Hercules Capital Inc

Previous wording

The matters discussed in this report, as well as in future oral and written statements by management of Hercules Capital, Inc. that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:

Current wording

The matters discussed in this Annual Report, as well as in future oral and written statements by management of Hercules Capital, Inc., that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, including those discussed under “Item 1A. Risk Factors,” which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:

Previous wording

•our ability to operate as a BDC and a SBIC;

Current wording

•our ability to operate as a BDC and our subsidiaries ability to operate as SBICs;

Previous wording

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this report.

Current wording

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Annual Report.

Previous wording

Throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “Non-GAAP financial measures” under SEC rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States. The Non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies.

Current wording

We present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “Non-GAAP financial measures” under SEC rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States. The Non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies.

Previous wording

We are a leading specialty finance company with a focus on providing financing solutions to high-growth and innovative venture capital-backed and institutional-backed companies in a variety of technology, life sciences, and sustainable and renewable technology industries. Our primary business objectives are to increase our net income, net investment income, and net asset value through our investments. We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on Structured Debt. We expect that our investments will generally range from $25.0 million to $100.0 million, although we may make investments in amounts above or below this range. Through generation of current income from our debt investments and capital appreciation from our warrant and equity investments, we aim to maximize our portfolio total return.

Current wording

We are a leading specialty finance company with a focus on providing financing solutions to high-growth and innovative venture capital-backed and institutional-backed companies in a variety of technology and life sciences industries. Our primary business objectives are to increase our net income, net investment income, and net asset value through our investments. We principally invest in debt securities and, to a lesser extent, warrant and equity securities, with a particular emphasis on Structured Debt. We aim to achieve our business objectives by maximizing our portfolio total return through generation of current income from our debt investments and capital appreciation from our warrant and equity investments. We expect that our investments will generally range from $25.0 million to $100.0 million, although we may make investments in amounts above or below this range. Through generation of current income from our debt investments and capital appreciation from our warrant and equity investments, we aim to maximize our portfolio total return.

Previous wording

Since inception through December 31, 2023, we have originated approximately $19.0 billion in commitments in over 600 companies. We, our subsidiaries or our affiliates, may also agree to manage certain other funds that invest in debt, equity or provide other financing or services to companies in a variety of industries for which we may earn management or other fees for our services. As of December 31, 2023, Hercules and its Adviser Subsidiary actively manage approximately$4.2 billion of assets.

Current wording

Since inception through December 31, 2024, we have originated more than $21.0 billion in commitments in over 600 companies. We, through the Adviser Subsidiary, may also agree to manage certain other funds that invest in debt, equity or provide other financing or services to companies in a variety of industries for which we, through the Adviser Subsidiary may earn management or other fees for our services. As of December 31, 2024, we, including through our Adviser Subsidiary, actively manage approximately$4.8 billion of assets.

Previous wording

We are structured as an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities of private U.S. companies, cash, cash equivalents, and high-quality debt investments that mature in one year or less. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies. We source our investments through our principal office, which was located in Palo Alto, CA until February 12, 2024 and in San Mateo, CA thereafter and presently, as well as through our additional offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, Denver, CO, and London, United Kingdom.

Current wording

We are structured as an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which includes securities of private U.S. companies, cash, cash equivalents, and high-quality debt investments that mature in one year or less. Consistent with requirements under the 1940 Act, we invest primarily in United States based companies and to a lesser extent in foreign companies. We source our investments through our principal office located in San Mateo, CA, as well as through our additional offices in Boston, MA, New York, NY, San Diego, CA, Denver, CO, and London, United Kingdom.

Previous wording

Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. Not all debt commitments represent future cash requirements. Unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments are subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the two succeeding quarters from close. From time to time, unfunded contractual commitments may expire without being drawn and thus do not represent future cash requirements.

Current wording

Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. Not all debt commitments represent future cash requirements. Unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments are subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the year following the underwriting of such debt commitment. From time to time, unfunded contractual commitments may expire without being drawn and thus do not represent future cash requirements.

