Runway Growth Finance Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Runway Growth Finance Third Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alex Routh, Investor Relations.

Thank you, Operator. Good afternoon, everyone, and welcome to the Runway Growth Finance Conference Call for the Third Quarter of 2021. With us on the call today from Runway Growth Finance are David Sprang, Chairman, Chief Executive Officer, Chief Investment Officer and Founder, and Tom Raderman, Chief Financial Officer. Runway Growth Finance third quarter financial results were released just after today's market closed 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 at the Runway Growth Finance webpage or by using the telephone number and passcode provided in today's earnings release. During this call, I want to remind you that we may make forward-looking statements based on current expectations. The statements on this call 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-looking statements including and without limitation the uncertainty surrounding the COVID-19 pandemic and other factors we identified from time to time in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of these 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. 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. To obtain copies of SEC-related filings, please visit our website. And with that, I will turn the call over to David. David?

Thank you, Alex, and welcome to the Runway Growth Finance Third Quarter Earnings Conference Call. This is our first public forum since completing our IPO on October 25th. And I'd like to welcome our new shareholders, prospective investors, and future analysts to our inaugural earnings call. Today, I will provide an overview of Runway Growth's unique growth lending platform, some color on our debt investment portfolio, and an outlook for the VC market as a whole. Runway Growth Finance is an established direct origination platform focused on sponsored and non-sponsored senior secured first lean debt investments. We lend to late and growth stage businesses in technology, life sciences, healthcare, information and services, consumer, and other select high growth industries. During the third quarter, we deployed 101.3 million of new funding to six new and existing portfolio companies. In Q3, Runway Growth generated total investment income of 18.6 million and net investment income of 10.7 million, or 32 cents per share. Through our advisor, Runway Growth Capital, we have access to a diversified portfolio of dynamic, late, and growth stage assets. We are pleased that we've continued to diversify our portfolio across industries, geographies, and investor profile and drive prudent portfolio growth in the process. Before describing further our third quarter results and the megatrends propelling our expansion, I'm happy to offer some relevant background on myself and Runway. I started Runway Growth Capital after 25 years as a VC and growth debt lender. During this time, I was actively involved in the formation and development of 50 technology companies, which include 18 IPOs and 14 trade sales. Along the way, I'm honored to have been named to the Forbes Midas list for several years. Turning to runway growth finance, I formed the firm in 2015 based on the megatrend of providing capital and financing solutions that serve founders and companies as a complement or an alternative to equity. Since our inception, we've benefited from this trend and proved that debt is an appropriate component of the capitalization of late and growth stage companies as they look to secure the requisite capital needed to fund long-term strategy while avoiding dilution. Since runway growth inception, we've originated cumulative capital commitments of 1.2 billion across 50 investments while maintaining an industry-leading low loss ratio of just 19 basis points per year on a gross basis and 15 basis points per year on a net basis based on fundings. What's more is that we also benefit from equity upside through warrant coverage in the majority of our deals. These warrants serve as a risk mitigator against potential future losses and can provide a return on our investment at the time of a liquidity event, including an M&A transaction or IPO. Next, I'll provide an overview of our investment process which is credit-driven and focused on principal protection with optionality for equity upside. Our origination success has been made possible for three reasons. First, we bring deep sector knowledge and an ability to quickly understand the bespoke needs of businesses that are burning cash in order to achieve their next growth milestone. Second, we bring a thoughtfulness in terms of developing customized investment solutions that meet the borrower's needs while minimizing dilution. Third, but not least, is our credit discipline that matches company risk with loan risk in a dual-sided pricing matrix that allows us to optimize the terms we offer our portfolio companies and ensure a mutually beneficial partnership. One of the core differentiators of Runway growth from our venture debt peers is that we originate and underwrite both sponsored and non-sponsored transactions. While the non-sponsored deals are harder to source and more widely dispersed around the U.S., they often have more attractive terms and generate higher returns. The foundational element of our differentiated approach is rooted in our efficient and robust origination infrastructure. Our origination team is led by Mark Donnelly, Managing Director and Head of Originations, and Rob Lake, Managing Director and Head of Life Sciences. Mark brings deep experience and relationships with technology sponsors, and Rob adds significant underwriting and investment leadership in life sciences and healthcare information technology. All in, our senior investment team boasts an average of 23 years of experience. Until recently, we built Runway's reputation and current portfolio with a nimble origination team of three. As we enter this next phase in our growth strategy, it is important that we drive prudent investment portfolio expansion. To this end, we recently increased our origination team from three to six. Notably, this team brings world-class networks and relationships that are leading to strong sequential origination momentum. Looking forward, we will be strategic as we make additional investments in the team to support our growth, focusing on both geographic and industry tailwinds as we continue to expand our team. Looking at the venture capital market broadly, the industries we serve continue to grow and benefit from strong equity capital markets in the VC space. According to Crunchbase, total investment in global late stage and technology growth companies surpassed $104 billion in the third quarter. This represents a 69% year-on-year increase, mirroring the accelerated growth that the overall venture capital industry is experiencing. Additionally, we stand to benefit as many late stage companies approach exits. Over the last year, we have had three portfolio companies go public. one through an IPO and two through SPAC combinations. These include Brilliant Earth, a NASDAQ-listed digital-first ethically-sourced jewelry company, Ouster, an NYSE-listed LIDAR solutions company, and Porch, a NASDAQ-listed vertical software company innovating the home services industry. As we mentioned, these are the types of liquidity events that highlight the benefit we experience on the equity side as we exercise our warrant positions. These warrants are a part of nearly every loan we fund. Turning to our outlook, as of November, we maintain a strong pipeline of actionable investment opportunities, totaling 2.1 billion in total commitment value. These deals are in various stages of underwriting, and as a reminder, the deals in our actionable pipeline, should they convert, could take between three and nine months to close. To fund the significant opportunities we see ahead, we plan to thoughtfully deploy leverage to drive portfolio growth and higher ROEs to our shareholders. In October, we received an investment grade rating of BBB plus from Egan Jones. This is an important step when we seek to issue debt. As Tom will explain later in the call, our intention is to optimize our capital structure and prudently lever up to a target of 0.8 to 1.1 times and may seek long-term unsecured financing for this part of our capital needs. We believe issuing debt and establishing a benchmark for our cost of capital is important as we continue to execute our business plan. Conceptually, we believe this approach to using leverage will support our portfolio growth objectives and drive strong returns on equity for our shareholders. We are thrilled to enter the public market at such an exciting inflection point in the VC industry. We begin this next chapter as a public company with a solid five-year track record, decades of VC operational experience and relationships, and a differentiated direct lending platform. With that, I now turn it over to Tom.

