Q2 2023 Runway Growth Finance Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Runaway growth Finance second quarter 2020, <unk> earnings Conference call.
Today's conference is being recorded.
Now like to hand, the conference over to Mary field.
<unk>, Vice President business development and Investor Relations. Please go ahead.
Thank you operator, good evening, everyone and welcome to the runway Girl Finance conference call for the second quarter ended June 30th 2023.
Joining us on the call today from Red Rock Finance, a grad Greifeld acting Chief Executive Officer of Finance, and Deputy Chief Investment Officer, and head of credit a run like our capital as well as time, rather than acting President and Chief Financial Officer, and Chief operating Officer.
Unlike all finances second quarter 2023 financial results were released just after today's market call. It.
It can be accessed from the runway girl finances, Investor relations website at investors that runway grouse dotcom.
We've arranged for a replay of the call at the run my Girls Finance webpage.
During this call I want to remind you that we may make forward looking statements based on current expectations.
The statements on this call that are not purely historical are forward looking statements.
These forward looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward looking statements.
Including without limitation market conditions caused by uncertainty surrounding rising interest rates the impact of the COVID-19 pandemic.
Economic conditions and other factors, we identified in our filings with the SEC.
Although we believe that the assumptions on which these forward looking statements are based are reasonable any of them.
Those assumptions can prove to be inaccurate and as a result, the forward looking statements based on those assumptions can be incorrect.
You should not place undue reliance on these forward looking statements.
Our forward looking statements contained on this call are made as the date hereof.
Serve as acting President in addition to his responsibilities as CFO and <unk> of the company. We're all focused on advancing runways strategy in the coming weeks runway has and will remain open for business.
Today I'll provide second quarter of 2023 highlights speak to the market environment, and lastly, discuss our outlook for the year.
During the second quarter runway maintained a robust pipeline of more than $2 billion.
These are investment opportunities with late stage companies and recession resistant industries that we know best I'm proud of the teams diligence and evaluating these opportunities and are active portfolio management in parallel. These two practices had been essential in building, but we believe to be the most stable portfolio in the venture that industry.
Three.
Companies are increasingly exploring the use of that as a minimally dilutive alternative to equity financing, which bodes well for us as a preferred partner noted for sophisticated Netflix solutions that meet borrowers diverse needs.
Second quarter operating results reinforce our commitment to prioritizing quality over quantity.
Turning to the second quarter operating results.
Runway completed for investments in existing portfolio companies, representing $59 million and funded loans originations and deployment activity reflect our focus on preserving credit quality and maintaining stable book value over the longterm are actionable pipelining remains strong as broad based originations exited.
<unk> has improved post regional bank fall out and the market becomes more lender friendly.
Runway delivered total investment income of $41.9 million of net investment income of $19.7 billion in the quarter, representing an increase of approximately 67% and 36% respectively from the prior year period net.
Net assets, where $573 9 billion at the end of the second quarter up 7% from 569 $8 million at the end of Q1 2023.
Tom will provide a deeper look at our credit quality, but are weighted average portfolio risk rating remained constant at two two in the second quarter of 2023.
Now I want to provide an update on three portfolio companies that experienced activity subsequent to quarter and the.
The first is Marley spoon, which is a global direct to consumer provider of quality meal kits.
On July 11th 2023, Marley Spoon completed it's dees back transaction and began trading on the Frankfurt stock exchange.
Prior to this transaction the company complete and replacement of approximately $38 million in equity exceeding initial targets and resulting in a paydown of approximately $5.4 million today.
Date runway is pleased with the outcome of the model the screen investments.
Additionally, last week, our loan to <unk> cyber security was repaid in full finally, an update on pivots three during.
During the quarter, we recovered an additional $1.2 million through the monetization of assets.
That strategy continues to move forward and we believe it will successfully unlocked the value of the companies iced tea.
These outcomes highlight key component of the runaway lending platform that we believe will continue to drive optimal results for our borrowers and shareholders every stage of the investment process plays a part in a favorable end result, let's.
Let's drill a little bit more into these components.
First and foremost we've taken disciplined approach to loan structure.
We tailor the commitment for business needs credit quality and enterprise value of the portfolio accompanying and avoid situations with significant downstream financing risk at junior capital of play.
