Horizon Know-how Finance Company (NASDAQ:HRZN) is a well-managed enterprise growth agency specializing in expertise companies.

The portfolio is performing effectively, the dividend is well-covered, and the BDC lately elevated its month-to-month dividend by 10%.

Horizon Know-how Finance, I consider, is an interesting BDC to contemplate for passive earnings buyers, owing to its concentrate on a market area of interest.

The inventory is buying and selling at roughly guide worth, but it surely has the potential to increase its premium valuation if the Fed continues to lift rates of interest in 2023.

Horizon Know-how Finance Operates In The Enterprise Capital Market

Horizon Know-how Finance is distinct from different enterprise growth companies in that it focuses on offering enterprise debt capital to rising corporations.

Most BDCs spend money on corporations within the center market, which consists of corporations which have issue acquiring financing from conventional banks. Nearly all of middle-market companies are established, mature companies with lengthy working histories and steady, recession-resistant money flows.

Horizon Know-how Finance, alternatively, focuses on the enterprise capital area of interest, with a selected emphasis on expertise, life sciences, and healthcare expertise corporations.

The full addressable marketplace for the sort of funding technique is $49 billion, and it’s served by a small variety of specialised BDCs equivalent to Horizon Know-how Finance and Hercules Capital, Inc. (HTGC).

Horizon Know-how Finance’s portfolio is primarily comprised of debt investments made to corporations in quite a lot of industries, nearly all of that are biotechnology (24%), medical units (18%), consumer-related expertise (18%), and software program (17%).

On the finish of the September quarter, debt investments made up 96% of the BDC’s portfolio, with warrants accounting for the remaining 3.5%.

Horizon Know-how Finance good points extra upside potential from warrant (but additionally fairness) investments if a selected borrower’s enterprise takes off.

As of September 30, 2022, the BDC’s funding portfolio was valued at $634.6 million. In response to Horizon Know-how Finance’s most up-to-date quarterly 10-Q report, there have been no non-accrual investments.

Dividend Protection And Dividend Progress

Horizon Know-how Finance earned $1.06 per share in web funding earnings between January and September 2022, whereas paying out a complete of $0.90 per share. The quarterly dividend was $0.30 per share and was paid on a month-to-month foundation all through 2022.

The pay-out ratio for 2022 based mostly on the info accessible up to now was 84.90%, indicating that the dividend may be very effectively lined.

Due to its sturdy dividend protection, the corporate introduced a ten% improve in its month-to-month dividend to $0.11 per share, giving buyers who purchase HRZN immediately a ten.9% dividend yield.

Horizon Know-how Finance additionally has portfolio earnings upside from its floating charge investments. Horizon Know-how Finance’s excellent principal quantity of debt investments had floating charge rates of interest as of September 30, 2022, implying {that a} hawkish central financial institution in 2023 might lead to funding earnings tailwinds for Horizon Know-how Finance.

In response to BDC projections, a 100-basis-point improve might lead to $5.85 million extra funding earnings and, probably, a rise within the base dividend or the cost of a particular dividend.

Premium Valuation Attainable

Horizon Know-how Finance is buying and selling at a 4% premium to web asset worth, which, for my part, has the potential to develop into the next premium, particularly given the BDC’s glorious portfolio high quality.

The BDC’s portfolio is performing effectively, and the floating charge funding publicity strongly implies portfolio earnings upside that buyers could not have absolutely factored into Horizon Know-how Finance’s valuation.

Hercules Capital, for instance, achieves a a lot greater web asset worth premium, and Horizon Know-how Finance, for my part, deserves an analogous 30%+ NAV premium.

Why Horizon Know-how Finance May See A Decrease/Increased Valuation

Horizon Know-how Finance, I consider, has a extra interesting progress profile than different enterprise growth corporations because of the BDC’s main concentrate on expertise corporations.

Horizon Know-how Finance is much like Hercules Capital in that it has the identical goal market and core funding focus. In gentle of the BDC’s lengthy historical past of manufacturing sturdy monetary outcomes, I strongly suggest HTGC.

My Conclusion

Horizon Know-how Finance, for my part, is a well-managed enterprise growth agency with potential within the enterprise capital area of interest in addition to upside in portfolio earnings and valuation.

The BDC’s inventory is at present buying and selling round guide worth, however I consider HRZN’s valuation premium will develop so long as the portfolio performs effectively (no new non-accruals).

On condition that the BDC lately elevated its dividend payout by 10%, I consider the ten.9% yield accessible right here is one which passive earnings buyers will have the ability to get pleasure from for fairly a while.