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

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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Q&A Session

Operator: [Operator Instructions] Our first question comes from Melissa Wedel from JPMorgan. Melissa, your line is open.

Melissa Wedel: Hi, good afternoon. Thanks for taking my questions today. First, David, it’s great to hear you again. Welcome back. I wasn’t sure if I missed this. I know that you talked about seeing an increasing pipeline during the first quarter. I think part of that was related to the Cadma JV. Did you give a specific amount of activity that you’ve seen in 2Q to-date?

David Spreng: Hi, Melissa. Thanks very much, and it is great to be back. I think the words that we used were heightened pipeline activity. And I know that sounds pretty nebulous in a way it is because to be a little more concrete. Our actual number of deals is pretty flat to what it was last year. The volume of opportunities is pretty flat, but we think that it’s a higher quality. Over the last 12 months, there has been such a high level of disarray in the venture community and so many companies struggling to figure out how they’re going to continue to operate that we’ve seen a lot of opportunities that really just don’t meet our standards. So we’ve been pretty harsh in cutting things off early. We are pretty far along on several deals that I think we’ll close quite soon.

And the visibility that we have on other stuff just looks really encouraging. So I can say with a really high level of confidence that you’re going to see us starting to do more deals. I don’t know how far we will get caught up relative to the goal for the entire year, but it’s going to accelerate quite a bit.

Melissa Wedel: Okay. I appreciate that additional context. I was hoping you could also walk us through Snagajob and we understand that when something goes on non-accrual, there can be a lot of avenues and different pathways to resolution. Could you help us understand sort of the nature of this one and share any details, any timeline? Any thoughts that you are able to? Appreciate it.

David Spreng: Yes. Of course, I’ll turn it over to Greg for that.

Greg Greifeld: Yes. Hi, Melissa. So Snagajob is a company that is undergoing a number of headwinds that you’re seeing with a number of their peers versus both public and private. It’s a fluid situation where we’re very actively involved with the management team with the equity sponsors. And additionally, we have engaged, we have a bench of operating partners where we have called one of them in to help us deal with the situation. So it is something that we are intimately involved with on a weekly, if not daily basis, and are working to have the best outcome in the right time frame for all constituents, but definitely our investors first and foremost.

Melissa Wedel: Understood. And is it because of the fluid nature of the situation? I take it to mean that, that’s one where it’s harder to have a sense on timeline and ultimate pathway?

Greg Greifeld: I think that’s definitely fair. We are continuing to evaluate in concert with the management and sponsors, all different avenues available to us, which are changing in order to accurately reflect that uncertainty. We have put it on non-accrual. But it is one we do believe that there are a number of paths and different outcomes ahead of us that can still have a favorable outcome.

Melissa Wedel: Okay, thank you.

Operator: Thank you, Melissa. [Operator Instructions] Our next question comes from Casey Alexander from Compass Point Research and Trading. Casey, your line is open.

Casey Alexander: Yes. Hi, good afternoon. Thanks for taking my questions. Runway’s – and David, welcome back. It is nice to have you back. My question is, can you kind of explain the rationale for even having a JV when the company has been public for about 2.5 years now and only in one quarter, has the leverage ratio exceeded one-time, and that was at 1.02x. I mean the company has been consistently under leveraged. So what’s the rationale for having the JV?

David Spreng: Yes. Thanks, Casey, and it’s good to hear your voice as well. I’ll turn it over to Tom for that one.

Tom Raterman: Thanks, David. Thanks, Casey, for the question. So as you look at our remaining capacity, it’s about to get up to that 1.2x for about $175 to $200 million, which is just a handful of deals. It’s five to six deals. Our target hold for the BDC is in that $35 million to $40 million range. Yet as we think about where we’re positioning and want to position the portfolio and our deal target, our target market, it’s that later stage, which tends to be a slightly larger yield, which would be in that $50 million to $75 million range. So it allows us to continue to participate in that risk sector that we want, while at the same time not overextending our desire to hold and maintaining diversification in the portfolio.

Casey Alexander: Okay, thank you. That’s only question.

Operator: Thank you. Our next question comes from Bryce Rowe from B. Riley. Your line is open.

Bryce Rowe: Thanks. David, good to have you back. Good to hear your voice.

David Spreng: Thank you.

