Q3 2022 Runway Growth Finance Corp Earnings Call
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Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Runaway growth Finance third quarter 2022 earnings Conference call. Please be advised that today's conference is being recorded.
I now like to hand, the conference over to Mary Thrill.
Assistant Vice President business development and Investor Relations. Please go ahead.
Thank you operator, good evening, everyone and welcome to runway gross Finance conference call for the third quarter ended September 32022.
Joining us on the call today from Runaway growth Finance are David Strang, Chairman, Chief Executive Officer, Chief Investment Officer, and founder and Tom Radavan, Chief Financial Officer, and Chief operating Officer.
Runaway growth finances third quarter 2022 financial results were released just after today's market close and can be accessed from runaway growth Finance Investor Relations website at investors got runaway growth Dot com.
We have arranged for a playback of the call at runway growth finances webpage.
During this call.
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 without limitation the uncertainty surrounding the COVID-19 pandemic change.
Changing economic conditions and other factors, we identified from time to time 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.
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.
Thank you Mary and thank you all for joining US this evening to discuss our third quarter results I'd.
I'd like to start by providing an overview of the quarter operational highlights and a brief market update.
Run rate growth generated record third quarter originations and net investment income results fueled by disciplined execution against our strategic initiatives.
Our success underscores our credit driven investment process, which provides the downside protection of that with the potential for upside of equity.
Runway gross weatherproof platform has been built to navigate all operating environments.
This call marks a little over a year since runaway growth went public.
As we prepared for life as a public company, we believe we have significant opportunity for portfolio growth.
ROE expansion and to build what we believe to be the.
Most stable portfolio, among our venture lending peers.
We knew that we would do this by deploying leverage to accelerate prudent portfolio growth, while partnering with the highest quality late stage companies in the venture market.
Over the last year runway growth has delivered gross fundings of $585 million, resulting in 55% net portfolio growth.
Expanded Roe.
<unk> 30 basis points to 10, 1%.
Nearly quadrupled our leverage ratio to six times.
And our balance sheet with diversified capital sources.
We recorded zero realized credit losses.
And increased our dividend per share for four consecutive quarters from 25 to.
To <unk> 36 per share.
This has been a historic year for our company and we believe there is ample room to run for the balance of 2022 and in year 2023.
Runway growth represents a compelling opportunity for investors that are looking for stable returns generated from partnering with some of the highest quality growth companies in the market.
Now, let's dive deeper into the third quarter.
We are pleased with our ability to originate and structure high quality senior secured debt investments and deliver significant portfolio growth.
As we predicted at the start of the year the cost differential between debt and equity capital continues to increase.
And that remains a tailwind for our platform.
Our investment team has built the strongest pipeline, we've seen which demonstrates the growing demand for our financing solutions amidst the current market environment.
Many of the companies in our pipeline are seeking non dilutive capital to take the next step in their development without giving up significant equity.
Companies that are seeking rescue financing are quickly weeded out.
We are lending the companies that can raise equity, but choose not to in order to preserve ownership positions and expand their businesses.
We delivered our strongest third quarter of portfolio growth historically.
<unk> nine investments in new and existing portfolio companies.
This represents $216 million in new commitments, including $161 million in funded loans.
In addition, we closed two transactions totaling $64 million in funding subsequent to quarter end.
We increased our core leverage ratio from four to six times in the third quarter.
Additionally, we strengthened our liquidity position by upsizing, our Keybank credit facility on which Tom will provide additional details momentarily.
We delivered total investment income of $27 million and net investment income of $15 million in the quarter.
This is up 47% and 35% respectively from the prior year period.
Net assets were $574 million at the end of the third quarter up 14% from $504 million in the prior year period.
These results and particularly the growth demonstrates the demand for our creative financing solutions.
We are pleased with the consistent strength of our credit quality. This is a direct result of our disciplined underwriting and monitoring processes.
Our work with portfolio companies continues throughout the life of our loans.
We believe runway growth monitoring process ensures that we are accurately marketing these investments and mitigating risk, while achieving consistent stable yield.
We view our risk mitigation process is a competitive edge and a key method to preserving credit quality.
We can see that through our loan to value of comps.
For an apples to apples comparison recalculated the loan to value for loans that were in the portfolio at the end of Q2 and Q3.
In comparing this consistent grouping of loans are dollar weighted loan to value ratio held consistent at 21% to 22% in the third quarter.
As we've said it may be more accurate to call this metric loan to our value.
This is because whenever we conduct due diligence our credit team takes an extremely conservative approach to valuation.
We're not solely based on your portfolio companies enterprise value on the last round of fundraising.
Run rate growth has always used proprietary processes to insulate our underwriting rigor from property valuations.
Looking ahead, we believe the rising interest rate environment, and the industry tailwind will contribute to runway growth momentum.
According to Pittsburgh data U S late stage venture activity slowed during Q3.
Which was further constricted by a lack of startup liquidity.
Year to date late stage company deals were down from 2021.
But still well above 2020 levels the.
The median deal value however continued to decline.
In other words late stage companies are continuing to raise equity capital, but it's smaller increments than in previous two years.
We believe late stage companies are deciding to execute smaller deals because they are scaling back growth focusing on profitability and being offered more onerous terms at lower valuations.
In the third quarter U S venture capital deal value was $195 billion year to date, surpassing the total value for full year, 2020, which was 169 billion.
Similarly venture debt deal value exceeded 22 billion and continues to grow as late stage companies embraced that as a means to reach additional milestones and avoid dilutive equity finance.
This trend points to venture debt untapped potential and bodes well for runway growth non dilutive capital, which we believe is only becoming more attractive.
We are positioned to take advantage of declining VC equity valuation as venture debt is increasingly being utilized to support the needs of entrepreneurs.
Companies are looking at that as an alternative or complement to new equity positioning runway for future growth.
Given the momentum we have in the market, we look forward to closing out our first full calendar year as a public company.
I will now turn it over to Tom.
Thanks, David and good evening everyone.
