🔒Equity market’s struggles offer growth opportunity for debt financier Horizon Technology

A small Farmington publicly-traded company is weathering the choppy equity markets with poise, hiring employees for six new positions, including vice president of operations.

Horizon Technology Finance Corp. provides debt financing to development-stage companies that are backed by venture capital. The company’s portfolio, which stood at $300 million at the beginning of 2020, has more than doubled to about $700 million today.

The stock market’s struggles this year have created strong demand for debt financing — and “a lot of opportunity for Horizon,” said President Gerald A. Michaud.

He said the firm’s investment pipeline is at historical highs as market conditions have made it more expensive for companies to raise capital. Greater demand for debt financing has spurred Horizon’s hiring spree, and it allows the company to be more selective about its investment choices.

“Venture capitalists are providing the equity; we are providing the debt,” Michaud said. “The investment strategy is around providing incremental debt to companies trying to create more value without having to do more equity in the marketplace. So, they can get to a higher valuation with financing that is less diluted than equity would be.”

Debt financing

Horizon Technology benefits from market cycles where fledgling companies are growing and need additional capital to achieve profitability, especially when debt is a better source of capital than equity.

“We used to have between $200 million and $300 million in opportunities we were looking at, at any time — now we’re over $1 billion,” Michaud said.

Horizon underwrites and manages loans to companies in the technology, life sciences, healthcare information and services, and sustainability industries.

One of Horizon’s most important markets is sustainability, which Michaud said is growing “nicely,” even in the difficult market.

It has provided loans to organic foods, recyclable packaging and environmentally-friendly construction material companies. Michaud believes the sector will continue to grow as supply catches up with demand. Many environmentally-friendly products are also more cost efficient, so “that’s a win-win,” he said.

Last month, Horizon made a $7.5 million debt investment in Soli Organic, which grows certified organic basil in a newly-upgraded, automated indoor farm in Elkwood, Virginia. In April, Horizon provided a $15 million venture loan to MyForest Foods Co., which produces sustainable meat alternative products using mushroom roots.

Other companies in Horizon’s loan portfolio range from the technology firm bolt, which provides a digital distribution platform for the property and casualty insurance industry, to Autonomy, which offers month-to-month car subscriptions for Tesla vehicles. Its portfolio also includes Kate Farms, which produces organic, plant-based formula for children and adults, along with the fashion subscription service, Le Tote.

During this year’s first quarter, Horizon funded 16 loans totaling $73.2 million, according to its quarterly report.

Growing company

Horizon tends to invest in companies on the east and west coasts, but its roots are in Connecticut.

It has provided loans to five companies in the state, and Connecticut Innovations, the state’s quasi-public venture arm, has been a source of funding.

Horizon has about 30 employees, including 22 at its Farmington headquarters, at 312 Farmington Ave. It also has offices in California, Texas and Virginia.

The company recently hired a new vice president of operations, Eric Tkacz, who came from Farmington-based Otis Worldwide Corp., where he was responsible for the reporting related to the company’s separation from United Technologies, now Raytheon Technologies.

Other new hires in Farmington include a staff attorney, Kailee W. Sullivan, investment associate, Brendan Burke, and senior accountant, Kelley D. Lynch.

Michaud said the new employees will help manage the company’s growing assets.

Horizon has weathered turbulent economic conditions before. It was founded by Michaud and Robert D. Pomeroy Jr. in 2003 and went public in 2010, after surviving the Great Recession. They’ve been in the venture lending business for more than 30 years.

They started as a small firm in Farmington in the early 1990s. Their company was sold to Transamerica in the mid-90s and was called Transamerica Technology Finance.

Although their parent company’s headquarters was in Chicago, the technology-finance firm remained in Farmington because “all of our talent was here in Connecticut,” Michaud said.

When Michaud and Pomeroy’s business was sold to railcar company GATX in 2000, they maintained their Farmington office.

A few years later, Michaud and Pomeroy planned to buy the business when it was put up for sale, but in 2003, GATX decided to let it run off.

“There we were, with a company with no assets, so we went out and raised capital,” Michaud said.

Some employees who worked for them at Transamerica and GATX are still with Horizon. Michaud said it’s a “very sticky company” and people rarely leave.

Strong returns

Horizon’s net investment income was $5.7 million during the first quarter of 2022, compared to $6 million the prior-year period. During the quarter, its total investment portfolio eclipsed $515 million.

According to its annual report, the company’s total revenue was $33.3 million in 2021 and $10.3 million in 2020.

Horizon’s yearly income fluctuates wildly because it depends on when companies repay their loans.

“Sometimes they just get to a point where they’re cash-flow positive, and they’re very bankable so they can go to a bank and get a lower cost loan and repay our debt,” Michaud said.

Horizon generates income from interest, charging a rate of about 11% in the current market. Loan terms are generally 36 to 60 months, but “more often than not we get prepaid,” he said.

In addition to interest payments, Horizon receives prepayment and end-of-term payment fees. It also holds stock warrants in some companies.

Chris Gillick, a Horizon spokesman, said the company’s goal is to try to earn 30 cents per share in net investment income every quarter, which gets paid out as dividends. Over the last six years, it has averaged 10 cents a share in monthly dividends, along with some special dividends when it has exceeded targets.

The company’s stock price was trading in the $12 per share around mid-June, down from around $17 per share a year earlier. Its market cap is around $285 million.

“So the shareholder return in this period has been very strong in terms of cash payments, which gets a lot of investors that like the yield,” Gillick said.