Runway Growth Finance Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Runway Growth Finance Second 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 Mary Frio, Assistant Vice President, Business Development and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good evening, everyone, and welcome to the Runway Growth Finance conference Call for the Q2 ended June 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 Raderman, Acting President, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's Q2 2023 financial results were released just after today's market close and can be accessed from the Runway Growth Finance's Investor Relations website at investors. Runwaygrowth.com.

Speaker 1

We've 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 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 on reasonable.

Speaker 1

Any of those assumptions can prove to be inaccurate, and as a result, the forward looking statements based on those assumptions can be incorrect. 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. With that, I will turn the call over to Greg.

Speaker 2

Thanks, Mary, Thanks everyone for joining us to discuss our Q2 results. I met many of you on our IPO roadshow in the fall of 2021 And it's good to be here today. On July 31, we announced that David Sprang, Runway Growth's Chairman, Founder and Chief Executive Officer He is taking a temporary leave of absence to undergo treatment for a medical condition. Personally, I joined Runway in 2016 My friendship with David dates back even further. The entire team has David and his family in our thoughts and prayers.

Speaker 2

David has instilled immense leadership in this team and we're positioned to navigate this temporary transition. As we stated last week, I will be serving as acting CEO in addition to my existing responsibilities during David's leave. Julie Personally, Our newly appointed Lead Independent Director will serve as acting Chair and Tom Ratermann will serve as acting President in addition to his responsibilities as CFO and COO of the company.

Speaker 3

We

Speaker 2

are all focused on advancing Runway's strategy in the coming weeks. Runway has and will remain open for business. Today, I'll provide Q2 2023 highlights, speak to the market environment and lastly discuss our outlook for the year. During the Q2, Runway maintained a robust pipeline of more than $2,000,000,000 These are investment opportunities with late stage companies and our active portfolio management in parallel. These two practices have been essential in building what we believe to be the most stable portfolio in the venture debt industry.

Speaker 2

Companies are increasingly exploring the use of debt as a minimally dilutive alternative to equity financing, which bodes well for us as a Prioritizing quality over quantity. Turning to the 2nd quarter operating results. Runway completed 4 investments in existing portfolio companies, representing $50,900,000 in funded loans. Originations and deployment activity reflect our focus on preserving credit quality and maintaining stable book value over the long term. Our actionable pipeline remains strong as broad based originations activity has improved post regional bank fallout and the market becomes more lender friendly.

Speaker 2

Runway delivered total investment income of $41,900,000 and net investment income of $19,700,000 in the quarter, representing an increase of Approximately 67% 36% respectively from the prior year period. Net assets were $573,900,000 at the end of the 2nd quarter, up 0.7% from $569,800,000 at the end of Q1 2023. Tom will provide a deeper look at our credit quality, but our weighted average portfolio risk rating remained constant at The first is Marley Spoon, which is a global direct to consumer provider of quality meal kits. On July 11, 2023, Marley Spoon completed its de SPAC transaction and began trading on the Frankfurt Stock Exchange. Prior to this transaction, the company completed the placement of approximately $38,000,000 in equity, exceeding initial targets and resulting in a pay down of approximately $5,400,000 To date, Runway is pleased with the outcome of the Marley Spoon investment.

Speaker 2

Additionally, last week, our loan to Fidelis Cybersecurity was repaid in full. Finally, an update on Pivot 3. During the quarter, we recovered an additional $1,200,000 through the monetization of assets. That strategy continues to move forward and we believe it will successfully unlock the value of the company's IP. These outcomes highlight key components of the Runway Lending platform that we believe will continue to drive optimal results for our borrowers and shareholders.

Speaker 2

Every stage of the investment process plays a Let's drill a little bit more into these components. 1st and foremost, we take a disciplined approach to loan structuring. We tailor the commitment for business needs, credit quality and enterprise value of the portfolio company and avoid situations significant downstream financing risk and junior capital at play. Runway is dedicated to understanding the attractiveness of each opportunity on its own merits, Gaining a comprehensive picture allows us to be flexible to identify price and structure inefficiencies in the debt market, better support our portfolio companies and ultimately maximize returns while minimizing losses. 2nd, we employ a rigorous underwriting process built around the key tenants of low loan to value, a thorough understanding of borrowers operating models, as well as structural protections and covenants embedded in deals to enable proactive monitoring and engagement.