Runway growth completed nine investments in new and existing portfolio companies in the third quarter, representing $216 million of new commitments, which included 161 man and funded loans runways weighted average portfolio rating increased to two two from two one in the second quarter.
As a reminder, our risk rating system is based on a scale of one to five where one represents the most favorable credit rating.
At quarter end, we continue to have only one portfolio company rated five and on non accrual status.
We attribute this to the partnerships, we formed with portfolio companies, we conduct extensive due diligence and risk analysis that meaningfully informs our underwriting and subsequent monitoring programs.
This order of operation Optimizes deal terms for us along with our borrowers if one of our company's goes on non accrual status. We evaluate ways. We can work with management to bring it back to a performing loan while best protecting our interests as the lender.
Our mission is to support passionate entrepreneurs that we have best in class late stage companies by positioning them for success from term sheet to final payment.
At the end of the third quarter, our total investment portfolio, excluding U S Treasury bills.
On a fair value of approximately $910 2 million compared to $807 7 million at the end of second quarter and $586 4 million for the comparable prior year period.
This represents a sequential increase of approximately 13% and a year over year increase of 55%.
As of September 32022, runaway growth had net assets of $573 7 million decreasing slightly from $579 4 million at the end of the second quarter.
<unk> per share was $14 12 at the end of the third quarter compared to $14 and 14.
At the end of the second quarter.
We are pleased with our stable NAV.
Which we feel reflects industry leading levels of scrutiny every material position in our portfolio is reviewed on a quarterly basis by a third party ensuring confidence in our marks.
From a credit spread perspective, we continued to see an encouraging environment attributable to our focus on late and growth stage companies with proven business models.
Spreads are stable and other terms are becoming slightly more favorable to lenders.
With respect to interest rates, we want to remind everyone. Our loan portfolio is comprised of 100% floating rate assets near term. We believe the current rising rate environment will have a positive impact on portfolio yield and net investment income.
In the third quarter, we received $55 million in principal repayments, a decrease from $80 6 million in the second quarter of 2022.
We expect prepayment activity to slow since equity is so expensive and refinancing markets remain challenged.
That said, we have attractive late stage companies that could become opportunistic acquisition targets in any environment, making it difficult to predict future prepayments.
In the third quarter, we generated total investment income of $27 3 million and net investment income of $14 5 million.
Impaired to $18 six man and $10 seven man in the third quarter 2021, driven by an increase in the size of our portfolio.
Yes.
Our debt portfolio generated a dollar weighted average annualized yield of 14, 4% for the third quarter as compared to 15, 3% for the third quarter 2021.
Moving to our expenses for the third quarter total operating expenses were $12 eight man increasing from $7 9 million for the third quarter 2021, driven by an increase in management fees incentive fees interest expense as well as expenses related to being a public company.
Our performance based incentive fee was $3 6 million for the third quarter compared to $2 7 million for the third quarter 2021.
Our base management fee was $3, one man up from $2 3 million in the third quarter of 2021 due to the increase in the average size of our portfolio.
Runway had a net realized gain of <unk> 4 million for the third quarter, which compares to a net realized gain of <unk> 7 million for the third quarter 2021.
We recorded net unrealized depreciation of $3 2 million in the third quarter largely due to the decline in fair value of our loan to pivot three and public equity holdings in fiscal note.
Weighted average interest expense was five 5% at the end of the third quarter, increasing from four 1% during the second quarter 2022.
End of period leverage was 60% in asset coverage was 266% as compared to 40% and 349% respectively. At the end of the second quarter 2022.
All investments in the third quarter were funded with leverage as part of our strategy to generate non dilutive portfolio growth.
Turning to our liquidity at September 32022, our total available liquidity was $255 8 million.
Including unrestricted cash and cash equivalents and borrowing capacity of $250 million under our credit facility, all subject to existing terms and conditions.
This compares to $123 8 million and $117 million, respectively on June 32022.
During the third quarter, we strengthened our liquidity position by upsizing, our Keybank credit facility to 425 man from $280 million to fund portfolio growth with cost effective debt capital. In addition, we issued $100 5 million in unsecured notes during the quarter.
Runaway growth continues to be judicious in deploying capital at favorable terms, while maintaining market leading credit quality.
Our credit quality is a reflection of our rigor across the entire lifecycle of alone, including sourcing negotiating underwriting and monitoring.
An example of this is our pipeline development.
We're very targeted with respect to the industries were in and where we want to go.
We're more concerned with long term returns than being early adopters in a space, which is why we have no current exposure to the web three point O in crypto spaces at this time.
We will continue to prioritize credit quality at every stage.
With the lowest balance sheet leverage among the BDC industry. We believe runway is strategically positioned for the current macroeconomic backdrop.
We have dry powder in credit discipline is to use it judiciously, we remain on track to achieve our core leverage target for the portfolio, which is between <unk> eight and $1 one times.
By the first quarter of 2023.
As leverage builds we believe it will unlock the full potential of our earnings power, we have the ability to grow our portfolio and in turn earnings without raising equity.
Before taking into account prepayments, we have the ability to grow our portfolio by approximately $286 million without exceeding our core leverage targets or returning to the equity markets.
We also believe our strong portfolio quality would allow us to exceed our upper leverage target for periods of time.
Providing us great flexibility in timing any return to the equity market.
Earlier this year, our board of directors approved a stock repurchase program to acquire up to $25 million of runway gross common stock.
The program expires on February 23, 2023.
Runaway growth use the program during the quarter and senior management was active in purchasing shares.
Finally on October 27th 2022, our board declared a dividend distribution for the fourth quarter of 2022 of <unk> 36 per share a 9% increase from our third quarter dividend of 33 per share and our fourth consecutive quarterly dividend increase.
I am encouraged by the momentum in deal flow is latest stage venture backed companies turned to runway growth as the preferred lender for minimally dilutive capital as we originate high quality loans, we expect our intentional deployment of leverage to enhance ROE and long term shareholder value.
This concludes our prepared remarks, we will now open the line for questions.
Operator.
