Runway Growth Finance Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Runway Growth Finance Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Taylor Donohue, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good evening, everyone, and welcome to the Runway Growth Finance Conference Call for the Q3 ended September 30, 2023. Joining us on the call today from Runway Growth Finance are Greg Greifeld, Acting Chief Executive Officer of Runway Growth Finance and Deputy Chief Investment Officer and Head of Credit of Runway Growth Capital as well as Tom Ratterman, Acting President and Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's 3rd quarter 20 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 The statements on this call that are not purely historical are forward looking statements.

Speaker 1

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, The impact of the COVID-nineteen pandemic, 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 As of the date hereof, End 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. With that, I will turn the call over to Greg.

Speaker 2

Thanks, Taylor, and thanks everyone for joining us to discuss our Q3 results. Before starting my prepared remarks, we want to provide an update I'm David Sprang, Runway's Growth's Chairman, Founder and Chief Executive Officer, who is on a medical leave of absence. We are pleased to share that David is doing well and has resumed select responsibilities at our external advisor, Runway Growth Capital. We look forward to and are hopeful for David's return in the first half of twenty twenty four and appreciate the ongoing support the investment community has provided during his recovery Today, I'll provide Q3 2023 highlights, speak to the market environment and lastly discuss our outlook Heading into 2024, our 3rd quarter results demonstrate the resilience of our credit first investment approach That has been a guiding principle for runway growth since inception. While the U.

Speaker 2

S. Economy has performed better than expected in 2023, Market uncertainty remains elevated as the effects of a higher interest rate environment and tighter financial conditions play out. Our focus on underwriting low loan to value loans to high quality companies has allowed us to build a portfolio That can continue to succeed and not just survive. We have always favored opportunities that have limited downstream financing risk, which has proven crucial For portfolio companies with unknown timing for exits or that require additional capital raises. Our patience in deploying capital during 2023 has been strategic and the current environment is more lender friendly than earlier this year.

Speaker 2

We expect this lender friendly environment to continue into 2024 And we are beginning to see an increase in favorable investment opportunities. We believe Runway has maintained its position as a preferred venture debt lender With a steady hand enforced by our ability to deliver industry leading credit performance with a late stage portfolio focused on recession resistant industries. We continue to believe runway growth represents a compelling opportunity for investors that are looking for stable risk adjusted returns from partnering with the highest quality growth companies in the market. Turning to Q3 operating results. Runway completed 6 investments in new and existing portfolio companies in the 3rd quarter, Representing $40,800,000 in funded loans.

Speaker 2

Originations and deployment activity during the quarter reflect our high bar for evaluating new investments To preserve credit quality while mitigating risk, Runway has built a strong track record of mitigating credit losses, which we attribute to our disciplined approach to loan structuring and rigorous underwriting process. Runway delivered total investment income of $43,800,000 and net investment income of $22,000,000 in the 3rd quarter, representing an increase of approximately 62% and 52% from the prior year period. Net assets were $570,500,000 at the end of the 3rd quarter, down 1% from $573,900,000 last quarter. Tom will provide a deeper look at our credit quality, But our weighted average portfolio risk rating increased slightly in the 3rd quarter to 2.24 from 2.21 in the 2nd quarter. Runway's loan portfolio is comprised of nearly 100 percent senior secured first lien investments and weighted average Loan to value at origination is 18% across the entire portfolio.

Speaker 2

We continue to uphold our credit standards as we evaluate opportunities to Let's turn now to the market outlook. According to recent pitch book data, U. S. Late stage venture equity deal value, which we view as a proxy for the venture debt market opportunity was approximately $57,000,000,000 Q3 year to date. While deal value is down from record levels in 2021 2022, It remains above the comparable period in 2020 preceding years.

Speaker 2

U. S. Late stage venture equity deal value represented 46 This It's a continuation of the dynamic we've observed in recent quarters, more late stage deals, but at smaller values. This snapshot shows that the late stage VC ecosystem is active. However, our team That's deal volume to accelerate into the middle of next year as companies that raise substantial equity in 2021 And 2022 spend the remainder of those proceeds.

