Q4 2022 Runway Growth Finance Corp Earnings Call
Speaker 2: and welcome to the runway growth finance 4th quarter 2022 earnings conference call. Please be advised that today's conference is being recorded.
Speaker 2: I would now like to hand the call over to Mary Friel, Assistant Vice President, Business Development and Investor Relations. Please go ahead.
Speaker 3: Thank you, operator. Good evening, everyone, and welcome to the Runway Growth Finance Conference call for the fourth quarter and fiscal year ended December 31, 2022. Joining us on the call today from Runway Growth Finance, our David Spring, Chairman, Chief Executive Officer, Chief Investor and Officer, and founder.
Speaker 3: website at investors.runwaygrofe.com. We have arranged for a replay of the call at the Runway Growth Finance webpage.
Speaker 3: During this call, I want to remind you that we may make forward-looking statements based on current expectations.
Speaker 3: 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.
Speaker 3: including and without limitation, market conditions caused by uncertainty surrounding the rising interest rates, the impact of the COVID-19 pandemic, changing economic conditions, and other factors we identify in our FCC filings.
Speaker 3: Although we believe that the assumptions on which the forelooking statements are raised are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forelooking statements based on those assumptions can be incorrect.
Speaker 3: 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 the SEC related filings, please visit our website.
Speaker 4: 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 fourth quarter results.
Speaker 4: I'd like to start by providing fourth quarter 2022 highlights, then I'll discuss broader market dynamics.
Speaker 4: to start by providing fourth quarter 2022 highlights, then I'll discuss broader market dynamics and the outlook for 2023.
Speaker 4: 2022 was a pivotal year for runway. It was our first full calendar year as a public company. We believe our investment thesis was validated, and we demonstrated the value in pursuing a portfolio that focuses on the latest stage companies in the venture market.
Speaker 4: Despite a volatile backdrop, runway continued to prunfully deploy leveraged a few non-deluded growth for its portfolio companies, while delivering five consecutive quarters of given an increase to our shareholders. Since inception, we built a track record of lending to
Speaker 4: what we believe to be the highest quality late and growth stage companies. I want to take a moment to summarize our very successful year. Runway delivered record originations of $878 million.
Speaker 4: We expanded leverage more than 7 fold to 0.97 times.
Speaker 4: We grew ROE 165 basis points to 10.3%. Increased our base dividend per share to 40 cents, marking an 11% increase from our prior quarter and 60% increase since our initial public offering.
Speaker 4: Additionally, we declared a supplemental dividend of $5 per share payable with the first quarter dividend along with our intention to pay a similar dividend in each quarter of 2023.
Speaker 4: We recorded zero realized credit losses. We expanded our investment in finance teams by over 40% and we grew our strategic footprint with new offices in Boston and Dallas.
Speaker 4: Now let's turn to our force quarter results.
Speaker 4: Runway closed 2022 with record fourth quarter portfolio growth. We completed 12 investments in new and existing portfolio companies.
Speaker 4: This represents 327 million in new commitments, including 233 million in funded loans. Runway is committed as ever to focusing on quality, high growth, potential companies and the sectors we know best, including life sciences, technology, and select consumer service and product industries.
Notably, our team deployed two loans to P.V. sponsored companies during the fourth quarter, highlighting our strategy to migrate toward larger, less risky opportunities.
Review growth-focused PE-back companies as an integral segment of the platform that offers compelling risk-adjusted returns. We also increased our core leverage ratio from 0.6 to 0.97 times in the fourth quarter, reaching our target range.
and on an accelerated schedule. This is an important achievement for Runway as we unlock the full potential of our balance sheet earnings power and expand our return on equity. Runway delivered total investment income of 37 million and net investment income of 18 million in the quarter. This represents an increase of approximately 109%.
Tom will dive deeper into our continued credit quality, but our weighted average portfolio rating improved to 2.1 compared to 2.2 and 2.3.