Thank you.
Minor to ask a question you're going to press star one one on your telephone.
Once again Thats Star one one please standby with compile the Q&A roster.
Our first question will come from the line of.
Mike each Liang from Ladenburg Your line is open.
Yes, good evening, David a couple of questions.
You talked about the fab.
Got that.
Our investment thesis in the sector remains intact in terms of the attractiveness of the type of funding you provide.
Wanted to further understand how has the volatility in the market and in particular, the rising interest rate environment environment, whether we're looking at LIBOR, where so for sort.
Sort of impacting the organic demand for your capital as opposed to refinancing, which we understand that will be suppressed under this environment.
Yes, so great question.
The major tailwind is as we highlighted that.
That remains cheaper than equity and as you pointed out that is getting a little bit more expensive with rising interest rates, but equity is dramatically more expensive with valuations.
Half of where they were in now in today's market coming with onerous terms. So.
Venture back companies, particularly the best ones the ones that could raise equity if they want to.
Deciding not to and are looking at that.
A better solution in a less expensive solution.
Certainly less expensive from dilution however, the cost of interest is higher.
But it's not a meaningful portion of.
Expense budget for any of these companies.
Average loan to value is.
20%.
And interest is just not a big factor in terms of their consideration.
Yes.
Consider from their point of view, it's really what are they going to do with the money and what's the return on the investment and if they can double their top line.
Without giving up any additional equity in the process doubled the value of their business.
Far exceeds the cost of the interest. So we really have not had a huge amount of pushback or people looking for fixed rates.
We are fortunate to have zero fixed rate loans.
You just don't do that so.
And the feedback from the market is.
We don't like rising rates, but it's still cheaper than equity and we still get it.
Really good return on our investment.
So David with those comments you just gave us in mind.
How would you characterize the size of your pipeline today versus a year ago, and perhaps even more importantly, the quality of the pipeline.
Yes, I'm glad you added that.
No.
Quantity has never been bigger in the quality and this is subjective but has never been higher so the higher I would say the highest quality of companies are coming to us and one of the reasons is of course the expense associated with equity.
But also the fact that the.
Some of the folks that were most active in providing let's call. It the latest latest possible stage pre exit money have exited the market hedge funds for example.
Even softbank.
Some of the funds that were honestly a competitor to us because if you could raise equity capital at.
2 billion, then thats really not very dilutive.
And it gives you a nice press release that it makes employees feel good and all of that kind of stuff, but we're not seeing that today. So theres less competition from from equity and as a result, the quality of the companies. We're seeing has never been higher.
Yes.
I appreciate that my final question.
I'm not sure how to look at the performance of your portfolio companies relative to the typical BDC in this economic environment works I mean, we're generally seeing BDC portfolios.
Producing revenue growth more or less in line with inflation, but.
Margins coming down is that also true in Europe venture space or are these companies at such high growth trajectories that.
They havent been affected yet by the slowdown in the economy and the sort of cost input increases that we've seen.
Well, it's difficult to generalize, we have a very diversified portfolio across three broad segments.
Tech life Sciences and consumer.
But on the whole the portfolio is still very much in growth mode.
I think youre seeing some.
Some.
Some companies.
<unk> having.
Changed their forecast for 2022, but by and large for the most part.
Out of roughly 30 companies.
All at 5445.
Have reduced their plan. So most most companies are.
Still achieving the revenue plan put together at the end of last year early this year and I'd say, we're seeing that impact more in the consumer than we are in the tech and life Sciences verticals.
And David I'm, sorry to keep asking questions but.
Based on what you just.
Commented have you started to see 2023 projections for these companies in.
Are they.
Are they being more conservative relative to where they were before.
So we of course have a 2023 plan for every company, but we haven't really started to see the official let's call. It board approved plan.
Yes.
So I can't really give you.
Back just.
In talking to companies I would say.
They are taking a cautionary view of course, they still want to grow and they are still going to continue to invest in growth.
But they're being a little bit more thoughtful on it and theres, probably a plan b.
And I'd say, especially as it relates to hiring.
One of the biggest expenses for almost all of our companies.
That is us.
Being paced I would say lake.
We'll we'll hire but only when we really needed and maybe a little bit slower than we might have otherwise.
So bottom line answer your question is no we have not started to see 2023 official plans yet.
Okay.
Thats It for me this evening.
I appreciate your time, thank you very much thank you.
Thank you one moment for our next question.
Our next question comes from the line of Casey Alexander from Compass Point. Your line is open.
Hi, good evening.
And thank you for delaying your call till six o'clock.
No, it's paint, but with everybody else dive in and at five o'clock to actually.
Less stressful at six o'clock. So I appreciate it we appreciate you too.
Yeah.
You actually had reasonably.
Almost robust sales and repayments of investments compared to much of what we've seen across the.
Sure.
Sure.
Venture debt universe, especially relative to your size could.
Could you give us some color as to where they came from what some of the circumstances are because.
Your ability to recycle is as important as your ability to originate.
And and seeing paybacks in this environment and it's actually quite encouraging.
Yes, well, let me let me just make an overall comment and then Tom can provide some details but.
Prepayments are very difficult to plan or project.
<unk>.
You did.
If there is an M&A transaction that's been in the works, we'll know about that certainly if a company is looking to go public we'll know about that.
We did have one company that actually did get published by us back so.
We're.
We get a little bit of warning, but it's hard to plan and so it is inevitable part of our business and I think we're going to see.
Less.
M&A.
Activity less we'll certainly fewer ipos and probably fewer if any specs so I expect the volatility to it.
Probably slowdown a bit over the next year.
But I think we're going to see more private to private mergers were to venture companies will merge together and that can be a good situation for us because it usually gives us the option to decide if we want to stay in or if we want to get refinanced out.
So I don't know Tom do you want to add some color on specifics.
I would just say that some of it there are two refinances both of which we participated in one of which was a.
<unk> syndication. This is for the spec company that allowed us to reduce our exposure a little bit and.