Previous wording

(4)Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones. This excludes $127.7 million and $173.5 million of unfunded commitments as of December 31, 2023 and December 31, 2022, respectively, to portfolio companies related to loans assigned to or directly committed by the Adviser Funds.

Current wording

(3)Amount represents unfunded commitments, including undrawn revolving facilities, which are available at the request of the portfolio company. Amount excludes unfunded commitments which are unavailable due to the borrower having not met certain milestones. This excludes $139.7 million and $127.7 million of unfunded commitments as of December 31, 2024 and December 31, 2023, respectively, to portfolio companies related to loans assigned to or directly committed by the Adviser Funds.

Previous wording

We receive principal payments on our debt investment portfolio based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period. During the year ended December 31, 2023, we received approximately $975.9 million in aggregate principal repayments. Approximately $50.8 million of the aggregate principal repayments related to scheduled principal payments and approximately $925.1 million were early principal repayments related to 45 portfolio companies.

Current wording

We receive principal payments on our debt investment portfolio based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period. During the year ended December 31, 2024, we received approximately $953.6 million in aggregate principal repayments. Approximately $31.6 million of the aggregate principal repayments related to scheduled principal payments and approximately $922.0 million were early principal repayments related to 56 portfolio companies.

Previous wording

Additionally, we may hold investments in debt, warrant, or equity positions of portfolio companies that have filed a registration statement with the SEC in contemplation of a potential initial public offering. There can be no assurance that companies that have yet to complete their initial public offerings will do so in a timely manner or at all.

Current wording

Additionally, we may hold investments in debt, warrant, or equity positions of portfolio companies that have filed a registration statement with the SEC in contemplation of a potential IPO. There can be no assurance that companies that have yet to complete their IPO will do so in a timely manner or at all.

Previous wording

The following table presents certain additional selected information regarding our debt investment portfolio as of December 31, 2023 and December 31, 2022:

Current wording

The following table presents certain additional selected information regarding our debt investment portfolio as of December 31, 2024 and December 31, 2023. This includes information on index rate floors which we have in place on all of our floating rate debt investments.

Previous wording

We will continue to monitor macroeconomic market developments and their related impact to our business, including impacts to our portfolio companies, employees, due diligence and underwriting processes, and the broader financial markets. Given the unpredictability and fluidity of the macroeconomic market, neither our management nor our Board is able to predict the full impact of the macroeconomic events on our business, future results of operations, financial position, or cash flows. However, we believe we and our portfolio are well positioned to manage the current environment. For additional information, see “Part I — Item 1A. Risk Factors” in this annual report on Form 10-K.

Current wording

Our investment portfolio continues to be focused on industries and sectors that are generally expected to be more resilient to U.S. and global economic cycles. This includes being partially insulated from declining interest rates as all of our floating rate debt investments, which represent 97.4% and 95.9% of our debt portfolio as of December 31, 2024 and December 31, 2023, respectively, are subject to interest rate floors. While our portfolio is not immune to the impact of macroeconomic events, we believe we and our portfolio are well positioned to manage the current environment. Given the unpredictability and fluidity of the macroeconomic market, neither our management nor our Board is able to predict the full impact of the macroeconomic events on our business, future results of operations, financial position, or cash flows. For additional information, see "Part I - Item 1A. Risk Factors" in this Annual Report.

Previous wording

As of December 31, 2023, our debt investments generally have a term of between two and five years and typically bear interest at a rate ranging from approximately 8% to approximately 18%. In addition to the cash yields received on our debt investments, in some instances our debt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.

Current wording

As of December 31, 2024, our debt investments generally have a term of between two and five years and typically bear interest at a rate ranging from approximately 7.5% to approximately 14.9%. In addition to the cash yields received on our debt investments, in some instances, our debt investments may also include any of the following: exit fees, balloon payment fees, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.

Previous wording

Additionally, we have debt investments in our portfolio that earn PIK interest. The PIK interest, computed at the contractual rate specified in each loan agreement, is recorded as interest income and added to the principal balance of the loan on specified capitalization dates. To maintain our status as a RIC, the non-cash PIK income must be distributed to stockholders with other sources of income in the form of dividend distributions even though we have not yet collected any cash from the borrower. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments. During the years ended December 31, 2023 and December 31, 2022, we recorded approximately $24.7 million and $20.5 million of PIK income, respectively.

