Q3 2023 Runway Growth Finance Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the wrong way on that third quarter 2023 earnings Conference call.
Please be advised that today's conference is being recorded.
I would now like to hand, the copies out to tell a donahue Investor Relations. Please go ahead.
Thank you operator, and good evening, everyone and welcome to the runway growth Finance Corp Conference call for the third quarter ended September 32023, joining us on the call today from Ron My garage Finance, our Grad Greifeld acting Chief Executive officer of Runaway growth Finance and Deputy Chief investment.
Officer, and head of credit a Broadway growth capital as well as Tom Ackerman, acting President and Chief Financial Officer, and Chief operating Officer.
Run rate gross finances third quarter 2023, the financial results were released just after today's market close and can be accessed from Ro <expletive> Sciences Investor Relations website at investors got runway growth dotcom.
We have arranged for a replay of the call at the front of my gross finance webpage.
This call I want to remind you that we may make forward looking statements based on current expectations.
Shipments 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.
And without limitation market condition caused by uncertainty surrounding rising interest rates the impact of the COVID-19 pandemic changing economic conditions and other factors, we identified in our filings with the SEC.
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 of forward looking statements based on those assumptions can be incorrect.
Should not place undue reliance on these forward looking statements.
Looking statements contained on this call are made as of the date hereof and run my gross finance assumes no obligation to update the forward looking statements or subsequent events.
Copies of our SEC related filings please visit our web site.
I will turn the call over to Greg.
Thanks, Taylor and thanks to everyone for joining us to discuss our third quarter results.
Before starting my prepared remarks, we wanted to provide an update on David sprang runways gross chairman founder and Chief Executive Officer, who is on a medical leave of absence. We are pleased to share that David is doing well and has resumed select responsibilities at our external adviser runway growth capital.
Look forward to and are hopeful for David's return in the first half of 2024 and appreciate the ongoing support the investment community has provided during his recovery process today I'll provide third quarter 2023 highlights speak to the market environment, and lastly, discuss our outlook heading into 2024.
Our third quarter results demonstrate the resilience of our credit first investment approach that has been a guiding principle for run rate growth since inception.
The U S economy has performed better than expected in 2023 market uncertainty remains elevated as the effects of a higher interest rate environment and tighter financial conditions play out our focus on underwriting low loan to value loans to high quality companies has allowed us to build a portfolio that can continue to succeed.
And not just survive.
Always favorite opportunities that have limited downstream financing risk, which has proven crucial for portfolio companies with unknown timing for exits or that require additional capital raises our patience in deploying capital. During 2023 has been strategic and the current environment is more lender friendly than earlier.
This year, we expect this lender friendly environment to continue into 2024, and we are beginning to see an increase in favorable investment opportunities. We believe runway has maintained its position as a preferred venture debt lender with a steady hand enforced by our ability to deliver industry, leading credit performance.
The late stage portfolio focus on recession resistant industries.
We continue to believe run rate growth represents a compelling opportunity for investors that are looking for stable risk adjusted returns from partnering with the highest quality growth companies in the market.
Turning to third quarter operating results.
Runway completed six investments in new and existing portfolio companies in the third quarter, representing $48 million in funded loans originations and deployment activity during the quarter reflect our high bar for evaluating new investments to preserve credit quality, while mitigating risk runway has built a strong track record.
Of mitigating credit losses, which we attribute to our disciplined approach to loan structuring and rigorous underwriting process.
Runway delivered total investment income of $43 8 million and net investment income of $22 million in the third quarter, representing an increase of approximately 62% and 52% from the prior year period net assets were $575 million at the end of the.
Third quarter down, 1% from $573 9 million last quarter.
Tom will provide a deeper look at our credit quality, but our weighted average portfolio of risk rating increased slightly in the third quarter to two to four from two to one in the second quarter runways loan portfolio is comprised of nearly 100% senior secured first lien investments and weighted average loan to value.
At origination is 18% across the entire portfolio, we continue to uphold our credit standards as we evaluate opportunities to expand the run rate growth portfolio.