Because it was the right thing to do for the company to diversify its funding sources, but still stand alone.
I think in terms of predictability there are.
Some very attractive late stage companies that are in process of.
Always evaluating.
<unk> and <unk>.
That could flow through so we do expect some level of recycle probably more from M&A and less from refinance there are some loans that are now converting into the end of the interest only period and we'll start amortizing.
But again hard to predict but we do expect the opportunity to recycle will be.
It won't be as robust as 2021, but it will still.
Be reasonably meaningful.
Okay. Thank you for that.
Secondly, and this is just kind of an oddity that I that I noticed.
In the second quarter Youre pick income jumped up about $2 $5 million over the first quarter and then in this quarter dropped right back actually to a level, even lower than where it was in the second quarter and I'm just curious.
Now how that cadence occurred in terms of Pik income and <unk> was it just a.
One quarter past that you gave a company or how that came about.
That was the collection of fee income that had been picked the interest that had been picked on <unk>. If you remember <unk> was a longtime category five and non accrual loan.
We had a long term plan.
<unk> worked with that company and see it through to sale and it was sold in second quarter and therefore, we were able to recognize all that previously deferred pick income.
So there was a second quarter aberration.
Alright, great. Thank you that explain that alright. Thank you for taking my questions. Yeah of course, you should clarify as a normal course of business our loans are cash pay.
So.
That was that.
Workout situations, where we just got it all in after five years.
So we can go to the next caller. Please. Thank you one moment for our next question.
Our next question comes from line of Bryce Rowe from B Riley Your line is open.
Thanks, so much.
I think for thanks for taking the questions here, one or two.
Tom.
It looks like Youre almost.
A bit more asset sensitive here at the end of September than you were at the end of June I think if you're looking at.
In the presentation from last quarter to this quarter that 200 basis point move.
LIBOR.
We will have a 30 will have a positive impact of 34 cents on NII versus 30.
Last last quarter, I mean not not.
Not a huge jump, but just curious.
What's driving the increased asset sensitivity.
Yes.
The portfolio is still floating rate, but now we've added.
During the second during the third quarter.
100, <unk> in fixed rate notes, so as the interest rate goes up were not fully matched so for the sofa.
If it were financed against the revolving credit facility. So we will get the benefit of.
Those two new fixed rate tranches in our capital structure.
Okay.
That's helpful. Thanks.
And then David I think in your prepared remarks.
You mentioned <unk>.
As spreads being stable here, which is a good sign.
But other other terms might be shifting too.
Favre of lenders. So I just wanted to see if you could possibly expand on that comment.
Yes of course, so spreads are pretty stable, which is good.
Terms that we see improving or in covenants.
In warrant coverage, where we're just able to get.
Marginally better.
Warrant position.
Physician and importantly, the thing we care the most about is <unk>.
<unk> able to get either more covenants or tighter covenants, which we view is beneficial to both the lender and the borrower.
We've been pretty successful at communicating that to potential borrowers and convincing them.
That a properly structured covenant package makes sense for both parties.
Alright thats helpful. Thanks.
Then maybe one more for me.
You highlighted the increased commitment level for the for the revolver.
Curious, if if youre, adding adding lenders to that or is that existing lenders upping their upping their commitment.
No. We are we are adding lenders and the.
According into 500 man on the facility we were at 425 <unk> at the end of Q3, and we're always looking to diversify that.
That lender base, and we'll continue to do that as well as all of our frankly.
Sources of debt.
Great. Thank you so much that's it for me. Thank you thanks, Brian .
Thank you.
Once again Thats star one one for questions one moment for our next question.
Our next question comes from the line of Melissa why now from Jpmorgan. Your line is open.
Good evening, Thanks for taking my question.
The first is actually more of a clarification I want to make sure I heard you right in your prepared comments I think you said subsequent to quarter end. There were two transactions that were closed for $56 million of funding is that right.
I think it's.
64 man on funding.
Ken.
64, but yes. Thank you closed subsequent to the end of the quarter.
Got it okay I appreciate that and then in thinking about.
Really asking third quarter is there anything we should be thinking about in terms of kind of the timing of the funding and when they were added to the portfolio I think sometimes we can see things get kind of skewed towards the back half of the quarter and maybe not fully contribute to the P&L.
Anything.
Anything we should be aware of on that.
Okay.
As we always say the deals tend to close at the end of the quarter and that was really true.
For the third quarter as well and it was.
I think is just a great Testament to our origination team and the pipeline now that we're out of the box in the fourth quarter with two deals closing in the first month.
But typically and I would expect this will remain the case for the balance of the fourth quarter that deals end up.
Closing at the end of the quarter.
Yes understood.
And if I could sneak in one last question.
You mentioned your <unk>.
Exposures in terms of industries and <unk>.
In life Sciences and consumer.
I'm thinking specific to consumer given sort of the macro uncertainties out there concern.
About.
A weakening of the consumer into 'twenty three is there anything that you are looking at differently with your consumer related companies your perspective consumer.
Estimates.
Well.
<unk> X.
Expectation that we're going to be living through an economic downturn.
And the business model of the company needs to be.
Resilient to that obviously, we're going to spend more time, ensuring that there is.
Adequate capital to weather any storm.
We're not going to take excessive downstream enhancing risk and it's one of the benefits of being very often the last money that the company needs before they actually they will be profitable.
Is that we can really.
Do a lot of scenario analysis on how much it's going to take to get to that point.
So we've been.
Historically consistently.
Thoughtful and cautious about.
Not doing anything that.
There is an element of bad or.
Subject to consumer wins and that kind of stuff. So really just continuing to focus on recession resistant stuff capital efficient business models.
World Class management.
Thank you.
Thank you.
Thanks for the questions in the queue I'd like to turn the call back over to David for any closing remarks.
Operator at runaway growth, we're focused on building a high quality portfolio that will generate stable and attractive long term shareholder value.
We have the team in place to execute on our strategy and deliver for years to come.
You all for joining us today and for your support.
