Q1 2025 Runway Growth Finance Corp Earnings Call
Speaker Change: Joining us on the call today from runway gross finance are David Strang, Chief Executive Officer, Greg Greifeld, Chief investment officer of runway gross capital LLC, our investment advisor.
Speaker Change: And Tom Rado men, Chief Financial Officer, and Chief operating Officer.
Speaker Change: Runaway growth finance its first quarter of 2025 financial results were released just after today's market close and can be accessed from runaway growth finances, Investor relations website at investors that runway gross dotcom.
We have arranged for a replay of the call to be available on the runway grows finance webpage.
Speaker Change: 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.
Speaker Change: Looking statements.
Speaker Change: Without limitation.
Speaker Change: Conditions caused by uncertainty surrounding interest rates changing economic conditions and other factors, we identify in our filings with the SEC.
Speaker Change: 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.
Speaker Change: You should not place undue reliance on these forward looking statements.
Speaker Change: 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: Obtain copies of our SEC related filings. Please visit our website with that I will turn the call over to David.
David Strang: Thank you Quinn Lynn and thanks to everyone for joining us this evening to discuss our first quarter 2025 financial results.
Speaker Change: Today I'll start by discussing first quarter highlights and how we are optimizing our portfolio in the current environment being Greg will shed light on the bulb adventure landscape and to conclude Tom will provide a deeper dive on our financial performance.
Speaker Change: For the first quarter runway delivered total investment income of $35 4 million of net investment income of 56 million.
Speaker Change: We touched on this during our fourth quarter.
Speaker Change: Quarter earnings call at the end of March, but it's worth reiterating that given the current volatility in the market. Our team has been focused on the health of our portfolio enhancing our origination channels given our recently completed merger with BC partners credit and continuing to apply discipline to our underwriting.
Speaker Change: Practices.
Speaker Change: To that end in the first quarter, we executed on three investments in existing portfolio companies, representing $57 million in funded loans.
Speaker Change: First quarter tends to be a seasonally slower period, but we've also been selective in our evaluation practices.
Speaker Change: Activity has been informed by the knowledge that our platform and opportunity set would be expanding in short order with the completion of our merger with BC partners.
Speaker Change: As we've said since we announced the BC partners transaction, we don't anticipate this expansion to result in portfolio growth overnight, but we believe we have ample liquidity and are positioned to move opportunistically when the right investments arise.
Speaker Change: As we look to the balance of the year.
Speaker Change: Runway growth capital is seeking the originations in the total loan size from $30 million to $150 million with the ideal allocation to the BDC, meaning between 20 and $45 million. We believe this range. We will further diversify our bdc's portfolio over time as we look for new opportunities.
Speaker Change: Is that meet our high credit standards.
Speaker Change: Our investors in turn are positioned to benefit from our strategic focus that will further diversify our portfolio and mitigate risks.
Speaker Change: Before I turn the call over to Greg I want to highlight the current inflection point for the run rate growth story. We are excited about the opportunities we have in front of us in this next phase of runway of growth.
Speaker Change: To both our existing and potential investors I want you to walk away from our call knowing the following three things.
Speaker Change: First we believe runway is well positioned to optimize our portfolio in the quarters ahead.
Speaker Change: We have expanded origination channels to ensure that our investment mix is built for the quarters and years to come.
Speaker Change: We intend to remain credit first and our underwriting practices. This may mean more episodic portfolio expansion over a longer time horizon, but we believe this is how we're going to deliver for our shareholder base over the long term.
Speaker Change: Finally, we have a strong decade long track record and we have low loss rates compared to our peers in the BDC sector. Overall, we are seasoned credit professionals, who know how to build our portfolio for any economic cycle.
Speaker Change: Today, we believe runway growth represents an attractive entry point for investors, who are looking for a prudent portfolio manager exposure to the venture ecosystem and clear upside opportunity.
Speaker Change: We are confident in the path ahead, and thrilled to officially be a part of the broader BC partners credit platform.
Speaker Change: That I will turn it over to Greg.