Runway is dedicated to understanding the attractiveness of each opportunity on its own merits, gaining a comprehensive picture allows us to be flexible to identify pricing structure inefficiencies into that market better support our portfolio companies and ultimately maximize returns while minimizing losses.
Second we employ a rigorous underwriting process built around the key tenets of low loan to value a thorough understanding of borrowers operating models as well as structural protections and covenants embedded in deals to enable proactive monitoring and engagement.
Rising interest rates have led to yield substantially greater than we have seen in the past few years, while they're a strong temptation to abandon structural standard to chase. These returns now is the time to stick to our <unk> we.
We believe that as market conditions become increasingly lender friendly we will have the opportunity to participate in these returns with appropriate structuring and covenant packages. We are committed to our credit first philosophy as an organization.
Yields major I've returned shorter term, but we believe these benefits are outweighed by costs that credit issues have on the business.
Our debt portfolio is comprised of nearly 100 per cent senior secured first green investments and weighted average active loan to value at origination is 17.6% across the entire portfolio. We take pride in these portfolio attributes and we have no plans to let up on covenants or protections as we pursue <unk>.
<unk> portfolio expansion <unk>.
Finally, we focus on diligence and risk management that both enabled runway to price and monitored downside risk effectively the company integrated risk management into the investment process through a proprietary analytics model, which gives our team an edge in determining pricing as it allows for both offensive and defensive.
Edit monitoring.
Let's now turn to the market outlook. According to Pitchbook data U S. Late stage venture equity deal value was approximately $38 billion in the first half of 2023.
Out from record levels in 2021, and 2022, but still above the first half of 2020 and years proceeding.
U S late stage venture equity deals value represented 44% of total deal value in the first half of 2023 and nearly a third of the total deal count this.
This is a continuation of the dynamic we've observed in recent quarters more late stage deals with a smaller values.
This snapshot shows that the late stage BC ecosystem is active from a deal count perspective.
That said our team believes that many attractive borrowers raise substantial equity capital prior to 2023. These companies completed rounds at historically high valuation to give them 24 to 36 months of runway. Many of these companies have continued to demonstrate healthy cash position throughout the first half of 2023.
And we believe our differing fundraising efforts through the year.
However, economic conditions have impacted does projected runways and these companies will ultimately seek partners to fund growth.
It's working capital Dwindles, we believe that these companies will be looking for non dilutive capital in late 2023, and beginning of 2024 to supplement their previous races, and fund potential growth with minimally dilutive capital. We also believe that this group of companies represent a high bar in terms of quality.
As the demand we are forecasting comes on line, we plan to be opportunistic and our dealmaking will not sacrificing on quality terms protections or size or pipeline to date has been robust, but we believe the quality of deals. We see is only going to increase in the latter half of this year and into the next.
With ample capital to deploy Opportunistically runway is confident in our strategy to preserve credit quality, while actively monitoring our existing portfolio companies.
We expect our pipeline to expand from strong demand for runways financing solutions. Our team is being patient to ensure that we are investing in the highest quality late stage companies that can deliver attractive risk adjusted returns for our shareholders.
We are confident in the health of the venture ecosystem and belief runway as strategically positioned to capitalize on the latter half of the year I.
I will now turn it over to Tom.
Thanks, Greg and good evening everyone.
On a personal note I want to reiterate that our thoughts and prayers are with David and his family Dave.
David is a good friend and business partner, we're all wishing him a speedy recovery.
Runaway completed for investments in the second quarter, representing 59 man and funded loans.
Runaways weighted average portfolio risk rating help relatively constant at 2.2 in the second quarter compared to first quarter of 2023.
As a reminder, a rating system is based on a scale of one to five where one represents the most favorable credit rating.
At quarter, and we continue to have only one portfolio company right at five and on non accrual basis, which is <unk>.
While the likelihood of a recession has diminished slightly we expect volatility to continue in the second half of 2023, given industry concerns around credit performance ongoing elevated interest rates and tightening financial conditions.
We believe the most important thing we can do to preserve our strong credit performance is consistently actively manage our portfolio.