We hope everyone stays safe and healthy and we look forward to updating you on fourth quarter and full year results in March.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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Ladies and gentlemen, thank you for standing by and welcome to the runway growth Finance third quarter 2022 earnings Conference call. Please be advised that today's conference is being recorded.
I'd like to hand, the conference over to Mary Thrill.
Assistant Vice President business development and Investor Relations. Please go ahead.
Thank you operator, good evening, everyone and welcome to runway growth Finance conference call for the third quarter ended September 32022.
Joining us on the call today from runway growth Finance are David Spring, Chairman, Chief Executive Officer, Chief Investment Officer, and founder and Tom Bradley, Chief Financial Officer, and Chief operating Officer.
Runaway growth finances third quarter 2022 financial results were released just after today's market close and can be accessed from runaway growth Finance Investor Relations website at investors got runway growth Dot com.
We have arranged for a playback of the call at runaway growth finances 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 without limitation the uncertainty surrounding the COVID-19 pandemic changing.
Changing economic conditions and other factors, we identified from time to time 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.
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 runaway 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.
Thank you Mary and thank you all for joining US this evening to discuss our third quarter results I'd.
I'd like to start by providing an overview of the quarter operational highlights and a brief market update.
Runway growth generated record third quarter originations and net investment income results fueled by disciplined execution against our strategic initiatives.
Our success underscores our credit driven investment process, which provides the downside protection of that with the potential for upside of equity.
Runway gross weatherproof platform has been built to navigate all operating environments.
This call marks a little over a year since runaway growth went public.
As we prepared for life as a public company. We believed we had significant opportunity for portfolio growth.
Expansion and to build what we believe to be the <unk>.
Stable portfolio, among our venture lending peers.
We knew that we would do this by deploying leverage to accelerate prudent portfolio growth, while partnering with the highest quality late stage companies in the venture market.
Over the last year runaway growth has delivered gross fundings of $585 million, resulting in 55% net portfolio growth.
Spanned in a row.
Third 30 basis points to 10, 1%.
Nearly quadrupled our leverage ratio to six times.
And our balance sheet with diversified capital sources.
We recorded zero realized credit losses.
And increased our dividend per share for four consecutive quarters from 25 to.
To <unk> 36 per share.
This has been a historic year for our company and we believe there is ample room to run for the balance of 2022 and in year 2023.
Runway growth represents a compelling opportunity for investors that are looking for stable returns generated from partnering with some of the highest quality growth companies in the market.
Now, let's dive deeper into the third quarter.
We are pleased with our ability to originate and structure high quality senior secured debt investments and deliver significant portfolio growth.
As we predicted at the start of the year the cost differential between debt and equity capital continues to increase.
And that remains a tailwind for our platform.
Our investment team has built the strongest pipeline, we've seen which demonstrates the growing demand for our financing solutions amidst the current market environment.
Many of the companies in our pipeline are seeking non dilutive capital to take the next step in their development without giving up significant equity.
Companies that are seeking rescue financing are quickly read it out.
We are lending the companies that can raise equity, but choose not to in order to preserve ownership positions and expand their businesses.
We delivered our strongest third quarter of portfolio growth historically.
<unk> nine investments in new and existing portfolio companies. This represents $216 million in new commitments, including $161 million in funded loans.
In addition, we closed two transactions totaling $64 million in funding subsequent to quarter end.
We increased our core leverage ratio from four six times in the third quarter.
Additionally, we strengthened our liquidity position by upsizing, our Keybank credit facility on which Tom will provide additional details momentarily.
We delivered total investment income of $27 million and net investment income of $15 million in the quarter.
This is up 47% and 35% respectively from the prior year period.
Net assets were $574 million at the end of the third quarter up 14% from $504 million in the prior year period.
These results and particularly the growth demonstrates the demand for our creative financing solutions.
We are pleased with the consistent strength of our credit quality. This is a direct result of our disciplined underwriting and monitoring processes.
Our work with portfolio companies continues throughout the life of our loans.
We believe runway growth monitoring process ensures that we are accurately marketing these investments and mitigating risk while achieving consistent stable yields.
We view our risk mitigation process is a competitive edge and a key method to preserving credit quality.
We can see that through our loan to value of comps.
For an apples to apples comparison, we calculated the loan to value for loans that were in the portfolio at the end of Q2 and Q3.
In comparing this consistent grouping those loans are dollar weighted loan to value ratio held consistent at 21% to 22% in the third quarter.
As we said it may be more accurate to call this metric loan to our value.
This is because whenever we conduct due diligence our credit team takes an extremely conservative approach to valuation.
We're not solely based on your portfolio companies enterprise value on the last round of fundraising.
Run rate growth has always used proprietary processes to insulate our underwriting rigor from property valuations.
Looking ahead, we believe the rising interest rate environment, and the industry tailwind will contribute to runway growth momentum.
According to Pittsburgh data U S late stage venture activity slowed during Q3.
Which was further constricted by a lack of startup liquidity.
Year to date late stage company deals were down from 2021.
But still well above 2020 levels.
Median deal value however continued to decline.
In other words late stage companies are continuing to raise equity capital, but it's smaller increments than in previous two years.
We believe late stage companies are deciding to execute smaller deals because they are scaling back growth.
Focusing on profitability and being offered more onerous terms have lower valuations.
In the third quarter U S venture capital deal value was 195 billion year to date, surpassing the total value for full year, 2020, which was 169 billion.
Similarly venture debt deal value exceeded 22 billion and continues to grow as late stage companies embrace that as a means to reach additional milestones and avoid dilutive equity finance.
This trend points debenture that untapped potential and bodes well for runway growth non dilutive capital, which we believe is only becoming more attractive.
We are positioned to take advantage of declining VC equity valuation as venture debt is increasingly being utilized to support the needs of entrepreneurs more companies are looking at that as an alternative or complement to new equity positioning runway for future growth.
Given the momentum we have in the market, we look forward to closing out our first full calendar year as a public company.
I will now turn it over to Tom.
Thanks, David and good evening everyone.