Greg Greifeld: Thanks, David and good evening, everyone as David mentioned I'd like to take a step back and speak to the dynamics, we see shaping the venture ecosystem and how we are positioned today as a result in.
Greg Greifeld: In 2021, with our VC funds raised capital at unprecedented levels at the time, the only hurdle for them to raise the next vintage of funds was deploying the funds that they had with that backdrop, we saw investors make a high volume of investments often at progressively larger sizes, which was additive for many firms in their pursuit to raise there.
Greg Greifeld: But as a result, we saw at venture backed companies operate at higher burn levels enter deliver in our view artificially enhanced growth rates and affect many companies were able to buy revenue that wasn't necessarily the highest quality are beneficial to the long term health of the business than in 2023 through 2024.
Greg Greifeld: Venture capital and growth equity firms experienced slower fundraising environments and this delayed some fund launches instead of the next vintage being launched six to 12 months, we saw firms seeking to return to a state of normalcy with deployment taking place over the course of three to four years.
Greg Greifeld: That played out venture backed companies had to reckon with the new landscape they have to either raise dilutive equity at a lower valuation than previous rounds are seeking non dilutive financing solutions. Additionally.
Greg Greifeld: Additionally, this push companies placed a renewed focus on profitability over top line growth and reduced cash burn, which involve cutting product expansions. As a result, we saw companies avoid the addition of more capital to the balance sheet via larger bonds or equity raises.
Greg Greifeld: We believe that the sentiment has begun to shift again and many companies have reached a point, where they must begin demonstrating growth again to attract investment or achieve a successful exit.
Greg Greifeld: Management teams were seeking with now have chartered paths for more reasonable growth moving forward and we believe companies are now prioritizing sustainable growth over the next few years.
Greg Greifeld: We expect to need to deal activity in 2020 as companies delay or cancel deals in response to the broader market uncertainty. We believe companies will require non dilutive growth capital to become attractive targets for potential M&A or IPO in the years to come.
Greg Greifeld: To that end, we recently completed a new $40 million investment to order books, and accounting and bookkeeping solution funding $27 million of close in line with my earlier commentary. This was a transaction that was scheduled to close in the first quarter and due to various market conditions was slightly delayed.
Greg Greifeld: Thrilled to kick off this partnership and our flexibility around timing demonstrates our belief in this investment and argue runway is attractively positioned to further optimize our portfolio for a few reasons our ability to source non sponsored deals, which often face less competition and allow us to originate loans at more favorable terms sets us apart from peers.
Greg Greifeld: While adding an additional point of differentiation to our portfolio.
Greg Greifeld: Now part of an expanded platform following the completion of our combination with BC partners, which will offer a larger funnel of investment opportunities to evaluate in a more comprehensive suite of solutions to offer borrowers. We look forward to updating you all on how we're executing against our ability to maximize our portfolio in the coming quarters and demonstrate the core.
Greg Greifeld: Earnings power of this next chapter for the BDC now I will turn the call over to Tom to discuss our financial results.
Tom: Thank you, Greg and good evening everyone.
Tom: During the first quarter of 2025 runway completed three investments in existing companies, representing $50 7 million in funded loans are.
Tom: Our weighted average portfolio of risk rating remained at 233 in the first quarter of 2025, consistent with $2 33 in the fourth quarter of 2024.
Tom: Our rating system is based on a scale of one to five where one 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 fourth quarter and at the end of the first quarter.
Tom: In comparing this consistent grouping of loans, we found that our dollar weighted loan to value ratio increased from 28% to 29, 1%.
Tom: Our total investment portfolio had a fair value of 1 billion a decrease of six 7% from $1 8 billion in the fourth quarter of 2024, and a decrease of one 2% from $1 $2 billion for the comparable prior year period.
Tom: Our loan portfolio continues to be comprised almost exclusively of first lien senior secured loans.
Tom: As of March 31, 2025 runway had net assets of $503 3 million decreasing from $514 9 million at the end of the fourth quarter of 2024.
Tom: NAV per share was $13 48 at the end of the first quarter, a decrease of two 2% compared to $13 79 at the end of the fourth quarter of 2024.
