Runway Growth Finance Corp. (NASDAQ:RWAY) Q1 2024 Earnings Call Transcript May 7, 2024

Runway Growth Finance Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Runway Growth Finance First Quarter 2024 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Quinlan Abel, Assistant Vice President, Investor Relations. Please go ahead.

Quinlan Abel: Thank you, operator. Good evening, everyone and welcome to the Runway Growth Finance conference call for the first quarter ended March 31, 2024. Joining us on the call today from Runway Growth Finance are David Spreng, Chairman, President and Chief Executive Officer; Greg Greifeld, Managing Director, Deputy Chief Investment Officer and Head of Credit of Runway Growth Capital; and Tom Raterman, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance’s first quarter 2024 financial results were released just after today’s market close and can be accessed from Runway Growth Finance’s Investor Relations website at investors.runwaygrowth.com. We have arranged for a replay of the call at the Runway Growth Finance webpage.

During this call, I want to remind you that we may make forward-looking statements based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation, market conditions caused by uncertainties surrounding rising interest rates, changing economic conditions, and other factors we identified in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions can be incorrect.

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You should not place undue reliance on these forward-looking statements. The forward-looking statements contained on this call are made as of the date hereof, and Runway Growth Finance assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of SEC related filings, please visit our website. Before we begin, on behalf of the company, we are thrilled to welcome back David Spreng as he assumes full responsibility as Chairman, President and Chief Executive Officer of Runway Growth Finance. And with that, I will turn the call over to David.

David Spreng: Thank you, Quinlan, and thanks, everyone, for joining us this evening to discuss our first quarter results. I want to thank all of those who reached out for their support during my recovery process. Further, I’d like to thank Greg, Tom and the entire Runway team for their collaboration in navigating the dynamic macro environment over the last several months. To start, I’ll provide some first quarter portfolio highlights, then an overview of our financial results and finally discuss the current market trends that we’re observing. During the first quarter, Runway saw heightened pipeline activity and completed two investments in new and existing portfolio companies, representing $25 million in funded loans. Runway delivered total investment income of $40 million and net investment income of $18.7 million in the quarter.

These figures both represent an increase of approximately 2% from the prior year period. Our weighted average portfolio risk rating increased slightly in Q1, which Tom will provide more details on shortly. We are very focused on credit quality and believe in working closely with all of our portfolio companies throughout the entire lifetime of our loans. This belief drives our monitoring philosophy and is the foundation for preserving credit quality. Consistent communication with our borrowers enables us to actively mark investments and mitigate potential risk while maintaining consistent yield. Turning now to the market. In our view, companies are increasingly exploring the use of debt as a minimally dilutive alternative to equity financing, which bodes well for us as a preferred partner known for sophisticated financing solutions that meet borrowers’ diverse needs.

As the economy proves resilient, with expectations for a soft landing, we believe our low leverage ratio and ample dry powder position us well to take advantage of opportunities that meet our high credit bar. Our role as a lender is to support the best companies with high conviction to reach their full growth potential. We are not a lender of last resort to provide funding during a crisis or a troubled situation. In fact, we are often the last capital brought in before a company executes a strategic exit like an M&A transaction or IPO. And that point remains critical for us. As an investor, I’ve spent nearly 3 decades sourcing, evaluating and deal-making in the venture ecosystem. Prior to founding Runway nearly 9 years ago, I was a venture capitalist for over 20 years.

My experience across economic cycles and rate environment underscores the importance of underwriting rigor. In the current market, we are seeing more venture-backed companies seeking capital than ever before. Further, these companies have a difficult fundraising backdrop as they maul over the possibility of down rounds and seek non-dilutive capital. We know this may sound counterintuitive given the quantum of VC dry powder, but it’s important to remember that many of these companies last raised money at record valuations and now want to preserve a functioning cap table for their investors and employees. That is precisely why our focus on selectivity and underwriting standards remain so high. We know that we’re not going to bat 1,000 on every loan.