Bryce Rowe: Yes, you are welcome. Let’s see, I wanted to maybe just try to help us calibrate the prepayment or the visibility of the kind of the prepayment activity that you see coming here in the balance of the year? And then maybe a related question would be trying to size up the pipeline relative to that prepayment activity and whether you think we’ll see kind of net growth for the balance of the year.

David Spreng: Yes, Bryce. Thanks. Great to hear your voice. And I’ll turn it over to Tom after just making a few comments. And the first is the common response every time is that it’s almost impossible to forecast prepayments. But we know when they come, that we just have to run that much faster on the origination side and that for companies that we want to keep in the portfolio, we’ll do whatever we can. Sometimes that’s impossible. When a portfolio company goes public and has hundreds of millions of dollars of cash on the balance sheet or we’ve had situations where JPMorgan was the lead underwriter and offered them a line of credit at 500 basis points below our cost. So sometimes you just can’t defend against it, but there are other times where we welcome the repayment so that we can redeploy the capital in today’s more attractive environment.

So I guess my bottom line answer to your question is we don’t exactly know what prepayments will be. But whatever they are, we’re going to ensure to the best of our ability that there are net positive new deployments, significant ones for the year.

Tom Raterman: Just to add a little to that. We know looking forward that we’ve got some component of scheduled amortization. We have a couple of transactions that mature. And then we know that we’ve got a handful of companies that are in some sort of process. Now as you pace those out and think about when that happens, those will likely come mid to end of third quarter and then be more back-end weighted in fourth quarter. At the same time, that’s where we see the origination momentum building. I think second quarter will be closer to net originations will be flat, maybe slightly up, but we’ll start seeing that flywheel process building into quarters three and four, and we’ll see greater net origination so that we can replace the earnings power in the long-term from those prepayments. In the short-term, we would anticipate a fair amount of accelerated income as a result of prepayment fees and some OID in quarter three and four.

Bryce Rowe: Okay. That’s helpful. Maybe a couple more for me. Tom, you talked about being comfortable with dividend coverage, and I assume that to mean kind of the all-inclusive dividend with the base and the spillover – I’m sorry, the supplemental. Can you kind of help quantify where spillover is at this point? And then my second question would probably also be for you, Tom, just in terms of buyback activity, nice to see it in the quarter. It looks like you continued that subsequent to quarter end. I was curious kind of what the average price was for the second quarter purchases and just where the appetite is from a price and NAV perspective there? Thanks.

Tom Raterman: Well, why don’t we answer the first part of that. Well, I’ll try to speak to the dividend first. Certainly, we would like to continue the supplemental dividend. I think as we look at what we know today with the current spillover pool and what we anticipate going forward in prepayments, we ought to be able to maintain that through the year. Obviously, our biggest priority is maintaining the base dividend. And so, we are always going to want to keep adequate spillover should we see a quarter where we get a lot of loan maturities that are close or prepayments that are close to maturity. So you don’t have a lot of accelerated OID or prepayment income. So we want to keep certainly spill over Kitty and good shape there.

With respect to the buyback, we do have a rubrick that we established at the beginning of every quarter. We set that once the window is open, and we really look at it as a as a percent of NAV. And the deeper the discount to NAV, the wider open the faucet is. I think as we start – if we’re trading at 100% of NAV, obviously, that’s an admirable accomplishment, and it doesn’t make any sense to use the repurchase program. But if the discount – certainly, if it’s below 90% as we were for a period of time that we’re really looking to be aggressive. So we’ll have to see where the market takes us. And if it’s a deep discount to NAV and we can continue to be accretive, we’ll use remaining $10 million, $12 million we had in the repurchase program.

Bryce Rowe: Awesome. That’s great color. Thank you.

Tom Raterman: You are welcome.

Operator: Thank you. Our next question comes from Vilas Abraham from UBS. Your line is open.

Vilas Abraham: Hey, everybody. Welcome back, David, and thanks for the question. Just on [indiscernible] appreciate the color there. How much of an impact did that non-accrual have on Q1 interest income?

Tom Raterman: They put on non-accrual at the end of the quarter, and so the impact is really going forward.

Vilas Abraham: Okay. Got it. And then just – and maybe you could comment on leverage. You guys have a target range that is pretty wide 0.8% I think to 1.25%. Just how are you thinking about that? Is that really as wide as it is just to capture some of the lumpiness? And is there maybe more of a kind of a true or ideal level you would like to be at over the next couple of years? And can you talk about that at all?