Tom: Our loan portfolio is comprised of 97% 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 spreads at the time of closing our signing of the term sheet.
Tom: During the first quarter, we experienced three prepayments totaling $71 9 million and scheduled amortization of $3 7 million.
Tom: We generated total investment income of $35 4 million and net investment income of $15 6 million in the first quarter of 2025.
Tom: <unk> to $33 8 million and $14 6 million in the fourth quarter of 2024.
Tom: Our debt portfolio generated a dollar weighted average annualized yield of 15, 4% for the first quarter of 2025 as compared to 14, 7% for the fourth quarter of 2024, and 17, 4% for the comparable period last year.
Tom: Moving to our expenses total operating expenses were $19 eight for the first quarter of 2025, an increase from $19 2 million for the fourth quarter of 2024.
Tom: We recorded a net gain on investments of $6 1 million in the first quarter of 2025 compared to a net realized loss on investments of $2 9 million in the fourth quarter of 2024.
Tom: At March 31, 2025, we continue to have two loans on non accrual status mental health care and snag, a job or loans you mingle healthcare has a cost basis of $4 9 million in fair market value of $2 4, million% to 49% of cost.
Tom: Our loan to snag a job he has a cost basis of $3 eight man and fair market value of $2 six man or 68% of costs together. These loans represent only <unk>, 5% of the total investment portfolio at fair value as of March 31, 2025.
At the end of the first quarter of 2025, our leverage ratio and asset coverage for <unk> 99, and two one times, respectively compared to one eight and $1 92 times at the end of the fourth quarter of 2024.
Tom: As of March 31, 2025, our total available liquidity was $315 4 million, including unrestricted cash and cash equivalents and we had borrowing capacity of $297 million.
Tom: As discussed during our fourth quarter 2024 earnings call. During the first quarter, we extended our credit facility with Keybank by three years subject to the terms and conditions as reflected in the amended credit facility agreement.
Tom: Subsequent to quarter end, we restructured our privately placed senior unsecured notes as a result of the triggering of the change of control provision applicable to the company's external adviser.
Tom: This provision required us to make an offer to repurchase our senior unsecured notes, resulting in a prepayment of the August 2027 notes and an exchange of upside of our December 2026 notes.
Tom: Total unsecured notes inclusive of our baby bonds increased to $264 3 million.
Tom: From $247 3 million.
Tom: As of March 31, 2025, we had a total of $162 2 million in unfunded commitments, which was comprised of $132 8 million to provide debt financing to our portfolio companies and $29 4 million to provide equity financing to our JV with cabinets.
Tom: Approximately $25 million of our unfunded debt commitments are eligible to be drawn based on achieved milestones.
Tom: Most of our unfunded commitments are subject to specific performance milestones.
Tom: Looking ahead, we believe we have sufficient liquidity to fund existing unfunded commitments selective portfolio growth and potential share repurchases.
Tom: On May seven 2025, our board of directors approved a new stock repurchase program of $25 million, which will expire on may seven 2026 or earlier, if we repurchased the total amount of stock authorized for repurchase under the program.
We believe the program reflects our view that runway growth stock is significantly undervalued and presents an attractive entry point as well as management's confidence in our 2025 performance.
Tom: Finally on May seven 2025, our board declared a regular distribution for the second quarter of <unk> 33 per share as well as a supplemental dividend of <unk> <unk> per share payable with a regular dividend.
Tom: With that operator, please open the line for questions.
Speaker Change: Thank you to ask a question. Please press star one on your telephone and wait for your name to be announced.
Speaker Change: Draw. Your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: The first question comes from Eric Zwick with Lucid capital markets. Your line is open.
Eric Zwick: Hi, good afternoon guys.
Speaker Change: Okay.
Speaker Change: Good afternoon.
Speaker Change: I wanted to start with a question just wanted to comment on slide seven indicates that median and late stage deal sizes are down in that healthcare lending is is low and I guess, maybe on the second part of that statement. Just curious if you could maybe add a little commentary there in terms of if this is a new term development of our health care lending has slowed or if.