Current wording

Additionally, we have debt investments in our portfolio that earn PIK interest. The PIK interest, computed at the contractual rate specified in each loan agreement, is recorded as interest income and added to the principal balance of the loan on specified capitalization dates. To maintain our status as a RIC, the non-cash PIK income must be distributed to stockholders with other sources of income in the form of dividend distributions even though we have not yet collected any cash from the borrower. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments. During the years ended December 31, 2024 and December 31, 2023, we recorded approximately $51.3 million and $24.7 million of PIK income, respectively.

Previous wording

(1)Yield calculated using“Total investment income” excluding bank interest, dividend income, and investment income from other assets for the three months and year ended December 31, 2023.

Current wording

(1)Yield calculated using“Total investment income” excluding bank interest, dividend income, and investment income from other assets for the three months and year ended December 31, 2024 and December 31, 2023.

Previous wording

Another financial measure that we monitor is the total return for our investors, which was approximately 42.0% and (10.1%) during the years ended December 31, 2023 and 2022, respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the distribution. The total return does not reflect any sales load that may be paid by investors. See “Note 10 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report.

Current wording

Another financial measure that we monitor is the total return for our investors, which was approximately 32.8% and 42.0% during the years ended December 31, 2024 and 2023, respectively. The total return equals the change in the ending market value over the beginning of the period price per share plus distributions paid per share during the period, divided by the beginning price assuming the distribution is reinvested on the date of the distribution. The total return does not reflect any sales load that may be paid by investors. See “Note 10 – Financial Highlights” included in the notes to our consolidated financial statements appearing elsewhere in this report.

Previous wording

Our portfolio companies are primarily privately held companies and public companies which are active in sectors characterized by high margins, high growth rates, consolidation, and product and market extension opportunities.

Current wording

Our portfolio companies are primarily privately held companies which are active in sectors characterized by high margins, high growth rates, consolidation, and product and market extension opportunities and, to a lesser extent, public companies active in those sectors.

Previous wording

(1)See “Note 4 – Investments” for complete list of industry sectors and corresponding amounts of investments at fair value as a percentage of the total portfolio. As of December 31, 2023 the fair value as a percentage of total portfolio does not exceed 5.0% for any individual industry sector other than “Drug Discovery & Development”, “Software”, “Consumer & Business Services”, or "Healthcare Services, Other".

Current wording

(1)See “Note 4 – Investments” for complete list of industry sectors and corresponding amounts of investments at fair value as a percentage of the total portfolio. As of December 31, 2024, the fair value as a percentage of total portfolio does not exceed 5.0% for any individual industry sector other than “Software”, “Drug Discovery & Development”, “Healthcare Services, Other”, and “Consumer & Business Services.”

Previous wording

Industry and sector concentrations vary as new loans are recorded and loans are paid off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and warrants or other equity interests, can fluctuate materially when a loan is paid off or a warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated in several portfolio companies.

Current wording

Industry and sector concentrations vary as new loans are recorded and loans are paid off. Investment income, consisting of interest, fees, and recognition of gains on equity and warrants or other equity interests, can fluctuate materially when a loan is paid off or a warrant or equity interest is sold. Investment income recognized in any given year can be highly concentrated in several portfolio companies.

Previous wording

For the years ended December 31, 2023 and 2022, our ten largest portfolio companies represented approximately 29.7% and 29.0% of the total fair value of our investments in portfolio companies, respectively. As of December 31, 2023 and December 31, 2022, we had five and eight investments that represented 5% or more of our net assets, respectively. As of December 31, 2023 and December 31, 2022, we had five and four equity investments representing approximately 56.5% and 39.8%, respectively, of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. No single portfolio investment represented more than 10% of the fair value of our total investments as of December 31, 2023 and 2022.