David Spreng: Sure. I can take that. We established that range really at the IPO window and post IPO, we were at 0.26. So we wanted to give a fairly wide range, and we want to accommodate a variety of economic circumstances. I think ideally, we want to operate between 1 and 1.2 in robust times, when deal flow is good, and credit conditions are strong. We’ll take it up to the upper end of that range. When you got more uncertainty, we really want to be at the lower end of that range. to leave dry powder to be opportunistic and to have the ability to manage any non-accruals without getting into any kind of valuation issues and being squeezed from a leverage standpoint. But I think if we operate between 1 and 1.2, I think we’re really happy with that range.

Vilas Abraham: Okay. I appreciate that. And then just maybe one more, on opportunities that you have a line of sight into for later in the year, in terms of verticals between tech, life sciences, you have some consumer services and products as well. Is it weighted towards one of those areas more than the others?

David Spreng: No, it’s pretty well spread out. I would say the one category that we’re leaning into a little less than the others is the consumer stuff. But we continue to find really interesting consumer products and services that are not really affected is marked by a recession, and those would be the ones that we would favor and I would mention Madison Reed is a great example there. But on tech and life sciences, and we use life sciences to refer to anything health care related. Where we continue to see enormous amount of deal flow, the next deal that will close is probably a life sciences deal. So in between tech and life sciences, it continues to be spread in about the right proportion, we’re more weighted towards tech, which we’re happy with.

We like the competitive nature of that market better than the life sciences side and where the returns in tech tend to be a little higher. The competition is a little lower and I don’t know if this is the right word, but it feels like it’s a little more disciplined where we’re able to get covenants and have more appropriate and lower loan to values.

Vilas Abraham: Alright. Appreciate it.

David Spreng: You bet, thanks, Vilas.

Operator: Thank you. [Operator Instructions] Our next question comes from Mickey Schleien from Ladenburg. Your line is now open.

Mickey Schleien: Hello, everyone. And David, welcome back. Yes, there have been a lot of comments and discussions about the pipeline and activity I think it would just be helpful if we – if you could step back for a moment. And just when we’re thinking about the backdrop with economic uncertainty, also uncertainty about interest rates still relatively muted M&A environment, but a lot of private debt capital available, what was your general thesis on the market and its activity levels, notwithstanding the pipeline, which can be very idiosyncratic?

David Spreng: Yes, again, and that’s an excellent question and one that we grapple with every day. And we tend to err on the side of conservatism because the loans that we’re making today we’ll be paying the dividend next year. So it’s really, really important that these be good loans. And as I said earlier, the venture ecosystem is really bumpy right now, and we’ve never seen so many venture-backed companies. According to PitchBook, there’s something like 50,000 venture-backed companies. And we know that most of them raised money if they could during the peak of the market and then move to a path to profitability mode, but so many of them need additional capital and so many of their VCs are being very stingy with that.

And one thing that a lot of people don’t pay enough attention to is that the folks that are really driving the pace of this market are the limited partners or institutional investors the university endowments, the foundations, the state pension funds, all that kind of stuff. The folks that give the money to the VCs are telling their venture partners to slow down because they have issues at the pension fund level. So until that changes, I don’t see VCs getting really, really more liberal with their investments and taking any of the tension off of the current market. They will continue to boatload on their best investments but on the ones that are more marginal, they’re pretty harsh and just basically set them free and say, go out in the world and survive if you can.

And if you don’t, so be it. We’ve got 40 other portfolio companies that will hopefully make up for it. So it’s just really a choppy environment, and we’ve been very conservative. We’re really focused on doing the best we can for our investors in terms of earnings, cash flow and ultimately, dividends. And of course, that requires avoiding losses. And I know we’ve had a couple of things that have gone on to non-accrual, which is very unusual for us, and we’re in the process of working through those. And I also know that this discussion and the path forward is really about credibility. And instead of saying words that mean nothing, we’re going to deliver. And over the course of this year, hopefully, avoid additional losses and fix the problems that we have and then move back into a position of portfolio growth.

We’re certainly not in this for growth at any cost. We think that’s the wrong way to go about it, and we’d rather build a solid foundation. And so we’ve been just a little slower than we might normally be. And hopefully, that will pay off in the long run.

Mickey Schleien: Thanks for that, David, that’s really helpful discussion. And just one follow-up, sort of a housekeeping question, maybe for Tom. The fund has consistently generated a somewhat small dividend, but I don’t see it this quarter. Was that due to the exit of a company? Or what’s the outlook for dividend income?

