Hercules Capital's shares dropped roughly 7% on Friday following the publication of a short report by Hunterbrook that challenged several aspects of the business development company's financial reporting and dividend coverage.
Hunterbrook's analysis singled out Hercules' concentration in software-related loans, estimating that about 35% of the company's loan book - roughly $1.5 billion - is tied to software debt. The short seller said Hercules continues to mark that exposure at 100 cents on the dollar, even as, according to the report, billions of dollars of similar software debt across the sector have moved into distressed territory. Hunterbrook disclosed its positions in the report, saying it is short HTGC and long a basket of comparable securities.
The report also focused on trends in Hercules' payment-in-kind, or PIK, loan activity. Hunterbrook noted that reported income from PIK loans rose to $55.9 million in 2025, roughly double prior levels, while actual cash collections on PIK loans fell sharply - down 73% year-over-year to $4.9 million. PIK instruments permit borrowers to satisfy interest obligations by adding to the loan balance rather than making cash interest payments. At the same time, the report said outstanding PIK receivables at Hercules nearly tripled to $109.1 million.
On the topic of dividend coverage, Hunterbrook compared full-year net investment income and the components of Hercules’ distribution. The firm calculated full-year net investment income at $1.91 per share, which covers the company’s $1.60 base distribution at 119%. Hunterbrook noted, however, that Hercules also pays a $0.28 supplemental distribution that is drawn from past earnings. When assessed on a cash basis, the report said the base distribution is covered at only 105.7%.
Hunterbrook additionally questioned Hercules’ reported cumulative net realized loss rate of 3 basis points. The short seller described that metric as netting equity and warrant gains from exits against loan losses, and said it could not identify other major BDCs applying that same methodology.
Hercules responded in writing, defending its practices and figures. The company said its portfolio valuations as of December 31, 2025, do not reflect market volatility that began in 2026. Hercules also stated that its PIK exposure is at the median level among similarly sized business development companies, and that its base dividend coverage of 119% ranks among the highest in the industry. The firm emphasized that its valuations process is rigorous, citing PwC audits, SOX compliance, and oversight by its board.
Investors reacted to the dispute between the short seller and Hercules with a fall in the stock, while the company reiterated confidence in its governance and accounting procedures. The exchange highlights the scrutiny around valuation practices for sector-concentrated loan portfolios and the difference between accrual-based income measures and cash receipts when assessing dividend sustainability.
Clear summary: A short report by Hunterbrook criticized Hercules Capital's marking of software loans, rising PIK receivables and the cash basis coverage of its dividend, prompting a roughly 7% drop in the stock. Hercules rebutted the report, defending its valuation process, PIK exposure level and dividend coverage.