Let's turn now to the market outlook occur.
According to recent pitch book data U S late stage venture equity deal value, which we view as a proxy for the venture debt market opportunity was approximately $57 billion Q3 year to date.
While deal value is down from record levels in 2021, and 2022 it remains above the comparable period in 2020 and preceding years.
U S late stage venture equity deal value represented 46% of total deal value for 2023 year to date and nearly a third of total deal counts.
This is a continuation of the dynamic we've observed in recent quarters more late stage deals, but at smaller values.
This snapshot shows that the late stage VC ecosystem is active however, our team expects deal volume to accelerate into the middle of next year as companies that raised substantial equity through 2021, and 2020 to spend the remainder of those proceeds as liquidity runs dry <unk>.
These will need to raise additional capital to fund growth. We believe the high quality late stage companies that runway targets, we'll explore minimally dilutive growth capital in the form of venture debt to supplement previous ranges.
Runways outlook remains consistent with previous quarters for many companies new business opportunities and growth potential remains high capital.
<unk> has become a major concern as management teams navigate tightening market conditions.
The market outlook gives us additional confidence in our ability to execute for the foreseeable future our strong reputation and depths of relationships is kept our pipeline robust and we continue to evaluate a steady stream of deal opportunities that said run rate will continue to focus on high quality companies with proof.
<unk> business models, and a clear path to success. This goes back to our credit first philosophy and careful monitoring which are essential to achieving premium results as we evaluate deals we are seeing in the market. Today, we are making sure to only engaged with those that meet our high bar.
With a deleveraged balance sheet and ample capital to deploy from our revolving credit facility runway is well positioned to drive non dilutive portfolio growth without sacrificing on quality terms protections or size. We believe we have positioned ourselves to capitalize on the evolving market conditions in Q4.
<unk> 23 in 2024, I'll now turn it over to Tom.
Thanks, Greg and good evening everyone.
Runway completed six investments in the third quarter, representing $48 million in funded loans.
Runaways weighted average portfolio risk rating increased slightly to 224 in the third quarter from $2 two one in the second quarter of 2023.
Our 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, which is pivot III.
As we've said on earlier earnings calls we are in the late phases of our pivot III resolution and expect next steps to be completed prior to year end.
Looking across markets more broadly, we expect ongoing uncertainty to weigh on the United States economic trajectory as we approach 2024.
While forecasts indicate that the probability of a soft landing has increased we anticipate a challenging environment as the market grapples with the impact of higher for longer interest rates.
We believe runways track record of effectively managing risk is a differentiator.
Our team's priority is to deliver superior credit performance, while preserving capital and maximize risk adjusted returns for our shareholders.
A key variable in that equation is our proactive approach to portfolio monitoring.
Runway connects with each of its portfolio company management teams at least quarterly and often every six weeks.
Our team takes a proactive approach to address problems and has difficult conversations early when optionality remains the highest.
In line with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the second quarter and current quarter. We found that our dollar weighted loan to value ratio slightly increased from 24, 2% in Q2 to 24, 8% in Q3.
Our total investment portfolio had a fair value of approximately 1 billion decreasing 8% from $1 1 billion in the second quarter of 2023, and increasing 11% from $910 2 million.
The comparable prior year period.
As of September 32023 runway had net assets of $575 million.
Creasing slightly from $573 9 million at the end of the second quarter of 2023.
NAV per share was $14 eight.
At the end of the third quarter compared to $14 17 at the end of the second quarter of 2023.
As a reminder, our loan portfolio is comprised of 100% floating rate assets. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing the term sheet.
In the third quarter, we received $125 3 million in principal repayments and increased from $88 $7 million in the second quarter of 2023.
This increase is driven primarily by runway gross credit first approach to investing that prioritizes the highest quality late stage companies, which are ideal candidates for refinancing our acquisition in most market environments.
Elevated prepayments are an indicator of the strength and runway approach to underwriting and health of the overall portfolio.
