The only notable intersect with some other BDCs is through our newly announced joint venture with Capital Southwest, a vehicle that is focusing on first-out senior secured loans in the lower middle market. This partnership with a fellow internally managed BDC allows us to diversify into a new segment of the lower middle market with a proven partner, while minimizing risk and providing stable income for our investors. To briefly touch on the AI and software topic, enterprise SaaS is currently 10% of our portfolio. Many of those are PE-backed lower middle market companies that have successfully integrated AI to enhance their offerings, increasing their value, not eroding it. The strongest companies continue to adapt and execute.
We are not seeing deterioration in our software exposure. Rather, companies with top-tier management teams, durable moats, and flexible strategies are increasingly distinguishing themselves. With respect to AI itself, we are not trying to pick winners at the application layer. Our exposure is focused on the infrastructure side through our equipment financing platform, which has deep experience financing data centers, GPUs, CPUs, and power assets. That is the backbone of the AI ecosystem, and it benefits regardless of which applications win. We remain focused on building a diversified portfolio that consistently delivers strong returns across all macroeconomic cycles. Our consistent performance is driven by three defining strengths: our differentiated structure, disciplined underwriting, and world-class team.
Our five complementary verticals—sponsor finance, equipment finance, tech lending, asset-based lending, and life sciences—provide meaningful diversification while keeping us firmly within our core competencies. Each vertical is powered by dedicated teams of originators, underwriters, and portfolio managers, forming a scalable, highly efficient operating model that drives results. Structurally, as an internally managed BDC, there is no external manager collecting fees, and our employees, management, and board all own the same shares as our investors, increasing alignment and a shared commitment to consistent dividends and long-term value creation. We operate like shareholders because we are shareholders. Our structure also supports premium valuation because investors own the management company and the underlying assets.
The management incentive fees generated through our managed fund business flow to the BDC, creating incremental income and enhancing value and fueling growth, all for the benefit of our shareholders. Our people are the foundation of everything we have built at Trinity Capital Inc. Our high-performance culture is rooted in humility, trust, integrity, care, and continuous learning. With an entrepreneurial spirit, this culture enables us to consistently attract and retain the best people who are the driving force behind our sustained growth. Since we started Trinity Capital Inc., the goal has never changed: out-earn the dividend, grow the business, and do it the right way.
That means originating our own deals, underwriting them to our own rigorous standards, and making important decisions as one internally managed team whose interests are fully aligned with our shareholders, not third-party managers. What we have built and continue to build is a platform with real breadth and growing scale. And with our managed funds platform continuing to expand, we are adding scale and diversification in ways that few BDCs can replicate. That is not an accident. It is structural. We did not stumble into this position; we have strategically built it. The pipeline is active. Our underwriting discipline is intact. We believe our capitalization strategy positions us well to grow earnings power as the market continues to evolve.
Trinity Capital Inc. is not your typical BDC. That is precisely the point. We are differentiated by design and built to last, regardless of market conditions. Now, to provide a more fulsome update on our managed funds platform, I would like to turn the call over to our General Counsel and Chief Compliance Officer, Sarah Stanton, who is spearheading many of our corporate development initiatives. Sarah?
Sarah Stanton: Thank you, Kyle. We are encouraged by the strategic and steady growth of our managed funds business, which diversifies our capitalization sources and generates fee income that benefits Trinity Capital Inc. shareholders. AUM for our managed funds now sits at $400 million across four vehicles, with meaningful new funding capacity coming from our recently announced SBIC fund as well as expansion into the lower middle market with the addition of our Capital Southwest joint venture I will discuss in a moment. Our managed funds platform continues to enhance returns for Trinity Capital Inc., contributing $0.04 per share of NII in Q1, roughly 8% of the $0.53 total.
We continue to thoughtfully raise managed funds to fuel our growth and minimize public shareholder dilution. Q1 brought two noteworthy developments in our managed funds platform. First, we held an initial close of $45.3 million in equity commitments to our new SBIC fund, constituting more than half of our target of $87.5 million of equity commitments. The SBIC fund will benefit from attractive low-cost leverage from the Small Business Administration at a two-to-one debt-to-equity ratio and is expected to add more than $260 million of incremental capacity to the platform once it is fully scaled. Earlier this week, we announced our final license approval from the SBA, and we expect to begin deploying out of the fund this quarter.
Second, as Kyle mentioned, we entered into a joint venture with Capital Southwest, which provides an efficient avenue for Trinity Capital Inc. to expand into a new, complementary segment of the lower middle market while maintaining strong credit underwriting alongside a highly respected partner in the space. With this new JV, we now co-manage several co-investment vehicles that diversify our capitalization sources and allow us to strategically expand our originations power without diluting shareholders. Our managed funds business is generating new income above and beyond the interest income and equity return from our BDC’s portfolio investments, all to the benefit of Trinity Capital Inc. shareholders.