We are pleased with the strength and resilience of our portfolio. While we anticipate continued macro turbulence in 2023, we believe our durable portfolio is built for all economic environments.
A top priority is the quality of our portfolio, and due to persistent fed rate increases and inflationary pressures, our team has been even more selective in evaluating additions to the runway portfolio.
We demonstrated our ability to grow and execute, however during kinds of uncertainty, we redouble our diligence efforts and become even more patient. Our next area of focus is our structuring and underwriting.
We focus on mutually beneficial terms that position runway at the top of the cap table.
relative to other listed venture debt BDCs, we believe runway is exposed to the least amount of risk. This is demonstrated by our concentration in first-line senior secured loans, as well as our weighted average active loan to value at a regeneration of 17.4% across the entire portfolio.
As we've done in the past, we also calculated the loan-to-value for loans that were in our portfolio at the end of Q3 and Q4. In comparing this consistent grouping of loans, our dollar weighted loan-to-value ratio was consistent at 22% in Q3 and Q5.
and 23% in 2.4%. This reflects the extremely conservative approach to valuation our credit team takes during the underwriting process to insulate our portfolio from exaggerated valuations.
For our existing physicians, we pride ourselves on our monitoring process. From term sheet to final payment, we're in regular communication with our portfolio companies. We're in regular communication with our portfolio companies.
to proactively assess their ability to identify and navigate potential challenges. Our communication cadence with portfolio companies is built into our terms on each loan. We do not take a one-size-fits-all approach. Portfolio monitoring is built on a course that of requirements.
all portfolio companies and is customized from that base to ensure an ongoing program that meets our needs as a lender while allowing the borrower to operate as efficiently as possible.
Additionally, each position in our portfolio undergoes a comprehensive valuation process internally, on a quarterly basis, and periodically by a third party.
For perspective, every material investment in our portfolio was reviewed by a third-party valuation specialist at least twice throughout 2022. This gives us confidence in our marks, even amid challenging operating environments for our portfolio companies.
Looking at the broader market outlook, three things are clear. Valuations are declining, DC deployments are down, and exit activity is slowing to reefing your lows. We view these trends as a natural part of the venture cycle.
They are also demand drivers for non-dilutive growth loans as an alternative to expensive equity.
They are also demand drivers for non-delutive growth loans as an alternative to expensive equity. Our credit bar is high.
and we see increasing demand for Runway's creative financing solutions. Our team continues to originate high-quality deals while focusing on companies with sound fundamentals and proven business models. The latest venture capital data reinforces these themes. According to recent pitch book data, late-stage venture capital activity continued to decline.
through 2022 as the market based on going volatility. However, it's important to note, 2022 late-stage deal values remain historically high.
outpacing 2020 and 2019 by 34 and 62% respectively. Compared to record levels in 2021, deal count only declined by 5%. If
In other words, based on this data, late-stage companies are continuing to raise equity capital, but in smaller increments. The venture capital ecosystem is nearing the end of the 10-year expansion cycle.
According to Pittsburgh data, even though US venture capital raised in 2022 was a record 163 billion venture capital fundraising slowed significantly in the fourth quarter as the full impact of the denominator effect became apparent in investor commitments. We expect this trend to continue for the foreseeable future.
venture-backed companies embracing debt as non-dilutive growth capital, which bodes well for Runway.
Before I turn the call over to Tom, I want to highlight a performance metric we take pride in.
Our consistent dividends to shareholders and sustained shareholder return.
Since becoming a public company, we've increased our dividend five consecutive quarters, representing 60% total growth.
We achieve this while building what we believe to be the most stable portfolio in the venture debt landscape. While the macro environment likely will continue to impact our portfolio companies, we have confidence that we can continue to execute our discipline strategy to drive long-term shareholder value. Turning to 2023. We have confidence that we can continue to achieve our discipline strategy to drive long-term shareholder value.
We continue to prioritize financing recession resistant companies with proven business models and minimal downstream financing risks. The cost differential between debt and equity capital continues to be a tailwind for the runway platform.
