Q3 2024 Runway Growth Finance Corp Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Runway Growth Finance third quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Quinlan Abel, Assistant Vice President, Investor Relations. Please go ahead.
Quinlan Abel: Thank you, Operator. Good evening, everyone, and welcome to the Runway Growth Finance conference call for the third quarter ended September 30, 2024.
Quinlan Abel: Joining us on the call today from Runway Growth Finance are David Spreng, Chairman, President and Chief Executive Officer, Greg Greifeld, Managing Director, Deputy Chief Investment Officer, and Head of Credit of Runway Growth Capital.
and Tom Raterman, Chief Financial Officer and Chief Operating Officer.
Quinlan Abel: Runway Growth Finance's third quarter 2024 financial results were released just after today's market close and can be accessed from Runway Growth Finance's Investor Relations website at investors.runwaygrowth.com. We have arranged for a replay of the call to be available on the Runway Growth Finance webpage.
Quinlan Abel: During this call, I want to remind you that we may make forward-looking statements based on current expectations.
Quinlan Abel: The statements on this call that are not purely historical are forward-looking statements.
Quinlan Abel: 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 statement.
Quinlan Abel: including, and without limitation, market conditions caused by uncertainty surrounding interest rates, changing economic conditions, and other factors we identified in our filings with the SEC.
Quinlan Abel: 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. You should not place undue reliance on these forward-looking statements.
Quinlan Abel: 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.
Speaker Change: To obtain copies of SEC-related filings, please visit our website. With that, I will turn the call over to David.
David Spreng: Thank you, Quinlan, and thanks everyone for joining us this evening.
David Spreng: Tonight, we want to detail our third quarter financial results and share more about the recently announced combination between Runway Growth Capital, the investment advisor to Runway Growth Finance, and BC Partners.
David Spreng: We believe this transaction is set to position Runway Growth Finance to deliver consistent, steady returns to stockholders. Additionally, on tonight's call, we plan to offer an overview of the investment environment and discuss our outlook heading into 2025.
David Spreng: We are pleased with our steady execution in 2.3, which demonstrates the underlying strength of our BDC.
David Spreng: We executed on attractive investments with new and existing portfolio companies. We completed two investments with new companies, four investments with existing companies, and one investment with the joint venture, representing 75.3 million in funded loans.
David Spreng: Additionally, Runway delivered total investment income of $36.7 million and net investment income of $15.9 million or $0.41 per share, which covered our base dividend for the quarter.
David Spreng: Subsequent to Quarter End, Runway Growth Capital, our investment advisor, entered into a definitive agreement to be acquired by BC Partners Credit as a long-term strategic investment.
David Spreng: B.C. Partners Credit is the $8 billion credit arm of B.C. Partners, an alternative investment firm with over $40 billion in assets under management.
David Spreng: Following the transaction, Runway Growth Capital will continue to operate independently and remain the investment advisor to Runway Growth Finance. The current leadership and investment teams will remain in place.
David Spreng: We believe our investors and borrowers alike will benefit from Runway Growth Capital's joining BC Partners industry-leading platform due to our combined scale, resources, expertise, and network.
David Spreng: Further, we anticipate this will enable us to accelerate originations in our ideal transaction size.
David Spreng: We believe that the combination will enhance our capabilities by introducing structured equity preferred investment, asset-based lending, and the ability to operate in new strategies such as equipment leasing.
David Spreng: It is also set to strengthen our sponsor relationships through fund finance and other fund level offerings.
David Spreng: We expect both the wider funnel and additional solutions to help our team further diversify our portfolio across both financing products and size of investments.
David Spreng: For our shareholders, this translates to more access and exposure to a broader range of investment opportunities designed to enhance value and the potential for attractive risk-adjusted returns.
David Spreng: To reiterate, this transaction positions the current leadership of Runway Growth Capital and Runway Growth Finance to execute its long-term vision. We believe it will enable us to strengthen our existing strategy of lending to high-quality, late- and growth-stage companies.
David Spreng: For the last several quarters, we've made it clear that we are focused on re-accelerating our portfolio expansion with selectivity and prudence.
David Spreng: and this focus manifested in several ways throughout the year. Namely, we have established an operational infrastructure that positions Runway for the opportunities that we believe to be ahead.
