Runway Growth Finance Corp. (NASDAQ:RWAY) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Ladies and gentlemen, thank you for standing-by and welcome to the Runway Growth Finance First Quarter 2023 Earnings Conference Call. Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Mary Friel, Assistant Vice President, Business Development and Investor Relations. Please go ahead.

Mary Friel: Thank you, operator. Good evening, everyone, and welcome to Runway Growth Finance conference call for the first quarter ended March 31, 2023. Joining us on the call today from Runway Growth Finance are David Spreng, Chairman, Chief Executive Officer, Chief Investment Officer and Founder and Tom Raterman, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance’s first quarter 2023 financial results were released just after today’s market closed 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 Runway Growth Finance’s web page. 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 uncertainty surrounding rising interest rates, the impact of the COVID-19 pandemic, changing economic conditions, and other factors we identify 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.

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 David.

David Spreng : Thank you, Mary, and thank you all for joining us this evening to discuss our first quarter results. I would like to start by providing first quarter 2023 highlights, and I’ll discuss broader market dynamics and our outlook. In the first quarter, Runway demonstrated its ability to be a steady hand in banking industry disruptions that caused shockwaves throughout the market. We attribute that to our weather improved portfolio focused on recession-resistant industries and our roster of seasoned team members who have experienced traversing every economic cycle. We want to take a moment to address the volatility we’ve seen in the banking sector since our last call, which began with the closure of Silicon Valley Bank.

As stated previously, Runway had no deposits or loans with SVB, nor did we participate in any credit facilities agented by or that included SVB as a lender. SVB’s lending portfolio was particularly concentrated in early-stage companies. Given our focus on the latest stage companies in the venture ecosystem, the recent banking disruptions did not financially impair Runway’s portfolio. We anticipate continued headwinds in the banking sector and we will remain proactive in communicating with our portfolio companies and managing our capital structure. Industry-wide, we’ve seen public and private investors adjusted our approach to risk management for the expectations of a potential hard landing recession. We believe this dynamic positions Runway as a preferred lender in the venture debt space.

Our priority has always been to deliver stable earnings while mitigating risk in any market environment. Runway continued to execute its disciplined strategy and we delivered stable earnings, as well as attractive risk-adjusted returns. Since inception, we believe our team has built the most stable portfolio in the venture debt space. We did this by underwriting first-lien investments in the highest-quality late-stage companies that operate in the recession-resistant industry sectors we know best. With looming macro concerns, we remain confident in the durability of our strategy, the experience of our team and the strength of our portfolio which we believe positions the company for continued success throughout 2023. Turning to the first quarter operating results.

Runway completed seven investments in existing portfolio companies, representing $12.9 million in funded loans. Our originations and deployment activity reflects first quarter seasonality and the conviction with which we evaluate investments, which we mentioned in our last call. That said, we continue to see healthy demand from quality companies with clear path to profitability, seeking to use debt as non-dilutive growth capital. Runway’s credit bar has never been higher and the team remains extremely selective in adding new companies to Runway portfolio. We remained in our core leverage range of 0.8 to 1.1 times only slightly increasing our ratio from 0.97 to 1.04 times in the first quarter. Runway has the lowest leverage ratio among the public venture debt peers and ample dry powder to deploy.

However, our approach to building a weather-proof platform has always been quality over quantity. We believe this selectivity in deploying capital will generate better terms and return-on-equity. Runway delivered total investment income of $39.3 million and net investment income of $18.2 million in the quarter. This represents an increase of approximately 104% and 46% respectively from the prior year period. Net assets were $569.8 million at the end of the first quarter, down 5% from $597.5 million in the prior year period and down 1% from $576.1 million at the end of Q4 2022. Tom will provide a deeper look at our strong credit quality, but our weighted-average portfolio risk rating remained constant at 2.1 in Q1 2023. Turning now to structuring and underwriting.