Further prepayment activity provides runway with liquidity to deploy in a manner, that's fully accretive, which we view as a differentiator in 2024.
Runway generated total investment income of $43 8 million and net investment income of $22 million in the third quarter of 2023 compared to $41 9 million and $19 7 million in the second quarter of 2023.
Our debt portfolio generated a dollar weighted average annualized yield of 18, 3% for the third quarter of 2023 as compared to 16, 7% for the second quarter of 2023, and 14, 4% for the comparable period last year.
Moving to our expenses for the third quarter total operating expenses were $21 7 million down 2% from $22 2 million for the second quarter of 2023.
Runway recorded a net unrealized loss on investments of $7 2 million in the third quarter compared to a net unrealized gain of $2 6 million in the second quarter of 2023.
In the third quarter of 2023, our leverage ratio and asset coverage were zero point 709, and $2 two seven times, respectively compared to <unk>, 97% and two three times at the end of the second quarter of 2023.
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 32023, our total available liquidity was $311 $9 million, including unrestricted cash and cash equivalents and we had borrowing capacity of $297 million as compared to $227 <unk>.
$7 million and $190 million, respectively on June 32023.
We had unfunded loan commitments to portfolio companies of $203 5 million the majority of which were subject to specific performance milestones $75 1 million of these commitments are currently eligible to be funded.
During the quarter, we experienced five prepayments totaling $125 3 million in scheduled amortization of zero point $3 million.
Prepayments included full principal repayments of our senior secured term loans to <unk> technologies for $55 million <unk> systems for $10 million epic Io technologies for $40 million and Fidelis cyber security for $14 9 million as well as a partial principal repayment of our senior secured term loan.
Tomorrow, eastern or $5 4 million.
Subsequent to quarter end runway funded investments of $8 million experiment holdings of $1 4 million to snag, a job as well as funded $3 1 million to <unk> as part of a larger equity raised by the company.
In addition, late.
Late last week, we funded a $30 million senior secured term loan under a $37 $5 million commitment two links up a provider of software for real time vehicle GPS monitoring and track.
<unk> also received a partial prepayment of $24 5 million from <unk>, Inc.
Finally on November 2nd our board declared a regular distributions for the fourth quarter of <unk> 47 per share as well as a supplemental dividend of <unk> <unk> per share payable with a regular dividend.
The board also approved a $25 million share repurchase program effective through November one 2024.
This concludes our prepared remarks, we will now open the line for questions operator.
Thank you.
Ladies and gentlemen to ask a question. Please press star one on your telephone and wait to hear your name announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from a lot of Mickey <unk> with Ladenburg. Your line is open.
Yes, good afternoon, Greg and Tom wanted to start with a high level question.
As you mentioned venture debt funding is down this year and I think thats most of the impact of SP FCB and <unk>.
Lenders raises the underwriting bar.
Looking out into next year I appreciate your comments on.
The need for liquidity that May drive.
Demand, but to what extent do you think a potential recession.
Next year could continue to depress deal volume as lenders in your space keep the bar high.
Yeah, So I think that without a doubt a combination of macro economics as well as SVP and other industry specific shocks have had impact on deal volume. This year. However, as we've seen in that pitch book data Volte.
Volume for late stage equity deals is down as well and we believe that thats driven by companies haven't raised substantial amounts of capital in 2020 in 2021.
Who realized that the market has changed they needed to make that capital last for longer and as such have made substantial cuts to their P&L in order to have the capital last for longer and we do think that in the middle or second half of next year. These companies are going to reenter the market.
Needing additional capital for growth and we do expect that to be a substantial pick up in volume.
Okay I appreciate that.
The clarification.
Could you give us some insight into what drove this quarters.
Unrealized depreciation.
Yes, Mickey it's Tom.
There were some broad changes in Denmark, and then really changes in the.
Public equity marks there was one in particular for care cloud that had a fairly sizeable.
Movement, but there was no wholesale change.
In terms of credit quality or methodology that was driving that.
Okay.