Speaker Change: Theres something larger at play and maybe kind of why you.
Speaker Change: To include that in that statement in there.
Eric Zwick: Yes, Eric.
Speaker Change: Those are the numbers from.
Speaker Change: Across the industry wide as reported in the pitch book veteran monitor.
Speaker Change: I think that.
Greg Greifeld: Greg can comment more specifically on health care, but.
Speaker Change: No listening too.
Speaker Change: The feedback from from our folks in from from the peers that.
Speaker Change: It's just been a little bit of a softer slower more cautious quarter and I think that's what's driving those results.
Speaker Change: Got it yes.
Speaker Change: Regarding health care I would say, sorry, I would say that that remains one of the three core pillars of verticals, we look at.
Speaker Change: <unk> technology broadly healthcare as well as the very selective amount.
Speaker Change: I would say looking across our pipeline we've seen some more interesting things come on the technology side recently.
Speaker Change: And.
Speaker Change: Given the announcement today about potential impact too.
Speaker Change: Drug prices coming out of a potential executive order, that's going to be something that we will be very focused on seeing those details as they come out.
Speaker Change: Thanks I appreciate the additional comments there and then maybe just a follow up on the pipeline I noticed Q1 activity with almost 70% refinance as you look at the pipeline today.
Speaker Change: I'm curious how it looks in terms of add on refinance and new opportunities.
Speaker Change: Yeah and to Echo my comments about the deal we closed auto books that is a term sheet that we had signed an anticipated to occur in Q1 ultimately the use of proceeds there was to help auto books fund, an M&A deal, which given the turbulence I think.
Speaker Change: Yeah.
Speaker Change: <unk> in Q1.
Speaker Change: Negotiations and the final point of that acquisition itself took longer than I think either buyer or seller expected.
Speaker Change: Caused it to push into Q2 I think those are the types of dynamics that we are seeing.
Speaker Change: This rapidly evolving.
Speaker Change: Markets, where there is desire to do deals, but folks are trying to make sure that they have the appropriate structure and pricing.
Speaker Change: Okay and could you provide an update on the JV there has been any recent investment activity.
Speaker Change: Yes, I would say that the JV investment activity continues to be somewhat.
Speaker Change: As.
Speaker Change: The overall environment and our approach towards credit as Greg mentioned has been.
Speaker Change: Cautious so the JV is experiencing that same level of.
Speaker Change: Speed, if you will on ramp or.
Speaker Change: Lack thereof.
Speaker Change: The general cautiousness as they approach to credit today.
Speaker Change: Thank you for taking my questions today.
Speaker Change: The next question comes from Melissa Wedel with Jpmorgan. Your line is open.
Good afternoon, Thanks for taking my question.
Speaker Change: Wanted to start first with NII trend I mean, obviously, there was a pick up quarter over quarter.
Speaker Change: And that despite that that inquiry.
Speaker Change: I noted that your declared dividend at the supplemental dividend declared for Q2 was actually a little bit lower than what you paid in the first quarter. Just curious if you can contextualize that help us.
Speaker Change: Brian how youre thinking about the earnings power of the portfolio.
Brian: Yes, thanks, Melissa Thanks for joining the call today and for the question.
Brian: Just to step back to reiterate the dividend policy. So.
Brian: In March we announced a revised dividend policy a re basing the 33, a share and then a supplemental dividend of up to 50% of <unk>.
NII.
Brian: Clearly today have a bias toward building NAA in.
Brian: Alright building NAV per share as opposed to building the dividend because we don't seem to be getting credit for the dividend in the market.
Brian: So we're confident in the core earnings power of the portfolio and the ability to cover the dividend.
Brian: Certainly the base dividend and we've set that base dividend modeling.
Brian: A number of different portfolio outcomes with respect to looking at potential for declining rates throughout the balance of the year a variety of scenarios with respect to non accruals and so we're confident in the portfolio's ability to cover that dividend going forward.