Speaker 2

As liquidity runs dry, companies will need to raise additional capital to fund growth. We believe the high quality late stage companies that Runway targets will explore minimally dilutive growth capital in the form of venture debt to supplement previous raises. Runway's outlook remains consistent with previous quarters. For many companies, New business opportunities and growth potential remains high. Capital availability has become a major concern as management teams navigate tightening market conditions.

Speaker 2

The market outlook gives us additional confidence And our ability to execute for the foreseeable future. Our strong reputation and depth of relationships has kept our pipeline robust And we continue to evaluate a steady stream of deal opportunities. That said, Runway will continue to focus on high quality companies with proven business models and a clear path to success. This goes back to our credit first philosophy and careful monitoring, which are essential to achieving premium results. As we evaluate deals we are seeing in the market today, we are making sure to only engage with those that meet our high bar.

Speaker 2

With a deleveraged balance sheet and ample capital to deploy from our revolving credit facility, Runway is well positioned to drive non dilutive portfolio growth without sacrificing on quality, terms, protections or size. We believe we have positioned ourselves to capitalize on the evolving market conditions in Q4 2023 2024. I'll now turn it over to Tom. Thanks, Greg, and good evening, everyone. Runway completed 6 investments in the 3rd quarter, representing $40,800,000 in funded loans.

Speaker 2

Runway's weighted average portfolio risk rating increased slightly 2.24 in the 3rd quarter from 2.21 in the Q2 of 2023, our rating system is based on a scale of 1 to 5 where one represents the most favorable credit rating. At quarter end, we continue to have only 1 portfolio company rated 5 and on non accrual status, which is Pivot 3. As we've said on earlier earnings calls, we are in the late phases of our Pivot 3 resolution and expect next steps to be completed prior to year end. Looking across markets more broadly, We expect ongoing uncertainty to weigh on the United States' economic trajectory as we approach 2024. While forecasts indicate that the probability of a soft landing has increased, we anticipate a challenging environment as the market grapples with the impact of Higher for longer interest rates.

Speaker 2

We believe Runway's track record of effectively managing risk is a differentiator. Our team's priority is to deliver superior credit performance while preserving capital to maximize risk adjusted returns for our shareholders. A key variable in that equation is our proactive approach Portfolio monitoring. Runway connects with each of its portfolio company management teams at least quarterly and often every 6 weeks. Our team takes a proactive approach to address problems and has difficult conversations early when optionality remains the highest.

Speaker 2

In line with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the second quarter and current quarter. We found that our dollar weighted loan to value ratio slightly increased from 24.2% in Q2 to 24.8% in Q3. Our total investment portfolio had a fair value of approximately 1,000,000,000 decreasing 8% from $1,100,000,000 in the Q2 of 2023 and increasing 11% from $910,200,000 for the comparable prior year period. As of September 30, 2023, Runway had net assets $570,500,000 decreasing slightly from $573,900,000 at the end of the Q2 of 2023. NAV per share was $14.08 at the end of the 3rd quarter compared to $14.17 At the end of the Q2 of 2023.

Speaker 2

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 3rd quarter, We received $125,300,000 in principal repayments, an increase from $88,700,000 in the Q2 of 2023. This increase is driven primarily by Runway Growth's credit first approach to investing that prioritizes the highest quality late stage companies, which are ideal candidates for refinancing or acquisition in most market environments. Elevated prepayments are an indicator of the strength in Runway's approach to underwriting and health of the overall portfolio.

Speaker 2

Further prepayment activity provides Runway with Runway generated total investment income of $43,800,000 and net investment income of $22,000,000 in the Q3 of 2023 compared to $41,900,000 $19,700,000 in the Q2 of 2023. Our debt portfolio generated a dollar weighted average annualized yield of 18.3% for the Q3 of 2023 as compared to 16.7% for the Q2 of 2023 and 14.4% for the comparable period last year. Moving to our expenses. For the Q3, total operating expenses were $21,700,000 down 2% from $22,200,000 for the Q2 of 2023. Runway recorded a net unrealized loss Investments of $7,200,000 in the 3rd quarter compared to a net unrealized gain of $2,600,000 in the Q2 of 2023.