These initiatives demonstrate our ability to strategically grow, expand investment capacity, and further diversify our capital base. I would now like to turn the call over to CFO, Michael Testa, to discuss our financial results in more detail. Michael?
Michael Testa: Thank you, Sarah. Our operational and financial performance remained strong in the first quarter. We generated $90.1 million of total investment income, a 38% year-over-year increase, and $44.5 million in net investment income, or $0.53 per basic share, representing 104% coverage of our quarterly distribution. Estimated undistributed taxable income is approximately $68 million, or $0.78 per share, which is equivalent to more than four months of distributions. We continue to reinvest the spillover for the benefit of our shareholders while maintaining consistent and meaningful distributions. Our platform continues to deliver best-in-class performance.
In Q1, we generated a 15.8% return on average equity and a 15.8% weighted average effective portfolio yield, both of which are at the top of the BDC sector. PIK continues to be an immaterial function of our business, with 1% of our income based on PIK. And lastly, approximately two-thirds of our debt portfolio is either fixed rate or already at its interest rate floor, making us less sensitive to rate cuts than many of our peers. Total net assets grew 7% to a record $1.2 billion, up 40% year-over-year. NAV per share moved from $13.42 to $13.27.
The decrease reflects realized and unrealized losses in the quarter and the dilutive impact of our annual restricted stock award issuance, partially offset by accretive ATM issuances and out-earning our distributions. NAV per share remains up 2% year-over-year. Turning to our capital position, we raised $78.4 million through our equity ATM program during the quarter at an average premium to NAV of 12%. Our net leverage ratio decreased to 1.15x from 1.18x quarter-over-quarter. Total platform liquidity stood at over $500 million as of the end of Q1, including capacity across our managed funds. To discuss our portfolio performance in more detail, I will now pass the call over to our COO, Gerald Harder. Jerry?
Gerald Harder: Thank you, Michael. Our portfolio continues to demonstrate exceptional strength, driven by broad diversification across 22 industries, with no single borrower representing more than 4% of total exposure. Our largest industry concentration, finance and insurance, accounts for 14.5% of the portfolio at cost, and is diversified across 25 portfolio companies. Portfolio quality remained consistent quarter-over-quarter, with 99% of debt investments performing at fair value. On our one-to-five scale, where five indicates very strong performance, the average internal credit rating was 3.0, a slight improvement over last quarter and reflecting broad-based strengthening across the book.
Before discussing our realized and unrealized activity for the quarter, I want to remind everyone of Trinity Capital Inc.’s quarterly asset valuation process, which is performed in conjunction with third-party valuation firms. These specialists provide an independent assessment of our asset valuations; their conclusions, along with the Trinity Capital Inc. team’s internal assessments, are subject to approval by our board of directors and review by our independent auditor. This rigorous process tests our assumptions and methodologies and provides healthy checks and balances, all of which are in place to give investors confidence in our asset valuations. With that context, our Q1 results included approximately $10 million of net realized losses and $5 million of net unrealized depreciation.
The realized loss was primarily driven by the equity conversion of two loans, partially offset by the exit of one warrant position. The net unrealized depreciation reflected a combination of broader market valuation dynamics and mark-to-market adjustments on certain positions. During the first quarter, we saw strong portfolio churn with $114 million in early repayments. This figure is a slight increase over the 2025 quarterly average early repayments of approximately $83 million. Additionally, our loan book continues to skew toward a greater number of new portfolio companies. Sixty percent of our portfolio at cost has been originated since the start of 2025, and investments from pre-2024 vintages now comprise less than 12% of the portfolio at cost.
Quarter-over-quarter, the number of portfolio companies on nonaccrual went from four to five. During Q1, one debt financing that was on our watch list in Q4 was placed on nonaccrual status. As of March 31, nonaccruals represented approximately 1% of the total debt portfolio. At quarter end, 88% of total principal was secured by first-position liens on enterprise value, equipment, or both. For enterprise-backed loans, the weighted average loan-to-value was 19%, consistent with previous quarters. Across our five business verticals, the approximate breakdown of our fundings in Q1 was as follows: 41% to life sciences, 22% to equipment financing, 13% to sponsor finance, 13% to tech lending, and 11% to asset-backed lending.
Looking ahead, our portfolio remains defensively positioned with a strong first-lien bias and low loan-to-values. Our disciplined underwriting culture and diversified platform allow us to continue delivering consistent dividends and net asset value growth. With a shareholder-first mindset, our team remains focused on building a best-in-class BDC that generates sustained long-term value for our investors. Before we conclude our call, we would like to open the line for questions. Operator?
