Runway Growth Finance Corp. - 7 Q1 FY2025 earnings call

• David Spreng discussed first quarter highlights, portfolio optimization, and the merger with BC Partners Credit, stating the team is focused on portfolio health, origination channels, and underwriting discipline. He mentioned the firm executed three investments in existing portfolio companies in Q1. - Greg Greifeld spoke about the venture ecosystem dynamics, noting changes in VC fundraising, company focus on profitability, and Runway's position to source non-sponsored deals. He highlighted the $40 million investment in Autobooks. - Tom Raterman discussed financial results, including loan investments, portfolio risk rating, loan to value ratio, investment portfolio fair value, net assets, NAV per share, investment income, operating expenses, net gain on investments, nonaccrual loans, leverage ratio, asset coverage, liquidity, unfunded commitments, stock repurchase program, and dividend declaration.

For the first quarter of 2025, Runway delivered total investment income of $35.4 million and net investment income of $15.6 million. The firm completed three investments in existing companies representing $50.7 million in funded loans. The weighted average portfolio risk rating remained at 2.33. The dollar weighted loan to value ratio increased from 28% to 29.1%. The total investment portfolio had a fair value of $1 billion, a decrease of 6.7% from the fourth quarter of 2024. Net assets were $503.3 million, down from $514.9 million in the fourth quarter. NAV per share was $13.48, a decrease of 2.2% from the fourth quarter. The debt portfolio generated a dollar weighted average annualized yield of 15.4% in Q1 2025. Total operating expenses were $19.8 million in Q1 2025, an increase from $19.2 million in the fourth quarter. A net gain on investments of $6.1 million was recorded in Q1 2025 compared to a net realized loss of $2.9 million in the fourth quarter. Two nonaccrual loans represented 0.5% of the total investment portfolio. Leverage ratio and asset coverage were 0.99x and 2.01x respectively. Total available liquidity was $315.4 million, and borrowing capacity was $297 million. Unfunded commitments were $162.2 million. A $25 million stock repurchase program was approved, and a regular dividend of $0.33 per share plus a supplemental dividend of $0.02 per share was declared.

• Runway Growth Capital is seeking originations in the total loan size of $30 million to $150 million with the ideal allocation to the BDC remaining between $20 million and $45 million. - The Board approved a $25 million stock repurchase program, expiring May 07, 2026. - A regular dividend of $0.33 per share and a supplemental dividend of $0.02 per share were declared for the second quarter.

• Market conditions caused by uncertainties surrounding interest rates, changing economic conditions. - Regulatory risks in the healthcare industry, including potential impacts from cuts at NIH and FDA. - Deal flow uncertainties due to market volatility and cautious credit approach.

Q: Just one of the comments on Slide 7 indicates that median and late-stage deal sizes are down and that healthcare lending is low. Could you add a little commentary there in terms of if this is a new term development where healthcare lending has slowed or if there's something larger at play?

A: Those are the numbers from across the industry wide as reported in the PitchBook Venture Monitor. Greg can comment more specifically on healthcare, but it's been a softer, slower, more cautious quarter.

Q: Could you provide an update on the JV, if there's been any recent investment activity there?

A: The JV investment activity continues to be somewhat muted as the overall environment and our approach for credit, as Greg mentioned, has been cautious.

Q: I wanted to start first with NII trends. I mean, obviously, there was a pickup quarter over quarter, and but despite that increase, I noted that your declared dividend or the supplemental dividend declared for 2Q was actually a little bit lower than what you paid in the first quarter. Just curious if you can contextualize that and help us frame how you're thinking about the earnings power of the portfolio?

A: In March, we announced the revised dividend policy rebasing to $0.33 a share and then a supplemental dividend of up to 50% of NII. We clearly today have a bias toward 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. So we're confident in the core earnings power of the portfolio and the ability to cover the dividend, certainly the base dividend and we set that base dividend modeling 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. And the supplemental dividend will continue to look up look for that target of up to 50%, but not necessarily saying it will be 50% every quarter.

Q: Wanted to start by asking about terms. Clearly in the conventional private credit arena, we it's been very borrower friendly and spreads have generally been tight with the market imbalance. But as you mentioned in your prepared remarks, the demand for private debt capital is better. And I'm curious how that's impacting the trends that you're seeing in your pipeline versus perhaps a year ago?

A: I do think that we are seeing an improvement in terms of the structure of the pipeline and the opportunities that we're seeing. There's the things that get reported in the schedule of investments, as you said, in terms of spread, flow rate and other things like that. But I would say most encouraging as well, we're seeing lower asks in terms of leverage from a loan-to-value perspective. We're seeing maintenance of amount of and quality of covenants. 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.

Q: Within the pipeline or just thinking broadly, what kind of companies within the AI landscape are you attracted to for investment, if any?

A: As I'm sure many folks in the market have seen, there's a large race for everyone to try to find a way to reinvent themselves as an AI company. In general, where we play in the market, we're looking for more mature, larger businesses that are generating a meaningful amount of revenue without a too high of a burn amount. So a lot of the really early-stage companies are still too nascent and immature for us to make loans to, but it is something that we do look for larger businesses. Example in our portfolio is a company Interactions, which has been in for a few years, but we're definitely interested in AI. But again, we're not necessarily willing to go earlier stage than we typically look across the portfolio.

Q: I imagine for those larger, more mature AI companies you're referencing, there must be enormous demand to get those deals. Are the terms and are the risk adjusted returns you can get in that space interesting at all?

A: I would say that as with everything, there's a need to be opportunistic. But that being said, you're completely right that anytime there's a really hot sector out there, you're going to see folks chase those deals in terms of either economics or structure. And that's why as we look to stick to our netting, you don't necessarily see the most current hot sector come into the portfolio.

Q: It is, if I'm not mistaken, your second largest allocation. To what extent are the cuts at the NIH and the FDA impacting the sentiment and the deal flow that underlies the sort of slow pace that you referenced before?

A: 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 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, particularly a number of the names in the portfolio today, it's post approval businesses that are generating more meaningful types of revenue, which don't necessarily have that same regulatory slowdown risk than you might see for an early stage pre approval biotech or something like that.

Q: 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?

A: Two parts. What really drove the realized gain was the previous announced closing of the sale of Gynesonics. And if you'll recall in Gynesonics, we had two pieces, we had our loan. So there was the acceleration of some income associated with the loan. But the gain was really driven by the sale of the preferred stock interest. In terms of the depreciation in the balance of the portfolio, that's a function of the ongoing valuation process. And I would say as you look at that, about 50% of that is influenced by performance and 50% is influenced by market multiples. So I think there were a couple of big movers that accounted for the majority of that change.

Q: Your loan yield has had kind of quite a variance over the past couple quarters. Can you just talk about how you're thinking about what is a normalized level that you would think you would kind of achieve as you kind of spread out some of prepayment activity and as you think about that over kind of the next several quarters?

A: I think if you look at the variability in yields, there's been spikes at times when we have accelerated or above normal kind of level of prepayments. Going forward, we see fewer prepayments. The transactions are staying in the portfolio longer, which mitigates that spike, if you will, but it also reduces the amount of acceleration from accreted income, whether it's the end of term payment or the OID. So you have a little bit of a less of an impact from that perspective. So if you normalize that yield, I think you're going to you're in the right neighborhood in terms of what we would expect. Our SOFR spreads and our prime spreads are pretty stable and you throw on the end-of-term payments and OID and that generates the core yield.