Runaway growth completed nine investments in new and existing portfolio companies in the third quarter, representing $216 million of new commitments, which included 161 man and funded loans runways weighted average portfolio rating increased to two two from two one in the second quarter.
As a reminder, our risk rating system is based on a scale of one to five where one represents the most favorable credit rating.
At quarter end, we continue to have only one portfolio company rated five and on non accrual status. We attribute this to the partnerships we formed with portfolio companies, we conduct extensive due diligence and risk analysis that meaningfully informs our underwriting and subsequent monitoring programs.
This order of operation Optimizes deal terms for us along with our borrowers if one of our company's goes on non accrual status. We evaluate ways. We can work with management to bring it back to a performing loan well best protecting our interests as the lender.
Our mission is to support passionate entrepreneurs that lead best in class late stage companies by positioning them for success from term sheet to final payment.
At the end of the third quarter, our total investment portfolio, excluding U S. Treasury bills had a fair value of approximately $910 2 million compared to $807 7 million at the end of second quarter and $586 4 million for the comparable prior.
Year to year period.
This represents a sequential increase of approximately 13% in a year over year increase of 55%.
As of September 32022 runway growth had net assets of $573 7 million decreasing slightly from $579 4 million at the end of the second quarter.
Earnings per share was $14 12 at the end of the third quarter compared to $14 in 2014.
At the end of the second quarter.
We are pleased with our stable NAV.
Which we feel reflects industry leading levels of scrutiny.
Every material position in our portfolio is reviewed on a quarterly basis by a third party ensuring confidence in our marks.
From a credit spread perspective, we continue to see an encouraging environment attributable to our focus on late and growth stage companies with proven business models.
Spreads are stable and other terms are becoming slightly more favorable to lenders.
With respect to interest rates, we want to remind everyone. Our loan portfolio is comprised of a 100% floating rate assets near term. We believe the current rising rate environment will have a positive impact on portfolio yield and net investment income.
In the third quarter, we received $55 million in principal repayments, a decrease from $80 6 million in the second quarter of 2022.
We expect prepayment activity to slow since equity is so expensive and refinancing markets remain challenged.
That said, we have attractive late stage companies that could become opportunistic acquisition targets in any environment, making it difficult to predict future prepayments.
In the third quarter, we generated total investment income of $27 3 million and net investment income of $14 5 million.
Impaired to $18 six man and $10 seven man in the third quarter 2021, driven by an increase in the size of our portfolio.
Yes.
Our debt portfolio generated a dollar weighted average annualized yield of 14, 4% for the third quarter as compared to 15, 3% for the third quarter 2021.
Moving to our expenses for the third quarter total operating expenses were $12 8 million, increasing from $7 9 million for the third quarter 2021, driven by an increase in management fees incentive fees interest expense as well as expenses related to being a public company.
Our performance based incentive fee was $3 6 million for the third quarter compared to $2 7 million for the third quarter 2021.
Our base management fee was $3, one man up from $2 3 million in the third quarter of 2021 due to the increase in the average size of our portfolio.
Runway had a net realized gain of <unk> 4 million for the third quarter, which compares to a net realized gain of zero point $7 million for the third quarter 2021.
We recorded net unrealized depreciation of $3 2 million in the third quarter largely due to the decline in fair value of our loan to pivot three and public equity holdings in fiscal note.
Weighted average interest expense was five 5% at the end of the third quarter, increasing from four 1% during the second quarter 2022.
End of period leverage was 60% in asset coverage was 266% as compared to 40% and 349% respectively. At the end of the second quarter 2022.
All investments in the third quarter were funded with leverage as part of our strategy to generate non dilutive portfolio growth.
Turning to our liquidity at September 32022.
Our total available liquidity was $255 8 million.
Including unrestricted cash and cash equivalents and borrowing capacity of $250 million under our credit facility, all subject to existing terms and conditions.
This compares to $123 8 million and $117 million, respectively on June 32022.
During the third quarter, we strengthened our liquidity position by upsizing, our Keybank credit facility to 425 man from $280 million to fund portfolio growth with cost effective debt capital. In addition, we issued $105 million in unsecured notes during the quarter.
Runaway growth continues to be judicious in deploying capital at favorable terms, while maintaining market leading credit quality.
Our credit quality is a reflection of our rigor across the entire lifecycle of alone, including sourcing negotiating underwriting and monitoring.
An example of this is our pipeline development.
We're very targeted with respect to the industries were in and where we want to go.
We're more concerned with long term returns than being early adopters in a space, which is why we have no current exposure to the web three point O in crypto spaces at this time.
We will continue to prioritize credit quality at every stage.
With the lowest balance sheet leverage among the BDC industry. We believe runway is strategically positioned for the current macroeconomic backdrop.
We have dry powder in credit discipline is to use it judiciously, we remain on track to achieve our core leverage target for the portfolio, which is between <unk> eight and $1 one times.
By the first quarter of 2023.
As leverage builds we believe it will unlock the full potential of our earnings power, we have the ability to grow our portfolio and in turn earnings without raising equity.
Before taking into account prepayments, we have the ability to grow our portfolio by approximately $286 million without exceeding our core leverage targets or returning to the equity markets.
We also believe our strong portfolio quality would allow us to exceed our upper leverage target for periods of time.
Providing us great flexibility in timing any return to the equity market.
Earlier this year, our board of directors approved a stock repurchase program to acquire up to $25 million of runway gross common stock.
The program expires on February 23, 2023.
Runaway growth to use the program during the quarter and senior management was active in purchasing shares.
Finally on October 27th 2022, our board declared a dividend distribution for the fourth quarter of 2022 of <unk> 36 per share a 9% increase from our third quarter dividend of <unk> 33 per share and our fourth consecutive quarterly dividend increase.
I am encouraged by the momentum in deal flow is latest stage venture backed companies turn to runway growth as the preferred lender for minimally dilutive capital as we originate high quality loans, we expect our intentional deployment of leverage to enhance ROE and long term shareholder value.
This concludes our prepared remarks, we'll now open the line for questions operator.