David Spreng: Through both our joint venture and our proposed transaction with BC partners, we have meaningfully expanded origination channels, investment solutions, and potential growth strategies for both the advisor and the BDC.
David Spreng: This has all been done while consistently driving originations and executing attractive investments that augment our portfolio.
David Spreng: As we have said before, these efforts will not necessarily result in linear portfolio expansion quarter-to-quarter, but we are confident that we are positioning our portfolio and stockholders for long-term returns.
With that, I'll turn it over to Greg.
Greg Greifeld: Thanks David. I will offer a market overview, discuss the performance of our portfolio, and then home in on the venture ecosystem.
Greg Greifeld: While still in the early innings of its taper, we believe the Federal Reserve's recent rate cuts are an encouraging sign to borrowers across the BDC landscape who are often subject to floating rate loans.
Greg Greifeld: This does not change our approach to investments, and we believe potential rate cuts over the quarters to come will only benefit our pipeline and ability to execute on loans to high-quality companies with sound fundamentals.
Greg Greifeld: As we enter this dynamic rate environment, we will continue to maintain our disciplined underwriting standards.
Greg Greifeld: That said, as borrowers experience improved conditions, we will follow through on our strategy to be opportunistic with deployment as we focus on diversifying our portfolio.
as some of our large share deals refinanced.
Greg Greifeld: Our new investments during the quarter included the completion of a $23 million Senior Secured Term Loan to SnapMobile, and we partnered with Vista Credit on a Senior Secured Term Loan to Vizinia. Our portion of the financing was $45.3 million.
Speaker Change: SNAP provides a software platform designed to help schools and organizations fundraise.
Speaker Change: manage their rosters and sell merchandise while Zinnia provides business processing and technology solutions.
Speaker Change: to the life insurance and annuity industry. These companies exemplify the high-performing technology industries within our late-stage, senior-weighted loan portfolio.
Speaker Change: Our joint venture purchased a portion of our airship loan, resulting in a $5 million equity investment in the JV subsidiary.
Speaker Change: We believe we are making steady progress on expanding and diversifying our portfolio and we expect to meaningfully add new investments to the portfolio over the coming months and quarters as our loans mature.
Speaker Change: Lastly, I want to touch on credit quality. Our weighted average portfolio risk rating remains stable at 2.48 in the third quarter, compared to 2.47 in the second quarter of 2024. We continue to proactively monitor our portfolio for potential issues that may arise regardless of market conditions.
Speaker Change: We uphold our commitment to supporting borrowers throughout the entire lifetime of a loan.
Speaker Change: Further, we believe that our focus on originating investments at the top of the capital stack while avoiding situations with significant downstream financing risk and junior capital at play, reduces our risk of exposure to the volatility often associated with investing in earlier stage companies.
Speaker Change: Now I'd like to take a moment to focus on U.S. venture equity deal activity during the third quarter.
Speaker Change: which continue to experience high deal counts contrasted with low deal value to ongoing liquidity constraints.
Speaker Change: According to recent pitch book data, late stage deal value is 53% lower than it was at the peak levels in 2021. As noted previously, companies at the later stages of venture have been the most apt to lengthen runway and the most cautious to stay out of the markets to stem further dilution.
Speaker Change: Despite the Fed's recent rate cuts, many late and growth-stage companies continued to face fundraising pressure and liquidity constraints in the third quarter, as the economy grappled with some uncertainty associated with the U.S. election cycle.
Speaker Change: We anticipate the market for borrowers will gradually improve over the coming quarters and will benefit our strong pipeline.
Speaker Change: Further, our ability to capitalize on attractive new opportunities in the dynamic environment that shaped 2024 is a testament to our deep sector relationships, along with our targeted outreach and marketing efforts.
Speaker Change: We expect that continued rate cuts combined with Runaway Growth Capital's pending transaction with BC Partners will serve as tailwinds for the company as we focus on amplifying our reach and the breadth of our investments moving forward. With that, I will now turn it over to Tom to dive deeper into our financials.
Tom: Thank you, Greg, and good evening, everyone. During the third quarter of 2024, Runway continued to expand deal flow, completing two investments in new companies and five investments in existing companies, representing $75.3 million in funded loans.