As demonstrated by our weighted-average active loan-to-value at origination of 17.4% across the portfolio, underwriting is a key component of our credit-first approach. With a proven track-record across multiple economic cycles, Runway has built its underwriting process around the core principles of low loan-to-value, a thorough understanding of our borrowers past profitability and value-creation as well as the structural protections and covenants that enable effective monitoring and communication. In an environment with higher base rates and growing concern over potential economic weakness, the importance of capital preservation and providing a margin of safety for both our and our portfolio companies’ balance sheets cannot be overstated. We continue to see the value in pursuing a growth mindset while establishing guardrails, such as thoughtful covenants and limitations on loan-to-value.

These measures limit downside risk for both us and our borrowers. We believe our traction balances are effective and allow us to work with borrowers to mitigate risk for us and them. Management prides itself on being a good partner and helping borrowers work-through problems when they arise while simultaneously preserving credit quality and safeguarding our shareholders. In step with previous quarters, we calculated the loan-to-value for loans that were in our portfolio at the end of Q4 2022 and Q1 2023 and found that our dollar-weighted loan-to-value ratio increased modestly to 24% in Q1 from 23% in Q4. We continue to employ a conservative approach to valuation. As you can see a primary focus heading into this year was to mitigate risk and support our existing portfolio companies.

Runway is focused on senior secured and almost exclusively first-lien loans is important for two reasons; the first is because this focus empowers us to be a good partner to our borrowers and the second is that it gives us control and being a fiduciary for our investors capital. Ultimately that means minimizing losses. The focus on first-lien loans protects our investors from situations in which a second-lien lender might find itself subordinated to any external party and precluded from taking action to preserve the value of alone. We follow-up our rigorous underwriting with proactive monitoring of our portfolio companies. Our communication cadence with portfolio companies is built into the terms of each loan. We do not take a one-size fits-all approach.

Portfolio monitoring is built on a core set of requirements for all portfolio companies and is customized to ensure we are positioned to protect our investors capital and avoid any potential losses in the portfolio. Additionally, each position in our portfolio undergoes a comprehensive valuation process internally on a quarterly basis and periodically by a third-party, which offers confidence in our markets. Turning to the market outlook. According to recent Pitchbook data, US late-stage venture equity deal value slowed to $11.6 billion in Q1. While this data provides a snapshot for BC equity market trends, Runway is not dependent on venture equity dynamics. We believe that our focus on late-stage companies including non-sponsored borrowers with defined paths to profitability insulates us further from downstream financing risk.

Across the ecosystem, the largest concern for companies is surrounding access to capital, as they navigate through a slower-growth environment. That’s where venture debt can provide a very strong value proposition because relative to equity which continues to be expensive and can come with onerous terms, debt remains an ideal option to fuel growth and minimize dilution. Venture debt is not however rescue financing, though it replace equity when the capital structure and business operations require in equity solution. We are mindful that existing portfolio companies may need additional support to navigate dynamic economic conditions, however, as the lender, we are confident in our ability to provide that helping hand. We can support our current portfolio companies and continue to prudently grow our loan book.

Our pipeline continues to expand as we see more quality companies come to Runway to explore creative financing solutions, while they assess future banking relationships and face fundraising challenges. We will continue to be extremely thoughtful as we evaluate opportunities in the current market environment. I will now turn it over to Tom.

Tom Raterman : Thanks, David, and good evening, everyone. Runway completed 7 investments in the first quarter, representing $12.9 million in funded loans. Runway’s weighted average portfolio risk rating held constant at 2.1 in the first quarter compared to the fourth quarter of 2022. As a reminder, our rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating. At quarter-end, we continued to have only 1 portfolio company rated 5 and on non-accrual status. During the quarter, we restructured our terms with Gynesonics and split our investment between a senior secured first lien loan and preferred equity, which has priority over all other equity. We also received fee contributions from the restructuring.