Runaways and frequent communication with all of our portfolio companies, we regularly interact with our companies because we are offering more than just capital we offer strategic counsel financial expertise and an operational network the differentiation from our peers.
Our relationships with portfolio companies aid in evaluating credit on an ongoing basis.
Each position in our portfolio undergoes a comprehensive quarterly valuation review internally and periodically by crawl or valuation Research Corporation power third party evaluation providers.
These are among the top valuation firms in the world and their review provides an additional layer of validation and our analysis.
We focused on important characteristics like business model operating leverage quality of sponsors timeline for profitability.
We believe this process demonstrates our conservative approach to ongoing valuation analysis.
And step with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the first quarter and current quarter. We found that our dollar weighted loan to value ratio slightly improved to $24, 2% and Q2 compared to $24, 4% in Q1.
Our total investment portfolio, excluding U S. Treasury bills had a fair value of approximately 1.1 billion holding constant from the first quarter of 2023, and increasing 36% from 807 seven man for the comparable prior year period.
As of June 30th 2023, Runaway had net assets of $573 nine ma'am, increasing from 569.8 man at the end of the first quarter of 2023.
Nah for sure was $14.17 at the end of the second quarter compared to $14.07 at the end of the first quarter of 2023.
We believe are stable naff reflects industry leading levels of scrutiny.
As a reminder, our loan portfolio is comprised of 100 per cent floating right assets. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or shining the term sheet.
And the second quarter, we received 88.7 million in principle repayments an increase from 10.2 man in the first quarter of 2023.
Runaway generated total investment income of $41.9 million and net investment income of 19.7 man in the second quarter of 2023 compared to $39 three man and $18 to man in the first quarter of 2023.
Our debt portfolio generated a dollar weighted average annualized yield of 16.7% the second quarter of 2023 as compared to 15.2% for the first quarter.
Moving to our expenses for the second quarter total operating expenses were 22.2 man increasing from $10.5 million for the second quarter of 2022.
Q2, 2023 as in Q1 2023, our management fee reduced automatically from 162, 5% per annum. During 2022 215 per cent per annum.
As our assets exceeded $1 billion at the end of 2022.
Runaway recorded a net unrealized gain of 2.6 men in the second quarter compared to a net unrealized loss of 16.2 man in the second quarter of 2022.
Weighted average interest expense was 7.5% at the end of the second quarter, increasing from 7.3% during the first quarter of 2023.
And the second quarter, we decreased our leverage ratio to 0.97 from 1.04 times and increased our asset coverage to 2.03 times from 1.96 times.
All investments in the second quarter were funded with leverage is part of our strategy to generate non dilutive portfolio growth.
Turning to our liquidity at June 30th 2023 hour total available liquidity was 227, seven man, including unrestricted cash and cash equivalents and borrowing capacity of $190 million as compared to $131 three man and 128 man respectively.
On March 31st 2023.
We had unfunded loan commitments to portfolio companies of 234 man the majority of which were subject to specific performance milestones.
103 man of these commitments are currently eligible to be funded.
During the quarter, we experienced for prepayments totaling 88.7 man and scheduled amortization of 2.8 minutes.
The prepayments include a full principal repayments of our senior secure term loans to inrix for $45 million Mustang bio for $30 million and rebel aesthetics for $12.5 million as well as a partial principal repayment of our senior secure term loan to pivot three of $1.2 million.
Subsequent to quarter and be completed a $20 million investment and elevate services, which was part of a 40 million dollar co investment with funds on the runway platform.
Runaway will continue to deploy capital at increasingly favorable terms in the second half of the year.
Finally on August 1st 2023.
Board declared a regular distribution for the third quarter of 40 cents per share as well as a supplemental dividend five cents per share table with a regular dividend.
Runaway attempts to pay a similar supplemental dividend in the fourth quarter of 2023 subject to the future approval from the board of directors.
This concludes our prepared remarks will now open the line for questions operator.
Thank you.
To ask a question. Please press star one one on your phone and wait for your name to be announced.
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Can't buy as a compiled Q&A roster.
One moment please for our first question.
First question will come from <unk> <unk>.
The line is open.
Thank you and good afternoon, everyone.
I appreciate the out of the commentary about.
