to get into the venture capital game.
However, over the last several months, one unique investment opportunity caught my attention. The company is basically a venture capitalist. It allows investors to get exposure to venture-stage growth while also collecting a stable stream of income.
I’m talking about Horizon Technology Finance Corp (NASDAQ:HRZN), a specialty finance company headquartered in Farmington, Connecticut. Structured as a business development company (BDC), HRZN invests in technology, life sciences, healthcare information and services, and cleantech industries.
According to the company, its investment objective is to generate current income from the debt investments and capital appreciation from the warrants it receives when making those debt investments.
And indeed, looking at the portfolio, Horizon Technology Finance Corp has a strong focus on lending.
By the end of the second quarter of 2018, the company’s debt portfolio consisted of 33 secured loans with an aggregate fair value of $203.0 million. Meanwhile, its warrants, equity, and other investments totaled just $19.0 million. (Source: “Fact Sheet,” Horizon Technology Finance Corp, last accessed September 26, 2018.)
HRZN Stock: A High-Income Opportunity
Compared to the hot tickers in the stock market, Horizon Technology Finance Corp may not seem like a familiar name. But the company has been in the business for quite some time. Since 2004, Horizon Technology Finance Corp had directly originated and invested more than $1.2 billion in venture loans to over 200 growing companies.
By operating its venture lending platform, Horizon can earn a stable stream of interest income. And its BDC structure means the company must return most of its profits to shareholders in the form of dividends.
Combining a stable lending business with the mandatory distribution requirement, HRZN stock has become one of the most generous dividend payers in today’s market. With a monthly dividend rate of $0.10 per share, the company offers a staggering annual yield of 10.5%.
That’s right, other than being a double-digit yielder, Horizon Technology Finance Corp is also a monthly dividend stock.
Managing Risks
Lending to small companies may not seem like the safest business. The good news is, Horizon Technology Finance Corp does not target early-stage startups or even mid-stage companies.
Instead, HRZN invests in later-stage and venture growth-stage companies in the technology market as well as later-stage, venture-growth-stage, and public companies in the life science market. (Source: “Investor Presentation,” Horizon Technology Finance Corp, last accessed September 26, 2018.)
Still, despite its focus on the more established companies, Horizon is able to earn oversized returns for its portfolio. Each loan usually ranges from $5.0 million to $25.0 million in size, with interest rates set at between 11% and 14%. In the second quarter of 2018, the weighted average annual yield on the company’s debt investments was 15.3%.
At the same time, the portfolio is well-diversified. Horizon has investments in 10 different sectors. Its three largest exposures are Software (24%), Internet & Media (19%), and Communications (12%).
To manage interest rate risk, Horizon has been running a portfolio of floating rate loans. As of June 30, 2018, 99% of the company’s debt investments bore interest at floating rates.
Management estimated that if the benchmark interest rates go up by 100 basis points, the company would earn an extra $1.8 million in annual interest income while incurring an extra $689,000 in annual interest expense.
Added up, that scenario would lead to an increase of $1.1 million in Horizon’s bottom line. (Source: “Form 10-Q,” Horizon Technology Finance Corp, last accessed September 26, 2018.)
With interest rates on the rise, Horizon’s sizable floating rate portfolio could turn into a major catalyst.
Horizon Technology Finance Corp: Growing Financials
The best part is, the company has been improving its financials.
Thanks to rising interest rates and a growing loan portfolio, Horizon Technology Finance Corp generated total investment income of $7.3 million in the second quarter of 2018, a substantial increase from the $5.9 million earned a year ago. (Source: “Horizon Technology Finance Announces Second Quarter 2018 Financial Results,” Horizon Technology Finance Corp, July 31, 2018.)
Total expenses also rose, but by a much lesser extent compared to HRZN’s top line growth. As a result, the company earned a net investment income of $3.3 million, or $0.29 per share in the second quarter. Again, this represented a solid improvement from the $2.8 million, or $0.24 per share in the second quarter of 2017.
For income investors who also want some exposure to venture growth stage companies, HRZN stock’s 10.5% yield is worth a look.