Runway Growth Finance Corp. - 7 Q2 FY2025 earnings call

• David Spreng discussed second quarter financial highlights, first half operational reflection, and outlook for the remainder of 2025. - Greg Greifeld shared progress in optimizing the portfolio, details on the venture debt market, credit quality, and market outlook. - Tom Raterman shared financial results, including investment income, expenses, net realized loss on investments, portfolio management, net assets, leverage ratio, asset coverage, liquidity, stock repurchase program, and distributions. - In second quarter, executed on 3 investments in new and existing portfolio companies across technology, health care and select consumer sectors, representing $37.8 million in funded loans. Subsequent to quarter end, announced new co-investments and investments in DigiCert, Inc. - Integration within the BC Partners ecosystem is benefiting Runway with broadened origination channels and expanded financing solutions. - Focus on driving shareholder value through enhanced positioning as part of the BC Partners credit platform, with strategic imperatives to optimize portfolio, expand financing solutions, and maximize existing commitments.

In the second quarter of 2025, Runway delivered total investment income of $35.1 million and net investment income of $13.9 million. The debt portfolio generated a dollar weighted average annualized yield of 15.4% for the quarter. Total investment portfolio had a fair value of $1.02 billion, an increase of 2.1% from $1 billion in the first quarter. Net assets were $498.9 million as of June 30, 2025, decreasing from $503.3 million at the end of the first quarter. NAV per share was $13.66 at the end of the second quarter, an increase of 1.3% compared to $13.48 at the end of the first quarter. The weighted average portfolio risk rating remained at 2.33. Loan-to-value ratio increased slightly from 29.0% to 29.8%. The loan portfolio is comprised of 97% floating rate assets. Unfunded commitments were $164.9 million as of June 30, 2025, with $135.5 million to provide debt financing to portfolio companies and $29.4 million to provide equity financing to the JV with Cadma. Approximately $35.7 million of unfunded debt commitments are eligible to be drawn based on achieved milestones.

• Management is pleased with the pipeline and remains hyper focused on providing superior risk-adjusted returns for shareholders. - Anticipate elevated level of repayments in Q3 that will benefit NII for the quarter, with plan to originate additional opportunities to replace anticipated repayments. - The dividend is set at $0.33 base and $0.03 supplemental for the third quarter. - The share repurchase program is executed through a 10b5-1, using it more aggressively at a higher discount to NAV and less aggressively when the discount diminishes. - Expect the benefits of portfolio optimization and origination side to bring additional growth into the portfolio in coming quarters.

• Market conditions caused by uncertainties surrounding interest rates, changing economic conditions and other factors identified in SEC filings could cause actual results to differ materially from forward-looking statements. - Exits halted in the aftermath of tariff announcements during the second quarter, with companies focusing on preserving optionality to safeguard against macro turbulence. - Constrained equity allocations in the BDC sector and venture debt market. - Potential for PIK usage in the portfolio, which could be influenced by borrower situations and market conditions. - Uncertainty around the drawdown of unfunded commitments based on economic environment and company performance.

Q: Nonaccruals have been pretty low. But I noticed that PIK as a percent of the total investment income has been increasing over the last several quarters. I just wanted to know like how much of that is sort of like force PIK versus perhaps like just companies using that optionality. I think earlier, you sort of mentioned that companies are sort of preparing for like possible like downturn or difficult situation. So I just want to see how much of that might be just related to optionality versus being forced into PIK.

A: Greg Greifeld said the PIK is used for offensive and defensive reasons. It's used to help get ahead of an issue a borrower might have from a short-term cash flow perspective and to help win transactions. Thomas B. Raterman echoed that it's a tool in the toolkit to keep best loans in portfolio or win new deals and is used judiciously.

Q: And just in regards to the share repurchase. Just wondering like how do you think that your repurchase program might play out from here going forward over the next few quarters? Do you plan on being more aggressive with it? Or is it sort of just like programmatic depending on where the stock price is at?

A: Thomas B. Raterman said when establishing the execution plan for the share repurchase program, it's done through a 10b5-1 with a rubric based on where the stock trades as a percent of NAV. They use it more aggressively at a higher discount to NAV because it's more accretive and less aggressively when the discount diminishes.

Q: I wanted to touch on some of the refinancing that was done and changes to the facilities during the quarter. I apologize if I missed it. Were there any sort of onetime costs associated with that, that we should be aware of?

A: Greg Greifeld said in Q2, about $0.04 a share was related to increased interest expense. About $0.015 of that $0.04 was onetime costs associated with the acceleration of the deferred financing costs on the existing secured notes. And about $0.025 is an ongoing increase to interest expense related to taking out 4.25% notes with 7-plus percent notes.

Q: I wanted to also go back to your comment about $35 million of unfunded commitments that are eligible to be drawn based on certain milestones that have been achieved. I'm sure this varies over time, but in an environment like this one, how much of that $35 million might you expect to be drawn down? And how quickly might that happen?