Expecting kind of inequality of deal with the increase in the back half of this year 20.
Twenty-four that's the kind of curious with respect to the the pipeline at the $2 billion. Today are there any particular industries that are more heavily represented <unk>, you're saying you know very attractive opportunity today and in seconds. Just wondering if you could provide any thoughts on that doesn't pull.
Pull through right at the current pipeline as well as tired.
Okay.
Yeah, Hey, this is Greg. Thanks. Thanks for the question I think overall just to radio reiterate we are definitely seeing continued strength of the pipeline on a broad base across the industries that we cover between enterprise software.
Life Sciences medical devices as well as next generation consumer I think we might see a bit of a skew towards some of the technology side of the house, but in general a broad base strength of the pipeline.
Like many thoughts just kind of on the <unk> radar I kind of with the timing of realization of the current pipeline.
Yeah, I I think we should see it continue to accelerate through the back half of the year. Historically Q4 has been our biggest quarter, but we already are seeing strength in this quarter as well.
Great. Thank you Uhm and then I just noticed that that pick income has increased now three quarters grow up to about $6 million now curious if you could talk.
Talk about what what's what's driven that and you know whether that expectations would continue in the back half of the year.
Yeah. Thanks, Thanks, Eric So pick income has has increased and we think about chicken come in two ways. We use it obsessively and we use it defensively and Ah obsessively, particularly in a rising rate environment will use it to be competitive.
In order to win a transaction maintain.
Maintain our spreads for instance for the long run, but perhaps give a little temporary relief as the as the companies come out of the out of the box is a new portfolio company and so you know roughly.
You know <unk>.
Half or so of our pick transactions are offensive and then the rest are defensive and so defensive is when we work with our portfolio companies, we understand their cash flow forecasts, we understand the other current performance and we may give some temporary relief we don't.
Necessarily give tick permanently we like to keep it a temporary but where.
I think we'll see some more requests but.
We're really sensitive to that picked number right now and we don't anticipate it going up in any.
Material manner, it will fluctuate a bit, but but we're not looking to increases substantially.
That's helpful. Thank you.
Is it for me today I appreciate that taking your questions, Thanks, where I can pump sure thing.
Thank you.
As a reminder to ask a question. Please press start one one on your phone and wait for your name to be announced to withdraw your question. Please post all one one again.
One moment please for our next question.
Next question will come from Melissa <unk> J P. Morgan Your line is open.
Good afternoon, Thanks for taking my questions today I.
<unk> <unk>.
First one to say I I appreciate your firms candor and family communication around you know the evolving situation located in I hope.
Okay I'll pass on our wishes for a full and speedy recovery kill EM.
At the risk.
<unk> Alright is there anything that we should be thinking about in terms of the potential timeline around his return or how long he might need can be serving in a temporary.
Well I think most of the most important thing is we we haven't missed a beat.
As everyone knows David he'll want to be back in the saddle as quickly as possible, but if you look at.
The team of of David Greg and Tom We've really been growing this business together since since the first private clothes on the fun. So we've been together six or seven years and.
And we haven't missed a beat we've issued multiple term sheets and the last week. The investment process continues and the and the train is on the tracks and running out of time.
So we we too wish David a speedy recovery and.
Will welcome him back when when he's when he's ready.
Okay I appreciate that and then the additional can't color <unk>, Yeah man.
<unk>.
A quarter of the day.
At <unk>.
Going back to the repayment activity that you guys shared in the press release, certainly noted that the repayments.
Repayments prepayments exceeding the new deal so far I know, it's only one month into the quarter should we be thinking about you guys started playing capital gradually over the back half and then to 24 and ramping leverage giving your outlook.
For an increasing level of quality uhm over that time frame and then on the repayments is there anything that we should be thinking about in terms of startup outside its acceleration of all I D.
So you know one of the things I think we've we've said on calls before with respect to repayments as we have a late stage portfolio and these companies can be attractive refinancing candidates can be attractive trait sell candidates and and we've had two companies.
Successfully enter into an incomplete spack transactions. So you know we're not seeing anything like the level of prepayments that we saw in 2021, but there is the prospect for.
Continued repayments given the late stage in the quality of the portfolio.