Speaker 2

Rising interest rates have led the yields substantially greater than we have seen in the past few years. While there is strong temptation to abandon structural standards to chase these returns, now is the time to stick to our knitting. We believe that as market conditions become increasingly lender friendly, we will have the opportunity to participate in these returns with appropriate structuring and covenant packages. We are committed to our Credit First philosophy as an organization. High yield may drive return shorter term, But we believe these benefits are outweighed by costs that credit issues have on the business.

Speaker 2

Our debt portfolio is comprised of nearly 100 1st lien investments and weighted average active loan to value at origination is 17.6% across the entire portfolio. We take pride in these portfolio attributes and we have no plans to let up on covenants or protections as we pursue continued portfolio expansion. Finally, we focus on diligence and risk management that both enable Runway to price and monitor downside risk effectively. The company integrates risk management into the investment process through a proprietary analytics model, which gives our team an edge in determining pricing as it allows for both offensive and defensive credit monitoring. Let's now turn to the market outlook.

Speaker 2

According to PitchBook data, U. S. Late stage venture equity deal value was approximately $38,000,000,000 in the first half of twenty twenty three, down from record levels in 2021 and 2022, but still above the first half of twenty twenty and years preceding. U. S.

Speaker 2

Late stage venture equity deals value represented 44% of total deal value in the first half of twenty twenty three and nearly a third of the total deal count. This is a continuation of the dynamic we've observed in recent quarters, more late stage deals that have smaller values. This snapshot shows that the late stage VC ecosystem is active from a deal count perspective. That said, our team believes that many attractive borrowers raise substantial equity capital prior to 2023. These companies completed rounds at historically high valuations to give them 24 to 36 months of runway.

Speaker 2

Many of these companies have continued to demonstrate healthy Cash positions throughout the first half of twenty twenty three and we believe our deferred fundraising efforts through the year. However, economic conditions have impacted those projected runways and these companies will ultimately seek partners to fund growth. As working capital dwindles, we believe that these companies will be looking for non dilutive capital in late 2023 beginning of 2024 to supplement their previous raises and fund potential growth with minimally dilutive capital. We also believe that this group of companies represents a high bar in terms of quality. As the demand we are forecasting comes online, we plan to be opportunistic in our deal making, While not sacrificing on quality, terms, protections or size, our pipeline to date has been robust, But we believe the quality of deals we see is only going to increase in the latter half of this year and into the next.

Speaker 2

With ample capital to deploy opportunistically, Runway is confident in our strategy to preserve credit quality while actively monitoring our existing portfolio companies. We expect our pipeline to expand from strong demand for Runway's financing solutions. Our team is being patient to ensure that we are investing in the highest quality late stage companies that can deliver attractive risk adjusted returns for our shareholders. We are confident in the health of the venture ecosystem and believe Runway is strategically positioned to capitalize in the latter half of the year. I will now turn it over to Tom.

Speaker 4

Thanks, Greg, and good evening, everyone. On a personal note, I want to reiterate that our thoughts and prayers are with David and his David is a good friend and business partner. We're all wishing him a speedy recovery. Runway completed 4 investments in the 2nd quarter, representing $50,900,000 in funded loans. Runway's weighted average portfolio risk rating held relatively constant at 2.2 in the second quarter compared to Q1 of 2023.

Speaker 4

As a reminder, our rating system is based on a scale of 1 to 5, where 1 represents the most favorable At quarter end, we continue to have only 1 portfolio company rated 5 in a non accrual basis, which is Pivot 3. While the likelihood of a recession has diminished slightly, we expect volatility We believe the most important thing we can do to preserve our strong credit performance is consistently actively manage our portfolio. Runway is in frequent communication with all of our portfolio companies. We regularly interact with our companies because we are offering more than just capital. We offer strategic counsel, financial expertise and an operational network that differentiates us from our peers.