Brian: The supplemental dividend, we will continue to look up look for that target of up to 50%, but not necessarily saying it will be 50% every quarter.
Speaker Change: Okay. I appreciate that so just putting a finer point on sort of earnings power of the portfolio Im hearing that Im hearing you say that the supplemental dividend declared for the second quarter is reflective that the stereo your expectations of the earnings power, but more of a function of this.
Brian: <unk> T cells now versus payout up to happen.
Brian: That's earnings above the base.
Brian: Thank you Luke.
Brian: So that being the case.
Brian: Assuming stable base price do you feel like the earnings the.
Brian: The NII per share of <unk> 42 cents that you saw in the first quarter end.
Brian: Fully reflective of the <unk>.
Brian: Ongoing dynamic again, given the stability in the base rates or were there some special onetime things I should be thinking about.
Brian: No again, I think we feel good about the earnings power of the portfolio the ability to cover the base dividend and the NII will.
Brian: Very quarter to quarter based on.
Brian: The growth of the portfolio or on.
Brian: The acceleration of income related to prepayments.
Brian: Thank you.
Mickey: And the next question will come from Mickey <unk> with Ladenburg. Your line is open.
Speaker Change: Yes, good afternoon, everyone.
Wanted to start by asking about the terms, but clearly in the conventional <unk>.
Speaker Change: But credit arena.
Speaker Change: It's been very borrower friendly and.
Speaker Change: Spreads have generally been tight with the market imbalanced, but as you mentioned in your prepared remarks the demand for.
Speaker Change: Private debt capital is better and I'm curious, how thats impacting the trends that youre seeing in your pipeline versus.
Speaker Change: Perhaps a year ago.
Greg Greifeld: Yes, so I'll take a first crack at that this is Greg I do think that we are seeing an improvement.
Speaker Change: In terms of that.
Speaker Change: The structure of the pipeline and the opportunities that we're seeing there.
Speaker Change: The things that get reported in the schedule of investments as you said in terms of spread floor rate and other things like that but I would say most encouraging encouragingly as well we're seeing lower asks in terms of leverage from a loan to value perspective, we're seeing on maintenance of.
Speaker Change: Mount up and quality of covenants.
Speaker Change: So I think we feel that we're in a good place in terms of the economics, but as importantly, if not more importantly, also the structural protections of the underlying documents.
Speaker Change: That's that's really good to hear.
Speaker Change: Within the pipeline or just thinking broadly.
Speaker Change: What kind of companies within the AI landscape are you attracted to for investment if any.
Speaker Change: Yes.
Speaker Change: Yes, so what I would say in general is as I'm sure. Many folks in the market have seen there is a.
Speaker Change: A large <unk>.
Speaker Change: Grace for everyone to try to find a way to re <unk>.
Speaker Change: Our reinvent themselves as an AI company in.
Speaker Change: In general where we play in the market, we're looking for more mature larger businesses that are generating a meaningful amount of.
Speaker Change: Revenue without a too high of a burn amount. So a lot of that really early stage companies are still too nascent and immature for us to make loans too.
Speaker Change: But it is something that we do look for larger businesses. You. An example in our portfolio as a company interactions which has been in for a few years, but we're definitely.
Speaker Change: Interested in AI, but again, we're not not necessarily willing to go.
Speaker Change: Earlier stage than we typically look across the portfolio.
Speaker Change: I imagine for those larger more mature AI companies, you're referencing there must be enormous demand to get those deals or the terms or the risk adjusted returns you can get in that space interesting at all.
Speaker Change: I would say that.
Speaker Change: Everything there is a need to be opportunistic.
Speaker Change: But that being said you're completely right that anytime there's a really hot sector out there youre going to see folks.
Speaker Change: Chase those deals in terms of either economics or structure.
Speaker Change: And that's why as we look to stick to our knitting, you don't necessarily see that.
Speaker Change: The most current hot sector come into the portfolio.
Speaker Change: Yes that makes sense just following up on the health care Health care question. It is if I'm not mistaken your second largest.
Speaker Change: Allocation.