Tom: As Greg mentioned, our weighted average portfolio risk rating remained stable at 2.48 in the third quarter compared to 2.47 in the second quarter of 2024.
Tom: Our rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating.
Tom: As with previous quarters, we calculated the loan-to-value for loans that were in our portfolio at the end of the second quarter and at the end of the third quarter.
Tom: In comparing this consistent grouping of loans based on investments held in the prior quarter, we found that our dollar-weighted loan-to-value ratio increased from 26.7% to 28.6% sequentially.
Tom: Our total investment portfolio had a fair value of approximately $1.07 billion, an increase from $1.06 billion in the second quarter of 2024, and an increase of 5.5% from $1.01 billion for the comparable prior year period.
Tom: Our loan portfolio continues to be comprised almost exclusively of first lien senior secured loans.
The End
Tom: As of September 30th, 2024, Runway had net assets of $507.4 million, increasing from $506.4 million at the end of the second quarter of 2024.
Tom: Thank you for tuning in. I'm Greg Greifeld. I'll see you next time.
Speaker Change: NAV per share was $13.39 at the end of the third quarter compared to $13.14 at the end of the second quarter of 2024.
Speaker Change: 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 of the term sheet.
Speaker Change: In the third quarter, we received $75 million in principal repayments, an increase from $25.3 million in the second quarter of 2024.
Thanks for tuning in. I'm Greg Greifeld.
Speaker Change: We generated total investment income of $36.7 million and net investment income of $15.9 million in the third quarter of 2024, compared to $34.2 million and $14.6 million in the second quarter of 2024.
Thank you for tuning in. I'm David Spreng.
Speaker Change: Our debt portfolio generated a dollar-weighted average annualized yield of 15.9% for the third quarter of 2024.
as compared to 15.1% for the second quarter of 2024.
and 18.3% for the comparable period last year.
Speaker Change: Moving to our expenses, total operating expenses were $20.8 million for the third quarter, up 6% from $19.6 million for the second quarter of 2024.
Speaker Change: We recorded a net unrealized gain on investments of $9.2 million in the third quarter compared to a net unrealized loss of $6.3 million in the second quarter of 2024.
Speaker Change: The net change in unrealized gain on investments was primarily due to an increase in the fair value of our investments in Gynasonics and Snagajob.
Speaker Change: As of September 30, 2024, we had two loans on non-accrual status, Mingle Health Care and Snagajob.
Speaker Change: Our loan to Mingle Healthcare has a cost basis of $5 million.
Speaker Change: and a fair market value of $2.6 million or 53% of cost, while our loan to Snagajob has a cost basis of $42.7 million and fair market value of $37.3 million or 87% of cost.
Speaker Change: At the end of the third quarter of 2024, our leverage ratio and asset coverage were 1.08 and 1.92 times, respectively, compared to 1.1 and 1.91 times at the end of the second quarter of 2024.
Speaker Change: As of September 30, 2024, our total available liquidity was $251.6 million, including unrestricted cash and cash equivalents, and we had borrowing capacity of $248 million.
Speaker Change: This reflects an increase from 249.8 million and 241 million, respectively, on June 30, 2024.
Speaker Change: At quarter end, we had unfunded financing commitments to portfolio companies of $260.4 million, the majority of which were subject to specific performance milestones.
The End
Speaker Change: The prepayment included full principal repayment of our Senior Secured Term Loan to Cloud Pay.
Speaker Change: In October, we continue to monitor and manage our portfolio to yield long-term benefits for our stockholders.
Subsequent quarter end on October 16th, 2024.
Speaker Change: The company sold its outstanding warrants and DTEX systems for proceeds of $1.9 million and on October 9, 2024 Betterment Holdings prepaid its outstanding principal balance of $8 million on the company's senior secured loan.
Speaker Change: Additionally, at the end of October, we received a partial prepayment of $2.1 million from Fiscal Note Holdings, and Prodactive, formerly known as ShareThis, repaid its outstanding principal balance of $18.5 million on its senior secured loans.
Thank you for watching!
Speaker Change: As discussed last quarter, prepayments enable the runway to deploy capital across our pipeline to drive portfolio replenishment and expansion.
Speaker Change: We believe our level of prepayments in the latter half of 2024 demonstrates the health and strong performance of our borrowers.