Operator: At this time, if you would like to ask a question, please press 1 on your keypad. To leave the queue at any time, press 2. Once again, that is 1 to ask a question. We will now open the call for questions. Our first question will come from Finian O’Shea with Wells Fargo Securities. Please go ahead.
Finian O’Shea: Hey, Kyle. I was interested in the opening commentary on your AI focus. That is where a lot of the money is going in VC, and maybe it is a little risky from a debt perspective for the companies that do not work out, but there is also presumably a ton of upside on the equity perspective. Do your originators see those rounds and is that an opportunity to construct a portfolio of those names—maybe a few losers, but a few spectacular winners as well? And as a follow-up, on originations, life sciences was the leader this quarter. Is there anything to that—team buildout versus market opportunity—and how might that trend?
Kyle Brown: Thanks for the question, Finian. As it relates to AI, we are not making many, if any, venture debt investments tied to AI. Almost everything we are doing relative to AI is in lower middle market, small public companies, private equity-backed deals, and primarily all the equipment financing that goes around that. We see this as a great opportunity for a couple of reasons. One, we have mission-critical equipment as our collateral—GPUs, CPUs, power generation equipment—and they have real value in any environment. We like that we can finance equipment that does not depend on whether a company becomes the next disruptor. So most of our investments there are focused on equipment or at-scale private equity-backed lower middle market companies.
On your follow-up, I would not read any long-term trend into life sciences leading the quarter. Deal flow can be idiosyncratic from quarter to quarter, some of it driven by activity at J.P. Morgan early in the year. The life sciences team had a great Q1, but I would not necessarily expect that trend to continue. The benefit of our diversified platform is that our five verticals are very complementary, and we can see outsized performance from any one of them in a given quarter.
Finian O’Shea: Very good. All for me for now, and thanks, everybody.
Operator: Thank you. Our next question will come from John Hecht with Jefferies. Please go ahead.
John Hecht: Hey, good morning. Thanks for taking my questions. First, a brief modeling question: anything to think about regarding expense requirements or human resource requirements given your growth into new fund vehicles, or should we think of it as linear growth as the company grows? And second, given your diversification across sectors, for the pipeline now, are you seeing different sectors where deals are getting done more smoothly than others and/or pricing has moved outward more than others?
Michael Testa: Hey, John. It is Mike. Having the benefit of these all being investment vehicles, we are using the same resources—the same origination platform, portfolio management, and credit underwriting. There is limited back office and operations support for these new vehicles, but that is minimal. It is really the benefit of co-investing along the Trinity Capital Inc. platform. We have built this platform intentionally to scale long term, and we continue to hire and invest in people, systems, and infrastructure. A lot of the leverage you get with SBIC—we started with an SBIC asset manager—means it is a vehicle we know how to operate.
Kyle Brown: On sector dynamics, there has been decreased activity in software, but significant increases in manufacturing, infrastructure, AI, and everything that goes along with that. That market is robust. We like the space because we can generate outsized returns. It is complicated, with problems to solve, so it is not a race to the bottom in pricing. We can generate higher fees and wider spreads by getting smart and understanding the space at a granular level, like we have in areas such as space and defense. Everything around space, AI infrastructure, and manufacturing in the U.S. is booming for us right now.
Operator: Thank you. Our next question will come from Brian Mckenna with Citizens. Please go ahead.
Brian Mckenna: Great, thanks. Your managed funds business generated about 120 basis points of ROE on an annualized basis in the quarter. As this platform continues to scale, how should we think about the overall contribution to firm-wide ROE over the next several years? And as you launch new strategies over time, how much on-balance-sheet capital do you plan to invest to help seed some of these newer vehicles? Also, on the lower middle market opportunity, I appreciate the comments on the new JV and the partnership with a leader in this part of the market, but what else can you do here?
How are you thinking about building versus buying versus partnering, and could the lower middle market ultimately end up becoming the sixth vertical at Trinity Capital Inc.?
Kyle Brown: Our goal is for you to think of us one day as a publicly traded fund management business. That requires us to do two things very well: continue to build out bespoke manufacturing in the verticals with products where we can generate outsized returns, and then provide a sampling of offerings to private investors—pension funds, banks, and retail. We have created multiple funds that meet those investors where they are and give them access to our bespoke manufacturing. It is difficult to raise capital, and we are grinding away at it, but money finds good deals. Over time, we plan to continue building out those funds to create NAV accretion through the manager and new income for shareholders.
On the lower middle market, I will not give forward-looking guidance, but historically we have done a very good job building businesses—five unique businesses that all run independently. Partnering with someone who has been doing this for a very long time, with joint decision-making, gets us into that business with a great partner and track record, giving us exposure and the ability to diversify some of our assets into a new, stable space that provides great new income. Our strategy is not changing.