As a reminder, the first quarter tends to be seriously the slowest period in terms of originations activity, which is consistent with what we have experienced here today.
This market dynamic is not expected to impact the supplemental dividend program we discussed earlier on this call. Of course, subject to board approval. The team continues to see a robust pipeline of opportunities in the marketplace and we will continue to evaluate these deals with discipline.
and rigor that we have employed to date. I will now turn it over to Tom. Thanks, David. And good evening, everyone.
Runway completed 12 investments in new and existing portfolio companies in the fourth quarter, representing 327 million in new commitments, which included 233 million in funded loans. Runways weighted average portfolio rating improved to 2.1 from 2.2 in the third quarter. As a reminder, our risk-creating system is based on a scale of 1 to 5.
1.1 billion compared to 910.2 million at the end of the third quarter and 684.5 man for the comparable prior year period.
This represents a sequential increase of approximately 24% and a year-over-year increase of 65%. As of December 31, 2022, runway had net assets of 576.1 million.
increasing from $573.7 million at the end of the third quarter. NAB per share was $14.22 at the end of the fourth quarter compared to $14.12 at the end of the third quarter. We're pleased with our stable NAV, which we feel reflects industry-leading levels of scrutiny.
With respect to interest rates, our loan portfolio is comprised of 100% floating rate assets which will continue to benefit from higher rates.
All loans are currently earning interest at or above agreed-upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing of the term sheet. In the fourth quarter, we received 16 million in principal repayments, which is a total
a decrease from 55 men in the third quarter of 2022. We expect prepayment activity to remain relatively low given equity valuations and a pullback in the refinancing markets. However, a number of our late-stage companies remain attractive acquisition targets in any environment which makes it difficult to predict future prepayments.
In the fourth quarter, we generated total investment income of 36.8 million and net investment income of 18.4 million compared to 17.6 million and 10.9 million in the fourth quarter of 2021.
Grimm and Vi are growing portfolio and rising interest rates. Our debt portfolio generated a dollar weighted average annualized yield of 15.5% for the fourth quarter 2022 as compared to 14.0% for the fourth quarter 2021.
Moving to our expenses for the fourth quarter, total operating expenses were 18.4 million, increasing from 6.7 million for the fourth quarter 2021, driven by an increased in interest expense and management and incentive fees.
Our performance based in Senevp was 4.6 million for the fourth quarter, compared to 2.7 million for the fourth quarter 2021.
Our base management fee was 3.4 man up from 2.3 man in the fourth quarter of 2021 due to the increase in the average size of our portfolio during the year.
Beginning in Q1 2023, our management fee declined from 1.6 to 1.5% per annum with our total assets now exceeding $10.
Runway had a net realized loss of $2 million in the fourth quarter compared to a net realized gain of 8.2 million for the fourth quarter of 2021. We recorded net unrealized appreciation of 2.1 million in the fourth quarter, primarily driven by adjustments to the equity portfolio. Weighted average interest expense.
was 6.5% at the end of the fourth quarter, increasing from 5.5% during the third quarter 2022. End of period leverage was 97% and asset coverage was 203% as compared to...
60% and 266% respectively at the end of the third quarter 2022. All investments in the fourth quarter were funded with leverage as part of our strategy to generate non-delutive portfolio growth.
Turning to our liquidity, at December 31, 2022, our total available liquidity was 93.8 man, including unrestricted cash and cash equivalents, and borrowing capacity of $88 million under our revolving credit facility, all subject to existing terms and conditions.
This compares to 255.8 million and 250 million respectively on September 30th, 2022.
Subsequent to quarter end, we further enhanced our liquidity by increasing our credit facility by $50 million to a total of $475 million, subject to the terms and conditions as reflected in the amended credit facility agreement. Runway continues to be disciplined.
with long-term gross potential.
We continue to have dry powder and available leverage capacity for growth. Today is opportunistically positioned to grow earnings while driving shareholder value.