Thank you, David. Appreciate everyone taking the time to review our financial results for the third quarter. During my prepared remarks, I will primarily focus my discussion on our third quarter results in the following key areas. Portfolio growth, operating performance, NAV and return performance, credit performance, and capital markets activity and liquidity. Let me begin with our portfolio growth. During the third quarter, we deployed 101.3 million across six new and existing portfolio companies each of which were sponsor-backed. Offsetting gross deployments was an aggregate of 104.7 million of proceeds received from principal repayments, including 3.5 million from normal amortization and 101.2 million from prepayments. As a result of our net funding and repayment activity, the portfolio held roughly flat from Q2. At quarter end, our total investment portfolio had a fair value of approximately $586.4 million compared to $587.6 million at the end of Q2. As David mentioned, we continue to see strong momentum in the venture capital space and are optimistic about our deployment and funding outlook. I'll now turn to our operating results. On a GAAP basis, We recorded total investment income of $18.6 million during the third quarter, comprised of approximately $18.2 million of interest income and other income of approximately $0.4 million. This represents an increase of $4.4 million, or 31%, compared to the prior year period, primarily related to the increased weighted average of our loan portfolio outstanding and higher fee income from prepayments. Income generated from prepayments increased by 685% or $3 million as compared to the prior year period. Our dollar weighted average annualized yield on debt investments was 15.3% as compared to 14.8% in Q3 2020. The increase was primarily driven by higher fee income received during the quarter. Turning to our expenses, For the third quarter of 2021, total expenses were $7.9 million compared to $4.7 million in the third quarter of 2020. Our performance-based incentive fee was $2.7 million, an increase of approximately $1 million from prior year periods based on higher interest income from prepayments generated in the third quarter of 2021. Our interest expense increased to $0.8 million, or two cents per share, from $0.4 million in last year's third quarter due to an increase in average borrowings. Our base management fee was $2.3 million up from $1.7 million in last year's third quarter due to an increase in the average size of the portfolio. During the quarter, we recognized approximately $0.7 million of realized gains largely driven by our investment in the common stock of Porch Group. We recorded net unrealized depreciation of $1.2 million, which was driven by mark-to-market adjustments to our warrant and equity portfolios. At the end of third quarter, Runway Growth Finance had net assets of $504 million, or $14.60 per share, increasing slightly from $478 million, or $14.61 per share, at the end of Q2. Our NAV per share declined slightly as we had an increase in shares outstanding during the period. Runway Growth Finance's consistently strong credit quality is a reflection of our initial underwriting and due diligence process, coupled with active management and monitoring of our investments to provide continued stability. We take an extremely disciplined approach to evaluating our investment portfolio and the quality of deals we source. This is demonstrated by our continued effort to improve our internal weighted average risk rating, which this quarter improved from 2.37 to 2.20. Note that a lower number reflects a higher credit quality rating. At the end of Q3 2021, there were two companies on non-accrual status with no new additions during the quarter. Switching now to liquidity, Our total liquidity as of September 30th, 2021 was approximately 135.9 million, including unrestricted cash and cash equivalents and a borrowing capacity of 135 million under our credit facility, subject to existing terms and conditions. End of period leverage was 16% and our asset coverage was 461%. Our leverage declined from 24% To end the second quarter, as in preparation for our initial public offering, we called $19 million of our remaining private investor capital commitments during the third quarter. On October 25th, we completed our IPO, raising net proceeds of approximately $94 million before expenses. In the short term, we used these proceeds to repay the balance outstanding under our revolving credit agreement, and we used the remaining proceeds to to fund new investments. Following deployment of the IPO proceeds, we will fund new investments with our revolving credit facility or other forms of debt financing. As David mentioned, our leverage target is between 0.8 and 1.1 times. Lastly, on October 28, 2021, our board declared a dividend distribution for the fourth quarter of 25 cents per share. Our board intends to declare a regular quarterly dividend going forward and stabilize the distribution based on the estimated earnings for a given quarter. I'll now turn the call back to David for closing remarks.

Thanks, Tom, and thank you all for joining us today. We could not be more excited to embark on this journey as a public company. This is only the beginning for runway growth. as we are well-positioned to capture industry tailwinds and execute on our long-term growth strategy as a differentiated growth lending platform. We hope you will join us on this journey. With that, we hope everyone is staying safe and healthy, and we look forward to updating you on the fourth quarter results in the new year. I will now turn the call back over to the operator.

And thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.