Current wording

For the years ended December 31, 2024 and 2023, our ten largest portfolio companies represented approximately 31.6% and 29.7% of the total fair value of our investments in portfolio companies, respectively. As of December 31, 2024 and December 31, 2023, we had six and five investments that represented 5% or more of our net assets, respectively. As of December 31, 2024 and December 31, 2023, we had three and five equity investments, respectively, that represented 5% or more of the total fair value of our equity investments. These equity investments represented approximately 49.7% and 56.5% of the total fair value of our equity investments as of December 31, 2024 and December 31, 2023, respectively.

Previous wording

As of December 31, 2023 and 2022, approximately 95.9% and 95.3%, of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime, LIBOR, SOFR, Eurodollar, or BSBY-based interest rate floor, respectively. Note that as of December 31, 2023, no investments were priced using LIBOR based interest rates. Changes in interest rates, including Prime, SOFR, Eurodollar, or BSBY rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates.

Current wording

As of December 31, 2024 and 2023, approximately 97.4% and 95.9% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime, SOFR, SONIA, or BSBY-based interest rate floor, respectively. Changes in interest rates, including Prime, SOFR, SONIA, or BSBY rates, may affect the interest income and the value of our investment portfolio for portfolio investments with floating rates.

Previous wording

Our investments in Structured Debt generally have detachable equity enhancement features in the form of warrants or other equity securities designed to provide us with an opportunity for capital appreciation. These features are treated as OID and are accreted into interest income over the term of the loan as a yield enhancement. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round. As of December 31, 2023, we held warrants in 103 portfolio companies, with a fair value of approximately $33.9 million. The fair value of our warrant portfolio increased by approximately $3.3 million, as compared to a fair value of $30.6 million as of December 31, 2022, primarily related to the decrease in fair value of the portfolio companies.

Current wording

Our investments in Structured Debt generally have detachable equity enhancement features in the form of warrants or other equity securities designed to provide us with an opportunity for capital appreciation. These features are treated as OID and are accreted into interest income over the term of the loan as a yield enhancement. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round. As of December 31, 2024, we held warrants in 98 portfolio companies, with a fair value of approximately $30.5 million. The fair value of our warrant portfolio decreased by approximately $3.4 million, as compared to a fair value of $33.9 million as of December 31, 2023, primarily related to the decrease in fair value of the portfolio companies.

Previous wording

Our existing warrant holdings would require us to invest approximately $61.7 million to exercise such warrants as of December 31, 2023. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. As attractive investment opportunities arise, we may exercise certain of our warrants to purchase stock, and could ultimately monetize our investments. Of the warrants that we have monetized since inception, we have realized multiples in the range of approximately 1.02x to 42.71x based on the historical rate of return on our investments. We may also experience losses from our warrant portfolio in the event that warrants are terminated or expire unexercised.

Current wording

Our existing warrant holdings would require us to invest approximately $60.5 million to exercise such warrants as of December 31, 2024. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. As attractive investment opportunities arise, we may exercise certain of our warrants to purchase stock, and could ultimately monetize our investments. Of the warrants that we have monetized since inception, we have realized multiples in the range of approximately 1.02x to 42.71x based on the historical rate of return on our investments. We may also experience losses from our warrant portfolio in the event that warrants are terminated or expire unexercised.

Previous wording

As of December 31, 2023, our debt investments had a weighted average investment grading of 2.24 on a cost basis, as compared to 2.23 as of December 31, 2022. Changes in a portfolio company's investment grading may be a result of changes in portfolio company's performance and/or timing of expected liquidity events. For instance, we may downgrade a portfolio company if it is not meeting our financing criteria or are underperforming relative to their respective business plans. We may also downgrade a portfolio company as it approaches a point in time when it will require additional equity capital to continue operations. Conversely, we may upgrade a portfolio company's investment grading when it is exceeding our financial performance expectations and/or is expected to mature/repay in full due to a liquidity event. The overall downgrade of the portfolio's weighted average investment grading is reflective of the impact of the current macroeconomic environment.