But when we have a credit that is pressured, our underwriting analysis strives to ensure that future challenges are limited to unforeseen external factors. These may include changes in market conditions or shifts in an operating environment as opposed to loosen the underwriting standards. A poorly structured loan is far more than just a challenge for that 1 borrower in a portfolio. It requires more time from a lender’s team put stress on the ability to monitor other names in the portfolio and ultimately impacts a portfolio’s earnings power. I want to be clear, we currently have two names on non-accrual and we’re working towards favorable outcomes for our shareholders there. That said, we are not going to adjust our underwriting standards to accelerate portfolio growth that minimizes the impact of these credits in the near term.

Instead, we aim to preserve our ability to serve the broader portfolio and deliver value for our shareholders through disciplined underwriting. We have been investors and operators for a long time, and we have a strong idea of what is ahead of us. We are confident in our ability to source, originate and underwrite deals that are up to our standards in the coming year. Further, we have a line of sight on our ability to preserve earnings power and ensure our shareholders can expect consistent distributions for the foreseeable future. Our selectivity is what will fund our future dividends in the years to come. And we are optimistic about the opportunities we’re evaluating that we expect to manifest in the latter half of the year. We remain committed to delivering value to our shareholders, which is a direct result of the strength of our portfolio.

With that, I’ll turn it over to Greg.

Greg Greifeld: Thanks, David. I want to further expand on our view of the current operating environment and Runway strategic positioning in the market. In our view, U.S. economic resilience is by far the most important macro story of recent quarters. In large part, we have seen that resilience firsthand through our portfolio companies. U.S. late-stage venture equity represented 52% of total deal value and 31% of total deal count, marking the strongest quarterly figures we’ve seen to-date. While overall venture activity remains suppressed, years of strong fundraising have resulted in well over $300 billion in dry powder waiting to be deployed. We believe runway’s value proposition amid the current market backdrop remains clear.

Companies will continue to seek minimally dilutive capital to extend Runway and supplement equity. This is bearing out in the opportunities we’re seeing. As David mentioned, we have seen more pipeline activity in the first quarter than historical levels. Our business model remains compelling to borrowers seeking growth capital in this current market. We are focused on the fastest-growing sectors of the economy we know best, which include life sciences, technology and select consumer service and product industries. While a few deals of our target check sizes met our consistent high standards in the first quarter, we are confident in our ability to selectively deploy capital at favorable terms when the market becomes more lender-friendly in the second half of this year.

We remain committed to upholding our credit-first philosophy as an organization, and we are proud of the team’s diligence in evaluating these opportunities while actively managing our portfolio in parallel. Further, we are increasing the avenues we have to evaluate and see more deals. As discussed on our last call, we are pleased to announce our newly formed joint venture with Cadma Capital Partners, a credit financing platform for the venture ecosystem that was established in 2023 by Apollo. Runway Cadma One LLC is an equal partnership between Runway and Cadma that will focus on financing private and sponsored late and growth-stage companies. We look forward to the incremental deal flow we expect to result from this partnership and have already been encouraged by the discussions that are taking place.

While selectivity remains at the forefront, we are actively pursuing more opportunities to source attractive investments and evaluate attractive deals in the industries we know best. With that, I will now turn it over to Tom.

Tom Raterman: Thank you, Greg, and good evening, everyone. During the first quarter of 2024, we saw heightening pipeline activity and executed on investments that demonstrate our disciplined lending strategy. We completed two investments in the first quarter, representing $25 million in funded loans. Our weighted average portfolio risk rating increased to 2.44% in the first quarter from 2.39% in the fourth quarter of 2023. Our rating system is based on a scale of 1 to 5, where 1 represents the most favorable rating. The quarter-over-quarter change in our internal portfolio risk rating resulted from three investments, which each declined one category from their Q4 2023 ratings of Category 2, 3 and 4 to ratings of Category 3, 4 and 5, respectively.

The Category 5 investment is Ming Healthcare, which continues to be on non-accrual. In line with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the fourth quarter and at the end of the current quarter. In comparing this consistent grouping of loans on a like-to-like basis, we found that our dollar weighted loan-to-value ratio improved slightly from 27.6% to 26% sequentially. Our total investment portfolio had a fair value of approximately $1.02 billion, excluding treasury bills, a decrease of 1% from $1.03 billion in the fourth quarter of 2023 and a decrease of 10% from $1.13 billion for the comparable prior year period. Our portfolio continues to be concentrated in first lien senior secured loans.