As leverage builds to the upper end of our target range
As leverage builds to the upper end of our target range, we believe it will unlock the full potential of our earnings power.
On that note, we achieved our core leverage target for the portfolio, which is between 0.8 and 1.1 times, marking tremendous progress. As we've said in previous calls, we believe we can safely increase our leverage ratio to 1.3 times, which is more in line with our publicly traded BDC peers. In 2022, our Board of Directors approved a stock repurchase for the BDC.
Finally, on February 23rd, 2023, our board declared a base dividend distribution for the first quarter of 40 cents per share, an 11 percent increase from our fourth quarter dividend of 36 cents per share, and our fifth consecutive quarterly dividend increase.
In addition, our board approved a supplemental dividend of five cents per share, payable with the base dividend, and our attention to pay a similar dividend in each quarter of 2023.
This concludes our prepared remarks. We will now open the line for questions. Operator?
This concludes our prepared remarks. We will now open online for questions. Operator? Thank you.
Ladies and gentlemen, to ask a question, please press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again.
Please stand by while we compile the Q&A roster. And our first question comes from the line of Mickey Sline with Laydenberg. Yes, good evening everyone. David wanted to ask you about the Internet and Direct.
ahead was. Yeah thanks for the question Mickey. So of the different sectors that we focus on and just as a quick reminder it's within tech we really like mission critical enterprise technology. We like life sciences and healthcare broadly and the third bucket that would be the one we're kind of
you know, being most cautious on is the consumer. And we have always focused on recession resistant businesses and so for something in the consumer space for us to do it today, it's gonna have to be recession resistant and have very impressive momentum and economics. And the new deal that was done in the last quarter meets those standards and that's Madison Reed.
and you're right, it was not a very big loan, but the company is really a very well-run, has really good economic metrics and is quite recession resistant. They built a fantastic business, direct to consumer, and then through COVID actually raised
quite a bit of equity to roll out an omnichannel approach where they have these color bars in big cities with a very small footprint, a great economic model, and most importantly, the revenue model is mostly on a subscription basis where a
a woman primarily could pay a fixed monthly charge and come into the color bar as much as they want or on a regular basis. So it's a smallest part of our portfolio. It's the highest bar to get into the portfolio today, but we do think that selectively there is room for continued investment in that space.
That's good to hear, David, and I appreciate that transparency. You mentioned in your prepared remarks, you know, a focus on more sponsored deal flow. And I don't recall off the top of my head what proportion of the portfolio is sponsored today.
But to the extent there's headwinds developing in your portfolio, anything anecdotal you can tell us about how sponsors are behaving in the portfolio in terms of supporting your portfolio companies? Yeah, of course. The comment that I made in the prepared remarks was referring to
PE backed companies. So a different category of sponsor than the traditional VC. And we did two deals in Q4 with PE sponsors, one that was sponsored by Mainsail and one that was sponsored by BlackRock. And we really like their backing.
They're obviously very sophisticated and are very committed to their companies and are a great counter-party for us. So we plan to continue to look for more P.E. sponsored companies. The broader question you asked is about within the portfolio.
how our sponsors behaving. And I would say that in venture land, you're seeing a lot of VCs doing triage on their portfolios and deciding that the limited amount of capital that they have access to.
to them and let them know we still love them, but we're going to let them know we don't have additional dry powder. So for our companies, we've really advised them to test that and go back to their venture investors and ask how much dry powder do you have and is it still
good, and if possible, actually do around. And so we have seen situations where VCs have backed out of what were otherwise commitments. And as a result, you will see occasionally.
what we call a down and dirty or a wipeout round where the go-forward investors say, we'll continue to invest, but we're not going to let the guys that aren't investing ride our coattails. So we're going to do a round that really wipes those folks out. So it's a mixed bag. We're lucky because
we really focus on the latest stage companies. And our average company, as a reminder, is doing more than 50 million, five zero US dollars of revenue, and they've raised over 100 million of venture equity. So the investors, for the most part, are very committed. And they're gonna think twice before flushing 100 million down the toilet. They might be more prone to...
you know, flush a company where they've only invested a little bit. So the venture industry is very choppy, it's very mixed, and you're finding a lot of VCs reneging on prior commitments, but that's a phenomenon that's happening much more at the earlier stages than the late stages.