A: Greg Greifeld said it depends on the economic environment, but historically it's probably about 50-50. Thomas B. Raterman added to highlight the quality of the credits in the book and the good percentage of companies eligible to draw based on milestones.

Q: You mentioned a few post quarter end deals that have been announced previously, and then I think you added some today. In terms of repayment activity, is there anything that you have line of sight on that we should be aware of for 3Q?

A: Greg Greifeld said they believe they've got line of sight into a slightly elevated level of repayments in Q3 that will benefit NII for the quarter. The benefit next quarter will offset the negative recurring impact of increased interest expense. In subsequent quarters, they'll work to originate additional opportunities and replace anticipated repayments.

Q: First of all, I'd like to state how much I'm sure shareholders appreciate the depth of the share repurchase program. That was great to see. I know you guys got locked out of the market in the first quarter. In reference to the new originations, were any particularly to the 2 new portfolio companies, were either of those larger deals that you shared with the BC platform? Or did you take all of those? Because I know that part of the intent of the merging with the BC platform was the ability to do larger loans and cut them up.

A: Thomas B. Raterman said the 2 deals announced last quarter were done exclusively in the BDC. The 2 deals announced as subsequent events were portions of larger deals run by BC. They are actively keyed into BC's pipeline and get appropriate allocations of deals that fit the RWA vehicle mandate.

Q: When I look at Page 7 of the presentation, it looks like first half deal flow this year implies a very strong year if we were just to annualize it. But in your prepared remarks, you sounded pretty cautious. Could you help reconcile that for us?

A: Thomas B. Raterman said the environment is a mixed bag. They highlight quality more than anything else. A deal like Swing is on the smaller size relative to the overall portfolio and helps with diversification. Another point is diversification is a big theme in investment outlook, with a deal like Swing allowing growth exposure as the company grows.

Q: If I could follow up, is AI also skewing the numbers that we're looking at in that PitchBook data in the sense that there might be some very large AI deals in there that make it look stronger than it actually is.

A: Thomas B. Raterman said AI is a sector they evaluate, but typically play in the latest stage of the venture and growth market, so those opportunities might be a couple of years away from being a meaningful part of the book.

Q: My last question relates to the consumer sector. Obviously, the consumer, at least parts of the consumer segment in the U.S. has been pretty challenged this year. And 20% of your portfolio is in that sector. I think it would be a good time to remind us how you approach making investments in that sector, which help reduce its inherent risk and cyclicality?

A: Thomas B. Raterman said they focus on 3 main sectors: technology, broadly health care, and consumer. As macro environments shift, the allocation between sectors shifts. They target consumer companies with $100 million-plus revenue, proven track record, and less tolerance for burn or path to profitability than in technology. So they're not trying to expand consumer position in this market currently but it could change.

Q: Can you just provide an update on the Cadma JV, if there's been any new developments there in the last 3 months or so?

A: Greg Greifeld said the Cadma JV is in place, ramping up, with additional transactions expected between now and the end of the year. It's a good relationship but they're judicious in underwriting approach, so it will take a few additional quarters to see ROE benefits.

Q: And with regard to the new products that you're offering now, just curious if you could provide any detail into which ones are receiving positive market reaction and the ones that you have had some originations on so far?

A: Thomas B. Raterman said all products rolled out are well received. They've done a structured second lien and a revolver. Part of the product expansion benefit from being part of the broader BC Partners platform, with more points of call on relationships and companies.

Q: And last one for me, just as I've listened to some commentary for some middle market BDCs over the past week, we're hearing that M&A is coming back and starting to see some activity there. Your comments earlier indicated that you're not really expecting an increase here in the venture market here in the second half of '25. Yes. So just kind of curious from your seat, from your perspective, why maybe it's a little bit slower to for M&A to pick up here in the venture market.

A: Thomas B. Raterman said over the past 2 or 3 years, venture cycle slowed, equity less free flowing, companies had to survive and cut burn. Now they're seeing green shoots, boards see reinvigoration for organic growth and higher exit value. Also, IPO market success doesn't typically lead to deleveraging for these growth stage businesses, and if IPO window remains open, there's opportunity to tack on debt raises in combination with IPOs.

Q: As a quick follow-up on that last question, it seems that there's been a couple of successive quarters of net portfolio contraction, at least at cost. And you guys mentioned some elevated repayments post quarter end. Are you looking at the first half of 2026 as the potential time for a turnaround for larger growth targets?

A: Greg Greifeld said it will take a little time, outlook is generally brighter for 2026 than the second half of 2025. It's about portfolio optimization, rightsizing the bite size for the BDC, introducing new products, diversifying with products, and using dry powder judiciously. They expect the pipeline to increase over the next several quarters. Thomas B. Raterman added they're comfortable where they are, with pipeline and able to cover the base dividend, not pressured to return to growth too quickly.