As mentioned on our previous earnings call,
Speaker Change: On July 30, 2024, our Board of Directors approved a new stock repurchase program of $15 million, which will expire on July 30, 2025, or earlier if we repurchase the total amount of stock authorized for repurchase under the program.
Speaker Change: Operator, please open the line for questions.
Speaker Change: Thank you.
Speaker Change: In order to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile our Q&A roster.
Speaker Change: Our first question comes from the line of Finian O'shea with Ws F. Your line is now open.
Finian O'shea: Hey, everyone. Good afternoon.
Speaker Change:
A couple a couple of questions on the advisor merger.
To start.
Speaker Change: As BC partners buying.
Speaker Change: Just the Oaktree.
Speaker Change: <unk> for the whole thing.
Speaker Change: And then also can you it looks like it's being bought from Us fund.
Speaker Change: So maybe is it less strategic than another another.
Speaker Change: Another sort of fund investment and if you could kind of.
Speaker Change: Opine on what what that means for the future of the company. Thank you.
Speaker Change: Sure Tim Thanks for the question.
Speaker Change: They are buying the whole thing.
Speaker Change: <unk> stake in the advisor as well as.
Speaker Change: All of the other.
Speaker Change: Shareholders there arent many most most of the remainder of the advisor is owned by.
Speaker Change: Myself and.
Speaker Change: Tom and Greg and so they will be buying 100% of the adviser.
Speaker Change: And it is being acquired by a fund, but I believe.
Speaker Change: The intention is for it to be a long term holding and the strategic part of their best there.
Speaker Change: Their growth plan and we're very much looking forward to.
Speaker Change: Working with Ted Golf Tour.
And his team.
Speaker Change: It's really important to us.
Speaker Change: It's a part of our plan and it expands our origination capability and extends our leadership team.
Speaker Change: It Fortifies our position in the market and allows us to participate in other types of financing that we don't currently do and lets us tap into their originations, which has already been quite active in showing us deals.
Speaker Change: Be announcing some very soon but most importantly positions us to be able to deliver for shareholders in terms of <unk>.
Speaker Change: Increased share value and increase return on there.
Speaker Change: Their investment.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from the line of Melissa Wedel with Jpmorgan. Your line is now open.
Speaker Change: Good afternoon, Thanks for taking my questions.
Speaker Change: I wanted to follow up on the.
A question about the acquisition by BC partners I think one of the things that you indicated in the press release and then in the earlier announcement was that it expands.
The offerings.
Speaker Change: And the types of solutions I'm curious.
Speaker Change: I think there is a lot to understand about just sort of the earnings profile going forward of the portfolio as you diversify into either.
Speaker Change: Solutions and other products, how will that how do you expect that to impact sort of the asset yield.
Speaker Change: On the portfolio.
Speaker Change: Thanks, Melissa and I do think it's key for us to say that this well is expanding the product suite that we are able to offer potential borrowers does not change our return targets in terms of the.
Speaker Change: Asset level on both the Levered and Unlevered basis, and we expect it to provide a similar stream of income to what we've seen historically.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: As we look at that sort of the environment going forward I think we've heard a range.
Speaker Change: Outlook.
Speaker Change: In terms of what the.
Speaker Change: M&A environment could be.
Speaker Change: You start to look forward to additional rate cuts or just a new administration coming in that maybe pro.
Speaker Change: Pro growth are you are you thinking that this is an environment, where you could see additional churn.
Speaker Change: In terms of exits.
Speaker Change: Im your portfolio companies get acquired or is there still quite an overhang.
On valuation in the space, where you operate.
Okay.
Speaker Change: Thanks Melissa.
Speaker Change: So we're really optimistic about the current environment.
Speaker Change: And getting the election behind us and having some certainty there is important.
Speaker Change: Yes.
Speaker Change: View that interest rates are most likely on.
Speaker Change: Downward trajectory has brought a lot of.
Speaker Change: Positivity and optimism to the market and when we combine that with the.
Speaker Change: The deal flow that we're seeing from BC.
Speaker Change: Okay.
We feel really good about what's happening and we're hearing that from the entrepreneurs in the market now on the other hand, you contrast that with some of the difficulties that are taking place.
Speaker Change: In the venture equity market, where.
Speaker Change: There is money being invested.