Thank you.
Minor.
<unk> going to press Star one one on your telephone once again Thats Star one one please standby we compile the Q&A roster.
Our first question will come from the line of.
Mike each lien from Ladenburg Your line is open.
Yes, good evening, David a couple of questions.
You talked about the fab.
Fact that your investment thesis in this sector remains intact in terms of the attractiveness of the type of funding you provide.
To further understand how does the volatility in the market and in particular, the rising interest rate and via environment, whether we're looking at LIBOR or so for sort.
Sort of impacting the organic demand for your capital as opposed to refinancings, which we understand that will be suppressed under this environment.
Yes, so great question.
The major tailwind is as we highlighted that.
That remains cheaper than equity and as you pointed out that is getting a little bit more expensive with rising interest rates, but equity is dramatically more expensive with valuations.
Half of where they were in now in today's market coming with onerous terms. So.
Venture back companies, particularly the best ones the ones that could raise equity if they want to are deciding not to and are looking at that.
As a better solution a less expensive solution.
Certainly less expensive from dilution however.
Cost of interest is higher.
But it's not a meaningful portion of the.
Expense budget for any of these companies.
Average loan to value is sub 20%.
And interest is just not a big factor in terms of their consideration.
Yes.
Consider from their point of view, it's really what are they going to do with the money and what's the return on the investment and if they can double their top line.
Without giving up any additional equity in the process doubled the value of their business.
Far exceeds the cost of the interest. So we really had not had a huge amount of pushback or people looking for fixed rates.
Really fortunate to have zero fixed rate loans.
Can you just don't do that so.
The feedback from the market is.
We don't like rising rates, but it's still cheaper than equity and we still get it.
Really good return on our investment.
So David with those comments you just gave us in mind.
How would you characterize the size of your pipeline today versus a year ago, and perhaps even more importantly, the quality of the pipeline.
Yes, I'm glad you added that.
No.
Quantity has never been bigger in the quality and this is subjective but has never been higher so the higher I would say the highest quality companies are coming to us and one of the reasons is of course the expense associated with equity.
But also the fact that the.
Some of the folks that were most active in providing let's call. It the latest latest possible stage pre exit money.
Exited the market hedge funds for example.
Even softbank.
Some of the funds that were honestly a competitor to us.
Because if you could raise X.
<unk> capital.
$2 billion, that's really not very dilutive.
And it gives you a nice press release that it makes employees feel good and all of that kind of stuff but.
Not seeing that today, so theres less competition from from equity.
And as a result, the quality of the companies. We are seeing has never been higher.
I appreciate that my final question.
I'm not sure how to look at the performance of your portfolio companies relative to the typical BDC in this economic environment works I mean, we're generally seeing BDC portfolios.
Producing revenue growth more or less in line with inflation, but.
Margins coming down is that also true in your venture space or are these companies at such high growth trajectories that.
They havent been affected yet by the.
Slowdown in the economy.
Cost input increases that we've seen.
Well, it's difficult to generalize, we have a very diversified portfolio across three broad segments.
Tech life Sciences and consumer.
But on the whole the portfolio is still very much in growth mode.
I think youre seeing some.
Some.
Some companies having.
Changed their forecast for 2022, but by and large for the most part.
I mean out of roughly 30 companies call it five four or five.
Have reduced their plan. So most most companies are.
Achieving the revenue plan that they put together at the end of last year early this year.
I'd say, we're seeing that impact more in the consumer.
We are in the tech and life Sciences verticals.
And David I'm, sorry to keep asking questions but.
Based on what you just.
Commented have you started to see 2023 projections for these companies in.
Are they.
Are they being more conservative relative to where they were before.
So we of course have a 2023 plan for every company, but we haven't really started to see the official let's call. It board approved plan.
Yet.
So I can't really give you.
Back just.
In talking to companies I would say.
They are taking a cautionary view of course, they still want to grow and you're still going to continue to invest in growth.
But they're being a little bit more thoughtful on it and there is probably a plan b.
And I'd say, especially as it relates to hiring.
One of the biggest expenses for almost all of our companies.
That is as being paced I would say lake.
We'll we'll hire but only when we really needed in maybe a little bit slower than we might have otherwise.
So bottom line to answer your question is no. We have not started to see 2023 official plans yet.
Okay.
That's it for me this evening.
I appreciate your time, thank you very much thank you.
Thank you one moment for our next question.
Our next question comes from the line of Casey Alexander from Compass Point. Your line is open.
Hi, good evening.
And thank you for delaying your call till six o'clock.
No its paint, but with everybody else dive in and at five o'clock.
<unk>.
Less stressful at six o'clock. So I appreciate it well we appreciate you too.
Okay.
You actually had reasonably.
Almost robust sales and repayments of investments compared to much of what we've seen across the.
Venture debt universe, especially relative to your size could.
Could you give us some color as to where they came from what some of the circumstances are because.
Your ability to recycle is as important as your ability to originate.
And seeing paybacks in this environment and it's actually quite encouraging.
Yes, let me let me just make an overall comment and then Tom can provide some details but.
Prepayments are very difficult to plan or project.
<unk>.
We get.
If there is an M&A transaction that's been in the works, we'll know about that certainly if a company is looking to go public we'll know about that.
We did have one company that actually did get published by us back so.
We're.
We get a little bit of warning, but it's hard to plan.
It is inevitable part of our business and I think we're going to see.
Less.
<unk>.
M&A.
Activity less certainly fewer ipos and probably you were any specs. So I expect the volatility to probably slow down a bit over the next year.
But I think we're going to see more private to private mergers were to venture companies will merge together and that to be a good situation for us because it usually gives us the option to decide if we want to stay in or if we want to get refinanced out.
So I don't know Tom do you want to add some color on specifics.
I would just say that some of the there are two refinances both of which we participated in one of which was.
<unk> syndication. This is for the spec company that allowed us to reduce our exposure a little bit.
Because it was the right thing to do for the company to diversify its funding sources, but still staying alone.