Speaker 4

Our relationships with portfolio companies aid in evaluating credit on an ongoing basis. Each position in our portfolio undergoes a comprehensive quarterly valuation review internally and periodically by Kroll or Valuation Research Our 3rd party valuation providers. These are among the top valuation firms in the world and their review provides an additional layer of validation in our analysis. We focus on important characteristics like business model, operating leverage, quality of sponsors and timeline for profitability. We believe this process demonstrates to 24.2% in Q2 compared to 24.4% in Q1.

Speaker 4

Our total investment portfolio, Excluding U. S. Treasury bills at a fair value of approximately $1,100,000,000 holding constant from the Q1 of 2023 an increasing 36% from $807,700,000 for the comparable prior year period. As of June 30, 2023, Runway had net assets of $573,900,000 increasing from $569,800,000 at the end of the Q1 of 2023. NAV per share was $14.17 at the end of the Q2 compared to $14.07 at the end of the Q1 of 2023.

Speaker 4

We believe our stable NAV reflects industry leading levels of scrutiny. 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 Q2, we received $88,700,000 in principal repayments, an increase from $10,200,000 in the Q1 of 2023. Runway generated total investment income of $41,900,000 and net investment income of $19,700,000 in the Q2 of 2023 compared to $39,300,000 $18,200,000 in the Q1 of 2023.

Speaker 4

Our debt portfolio generated a dollar weighted average annualized yield of 16.7% for Moving to our expenses. For the Q2, total operating expenses were $22,200,000 increasing from $10,500,000 for the Q2 of 2022. Note that in Q2 2023 as in Q1 2023, Our management fee reduced automatically from 1.625 percent per annum during 2022 to 1.5% per annum as our assets exceeded $1,000,000,000 at the end of 2022. Runway recorded a net unrealized gain of $2,600,000 in the 2nd quarter compared to a net unrealized loss of $16,200,000 in the Q2 of 2022. Weighted average interest expense was 7.5% at the end of the 2nd quarter, increasing from 7.3% during the Q1 of 2023.

Speaker 4

In the second quarter, We decreased our leverage ratio to 0.97 from 1.04 times and increased our asset coverage to 2.03 times from 1.96x. All investments in the 2nd quarter were funded with leverage as part of our strategy to generate non dilutive portfolio growth. Turning to our liquidity. At June 30, 2023, our total available liquidity was 227,700,000 including unrestricted cash and cash equivalents and borrowing capacity of $190,000,000 as compared to $131,300,000 and $128,000,000 respectively on March 31, 2023. We had unfunded loan commitments portfolio companies of $234,000,000 the majority of which were subject to specific performance milestones.

Speaker 4

$103,000,000 of these commitments are currently eligible to be funded. During the quarter, we experienced Four prepayments totaling $88,700,000 and scheduled amortization of $2,800,000 The prepayments included full principal repayments and Revel Aesthetics for $12,500,000 as well as a partial principal repayment of our senior secured term loan to Pivot 3 of $1,200,000 Subsequent to quarter end, we completed a $20,000,000 investment in Elevate Services, which was part of a $40,000,000 co investment with funds on the Runway platform. Runway will continue to deploy capital at increasingly favorable terms in the second half of the year. Finally, on August 1, 2023, Our Board declared a regular distribution for the Q3 of $0.40 per share as well as a supplemental dividend of $0.05 per share payable with the regular dividend. Runway intends to pay a similar supplemental dividend in the Q4 of 2023, subject to the future approval from the Board of Directors.

Speaker 4

This concludes our prepared remarks. We'll now open the line for questions. Operator?

Operator

Thank Our first question will come from Erik Suik of Houde Group. Your line is open.