Speaker Change: Quite often it's at a down round and I think we're at an all time high for down rounds in terms of percentage of all rounds, and one way to avoid a down round is to use that so more and more people are coming to us.
Greg Greifeld: Greg you want to add some more color, yes. The one thing I would add in terms of M&A is since we play in.
Greg Greifeld: The latest stage of venture and growth companies for the most part not only are our borrowers potential targets from much bigger companies, but they're also acquirers and as we see.
Greg Greifeld: Potential financing, becoming cheaper in terms of.
It's potentially coming down seeing greater certainty in terms of antitrust and other things like that we do believe that there is not only going to be a cigar.
Greg Greifeld: Significant use case for us to potentially upsize, our loans to existing portfolio companies as they look to do M&A, but also have opportunities to finance new companies, who are out there looking to go back and find additional M&A opportunities.
Speaker Change: Okay understood. One final question if I could.
Speaker Change: The press release today, I think you identified maybe about $30 million repayments and I guess post quarter end.
Speaker Change: Can you help contextualize that for us.
Speaker Change: Fourth quarter can be a seasonally busy one are you.
Speaker Change: Surprise, not surprised to see 30 million rotate out in the first month of <unk>.
Speaker Change: Quarter. Thank you.
Speaker Change: Earlier, thanks, Melissa earlier in the year, we talked about a level.
Speaker Change: Our expectations for the level of prepayments during the third.
Speaker Change: Third and fourth quarter and is always what happens is you tend to get a lot of prepayments at the beginning of the quarter and you replace that.
Speaker Change: That's at the at the end of the quarter. So.
Speaker Change: These were transactions.
Speaker Change: <unk>.
Speaker Change: You can make good strategic sense one was.
Speaker Change: A refinancing of us out and the other was a sale of one of the Companys business units. So.
We're not.
Speaker Change: We werent surprised we expected them and there are other <unk>.
Speaker Change: M&A transactions that are announced that could yet close this quarter and add to that prepayment so no surprise.
Speaker Change: Sure.
Speaker Change: Working to redeploy those assets.
Speaker Change: Thank you.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Mickey <unk> with Ladenburg Thalmann. Your line is now open.
Speaker Change: Yes. Good afternoon, everyone. Most of my questions have been asked but I just wanted to.
Speaker Change: Quickly get your insight on US no good job, which is now.
Speaker Change: Value you're much closer to par.
Speaker Change: Can we expect that investment to go back on accrual.
Speaker Change: Soon or some other.
Speaker Change: Expected outcome in the near future.
Speaker Change: Thanks, Nikki and our strategy with spinnaker job is too.
Speaker Change: Really preserve and restore now.
Speaker Change: So.
Speaker Change: There is a plan in place that.
Speaker Change: That will lead to protecting the NAV I don't expect that in the short term it will be back.
Speaker Change: On an accrual basis.
We would expect over the long term that it does return to accrual status, but in the short term it will stay on nonaccrual, but there is a plan in place that really protects the value of the asset for us.
Speaker Change: I understand those are all my questions. This afternoon.
Speaker Change: You for your time.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Finian O'shea with Duffy.
Speaker Change: Your line is now open.
Speaker Change: Hey, everyone just a follow up on.
Speaker Change: Just housekeeping question on the merger.
Speaker Change: Should we expect any.
Speaker Change: Deal related expenses, I want to close and what that might look like.
Speaker Change: Thanks, Thanks, Tim So under the under the 40 Act all of the transaction expenses cost of the proxy.
Speaker Change: Cost of legal around that anything related to the transaction from a deal cost perspective is borne by the adviser.
Speaker Change: That's very helpful. Thank you so much.
Speaker Change: Thank you.
Speaker Change: I'm showing no further questions at this time and would now like to turn it back to David.
David Spreng: For closing remarks.
David Spreng: Thank you operator, we are pleased with the momentum achieved during the third quarter and believe runway is advantageously positioned to meaningfully accelerate originations with the partnership of BC partners. We look forward to executing on attractive investments that diversify our portfolio.
And drive long term returns for our stockholders.
David Spreng: Thank you all for joining us today.
David Spreng: We look forward to updating you on our fourth quarter and full year 2024 financial results in March.
Speaker Change: This does conclude the program and you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].