Venture And Growth Capital Demand Will Support Long-Term Lending Platform Expansion

Catalysts

About Monroe Capital

Monroe Capital provides customized direct lending and venture debt solutions to technology focused, health care, life sciences, sustainability and small cap public companies.

What are the underlying business or industry changes driving this perspective?

• The merger funded equity infusion of roughly $165 million positions the platform to scale originations into a structurally expanding venture and growth capital market, supporting sustained growth in interest income and total revenue.
• Growing demand from technology, software and life sciences borrowers for non-dilutive capital, combined with Monroe's broadened mandate to serve both private and public small cap companies, is expected to deepen deal flow and support higher portfolio yields and earnings.
• Industry preference for larger, specialized BDCs with diversified funding and broader capital solutions is expected to reward Monroe's expanded scale and enhanced liquidity with better financing terms, potentially improving net interest margins and net investment income.
• Identified G&A synergies of approximately 30 percent from consolidating corporate functions, combined with temporary advisory fee waivers, are anticipated to create a structurally lower expense base that may improve net margins and support dividend coverage.
• Leveraging Monroe's approximately $22 billion asset management platform for sourcing and underwriting, alongside targeted hiring in origination and credit, is intended to accelerate capital deployment post merger and may support faster earnings per share growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Monroe Capital's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.6% today to 178.6% in 3 years time.
• Analysts expect earnings to reach $80.8 million (and earnings per share of $3.14) by about December 2028, up from $-4.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $192.1 million in earnings, and the most bearish expecting $-42.2 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 3.1x on those 2028 earnings, up from -34.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Venture and growth capital cycles are highly sensitive to capital market conditions, and a prolonged downturn in technology and life sciences funding could limit attractive lending opportunities, slowing deployment of the new equity capital and weighing on revenue and earnings growth.
• The strategy depends on rapidly and prudently deploying approximately $165 million of fresh capital into high-yielding assets. However, if competitive pressure or weaker deal quality forces the combined company to choose between lower yields or higher credit risk, future net interest margins and ultimately earnings could disappoint.
• The temporary nature of the up to $4 million advisory fee waivers and the targeted $2.5 million of G and A savings may mask a structurally higher expense base in a larger, externally managed BDC. Once waivers roll off, operating leverage could prove weaker than expected, compressing net margins and net investment income.
• The plan assumes minimal integration risk and seamless scaling across the broader Monroe platform. Any operational missteps, underwriting errors, or governance challenges in a more complex multi-entity structure could lead to higher credit losses over time, pressuring net asset value and earnings.
• A key part of the long-term thesis is that public markets will reward greater scale, liquidity, and specialization. However, if BDC valuations for venture debt names de-rate due to sector sentiment or regulatory changes, Horizon’s share price could stagnate or fall even if NAV and earnings improve.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $8.25 for Monroe Capital based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $45.2 million, earnings will come to $80.8 million, and it would be trading on a PE ratio of 3.1x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of $6.68, the analyst price target of $8.25 is 19.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.