That's also good to hear. I appreciate that. Just one question. Well, a question on liquidity. I appreciate that you expanded the credit facility, but even with that expansion, your liquidity relative to your unfunded commitments is pretty tight. But within those unfunded commitments, there's a lot of discretion.
Can you give us a sense of how much of those unfunded commitments are at Runways discretion and your comfort with your liquidity level? Sure, Mickey. This is Tom. Total unfunded is $315.7 million. What's eligible at 1231 to be funded because of milestones and other requirements was only $56 million. And then…
Out of that 315, 316 man, 131 and a half man of those expire during 2023. We believe that we have more than adequate liquidity to cover that. We have expanded the credit facility. We also believe we will continue to have access to the debt capital markets.
I'm sorry. Well, I was gonna say, Mickey, I would add another phenomenon that's hard to put numbers on, but we've seen a couple companies that have had access because they achieve the milestones actually decide not to take the available capital because they had
done a really good job of cutting their burn and they no longer need the capital and don't want to pay interest on money they don't need. Again, impossible to quantify that, but I think we'll see more of that as we go through the year in 2023.
Okay, well, that's that's that's not a bad situation then and just a question on the portfolio. You have one investment called circadian, which has been marked at 80% of amortized cost for a couple of quarters and now mingle healthcare is also down at that level.
Those are pretty distressed valuations, generally speaking. I don't know if that's being impacted by market technicals or if there's anything you can tell us about how those companies are progressing. Yeah, it's not really a market technical thing. It's more a...
specific to each of those companies and you know with without getting detailed I think that they're stumbling and so we're trying to be conservative in in our valuations and for some of those companies you know we'll use scenario analysis as the as the best way to
come up with the value and keep in mind our value is reconfirmed by a third party and then reconfirmed again by our auditors and our audit committee. So it's a fairly extensive process and in both cases there are just things happening at those businesses that
we think will come to fruition, which will put the credit in a better position. But until they happen, we're conservative on valuation. Okay, I understand. That's it for me this evening. I appreciate your time. Thank you. Yeah. Thank you.
Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. One moment, please.
Our next question comes from the line of Eric Zwick with HUB-D Group. Thank you. Good evening, everyone. I wanted to start first with a question on the leverage and the comments you made that you believe you can safely increase the leverage up to 1.3 times. And I'm curious, just given the amount of economic uncertainty.
of course.
This is something that we look at continuously and evaluate continuously. Our thought and our process in expanding that range starts really with the quality and the stability of the income and the cash flow that is coming off the portfolio. A portfolio that is
well seasoned and very late stage, 99% first lien loans and a portfolio that has
the majority, 90 plus percent in our number two rating. So we're very confident in the quality of the portfolio. And as we first became a public company, we used a narrower range because we thought it was prudent to demonstrate.
our ability to build a quality portfolio to our public investors. Now that we've done that and we see that we can support more leverage, we're going to be very judicious about adding it.
But, and we don't intend to raise equity below NAV, so the way we can take advantage of these opportunities that are presenting themselves, and as David mentioned.
economic terms and economic terms are improving. So we may well exceed that 1.1 opportunistically and then we'll see how you know things season out over time. Great, I appreciate the commentary there.
Turning to the non-sponsor portion of the portfolio, curious just about the, I guess, maybe two-part question. One, just the general underwriting, how that differs from the sponsor side, just given that there's not a big fund behind these. And two, the second part is how that potentially plays out in a stressed economic environment in terms of how you would manage them and work out, find resolutions in situations that don't work out optimally from.
based on original expectations. Yeah of course. Well so first of all as it relates to the underwriting if there is not a sponsor and we really define that as to be sponsored the company needs to have an investor or you know more than one investor that could be called and will return the call and actually provide capital on a very short notice.