Speaker 3

Thank you and good afternoon everyone. I appreciate the commentary about expecting kind of the quality of deals to increase in the back half of this year and into 24. So kind of curious with respect to the pipeline at the $2,000,000,000 today, are there any particular industries that are more heavily represented where you're seeing Very attractive opportunity today. And then second, just wondering if you could provide any thoughts on the pull through rate of the current pipeline as well as timing.

Speaker 2

Yes. Hey, this is Greg. Thanks for the question. I think overall, just to reiterate, We are definitely seeing continued strength of the pipeline on a broad base across the industries that we cover Between enterprise software, life sciences, medical devices, as well as next generation consumer, I think we might see a bit of a skew towards some of the technology side of the house, but in general, broad based strength of the pipeline.

Speaker 3

Thanks. Any thoughts just kind of on the pull through rate or kind of the timing of realization of the current pipeline?

Speaker 2

Yes. I think we should see it continue to accelerate through the back half of the year. Historically, Q4 has been our biggest quarter, But we already are seeing strength in this quarter as well.

Speaker 3

Great. Thank you. I mean, I just noticed that that PIK income has increased now Three quarters in a row up to about $6,000,000 Now, curious if you could talk about what's driven that and whether that expectation would continue in the back half of the year.

Speaker 4

Yes. Thanks, Eric. So PIK income has increased And we think about PIK income in 2 ways. We use it offensively and we use it defensively. And offensively, Particularly in a rising rate environment, we'll use it to be competitive in order to win a transaction, Maintain our spreads, for instance, for the long run, but perhaps give a little temporary relief as the companies Come out of the box as a new portfolio company.

Speaker 4

And so roughly Half or so of our PIK transactions are offensive and then the rest are And so defensive is when we work with our portfolio companies, we understand their cash flow forecast, we understand Their current performance and we may give some temporary relief. We don't necessarily give TIC Permanently, we like to keep it temporary. But we're I think we'll see some more requests, but We're really sensitive to that FICC number right now and we don't anticipate it going up in any material It will fluctuate a bit, but we're not looking to increase it substantially.

Speaker 3

That's helpful. Thank you.

Operator

One moment please for our next question. Next question will come from Melissa Wedel of JPMorgan, your line is open.

Speaker 5

Good afternoon. Thanks for taking my questions today. I First, I want to say I appreciate your firm's candor and timely communication around You know the evolving situation with David and I hope you'll pass on our wishes for a full and speedy recovery to him. At the risk of being in delicate, is there anything that we should be thinking about in terms of a potential timeline Around his return or how long you two might need to be serving in a temporary role?

Speaker 4

Well, I think, Melissa, the most important thing is we haven't missed a beat. As everyone who knows David, he'll want to be back in the saddle as quickly as possible. But if you look at the team of David, Greg and Tom, we've really been growing this business together since the first private close on the fund. So we've been together 6 or 7 years And we haven't missed a beat. We've issued multiple term sheets in the last week.

Speaker 4

The investment process continues And the train is on the tracks and running on time. So we too wish David a Speedy recovery, and we'll welcome him back when he's ready.

Speaker 5

Okay. I appreciate that. And then the additional color on Sort of business as usual and issuing term sheets quarter to date. Going back to the repayment activity that you guys shared in the press release, certainly noted that the Prepayments or the prepayments exceeding the new deals so far, I know it's only 1 month into the quarter. Should we be thinking about you guys sort of deploying capital gradually over the back half and into 'twenty four and ramping leverage Given your outlook for an increasing level of quality over that timeframe And then on the repayments, is there anything that we should be thinking about in terms of sort of outsized acceleration of OID?

Speaker 2

So one of the things I

Speaker 4

think we've said on calls before with respect to repayments is we have a late stage portfolio and these companies It can be attractive refinancing candidates, it can be attractive trade sale candidates, and we've had 2 companies Successfully enter into and complete SPAC transactions. So we're not seeing anything like the level of prepayments We saw in 2021, but there is the prospect for continued repayments given the late stage and the quality of the portfolio. So We will continue to ramp the portfolio steadily throughout the year. Q3 tends to be our softest quarter. So it will be more weighted to Q4.

