Runway Growth Finance Corp. Q2 FY2024 earnings call

• Executed two investments in new portfolio companies in the second quarter, totaling $75.5 million in funded loans, including a $58.4 million senior secured term loan to Airship Group and a $17.1 million senior secured term loan to ONWARD Medical.
• Total investment income was $34.2 million and net investment income was $14.6 million in the quarter.
• Average portfolio risk rating increased to 2.47% in Q2.
• Focus on high-quality late-stage companies in technology, healthcare, and select consumer service and product industries.
• Market conditions: cautious investors, companies seeking debt for non-dilutive growth; venture-backed companies scrutinized for quality and path to profitability.
• Plan to thoughtfully accelerate origination growth, emphasizing credit quality and acyclical sectors.
• Repurchased shares under stock repurchase program, with a new $15 million repurchase program approved by the board.

In the second quarter of 2024, Runway Growth Finance delivered total investment income of $34.2 million and net investment income of $14.6 million. The average portfolio risk rating increased to 2.47% from 2.44% in the first quarter. The total investment portfolio had a fair value of approximately $1.06 billion, excluding treasury bills, an increase of 5% from the first quarter. The loan-to-value ratio increased from 25.8% to 27.3% sequentially. Principal repayments in the second quarter were $25.3 million, a decrease from $34.5 million in the first quarter. The debt portfolio generated a dollar weighted average annualized yield of 15.1% in Q2 compared to 17.4% in Q1 and 16.7% in the comparable prior year period. Revenue contribution details weren't explicitly broken down by product segments but focused on loan-related income.

• Expect prepayment activity to continue throughout the balance of the year, providing additional capital to deploy.
• Board approved a new stock repurchase program of $15 million.
• Anticipate elevated prepayment-related income in the near term, which will enable strategic redeployment of capital.
• Plan to be opportunistic in executing select transactions at more favorable terms as economic headwinds subside in preferred sectors.

• Uncertainties from market conditions caused by rising interest rates, changing economic conditions, and geopolitical tensions.
• Difficulty in predicting the exact timing of prepayments.
• Cautious investor environment leading to companies facing down rounds and liquidity constraints.

Q: Hoping you could give a little more detail behind the drop in yield on the portfolio this quarter.

A: Thanks Doug. The drop in yield really is a result primarily of a decrease in prepayment-related income. Spreads were reasonably steady. The portfolio yield remained -- the accounting yield was pretty steady. So it's largely a result of the one-time income.

Q: You've talked a lot about expecting higher repayment activity in the near term, and certainly appreciate the disclosure around CloudPay. It looks like that one might have come in just before a two-year mark since origination. Should we think about that one as having prepayment income associated with it?

A: There was some prepayment income associated with that. That's a loan and a borrower that we've had the pleasure of working with for a considerable period of time. So, it really relates to prepayments. There wasn't a tremendous amount of acceleration in accretion on the end-of-term payment. And the range of $200 million to $300 million includes the $75 million CloudPay number.

Q: I'm just wondering, I mean, you were pretty specific around the repayment activity. Obviously, we know that the origination activities, it's tough to get your arms around, especially a couple of quarters ahead of time. But is there anything that you can tell us about the origination environment so far in 3Q?

A: Yes, sure, Melissa. I would say there's probably five really important points to make, three kind of on the demand side and then two as it relates to the environment. And from a demand perspective, borrowers are more realistic about valuation, structure and terms. They've finally come to grips with the reality of the market. And they've really delayed raising as long as they can. And now, especially in the face of a potential economic downturn, they really do want to raise money, and equity remains scarce and expensive. So, there's a lot of demand for the capital that we provide. And from an environmental point of view, if you will, base rates are likely to decline and spreads hopefully will expand a bit. And as I said earlier, we're able to get more in terms of structure, like covenants, and a little bit better spread. And the other point is that these companies are actually borrowing less, so that they pay less, and they're looking for a lender that can grow with them. And we're almost always able to structure something that makes sense for both the borrower and Runway. Is that helpful?

Q: I want to maybe follow up on some of Melissa's questions or comments there. I think, David, you and Greg both talked about broadening the funnel out, whether it was last quarter or over the last couple of quarters. Can you help us or can you talk a little bit about that process? I assume there's some, pun intended here, there's a bit of a Runway in terms of that process. And how has it or has it yielded a better pipeline? And not necessarily quantify that for us, but maybe give us multiples of what you expect from a pipeline once those efforts really start to take hold?

A: So, it's a great question. And we're referring to the fact that we are simultaneously trying to achieve our overall origination goals with a more conservative lens and a more challenging backdrop, but we're also trying to add diversification to the portfolio. And our average commitment last quarter, and I think really over the last couple of quarters, is right around $40 million. And that's perfect to accomplish both of those goals, but it does mean we need to do more deals. So, we're busier. We're spending a lot more time filtering. And I think that's just the new reality that we have to get used to. But the one thing I can assure you is we're not doing any less thorough of an analysis or being any less thoughtful about how we structure and price the deals that get into the portfolio.

Q: Nice to see the repurchase activity. It sounds like most of that program has been used up, there's some opportunity for another one at some point if the Board authorizes one. Can you talk about your appetite for that, especially considering what could be either a much smaller credit facility outstanding or a big pile of cash with the repayment activity that's expected?

A: I'll answer that, Bryce. The Board did approve last week a $15 million share repurchase program. So, we have reloaded that bucket, if you will. And I think as we look at it, clearly, depending on where the stock trades, we're, we believe, investing in ourselves. At the same time, I think we have a bias to really return capital to investors through dividends and through building a portfolio that demonstrates significant core earnings power over time. We have a lot of capacity to use that $15 million right now, whether it's leverage or not. So, we'll just have to see what opportunities the market gives us on that, and we'll certainly be opportunistic in implementing that program.