The amended agreement attracted additional junior equity investment to support the company’s growth and development. We’re pleased with this result and that our entire investment remains first-out in the current capital stack. Our total investment portfolio, excluding US treasury bills at a fair value of approximately $1.1 billion, holding constant from the fourth quarter of 2022 and increasing 49% from $754.3 million for the comparable prior year period. As of March 31, 2023, Runway had net assets of $569.8 million, decreasing from $576.1 million at the end of the fourth quarter of 2022. NAV per share was $14.07 at the end of the first quarter compared to $14.22 at the end of the fourth quarter of 2022. We’re pleased with our stable NAV, which we feel reflects industry-leading levels of scrutiny.

With respect to interest rates, our loan portfolio is comprised of 100% floating rate assets, which will continue to benefit from higher rates. 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 of the term sheet. In the first quarter, we received $10.2 million in principal repayments, a decrease from $16 million in the fourth quarter of 2022. Runway generated total investment income of $39.3 million and net investment income of $18.2 million in the first quarter of 2023 compared to 19.2 and $12.5 million in the first quarter of 2022, largely driven by the increase in the size of our portfolio. Our debt portfolio generated a dollar weighted average annualized yield of 15.2% for the first quarter 2023 as compared to 12.2% for the first quarter of 2022.

Moving to our expenses. For the first quarter, total operating expenses were $21.1 million, increasing from $6.8 million for the first quarter of 2022. The majority of this increase was driven by higher interest expense and debt fees, with the balance made up of an increase in performance-based incentive fees and management fees. Runway had a net realized loss of $1.2 million in the first quarter compared to a net realized loss of $0.4 million for the first quarter of 2022. We recorded net unrealized depreciation of $5.1 million in the first quarter compared to net unrealized depreciation of $9.2 million in the first quarter of 2022. Weighted average interest expense was 7.3% at the end of the first quarter, increasing from 6.5% during the fourth quarter of 2022.

End-of-period leverage was 104% and asset coverage was 196% as compared to 97% and 203%, respectively, at the end of the fourth quarter of 2022. All investments in the first quarter were funded with leverage as part of our strategy to generate non-dilutive portfolio growth. Turning to our liquidity. At March 31, 2023, our total available liquidity was $131.3 million, including unrestricted cash and cash equivalents and borrowing capacity of $128 million as compared to 93.8 and $88 million, respectively, on December 31, 2022. We had unfunded loan commitments to portfolio companies of $302 million, the majority of which were subject to specific performance milestones, $63 million of those commitments are currently eligible to be funded. During the quarter, we further enhanced liquidity by increasing our credit facility pursuant to the accordion feature by $75 million to a total of $500 million, subject to the terms and conditions as reflected in the credit facility agreement.

Subsequent to quarter-end, we completed a $25 million private placement of three-year unsecured notes. We also received full prepayment of our $30 million loan to Mustang Bio. With ample dry powder that fortifies our balance sheet, Runway remains well positioned to selectively deploy capital at increasingly favorable terms for the remainder of the year. Finally, on May 2, 2023, our Board declared a regular distribution for the second quarter of $0.40 per share as well as a supplemental dividend of $0.05 per share, payable with the regular dividend. As communicated last quarter, Runway intends to pay a similar supplemental dividend for each remaining quarter of 2023, subject to future approval from the Board of Directors. This concludes our prepared remarks.

We’ll now open the line for questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Erik Zwick of Hovde Group.

Operator: Our next question comes from the line of Bryce Rowe of B. Riley.

Operator: [Operator Instructions] Our next question comes from the line of Melissa Wedel, JPMorgan.

Operator: [Operator Instructions] Our next question comes from the line of Mickey Schleien of Ladenburg.

Operator: [Operator Instructions] I’m showing no questions at this time. I’d like to turn the call back over to Mr. David Spreng for any closing remarks.

David Spreng : Great. Thank you, operator. Runway’s first quarter operating performance is indicative of the high-quality durable portfolio we have constructed to navigate the current environment. Our team remains confident in our disciplined approach of deploying leverage to drive prudent portfolio growth while partnering with the latest stage companies in the venture market. We believe that Runway is well-positioned to thoughtfully grow earnings and shareholder value in any market environment. Thank you all for joining us today. We look forward to updating you on second quarter 2023 results in August. Goodbye.

Operator: Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.