Current wording

As of December 31, 2024 and December 31, 2023, our debt investments had a weighted average investment grading of 2.26 and 2.24 on a cost basis, respectively. Changes in a portfolio company's investment grading may be a result of changes in portfolio company's performance and/or timing of expected liquidity events. For instance, we may downgrade a portfolio company if it is not meeting our financing criteria or are underperforming relative to its respective business plan. We may also downgrade a portfolio company as it approaches a point in time when it will require additional equity capital to continue operations. Conversely, we may upgrade a portfolio company's investment grading when it is exceeding our financial performance expectations and/or is expected to mature/repay in full due to a liquidity event. The overall downgrade of the portfolio's weighted average investment grading is reflective of the impact of the current macroeconomic environment.

Previous wording

As macroeconomic events evolve and cause disruption in the capital markets and to businesses, we are continuing to monitor and work with the management teams and stakeholders of our portfolio companies to navigate the significant market, operational, and economic challenges created by these events. This includes remaining proactive in our assessments of credit performance to manage potential risks across our investment portfolio.

Current wording

If macroeconomic events evolve and cause disruption in the capital markets and to businesses, we monitor and work with the management teams and stakeholders of our portfolio companies to navigate any significant market, operational, and economic challenges created by these events. This includes remaining proactive in our assessments of credit performance to manage potential risks across our investment portfolio.

Previous wording

Debt investments are placed on non-accrual status when it is probable that principal, interest or fees will not be collected according to contractual terms. When a debt investment is placed on non-accrual status, we cease to recognize interest and fee income until the portfolio company has paid all principal and interest due or demonstrated the ability to repay our current and future contractual obligations. We may not apply the non-accrual status to a loan where the investment has sufficient collateral value to collect all of the contractual amount due and is in the process of collection. Interest collected on non-accrual investments are generally applied to principal.

Current wording

Debt investments are placed on non-accrual status when it is probable that principal, interest or fees will not be collected according to contractual terms. When a debt investment is placed on non-accrual status, we cease to recognize interest and fee income until the portfolio company has paid all principal and interest due or demonstrated the ability to repay our current and future contractual obligations. We may choose not to apply the non-accrual status to a loan where the investment has sufficient collateral value to collect all of the contractual amount due and is in the process of collection. Interest collected on non-accrual investments are generally applied to principal.

Previous wording

Total investment income for the year ended December 31, 2023 was approximately $460.7 million as compared to approximately $321.7 million for the year ended December 31, 2022. Investment income is primarily composed of interest income earned on our debt investments and fee income from commitments, facilities, and other loan related fees.

Current wording

Total investment income for the year ended December 31, 2024 was approximately $493.6 million as compared to approximately $460.7 million for the year ended December 31, 2023. Investment income is primarily composed of interest income earned on our debt investments, fee income from commitments, facilities, and other loan related fees and dividend income.

Previous wording

Interest and dividend income for the year ended December 31, 2023 totaled appro ximately $434.4 million as compared to approximately $307.3 million for the year ended December 31, 2022. The increase in interest and dividend income for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily attributable to an increase in the weighted average principal and an increase in core yield due to increases in the benchmark rates of our debt investment portfolio outstanding between the periods.

Current wording

Interest and dividend income for the year ended December 31, 2024 totaled appro ximately $467.2 million as compared to approximately $434.4 million for the year ended December 31, 2023. The increase in interest and dividend income for the year ended December 31, 2024 as compared to the year ended December 31, 2023 isprimarily attributable to an increase in the weighted average principal outstanding and dividend income distributions primarily from the Adviser Subsidiary. Partially offsetting income growth was the impact of declining Core Yield due to declining benchmark rates in 2024.

Previous wording

The following table summarizes recurring and non-recurring interest income for the years ended December 31, 2023 and December 31, 2022:

Current wording

The following table summarizes recurring and non-recurring interest income and dividend income for the years ended December 31, 2024 and December 31, 2023:

Previous wording

The increase in PIK interest income during the year ended December 31, 2023, as compared to the year ended December 31, 2022 is due to an increase in the weighted average principal outstanding for debt investments which earn PIK interest. Payments on PIK loans are normally received only in the event of payoffs. The PIK receivable for December 31, 2023 and December 31, 2022 was approximately 1% and less than 1% of total debt investments, respectively.