Speaker 4

And that's kind of our normal seasonal pattern. So with those prepayments, You will see some acceleration of OID with that.

Speaker 1

Okay. Thank you.

Operator

Thank you. One moment please for our next question. Our next question will come from Bryce Roe of B. Riley. Your line is open.

Speaker 6

Hi, thanks. Good afternoon, Tom and Greg. Appreciate you taking the question here. Maybe wanted just to drill down on some of Melissa's line of questioning there and get a feel for visibility into both pipeline and repayment. Just curious if Some of the recent repayment activity kind of surprised you.

Speaker 6

Did you have some visibility into it? And then Wanted to ask about balance sheet leverage. I think you guys have talked about your initial range out of the IPO up 110% debt to equity with some level of comfort to go above and beyond that, just kind of curious how you're feeling About balance sheet leverage today, now that we're another quarter removed from what happened in March in the first part of

Speaker 3

the year?

Speaker 4

Thanks, Bryce. Appreciate your question. With respect to the prepayments, we have some visibility to prepayment None of the prepayments in Q2 or even Q3 to date that are in our subsequent events were surprises. We're in pretty close touch with our portfolio companies. It's one of the tenants of our whole approach to risk management.

Speaker 4

So that gives us pretty good idea whether a company might be considering refinancing We're looking at a potential M and A transaction. So we do expect to see some more Repayment activity into this quarter and into Q4, I don't think there'll be any surprises. I think we have a good feel for what Is in process. And frankly, we're pleased with the impact on the portfolio and on the P and L of the repayments that we've had to date. Now it did bring our leverage down a little bit.

Speaker 4

We're within our range. We're still Comfortable growing outside of that range. So we've said that the initial range was at 0.8 to 1.1. That's lower than most of our peers and we believe our portfolio frankly is higher quality and later stage and To take some additional leverage, so as we start seeing higher quality deals and We're not changing the bar, but we're seeing more activity so that, yes, those deals that go to close We'll pick up throughout the year and into Q1. So we're comfortable going up to that 1.25.

Speaker 6

Okay. Okay. That's helpful. And then maybe a follow-up, Tom. You added 2 existing portfolio companies With fundings here in the Q2, you've got a new platform coming in here in the Q3.

Speaker 6

In terms of how the kind of the pipeline looks, are you kind of more inclined to stick to existing portfolio companies? Or Do you expect to add some other platforms along the way here? Thanks.

Speaker 4

No. We expect to add new names to the portfolio. We're going to support our names. We've got about 100 a little over 100,000,000 Out of that unfunded commitment that's available, we would expect to see some usage on that, which we'll support. And then We'll continue to evaluate new names.

Speaker 4

As we talked about, we have Greg mentioned, we have a pipeline in excess of $2,000,000,000 and We've got term sheets outstanding that we will work diligently to win and to close. Great.

Speaker 2

Thanks for the question and sorry to jump in, but to contextualize, We do believe that we are in a continuously evolving market that is becoming continuously Lender friendly, not only in terms of pricing, but also structure. Some of the Focus on the existing portfolio to date has been being judicious with our capital and making sure that we are structuring the right deals. And that should be taken as a sign that we believe that going into the back half of this year As well as next year, there will be a number of attractive opportunities as this market does continue to move towards us.

Speaker 6

Excellent. Appreciate the answers there.

Operator

Thank you. Stand by as we compile the Q and A roster. I am seeing no further questions in the queue. I would now like to turn the conference back to Greg Greifeld for closing remarks.

Speaker 2

Thank you, operator. Runway's 2nd quarter operating performance speak to our team's discipline as we expand our portfolio and maintain a robust pipeline. Looking to the second half of twenty twenty three, we will apply the same level of rigor in our evaluation Remain selective as we assess future opportunities for growth. Thank you all for joining us today. We will close the call by wishing David our best.

Speaker 2

David has instilled leadership across all levels of the Runway team, which gives us immense confidence in our ability to execute. We are open for business and focused on advancing our strategy in the interim.

Operator

This concludes today's conference call.

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