Were there any outsized contributors to the fee income, which.
Despite the level of exits still seems pretty significant.
Well there was a significant amount of end of term payments. So there was a fair amount of acceleration.
They're in that prepayment fees were really the big driver on that.
Okay. My last question it looks like those exits and repayments were.
Weighted towards the end of the quarter is that right or am I misinterpreting the numbers.
Deal volume.
Either in or out tends to be weighted towards the end of the quarter. We did have one prepayment at the beginning of the fourth quarter of partial prepayment on Bravo.
Kind of the exception to that rule, but most of those comments.
At the end of the quarter.
Okay.
Our next question comes from the line of Melissa Wedel with Jpmorgan. Your line is open.
Yes.
Good afternoon, Thanks for taking my questions today.
I appreciate it.
Transparency provided in the investment activity so far in four Q, it actually sounds like a pretty busy quarter, so far and we're only about five weeks into it.
Given that a lot of activity.
Skewed towards the back end of this quarter just wondering if you have any additional commentary.
Yes.
Sort of activity yet to come this quarter versus what you've already seen and then any.
Color on sort of repayment activity that Michael and tied to that.
Yes, so we definitely do echo the sentiment that is has been busy start to the quarter.
Do have line of sight that there should be some additional activity for the rest of the quarter as folks.
With the beginning of that trend are starting to look towards their budgets for the next year. Realizing that there is growth opportunity with the need to actually fund it and.
We expect that trend to continue.
And then as to the repayments Melissa.
Sure.
Isn't anything.
In particular outside of the normal pace. So I think it's going to be substantially less we would expect it to be substantially less than that in Q3.
Okay. That's helpful. Thank you.
Just follow up on Q particular near term maturities. If we're looking at this right. It looks like you might have a couple coming due in the fourth quarter around sort of cadence and mingle with what's your remark that bit of a discount to cost and just wondering if theres anything that we should read into that in terms of.
Repayment or refinancing.
Yes, I think both of those names are actively looking to refinance as you might expect with the maturities coming up. We're also determining if there is a structure that makes sense for them to stay on our books. Since they are credits that we have known for a period of time.
I've seen them whether through.
A variety of cycles and just know the names intimately.
Thank you.
Thank you.
As a reminder, ladies and gentlemen that star one to ask a question. Please standby for our next question.
Our next question comes from the line of Bryce Rowe with B Riley Your line is open.
Good too.
Maybe just ask about the.
The buyback you just talked about.
Yes, I guess paired up with.
The lower balance sheet leverage that youre working working with right now.
Tom can you can you kind of.
Talk about the prospects for proportion of active buyback activity relative to the pipeline and what origination volume might look like it sounds like you've got you've got some good opportunities as we go into 2024, and so just kind of curious.
You had kind of prefer to spend the money or put the money.
Yeah. Thanks, Brian So I think in general our first preference is always to.
Yes.
Return capital to shareholders via distributions and that means using our leverage capacity to grow the portfolio.
Said, there are times, where we're trading at such a discount to NAV that the investment opportunity is compelling and making an investment in ourselves as is a good use of our leverage capacity. So looking forward the board.
Our team thought that as we look forward for the next year that we wanted to.
Enhanced return on equity by the.
Alright by use of the share repurchase.
Okay. That's helpful. Tom.
And then if maybe you could kind of touch on that.
The dividend declaration here and in the supplemental that we're going to see in the fourth quarter. Obviously you paid one.
Throughout 2023, any any thoughts on kind of how you. How you plan to think about 'twenty four in terms of our supplemental or was it more of a 'twenty three that thanks.
As we get into 2024, we'll certainly take a look at the interest rate environment and the yield on the on the portfolio.
We would like to be able to continue some form of supplemental dividend we will keep.
We are thought to keep the base dividend as is.
And then continue to distribute incremental income through that.
Through that supplemental dividend.
So.
It's our objective to two.
To grow to a point, where we can return.
More than the base and portfolio grows we would expect to be able to do that.
Great I appreciate the time, thanks, Thanks Bryce.