Speaker Change: What extent are the cuts at the NIH and the FDA impacting the sentiment on the deal flow.
Speaker Change: That underlies the sort of slow pace that you referenced before.
Speaker Change: Yeah, I would say that by nature. It is an industry with a tremendous amount of regulatory risk not only in terms of achieving or not achieving approval, but also in terms of.
Speaker Change: Sure.
Speaker Change: How long things might take as a result, if you look at the majority of our healthcare book and we've had a good amount of success.
Speaker Change: Particularly number of the names in the portfolio today is post approval businesses that are generating.
Speaker Change: Or more meaningful types of revenue, which don't necessarily have that same regulatory slowdown risks than you might see for in early stage pre approval biotech or something like that.
Speaker Change: Okay that's interesting.
Speaker Change: Lastly, just sort of a housekeeping question maybe for Tom If you could give us some highlights of what drove this quarter's realized gain and the unrealized portfolio depreciation.
Speaker Change: Sure two parts.
Speaker Change: What really drove the realized gain was the previous announced closing of the sale of Guyana, Sonics and if you'll recall at <unk> we had.
Speaker Change: Two pieces, we had our loan so there was the acceleration of some income associated with the with the loan but the gain was really driven by the sale of the preferred stock interest in terms of the depreciation.
Speaker Change: And in the balance of the portfolio.
Speaker Change: As a function of the ongoing valuation process and I would say as you look at that about 50.
Speaker Change: <unk>, 50% of that is.
Speaker Change: Influenced by performance, 50% is influenced by market multiples.
Speaker Change: So.
Speaker Change: I think there were a couple of big movers that accounted for the majority of that change.
Tom: And Tom did you just say some of the.
Tom: Okay Sonics proceeds were recognized to recruit into income as well there is fee.
Tom: Yes, but the.
Tom: The gain on the.
Tom: <unk>.
Tom: The sale of the equity is what what drove that.
Tom: It's almost $7 million gain.
Speaker Change: I understand okay. Thanks for your time this afternoon that those are all my questions.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone. The next question will come from Doug Harter with UBS. Your line is open.
Doug Harter: Alright. Thanks.
Speaker Change: Your.
Speaker Change: Sure.
Speaker Change: Loan yield.
Speaker Change: Quite a variance over the past couple.
Speaker Change: Quarters can you just talk about how youre thinking about what is a normalized.
Speaker Change: Normalized level that you would think you would.
Speaker Change: Kind of achieve as you kind of spread out some of.
Prepayment activity.
Speaker Change: Think about that over the next several quarters.
Speaker Change: Sure I think if you look at the variability in yield theres been spikes.
Speaker Change: Times, when we have accelerated or above above normal kind of level of prepayments.
Speaker Change: Going forward, we see.
Speaker Change: Fewer prepayments the transactions are staying in the portfolio longer which mitigates that that spike if you will but it also reduces the amount of acceleration.
Speaker Change: From.
Speaker Change: Accreted income whether it's the end of term payment or the OID. So you have a little bit of a.
Speaker Change: No.
Speaker Change: Less of an impact from that perspective, so if you normalize that yield I think youre going to.
Speaker Change: Youre in the right neighborhood in terms of of what we would expect our sulfur spreads in our prime spreads are pretty stable and.
Speaker Change: Throw on and.
Speaker Change: The term payments.
Speaker Change: Right.
Speaker Change: That generates the core yield.
Speaker Change: Okay I appreciate it thank you.
Speaker Change: I show no further questions at this time I would now like to turn the call back over to David Spring CEO for closing remarks.
Speaker Change: Okay.
Speaker Change: I am showing no further questions in the queue at this time I would now like to turn the call back over to David Spring CEO for closing remarks, great.
David Spring: Thank you operator.
Speaker Change: And thank you everybody for joining today.
Speaker Change: In conclusion, we believe that our high quality portfolio is positioned to perform.
<unk> ongoing market volatility and we look forward to updating you on our progress during our second quarter earnings call in August.
Speaker Change: This does conclude today's conference call.
Speaker Change: Thank you for participating and you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Yes.
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