As of March 31, 2024, Runway had net assets of $529.5 million, decreasing from $547.1 million at the end of the fourth quarter of 2023. NAV per share was $13.36 at the end of the first quarter compared to $13.50 at the end of the fourth quarter of 2023. Our Q1 2024 investor presentation includes a detailed NAV bridge for the quarter. Approximately $0.045 of the decline in NAV per share arose from our equity investments, including warrants where the largest equity investment impact was the write-down of our equity holdings in Progenity, which was received in conjunction with the sale of our former portfolio company Agenity. Approximately $0.125 of the unrealized loss was attributable to changes in the value of certain debt investments, the most significant of which was the markdown of our debt investments in Snagajob amounting to approximately $2.9 million or $0.07 per share.

As a reminder, our loan portfolio is comprised of 100% floating rate assets. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing the term sheet. In the first quarter, we received $34.5 million in principal repayments, a decrease from $63.4 million in the fourth quarter of 2023. This is a result of our credit-first approach to investing that prioritizes the highest quality sponsored and non-sponsored companies, which are often ideal candidates for refinancing or acquisition in most markets. This level of repayments indicates that our portfolio is performing as we expected and fits within our stated investment criteria.

On April 26, 2024, our loan to turning tech intermediate, also known as Echo360 was repaid in full. As discussed during our fourth quarter earnings call earlier this year, we expect additional prepayment activity throughout the year with activity building significantly in the second half of 2024. We believe prepayment activity provides Runway with liquidity to deploy in a manner that is fully accretive. Increased prepayment and an uptick in M&A activity enabled us to reinvest in attractive opportunities in the market. We generated total investment income of $40 million and net investment income of $18.7 million in the first quarter of 2024 and compared to $39.2 million and $18.3 million in the fourth quarter of 2023. Our debt portfolio generated a dollar weighted average annualized yield of 17.4% for the fourth quarter of 2024 as compared to 16.9% for the fourth quarter of 2023 and 15.2% for the comparable period last year.

Moving to our expenses. For the first quarter, total operating expenses were $21.3 million, up 2% from $20.9 million for the fourth quarter of 2023. Runway recorded a net unrealized loss on investments of $6.6 million in the first quarter compared to a net unrealized loss of $5.9 million in the fourth quarter of 2023. We had no realized loss in the first quarter compared to a net realized loss of $17.2 million in the prior quarter. We remain confident that our highly selective investment process and diligent monitoring of portfolio companies support our track record of maintaining low levels of non-accruals coupled with generally healthy credit performance. As of March 31, 2024, we had two loans on non-accrual status. Our loan to Mingle Health Care represents outstanding principal of $4.3 million and a fair market value of $3.2 million our loans to Snagajob represent outstanding principal of $42.3 million at a fair market value of $35.5 million.

These loans represent 3.8% of the total investment portfolio at fair value. In the first quarter of 2024, our leverage ratio and asset coverage were 0.91 and 2.09x, respectively, compared to 0.95 and 2.05x at the end of the fourth quarter. Turning to our liquidity. At March 31, 2024, our total available liquidity was $319.9 million, including unrestricted cash and cash equivalents. We have borrowing capacity of $313 million, reflecting an increase from $281 million and $278 million, respectively, on December 31, 2023. At quarter end, we had unfunded loan commitments to portfolio companies of $235.8 million, the majority of which were subject to specific performance milestones. $42 million of these commitments are currently eligible to be funded.

During the quarter, we experienced 2 prepayments totaling $34.5 million and scheduled amortization of $0.4 million. The prepayments included a partial principal repayment of our senior secured term loan to fiscal note were $27.4 million and a partial principal repayment of our senior secured term loan to Marley Spoon for $7.1 million. As mentioned on our previous earnings call, in 2023, our Board of Directors approved a stock repurchase program, giving us the ability to acquire up to $25 million of Runway’s common stock. In the first quarter, the company repurchased approximately 887,000 shares under the program, which expires on November 2, 2024. Finally, on April 30, 2024, our Board declared a regular distribution for the first quarter of $0.40 per share as well as a supplemental dividend of $0.07 per share payable with the regular dividend.

We are confident that through our prepayment fees and spillover income, we will have no difficulty covering our dividend in the foreseeable future. With that, operator, please open the line for questions.

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