Speaker 2

In the Q3 of 2023, our leverage ratio and asset coverage were 0.79 and 2.27 times respectively compared to 0.97 and 2.03 times at the end of the Q2 of 2023. All investments in the Q3 were funded with leverage as part of our strategy to generate non dilutive portfolio growth. Turning to our liquidity. At September 30, 2023, our total available liquidity was $311,900,000 including unrestricted cash and cash equivalents and we had borrowing capacity of $297,000,000 as compared to $227,700,000 $190,000,000 respectively On June 30, 2023. We had unfunded loan commitments to portfolio companies of 203,500,000 The majority of which were subject to specific performance milestones.

Speaker 2

$75,100,000 of these commitments are currently eligible

Speaker 3

to be

Speaker 2

funded. During the quarter, we experienced 5 prepayments totaling $125,300,000 and scheduled amortization of 300,000 The prepayments included full principal repayments of our senior secured term loans to Allerian Technologies for 55,000,000 DTEK Systems for $10,000,000 Epic IO Technologies for $40,000,000 and Fidelis Cybersecurity for $14,900,000 As well as the partial principal repayment of our senior secured term loan to Marley Spoon for 5,400,000 Subsequent to quarter end, runway funded investments of $8,000,000 Betterment Holdings and $1,400,000 to Snagajob As well as funded $3,100,000 to Dynasonics as part of a larger equity raise by the company. In addition, Late last week, we funded a $30,000,000 senior secured term loan under a $37,500,000 commitment to Linxup, A provider of software for real time vehicle GPS monitoring and tracking. Runway also received a partial prepayment of $24,500,000 from Brevo Inc. Finally, on November 2, our Board declared a regular distribution for the Q4 of $0.40 per share as well as a supplemental dividend of $0.06 per share payable with the regular dividend.

Speaker 2

The Board also approved the $25,000,000 share repurchase This concludes our prepared remarks. We'll now open the line for questions. Operator?

Operator

Thank Please standby while we compile the Q and A roster. Our first question comes from the line of Mickey Schindler with Ladenburg. Your line is open.

Speaker 4

Yes. Good afternoon, Greg and Tom. I wanted to start with a high level question. As you mentioned, venture debt funding It's down this year. And I think that's mostly the impact of SVB and lenders raised the underwriting bar.

Speaker 4

Looking out into next year, I appreciate your comments on the need for liquidity that may drive Demand, but to what extent do you think a potential recession next year could continue to depress deal volume As lenders in your space keep the bar high.

Speaker 2

Yes. So I think that without a doubt, A combination of macroeconomics as well as SVB and other industry specific shocks have had impact on deal volume this year. However, As we've seen in that pitch book data, volume for late stage equity deals is down as well. And we believe that that's driven by companies having Raised substantial amounts of capital in 20202021, who realized that the market has changed, They needed to make that capital last for longer and as such have made substantial cuts to their P and L in order to have the capital last for longer. And we do think that in the middle or second half of next year, These companies are going to reenter the market, needing additional capital for growth, and we do expect that to be a substantial tick up in

Speaker 4

volume. Okay. I appreciate the clarification. Could you give us some insight into what drove this quarter's Unrealized depreciation?

Speaker 2

Yes, Mickey, it's Tom. There were some broad changes in the debt marks and then really changes in the public equity marks. There was one in particular Methodology that was driving that.

Speaker 4

Okay. Tom, were there any outsized contributors to the fee income, which Despite the level of exits still seems pretty significant?

Speaker 2

Well, there was a significant amount of end of term Payments, so there was a fair amount of acceleration of the OID there and then prepayment fees were really The big driver on that.

Speaker 4

Okay. My last question, it looks like those exits and repayments were Weighted toward the end of the quarter. Is that right? Or am I misinterpreting the numbers?