Operator: A reminder, that is star one to ask a question. Our next question will come from Erik Zwick with Lucid Capital Markets. Please go ahead.
Erik Zwick: Thanks. You described the pipeline as robust earlier in your prepared comments. Could you provide more color on how that looks across your lending verticals and where spreads are today in the pipeline for what you are underwriting and adding to the portfolio compared to the existing portfolio? And any thoughts on how spreads look in the market relative to the existing portfolio?
Kyle Brown: Anything around manufacturing and equipment is booming right now. Across the platform, we have been growing deployment at a 30% to 40% annual rate, and I do not see that changing anytime soon. Each vertical is growing at a different pace depending on scale, but lower middle market should continue to be robust. The baby boomer transfer of ownership is real; we are seeing it, and it is in our sweet spot for $20 million to $100 million check sizes. On spreads, it depends on the vertical. We are seeing a little more pressure in tech lending or life sciences, but we are seeing very attractive returns in the lower middle market and in equipment financing.
Overall, nothing notable one way or the other across the entire book.
Erik Zwick: Thanks. Looking at the income statement, fee income has really ramped up the past two quarters, and I think some of that is due to your success on the managed fund side. Was there anything nonrecurring in 1Q, or is that a good number to build off going forward?
Kyle Brown: We did see elevated repayments this quarter. Those are hard to predict, but looking at least one quarter ahead, we feel comfortable that they will continue to be higher than normal. With prepayments, you get the benefit on more recent deals—the accelerated OID and prepayment penalties. Those do reoccur, but yes, there was some of that coming in during Q1.
Operator: Our next question will come from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Christopher Nolan: Hey, guys. On the new vehicles, are they going to be co-investing in the same portfolio companies as Trinity Capital Inc.? Also, can we expect higher leverage ratios as you finance the new SBIC sub? And is the outlook for growing in the lower middle market area to start making equity investments in these companies and possibly taking control positions?
Sarah Stanton: Thanks for the question. With respect to the SBIC fund, that will be a co-invest vehicle with deals originated by Trinity Capital Inc., taking a piece of every deal that is eligible for an SBIC fund in accordance with our allocation policy. There are nuances with SBIC eligibility—for instance, the portfolio company has to be located in the United States. With respect to the Capital Southwest joint venture, those will largely be transactions originated by Capital Southwest—first-out senior loans placed into that JV. We will be underwriting those alongside Capital Southwest with 50/50 governance, so we will have a say on what assets go into that vehicle.
Kyle Brown: On leverage, that is not the plan. We did something different with the SBA fund—different than BDCs have done historically. We went out and raised third-party capital. Utilizing our adviser that Trinity Capital Inc. shareholders own 100% of, we were able to raise third-party equity which we can then leverage two-to-one, providing us with approximately $270 million of new AUM that we can charge management and incentive fees on, which we started April 1, and we will use those to co-invest alongside Trinity Capital Inc. We did not approach it the same way most groups do—taking our own equity off the balance sheet to get more leverage.
We are utilizing other people’s money because we have the ability to do that, and that is our strategy with the Trinity Capital Inc. adviser. As for equity and control positions, we are focused on being a lender. For twenty years, our returns have been primarily rates and fee income. The vast majority of our income is not based on equity upside or warrants, and that strategy is not changing.
Operator: Our next question will come from Paul Johnson with KBW. Please go ahead.
Paul Johnson: Does the SBIC fund that was recently attained for the RIA fund mean that it is unlikely going forward that there would ever be an SBIC license eligible for the BDC on balance sheet, or is it just way more valuable within the RIA to allow you to raise capital under that type of structure?
Kyle Brown: Good question. For us, it is way more valuable because we do not have to issue new shares at Trinity Capital Inc. to pull together that approximately $70 million of equity, and generating management and incentive fees on new capital is new revenue without issuing new shares. This is the strategy, and we want to deleverage the Trinity Capital Inc. BDC over time. Doing more off-balance-sheet vehicles like this gives us more liquidity and new income so that we can deleverage over time, putting us in a great spot to have liquidity and the ability to be opportunistic. The more off-balance-sheet vehicles we can ramp, the more control it gives us and it de-risks the BDC.
Operator: This does conclude our question and answer session. I would like to turn the call back over to Kyle Brown, CEO, for closing remarks.
Kyle Brown: On behalf of the entire team, thank you for joining the call today. We appreciate your continued interest and investment in Trinity Capital Inc., and we look forward to updating you on Q2 results during our next earnings call on August 5. Have a great day. Thanks.
Operator: Thank you, ladies and gentlemen. This brings us to the end of today’s meeting. We appreciate your time and participation, and you may now disconnect.
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Trinity Capital (TRIN) Q1 2026 Earnings Transcript was originally published by The Motley Fool