Current wording

The increase in PIK interest income during the year ended December 31, 2024, as compared to the year ended December 31, 2023 is due to an increase in the weighted average principal outstanding for debt investments which earn PIK interest. Payments on PIK loans are normally received only in the event of payoffs. The PIK receivable for December 31, 2024 and December 31, 2023 was approximately 2% and 1% of total debt investments, respectively.

Previous wording

Our operating expenses are comprised of interest and fees on our debt borrowings, general and administrative expenses, taxes, and employee compensation and benefits. During the years ended December 31, 2023 and 2022, our net operating expenses totaled approximately $156.6 million and $133.6 million, respectively.

Current wording

Our operating expenses are comprised of interest and fees on our debt borrowings, general and administrative expenses, taxes, and employee compensation and benefits. During the years ended December 31, 2024 and 2023, our net operating expenses totaled approximately $167.8 million and $156.6 million, respectively.

Previous wording

Interest and fees on our debt totaled approx imately $77.5 million and $62.3 million for the years ended December 31, 2023 and 2022, respectively. Interest and fee expense during the year ended December 31, 2023, as compared to the year ended December 31, 2022, increased due to higher weighted average borrowing costs and debt outstanding.

Current wording

Interest and fees on our debt totaled approx imately $86.0 million and $77.5 million for the years ended December 31, 2024 and 2023, respectively. Interest and fee expense during the year ended December 31, 2024, as compared to the year ended December 31, 2023, increased due to higher weighted average borrowing costs and debt outstanding.

Previous wording

We had a weighted average cost of debt of approximately 4.8% and 4.2%for the years ended December 31, 2023 and 2022, respectively. The weighted average cost of debt includes interest and fees on our debt, but excludes the impact of fee accelerations due to the extinguishment of debt. The increase in the weighted average cost of debt during 2023 as compared to 2022, was attributable toincreased usage of our Credit Facilities which are floating rate instruments and thus, have a higher cost of debt.

Current wording

Our weighted average cost of debt was approximately 5.0% and 4.8%for the years ended December 31, 2024 and 2023, respectively. The weighted average cost of debt includes interest and fees on our debt, but excludes the impact of fee accelerations due to the extinguishment of debt, as applicable. The increase in the weighted average cost of debt during

Previous wording

General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with theworkout of underperforming investments and various other expenses. Our general and administrative expenses increased to $18.7 million from $16.9 million for the years ended December 31, 2023 and 2022, respectively. The increase in general and administrative expenses for the year ended December 31, 2023 is primarily attributable to an increase in costs of office and travel expenses and certain professional fees. Tax expenses primarily relate to excise tax accruals. Tax expenses were $6.1 million and $5.4 million for the years ended December 31, 2023 and December 31, 2022, respectively.

Current wording

General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with theworkout of underperforming investments and various other expenses. Our general and administrative expenses increased to $19.7 million from $18.7 million for the years ended December 31, 2024 and 2023, respectively. Theincrease in general and administrative expenses for the year ended December 31, 2024 is primarily attributable to anincrease in costs of office and professional fees and expenses. Tax expenses were $5.8 million and $6.1 million for the years ended December 31, 2024 and December 31, 2023, respectively. Our tax expenses primarily relate to excise tax accruals.

Previous wording

Employee compensation and benefits totaled approximately $50.2 million for the year ended December 31, 2023, as compared to approximately $43.9 million for the year ended December 31, 2022. The increase between comparative periods was primarily due to increased headcount and variable compensation duringthe year ended December 31, 2023 .

Current wording

Employee compensation and benefits totaled approximately $54.2 million for the year ended December 31, 2024, as compared to approximately $50.2 million for the year ended December 31, 2023. The increase for the year ended December 31, 2024 was primarily due to fluctuations in variable compensation and increase in headcount.

Previous wording

Employee stock-based compensation totaled approximately $13.2 million for the year ended December 31, 2023, as compared to approximately $13.4 million for the year ended December 31, 2022. The decrease between comparative periods was primarily attributable to a decrease in compensation expense related to Performance Awards which vested in 2022.

Current wording

Employee stock-based compensation totaled approximately $12.8 million for the year ended December 31, 2024, as compared to approximately $13.2 million for the year ended December 31, 2023. The decrease for the year ended December 31, 2024 was primarily attributable to a decrease in compensation expense related to Performance Awards (as defined below) which vested in 2023.