Thank you.
Please standby for our next question.
Our next question comes from the line of Erik Zwick with hub Group. Your line is open.
Good afternoon, guys I wanted to start with.
Just kind of another question on leverage but coming at it from a different perspective, you mentioned.
Starting to see increasing opportunities for investment.
Environment remains very lender friendly.
And also noted while the probability of a <unk>.
Soft landing has increased or theres still some uncertainty out there in the market. So just curious how you.
Think about leverage today is this an opportunity given that the lender friendly environment that you would consider taking leverage up to capitalize on that opportunity or just some of the caution in the economic outlook, maybe give you. Some pause in terms of maybe keeping leverage where it is today I'm curious how you kind of frame.
The current environment.
Yes, Thanks, Eric.
Very comfortable with our leverage range of <unk> eight to $1. One in fact, we said that we would.
Expand beyond that range up to 1.25 and as we see high.
High quality opportunities and a.
More certain economic environment, we will we'll cross that one one to 125 I think.
As it stands right now <unk> eight to $1 one.
Is good but if the lender friendly.
<unk> continues to develop and if the portfolio remains performing as it has very high quality.
And we see some more certainty.
We will think about expanding beyond that but it is our objective to use leverage to grow the portfolio.
That's helpful. Thank you.
As you kind of curious if you could maybe provide some color to that.
Our lender friendly environment, you keep referring to in terms of maybe the types of leverage covenant spreads and things that you are seeing today and how that's changed over the past six months to 12 months.
Yes, So I think the short answer which is the best answer is all of the above we're seeing companies looking for much more reasonable attachment points in terms of quantum and the implied LTV.
<unk> are definitely something that we're having ability to not only have tighter covenants, but have more covenants and then I think just an interesting anecdote is this has now happened twice this quarter, where there is companies that have had access to delayed draw.
<unk> of the debt who have looked at the use of proceeds relative to the incremental cost of this debt.
For perspective, it was underwritten with a 1% silver floor, which now so far is north of 5% substantially higher and just can't justify that additional expense and have actually asked us if we can extend out that delayed draw period.
These are things that we will.
Evaluate on a.
Case by case basis, but I think a key takeaway here is we like to say that we're investing in the best companies and I think that this is a key proof that we're lending to businesses that are very prudent in their own use and allocation of capital.
I appreciate the details there thanks for taking my questions today.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Please standby for our next question.
Our next question comes from the line of <unk> Abraham with UBS. Your line is open.
Hi, everyone.
My questions have been asked and answered, but maybe just maybe one or two here. So.
Just to.
To your comments.
It sounds like next year, we should.
The bit more new portfolio investment from from runway versus the last couple of quarters, where it was much more weighted towards follow on investments is that is that a fair characterization of how we should think about it.
Okay.
And just one more.
Pivot three I think you mentioned in your prepared remarks that that's going to come to a resolution here shortly.
That looks like 11, $11 6 million.
This last quarter is there any any thoughts around how that market is looking heading into resolution there.
So I think the first point is I would.
Usually a clarification on the word resolution.
We don't expect this to be the final resolution. We expect this to be the next step along our process of monetization, which will require us to change the accounting treatment. So you will see a change on the books in terms of what the impact on the Mark will be ultimately that will.
Be driven by the facts and circumstances at that time, when we do move the position over and as the quarter unfolds, we should have much greater clarification in terms of the magnitude of that.
Okay.
Okay. That's it for me thank you.
Thank you.
I'm showing no further questions in the queue.
At this time I would now like to turn the call back over to Greg Rockville, Atkins, CEO, Deputy CFO and head of credit for closing remarks.
Thank you operator.
Third quarter operating performance demonstrates runways meticulous underwriting practices.
Quality remains our top priority. We are pleased with the composition of our portfolio and will continue to be selective given the current market landscape. Thank you all for joining US today, we wish you a safe and healthy end of the year and we look forward to updating you on our first fourth quarter and full year 2023 financial results in March.
24.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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