So we will continue to ramp the portfolio steadily throughout the year Q3 tends to be our our soft this quarter.
So it will be more wait it to to queue for.
And that's kind of our normal seasonal pattern.
So with those prepayments you will see some acceleration of O I D with that.
Okay. Thank you.
Thank you.
One moment, please while next question.
Next question will come from price will be Riley. Your line is open.
Hi, Thanks for <unk>. Good afternoon common common gray appreciate you taking the question here.
Maybe maybe wanted just to.
Filled out on some of the.
Melissa <unk> line of questioning there and and get a feel for.
There's ability into into the pipeline and repayment just curious if you know some of the some of the recent repayment activity.
Kind of surprised you did you did you have some visibility into it and then.
Wanted to ask about balance sheet leverage yeah. Thank you guys talk about.
Your initial range out of the I P 021 hundred 10% that's equity with some level of comfort to go above and beyond that just kind of curious how you're feeling about balance sheet leverage today, you know now that we're another quarter removed from you know what happened.
March the first first part of the year.
Thanks, Thanks price I appreciate your question.
With respect to the prepayments, we have some visibility too prepayment activity, none of the prepayments and and Q2.
Or even Q3 to date that are in our subsequent events were were surprises we were pretty close touch with our portfolio companies. It's one of the tenets of our whole approach to risk management.
So.
That.
That gives us pretty good idea of whether company might be considering refinancing or is looking at a a potential M&A transaction. So we do expect to see some more repayment activity into this quarter and into fourthquarter I don't think.
There'll be any surprises I think we have a good feel for what is is in process and.
Frankly, we're pleased with the impact on the portfolio and on the P&L of the repayments that we've had to date.
Now it did bring our leverage down a little bit where within our range. We're still comfortable growing outside of that range. So we've said that the initial range was a 0.8 to 1.1, that's lower than most of our peers and we believe our our portfolio frankly.
Higher quality and later stage in the.
So take some additional leverage so as we start seeing higher quality deals and we're not changing the bar, but we're seeing more activity. So that you know that yes. Those deals that go to close will pick up throughout the year and into in the first quarter. So we.
We're comfortable going up to that that 1.25.
Okay. Okay. That's helpful and then maybe maybe a follow up Tom yet.
Yeah, you added to existing portfolio companies with with fundings here in the second quarter, you've got a a new platform coming in here in here in the third quarter.
In terms of how the kind of the pipeline looks.
Kind of more.
More more inclined to stick to you know existing portfolio companies or or yeah or did the expected to add some other platforms along the way here. Thanks.
Yeah, we we expect to add new names to the portfolio, where we're going to support our names. We've got about 100 little over 100 men out of that unfunded commitments.
Available, we would expect to see some usage on that which will support.
And then we'll continue to evaluate new names as we talked about we have the grid mentioned, we have a pipeline in excess of two band.
Dollars and we've got term sheets outstanding that we will we will work diligently to win them to close.
Great. Thanks. Thanks for the question, then sorry to jump in but to Contextualize you know we do believe that we are in a continuously evolving market that is becoming continuously lender friendly not only in terms of pricing, but also structure some of the.
Focus on the existing portfolio to date has been being judicious with our capital and making sure that we are structuring the right deals and that should be taken as a sign that we believe that going into the back half of this year as well as next year there there will be.
A number of attractive opportunities as this market does continue to move towards us.
Excellent appreciate the the answers there.
Thank you.
And again to ask a question. Please post one one on your phone and wait for your name to be announced.
Your question. Please first all one one again standby as he compared the Q&A roster.
I see no further questions in queue I would now like to turn the conference back to Greg Greifeld, Some closing remarks.
Thank you operator.
Runway second quarter operating performance speak to our teams discipline as we expand our portfolio and maintain a robust pipeline looking to the second half of 2023, we will apply the same level of rigor and or evaluation and remain selective as we assess future opportunities for growth.
Thank you all for joining US today, we will close the call by wishing David Our best David has instilled leadership across all levels of the runway team, which gives us confidence in our ability to execute we are open for business and focused on advancing our strategy in the interim.
This concludes today's conference call. Thank you all for participating you may now disconnect.
Pleasant day.
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