So that's what VCs are meant to do, that's what PE firms do. And a non-sponsored company could be an owner-operated business, and it could even be a public company, or it could be a private company that had venture investors, and they may still sit on the board, but they're out of dry powder and have no ability to support the company.
And if that is the case, either of those things, if for whatever reason there's no deep pocket to call in an emergency, then our underwriting is going to be much more focused on liquidity, path to profitability, predictability of revenues. And we're going to, everything is going to be a lot tighter, I would say. And that is how we underwrite these. And so they're going to be a little more mature, they're very often even older and have been around a long time. And in some cases, they're going to be a little more mature.
they have been profitable for years and years and years and then they decide there's a growth initiative that justifies an investment and perhaps even dropping out of profitability but after a year or two they'll return and of course we're going to analyze that extremely closely to make sure that we believe it and understand the scenarios of what would happen if for whatever reasons that return to profitability takes longer than planned. So you know the the underwriting is different and I would say it's characterized as being more conservative and more cautious.
requiring more liquidity and probably tighter covenants. And then in the situation of distress, it depends which one of the non-sponsored buckets you're in. If it's an owner-operated business...
where it's like the entire livelihood of the owner CEO , you know they're gonna do everything in their power to not hand the keys over to us, where the venture model, whether we like it or not, and we tend to focus on the late stage companies where.
where this is less prevalent, but the venture model is still based on home runs and based on being willing to walk away from a loser because you know you're going to have a winner in one of the next deals. That's not the case with an owner-operated company. It's their whole life. So from that perspective, the counterparty is much more motivated to make sure that there is not a problem. And then in the case of a public company and you'll see
scrutinize as we do with every company how quickly we could sell the company. Because at the end of the day most of our companies are going to end their lives in an M&A process and if there is a default we don't want to foreclose we want to
pressure them, encourage them to sell the business. And so really understanding who the buyers are, what the multiples are, and how quickly it can be sold, that analysis will be even more important in a non-sponsored company.
I don't think we've ever had a loss or a workout as it related to a non-sponsored company. I mean, we've only had four losses, four workouts and almost no losses. So far, the non-sponsored part of our business has been without any kind of blemish. Thank you for the detail.
have come out with some sort of percentage relative to adjusted NII to the regular dividend. I'm curious if you're thinking about it in a similar fashion or maybe some other way. Well, at this point, when we came into 2023 with a bit of a spillover, spillback dividend, as the board looked at it and we looked at it, we looked at it in a similar fashion.
get the top end or close to the top end of our leverage range.
Thank you so much for taking my questions. Thank you. As a reminder, to ask a question, please press star 11 on your telephone. One moment, please. Question comes from the line of Bryce Rowe with B. Riley. Thanks. Good evening. I think it got a bit too incorrect.
I wanted to maybe ask the dividend question a different way and hearing the supplemental being put in place here, I assume that does not preclude you all from further regular base dividend increases as we work through 2023.
That's correct. That's a good assumption. Okay. That's helpful, Tom. Then, looking at the revenue stream this quarter, I think in past presentations you've broken out what prepayment income would have been and perhaps there just wasn't much here in the fourth quarter. I'm just curious if there's a component of prepayment income within the interest income bucket.
Not really significant. The prepayment fees were, as you can see, just under $700,000. But there wasn't a significant amount of prepayment in the fourth quarter.
we kind of expect that to be the status quo for the near term. Okay. Okay. That was it for me. I appreciate the answers. Sure thing, Bryce. Thank you. And that concludes today's Q&A segment. I would now like to hand the call back over to CEO David Spring for any closing remarks.
Thank you, operator. We believe that our success in 2022 is validation of the execution and investment strategy we pursue. While we expect a challenging backdrop during the next year, the runway team and myself are confident in our ability to generate stable earnings and drive shareholder value in any market environment.
Thank you all for joining us today and for your support. And we look forward to updating you on First Quarter 2023 results in May. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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