Speaker 2

No. Deal volume Either in or out tends to be weighted toward the end of the quarter. We did have one prepayment at the beginning of the 4th quarter, a partial prepayment on Breville, that's kind of the exception to the rule, but most of those come at the end of the quarter.

Speaker 4

Okay. Those are all my questions this afternoon. I appreciate your time. Thank you.

Operator

Our next question comes from the line of Melissa Wedel with JPMorgan. Your line is open.

Speaker 5

Good afternoon. Thanks for taking my questions today. I appreciate The transparency provided in the investment activity so far in 4Q, it actually sounds like a pretty busy quarter So far, and we're only about 5 weeks into it, given that a lot of activity tends to be skewed towards the back end of this Just wondering if you have any additional commentary on sort of activity yet to come this quarter versus what you've already seen? And then any Color on sort of repayment activity that might coincide with that?

Speaker 2

Yes. So we definitely do echo the sentiment that it has been busy start to the quarter. We do line of sight that there should be some additional activity for the rest of the quarter as folks with the beginning of that trend Are starting to look towards their budgets for the next year, realizing that there is growth opportunity with the need to Funded and we expect that trend to continue. And then as to repayments Melissa, there It isn't anything in particular outside of the normal pace. I think it's going to be We would expect it to be substantially less than Q3.

Speaker 5

Okay. That's helpful. Thank you. If I could follow-up on 2 particular near term maturities, if we're looking at the Great. It looks like you might have a couple coming due in the Q4 around Circadence and MINGLE, both of which are marked at a bit of a discount To cost.

Speaker 5

And just wondering if there's anything that we should read into that in terms of repayment or refinancing?

Speaker 2

Yes. I think both of those names are actively looking to refinance as you might expect with the maturities coming up. We are also determining if there is a structure that makes sense for them to stay on our books since they are credits that we have known for A period of time, have seen them weather through a variety of cycles and just know the names intimately.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Bryce Roe with B. Riley. Your line is open.

Speaker 6

Thanks. Good evening. I wanted to maybe just ask about the buyback you just talked about and I guess paired up with the lower balance sheet leverage that you're working with right now. Greg and Tom, can you kind of Talk about prospects for some active buyback activity relative to the pipeline and what origination Volume might look like it sounds like you got some good opportunities as we go into 2024. And so just kind of curious where you'd kind of prefer Spend the money or put the money.

Speaker 6

Thanks.

Speaker 2

Yes. Thanks, Bryce. I think in general, our first preference is always to Return capital to shareholders via distributions and that means using our leverage capacity to grow the portfolio. That said, there are times where we're trading at such a discount to NAV that the investment opportunity is compelling And making an investment in ourselves is a good use of our leverage capacity. So looking forward, The Board and our team thought that as we look forward for the next year that we wanted to have the ability To set some parameters and be opportunistic to use our leverage capacity to enhance return on equity Yes, by use of the share repurchase.

Speaker 6

Okay. That's helpful, Tom. And then if maybe you could kind of touch on the dividend declaration here and the supplemental that we're going to see In the Q4, obviously, you paid 1 throughout 2023. Any thoughts on kind of how you plan to think about 2024 in terms of a supplemental or was it more of a 2023 event? Thanks.

Speaker 2

I think as we get into 2024, We'll certainly take a look at the interest rate environment and the yield on the portfolio. We would like to be able to continue some form of supplemental dividend. We'll keep It would be our thought to keep the base dividend as is and continue to distribute incremental income Through that supplemental dividend. So it's our objective To grow to a point where we can return more than the base and if the portfolio grows, we would Expect to be able to do that.

Speaker 6

Great. Appreciate the time. Thanks.

Speaker 2

Thanks, Bryce.

Speaker 7

Thank you.

Operator

Please standby for our next question. Our next question comes from the line of Eric Zviuk with Hovde Group. Your line is open.

Speaker 3

Good afternoon, guys. Wanted to start with, I guess, kind of another question on leverage, but coming at it from a different perspective. You mentioned You're starting to see increasing opportunities for investment and the environment remains very lender friendly. And also noted while the probability of a soft landing has increased, there's still some uncertainty out there in the market. So just curious how you Think about the leverage day, is this an opportunity given the lender friendly environment that you would consider taking leverage up to capitalize on that opportunity or just some of the caution in the Economic outlook, maybe give you some pause in terms of maybe keeping leverage where it is today.