Tom Raterman: So we declared our dividend last week at the $0.40 base and the $0.07 supplemental. Certainly, we don’t anticipate any changes to the base and our objective is to maintain the supplemental dividend, while not compromising the spillover cushion that we have.

Mickey Schleien: Tom, I was referring to dividend income on the income statement.

Tom Raterman: Okay. So that – the dividend income on the income statement came from CareCloud. And in November, that’s a public company. We received that equity in the sale of one of our businesses. It was a company called CareCloud and a public company ultimately adopted its name. They suspended that dividend in November, which certainly created a lot of volatility in the valuation on that Level 1 asset. And so the company has indicated that they expect that dividend to resume later this year. So when CareCloud resumes their dividend, we would expect to see the dividend income come in again.

Mickey Schleien: I understand. That’s helpful. that’s it for me this afternoon. Thank you for your time as always.

David Spreng: Thanks, Mickey.

Operator: Thank you. Our next question comes from Erik Zwick from Hovde Group. Your line is open.

Erik Zwick: Good afternoon, everyone. And I just want to echo all the previous comments of David, it’s truly great to have you back and hear your voice again. So first question for me. Curious, David, both you and Greg mentioned some often business for a more friendly – lender-friendly market in the second half of ‘24. And I’m curious if you could maybe provide a little more detail or color around any kind of indicators or kind of activity you’re seeing now today because that gives you that optimism?

David Spreng: Well, so I’ll make a few comments and then turn it over to Greg. But especially on the tech side, we’re seeing terms that make a little more sense. And I think you know that we’re really big believers in covenants and in having appropriately structured loans, and that is starting to come back. And especially in the really late-stage larger deals we feel that that’s where and we’ve always thought that’s where the best risk-adjusted returns are. And those companies are now coming to grips with the interest rate environment. And for a long time, there was, I think, a little bit of sticker shop about the rate of increase in rates, which is very fair. But now companies are understanding the environment that we’re going to be in and that they can afford, maybe there needs to be some adjustments to the budget, but they can afford it.

So that’s the main basis for those comments. I will say the life sciences side remains a little bit more competitive and a little bit looser. I don’t know, Greg, do you want to add some additional color?

Greg Greifeld: Yes, I would definitely echo the sentiments in terms of just data level setting of structure and what the different companies and sponsors are willing to accept. And I’d add on to that, that their own expectations in terms of not only their value of the businesses but also just the ability to support amounts of debt has come in quite a bit, too. So opportunities that maybe 18, 24 months ago might have been looking for a certain amount of capital. We’re seeing those same sized companies come back to us today looking for maybe 60% to 70% of that kind of amount, which is much more attractive to us from a loan-to-value standpoint from other types of attachment points. and we’re just seeing a meeting of the minds in terms of what we believe is a reasonable structure as well as what the companies and the sponsors are actually looking for.

Erik Zwick: Thank you, that’s helpful. I appreciate the commentary there. And then just last one for me. I noticed in this quarter’s slide deck, you did not include the interest rate sensitivity slide. So maybe kind of two quick questions there. One, I’m guessing that it hasn’t changed a whole lot since last quarter, but I wonder if you could confirm that? And two, this absent there, just maybe indicative of your belief that we’re going to be at these levels of interest rates kind of this is higher for a longer period? Or just curious around that point?

Tom Raterman: Yes. We eliminated that slide because it was calculated based on rates going up to 200 basis points from the current level and we thought the utility of that was limited because I don’t think we see any increases in rates and our loans have floors that are at a variety of levels. Typically, it’s what the SOFR rate or the prime rate was at the time a loan closed plus the spread. So there’s no real change in it. We think it’s going to be pretty stable as we settle into this higher for longer, probably for the better part of this year.

Erik Zwick: Thanks for confirming. That’s all for me today.

David Spreng: Thanks, Erik.

Operator: Thank you. This concludes our question-and-answer session. I would now like to turn it back to David Spreng for closing remarks.

David Spreng: Thank you, operator. We believe our late and growth stage portfolio is well positioned for any economic environment. We’re in a strong position to deploy capital at favorable terms, and we will continue to maintain our underwriting rigor while evaluating future opportunities. Thank you all for joining us today. We look forward to updating you on our second quarter 2024 financial results in August. Thank you.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.