I think in terms of predictability there are.
Some very attractive late stage companies that are in process.
Always evaluating.
Opportunities in.
That could flow through so we do expect some level of recycle probably more from M&A and less from refinance there are some loans that are now converting into the end of the interest only period and we'll start amortizing.
But.
Hard to predict but we do expect the opportunity to recycle will be.
It won't be as robust as 2021, but it will still.
Be reasonably meaningful.
Okay. Thank you for that.
Secondly, and this is just kind of an oddity.
Noticed.
In the second quarter Youre pick income jumped up about $2 $5 million over the first quarter and then in this quarter dropped right back actually to a level, even lower than where it was in the second quarter and I'm just curious.
How that cadence occurred in terms of Pik income and <unk> was it just a one quarter past that you gave a company or how that came about.
That was the collection of fee income that had been picked the interest that had been picked on <unk>. If you remember <unk> was a longtime category five and nonaccrual loan.
We had a long term plan.
<unk> worked with that company and see it through to sale and it was sold in second quarter and therefore, we were able to recognize all that previously deferred pick income.
So there was a second quarter aberration.
Alright, great. Thank you that explain that alright. Thank you for taking my questions. Yes of course, we should clarify as a normal course of business our loans are cash pay.
So.
That was that.
Workout situations, where we just got it all in after five years.
So we can go to the next caller. Please. Thank you one moment for our next question.
Our next question comes from line of Bryce Rowe from B Riley Your line is open.
Thanks, so much.
Evening. Thanks for thanks for taking the questions here I wanted to touch.
Tom It looks like Youre almost.
A bit more asset sensitive here at the end of September than you are at the end of June I think if you look in the.
In the presentation from last quarter to this quarter that 200 basis point move in LIBOR.
We will have a 30 will have a positive impact of 34 cents.
On NII versus 30.
Last last quarter I mean.
Not a huge jump, but just curious.
What's driving the increase asset sensitivity.
Well the portfolio is still floating rate, but now we've added.
During the second during the third quarter of $100 million in fixed rate notes. So as the interest rate goes up we're not.
Fully matched so for the sofa.
As if it were financed against the revolving credit facility. So we will get the benefit of those.
Those two new fixed rate tranches in our capital structure.
Okay.
That's helpful. Thanks.
And then David I think in your prepared remarks.
You mentioned <unk>.
And spreads being stable here, which is a good sign.
But other other terms might be shifting too.
The favor of lenders. So I just wanted to see if you could possibly expand on that comment.
Yes of course, so spreads are pretty stable, which is good.
<unk> that we see improving or in covenants in warrant coverage, where we're just able to get.
Marginally better.
Morning.
Position and importantly, the thing we care the most about is <unk>.
Just able to get either more covenants or tighter covenants, which we view is beneficial to both the lender and the borrower.
And we've been pretty successful at communicating that to potential borrowers and convincing them.
At a properly structured covenant package makes sense for both parties.
Alright thats helpful. Thanks.
And maybe one more for me Tom.
You highlighted the increased commitment level for the for the revolver.
Curious, if if youre, adding adding lenders to that or is that existing lenders upping their upping their commitment.
No. We are we are adding lenders and.
The accordion to 500 man on the facility we were at 425 <unk> at the end of Q3, and we're always looking to diversify that.
That lender base, and we'll continue to do that as well as all of our frankly.
Sources of debt.
Great. Thank you so much that's it for me. Thank you thanks, Brian .
Thank you.
Once again Thats star one one for questions one moment for our next question.
Our next question will come from the line of Melissa why now from Jpmorgan. Your line is open.
Good evening, Thanks for taking my questions. The first is actually more of a clarification I want to make sure I heard you right in your prepared comments I think you said subsequent to quarter end. There were two transactions that were closed for $56 million of funding is that right.
I think it's.
64 million on funding.
Ken.
64, but yes. Thank you closed subsequent to the end of the quarter.
Got it Okay appreciate that and then in thinking about.
Atkins third quarter is there anything we should be thinking about in terms of.
And the timing of the funding and when they were added to the portfolio I think sometimes you can see things get kind of skewed towards the back half of the quarter and maybe not fully contribute to the P&L.
Anything.
Anything we should be aware of on that.
Okay.
As we always say the deals tend to close at the end of the quarter and that was really true.
For the third quarter as well and it was.
I think is just a great Testament to our origination team and the pipeline now that we're out of the box in the fourth quarter with two deals closing in the first month.
But typically and I would expect this will remain the case for the balance of the fourth quarter that deals end up.
Closing at the end of the quarter.
Yes understood.
If I could sneak in one last question.
You mentioned your ex.
Closures in terms of industries, and Tech and life Sciences and consumer.
Well, thank you specific to consumer.
And sort of the macro uncertainties out there concerns about.
A weakening of the consumer into 'twenty. Three is there anything that you are looking at differently with your consumer related companies your perspective consumer investments.
Well.
Expectation that we're going to be living through an economic downturn.
And the business model of the company needs to be.
Resilient to that obviously, we're going to spend more time, ensuring that there is.
Adequate capital.
Weather any storm.
And we're not going to take excessive downstream financing risk and it's one of the benefits of being very often the last money that the company needs before they actually they will get profitable.
Is.
That we can really.
Do a lot of scenario analysis on how much it's going to take to get to that point.
<unk>.
So we've been.
Historically consistently.
Thoughtful and cautious about.
Not doing anything that.
As an element of bad or.
Subject to consumer wins and that kind of stuff. So.
Really just continuing to focus on recession resistant stuff capital efficient business models.
And World Class management.
Thank you.
Thank you.
Okay.
Questions in the queue I'd like to turn the call back over to David for any closing remarks.
Thank you operator at runway growth, we're focused on building a high quality portfolio that will generate stable and attractive long term shareholder value.
We have the team in place to execute on our strategy and deliver for years to come.
Thank you all for joining us today and for your support we hope everyone stays safe and healthy and we look forward to updating you on fourth quarter and full year results in March.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.