Speaker 3

Curious how you kind of frame the current environment.

Speaker 2

Yes, thanks. Eric, we're very comfortable with our leverage range of 0.8 to 1.1. In fact, we said that we would Expand beyond that range up to 1.25. And as we see high quality opportunities in a More certain economic environment will cross that 1.1 to the 1.25. I think As it stands right now, 0.8 to 1.1 is good.

Speaker 2

But if the lender friendly environment That continues to develop and if the portfolio remains performing as it is, very high quality And we see some more certainty and understanding around what's happening in the macroeconomic environment. We'll think about expanding beyond that, but it is our objective to use leverage to grow the portfolio.

Speaker 3

That's helpful. Thank you. And As you kind of curious if you could maybe provide some color to the lender friendly environment you keep referring to in terms of Maybe that the types of leverage, covenants, spreads and things that you're seeing today and how that's changed over the past 6 to 12 months?

Speaker 2

Yes. So I think the short answer, which is the best answer is all of the above. We're seeing companies looking for Much more reasonable attachment points in terms of Quantum and the implied LTV. Covenants are definitely Something that we're having ability to not only have tighter covenants, but have more covenants. And then I think just an interesting anecdote is This has now happened twice this quarter where there's companies that have had access to delayed draw portions of the debt Who have looked at the use of proceeds relative to the incremental cost of this debt, which for perspective, It was underwritten with a 1% SOFR floor, which now SOFR is north of 5% substantially higher And just can't justify that additional expense and have actually asked us if we can extend out that delayed draw period.

Speaker 2

These are things that we will evaluate on a case by case basis. But I think a key takeaway here is, We like to say that we're investing in the best companies and I think that this is a key proof that we're lending to businesses that Are very prudent in their own use and allocation of capital.

Speaker 3

I appreciate the details there. Thanks for taking my questions today.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Vilas Abraham with UBS. Your line is open.

Speaker 7

Hi, everyone. Most of my questions have been asked and answered, but maybe 1 or 2 here. So just listening to your comments It sounds like next year we should be a bit more new portfolio investment from Runway versus the last couple of quarters where it was much more weighted towards follow on investments. Is that a fair characterization of how we should think about it?

Speaker 2

I do think that there will be some follow on activity, and many of our loans do have milestone based delayed draws, which we expect these companies to gain accessibility to the capital next year. But I do think that we do expect In the middle of next year to see new deal activity to stick to tick up meaningfully.

Speaker 7

Okay. And just one more on PIVOT3, I think you mentioned in your prepared remarks that That's going to come to a resolution here shortly. It marked it looks like $11,600,000 in the last quarter. Is there any thoughts around how that market looking heading into resolution there?

Speaker 2

So I think the first Point is, I would use a clarification on the word resolution. We don't expect this to be the final resolution. We expect this to be the next step along our process of monetization, which will require us to change the accounting treatment. So you will see a change on the books. In terms of what the impact on the mark will be, Ultimately, that will be driven by the facts and circumstances at that time when we do move the position over.

Speaker 2

And as the quarter unfolds, we should have much greater clarification in terms of the magnitude of that.

Speaker 7

Okay. That's it for me. Thank you.

Operator

Thank you. I'm showing no further questions in the queue.

Speaker 1

At this

Operator

time, I would now like to turn the call back over to Greg Greifield, Acting CEO, Deputy CIO and Head of Credit for closing remarks.

Speaker 2

Thank you, operator. 3rd quarter operating performance demonstrates Runway's meticulous underwriting practices. Credit quality remains our top priority. We are pleased with the composition of our portfolio and will continue to be selective given the current market landscape. Thank you all for joining us today.

Speaker 2

We wish you a safe and healthy end of the year, and we look forward to updating you on our 4th quarter and full year 2023 financial results in March 2024.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Runway Growth Finance Q3 2023
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