Previous wording

The shared services agreement with the Adviser Subsidiary (the “Sharing Agreement”), provides the Adviser Subsidiary access to our human capital resources, including deal professionals, finance, and administrative functions, as well as other resources including infrastructure assets such as office space and technology. Under the terms of the Sharing Agreement, we allocate the related expenses of shared services to the Adviser Subsidiary. Our total net operating expenses for the years ended December 31, 2023 and 2022, are net of expenses alloc ated to the Adviser Subsidiary of $9.1 million and $8.3 million, respectively. The increase in expenses allocated to the Adviser Subsidiary for the year ended December 31, 2023 compared to 2022 is due to higher average assets under management and higher allocations to the Adviser Funds. As of December 31, 2023 and 2022, $0.1 million and $0.1 million, respectively, was due from the Adviser Subsidiary.

Current wording

The shared services agreement with the Adviser Subsidiary (the “Sharing Agreement”), provides the Adviser Subsidiary access to our human capital resources, including deal professionals, finance, and administrative functions, as well as other resources including infrastructure assets such as office space and technology. Under the terms of the Sharing Agreement, we allocate the related expenses of shared services to the Adviser Subsidiary. Our total net operating expenses for the years ended December 31, 2024 and 2023, are net of expenses alloc ated to the Adviser Subsidiary of $10.8 million and $9.1 million, respectively. The increase in expenses allocated to the Adviser Subsidiary for the year ended December 31, 2024 compared to 2023 is due to higher average assets under management and higher allocations to the Adviser Funds. As of December 31, 2024 and 2023, less than $0.1 million and $0.1 million, respectively, was due from the Adviser Subsidiary.

Previous wording

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period, net of recoveries. Realized loss on debt extinguishment relates to additional fees, costs, and accelerated recognition of remaining debt issuance costs, which are recognized in the event debt is extinguished before its stated maturity. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Current wording

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period, net of recoveries. Realized loss on debt extinguishment relates to additional fees, costs, and accelerated recognition of remaining debt issuance costs, which are recognized in the event our debt is extinguished before its stated maturity. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Previous wording

During the year ended December 31, 2023, we recognized a net realized gain of $8.4 million. The net realized gains were generated from gross realized gains of $29.9 million primarily from the sale of our equity and warrant positions in Palantir Technologies, Provention Bio, Inc., TransMedics Group, Inc., Sprinklr, Inc., DoorDash, Inc., and Zeta Global Corp. Our gains were offset by gross realized losses of $21.5 million from the write-off of equity and warrant investments in Concert Pharmaceuticals, Inc. and Fungible, Inc. which had no value after the respective portfolio companies were acquired, the write-off of our equity investments in Gynesonics, Inc., Paratek Pharmaceuticals, Inc., Tricida, Inc., Gelesis, Inc. and Flowonix Medical Inc. as a result of capital markets transactions or events. Additionally, we realized a net $6.3 million loss from write-off of our debt investments relating to Codiak Biosciences, Inc. and Esme Learning Solutions, Inc, net of recovered collections of $17.5 million.

Current wording

During the year ended December 31, 2023, we recognized a net realized gain of $8.4 million. The net realized gains were generated from gross realized gains of approximately $29.9 million primarily from the sale of our equity and warrant positions in Palantir Technologies, Provention Bio, Inc., TransMedics Group, Inc., Sprinklr, Inc., DoorDash, Inc., and Zeta Global Corp. Our gross realized gains were offset by gross realized losses of $21.5 million from the write-off of equity and warrant investments in Concert Pharmaceuticals, Inc. and Fungible, Inc., which had no value after the respective portfolio companies were acquired, as well as the write-off of our equity investments in Gynesonics, Inc. Paratek Pharmaceuticals, Inc., Tricida, Inc., Gelesis, Inc. and Flowonix Medical Inc. as a result of capital market transactions or events. Additionally, we realized a net $6.3 million loss from the write-off of our debt investments relating to Codiak Biosciences, Inc. and Esme Learning Solutions, Inc., which are net of recovered collections of $17.5 million.