Runway Growth Finance Corp.

Ladies and gentlemen, thanks for standby and welcome to the Runway Growth Finance First Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Mary Frill, Assistant Vice President, Business Development and Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, everyone. and welcome to the Runway Growth Finance conference call for the first quarter ended March 31st, 2022. With us on the call today from Runway Growth Finance are David Spring, Chairman, Chief Executive Officer, Chief Investment Officer, and Founder, and Tom Raderman, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's first quarter 2022 financial results were released just after today's market closed and can be accessed from Runway Growth Finance's investor relation website at investors.runwaygrowth.com. We've 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 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-looking statements, including and without limitation, the uncertainty surrounding the COVID-19 pandemic and other factors we identify 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 the 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. With that, I will turn the call over to David.

Thank you, Mary, and thank you all for joining us today. I'm pleased to provide an update on our first quarter results and our outlook for the rest of the year. Runway growth had a tremendous start to 2022, making significant progress towards our business objectives in the first quarter against a backdrop of volatility in the equity capital markets. We continue to originate high-quality loans in a competitive growth lending environment, increase our investment portfolios already market-leading credit quality, and thoughtfully utilize leverage to drive portfolio growth and expand ROE for our shareholders. The value of the runway growth band is gaining even more traction in the marketplace as more companies fully understand our differentiated and durable model. We believe we have a unique opportunity to further position our venture lending products as an attractive and optimal capital solution for rapidly growing companies given the slowdown in equity capital markets activities in the first quarter and concerns surrounding inflation, increasing interest rates, and geopolitical uncertainties. During the first quarter, we completed seven investments in new and existing portfolio companies representing $135 million in new commitments, including $83.5 million in funded loans. We funded all investments in the first quarter with proceeds from our revolving credit facility as a part of our ongoing strategy to fund prudent portfolio growth with leverage. Notably, we doubled our core leverage ratio quarter over quarter to 26.1%. We've recorded record total and net investment income of $19.3 million and $12.5 million at the end of the first quarter, up 17% and 8.5% respectively from the prior year period. Net assets were $597.5 million at the end of the first quarter, up 26% from $473.5 million at the end of the first quarter of 2021. Runway Growth is a credit-first organization with what we believe to be the latest stage lowest risk portfolio among the public venture debt PDCs, with a weighted average loan-to-value at origination of 16.3%. In addition, at the end of 2021, approximately 90% of our underlying investments were well-protected first lien senior secured loans, which compares to an average of 72% first lien loans for the other public venture debt BDCs. Runway Growth is building a prudent platform with best-in-class underwriting rigor, and we believe our portfolio composition underscores that. Our credit quality continues to be very strong. And in the first quarter, our weighted average risk rating for the portfolio improved again, down to 1.98 from 2.04 in the fourth quarter. Our risk rating system is based on a scale of one to five, where one represents the most favorable credit rating. This is a testament to our investment strategy, focusing on recession resistant late stage companies, as well as our team's disciplined diligence in the underwriting process and active monitoring of our investments to prevent losses and keep strong companies in the portfolio. Runway is as committed as ever to our overall investment strategy and focus on the fast-growing sectors of the economy we know best, including life sciences, technology, and select consumer service and product industries. We were particularly pleased to originate two new loans in the life sciences sector in the first quarter to Mustang Bio and Revell Aesthetics. Life sciences has been an integral part of our strategy from the beginning. Personally, I have a long history in life science investing. I was chairman of a publicly traded biotech company and helped found a medical device incubator with Medtronic. Runway made its first life sciences investments in 2018 when we financed CareCloud, Mingle Health, and Mobius Imaging. one of which is a healthcare IT company, one is a healthcare services company, and one is a medical device company. We continue to capitalize on strong Originations activity in the life sciences space through our deep bench, industry knowledge, extensive network, and unparalleled reputation. Runway growth has strategically grown our Originations team to enhance prudent portfolio growth, and our strategy remains the same going forward. A reminder that we source our investments across three distinct lending verticals. First, late and growth-stage VC-sponsored companies sinking an alternative or complement to equity to minimize dilution. Second, non-sponsored companies, which take more time to source but generally provide more favorable terms and conditions for the lender. And third, PE-backed companies with great potential but insufficient cash flow or assets to support loans from their traditional lending sources. We introduced the latter on our last call, and while we did not originate new loans to PE-backed companies in the first quarter, we remain excited about this new vertical. PE-backed companies are increasingly looking to flexible loan options to fund capital-efficient growth, and Runway can help structure the right loans to help to provide growth capital to get to the next level of operational success. In terms of what we're seeing in the market overall, the contraction of multiples in the public equity markets is impacting liquidity and terms for late-stage venture rounds, while having little material impact for us on loan-to-value and portfolio valuation. In the first quarter, as our dollar-weighted average portfolio enterprise value declined by 5.8 percent, our strong dollar-weighted loan-to-value was up only 3.9 percent. Remember that our valuation is based on our methods, not the value assigned by VCs in the last round. From a spread perspective, we continue to see a stable environment attributed to our focus on late and growth stage companies with sound fundamentals. Runway has proven risk mitigation methods that have provided consistent and attractive returns for shareholders during the previous times of stress. most recently during the COVID-related market volatility of 2020, and we are confident in our ability to execute against macroeconomic headwinds. I'd like to spend a moment on our outlook for 2022 before passing it to Tom to review our financial results. We believe the current market environment is set to benefit runway growth. According to PitchBook, U.S. venture-backed companies attracted $71 billion in financing in the first quarter indicating a slight downturn from the record levels seen in 2021, yet still well above 2020 activity. With funding starting to pull back, we're also seeing more conservative views when it comes to VC equity valuations. Every day we hear feedback from late-stage companies that they are being compared to public market valuations, making equity financing options much less attractive. Runway is strategically positioned to benefit from the decline in VC equity valuations as more late-stage companies turn to the private markets for the crucial capital needed to fund their next phase of growth. We want to reiterate our view that in the rising rate environment, debt remains cheaper than equity, and we believe that the cost differential between debt and equity capital will be further magnified going forward. Runway Growth is prepared to capitalize on these tailwinds and will continue to focus on driving value for our shareholders. I'll now turn it over to Tom.

Thanks, David, and good afternoon, everyone. Runway Growth completed seven investments in new and existing portfolio companies in the first quarter, which is traditionally a slower quarter, representing $135 million in new commitments, which resulted in $83.5 million in funded loans. As David mentioned earlier, each investment was funded with proceeds from our revolving credit facility as part of our ongoing strategy to fund prudent portfolio growth with leverage. Runway's weighted average portfolio rating further improved for a second consecutive quarter to 1.98 in the first quarter as compared to 2.04 in the fourth quarter of 2021 from 2.20 in the third quarter of 2021. As of March 31st, 2022, we had one portfolio company on non-accrual status. At the end of the first quarter, our total investment portfolio, excluding U.S. Treasury bills, had a fair value of approximately $754.3 million compared to $684.5 million at the end of 2021 and $590.1 million at the end of the first quarter of 2021, representing increases of approximately 10 percent and 28 percent respectively. As of March 31st, 2022, runway growth had net assets of 597.5 million, decreasing slightly from 606.2 million at the end of the fourth quarter. NAV per share was $14.45 at the end of the first quarter, compared to $14.65 at the end of the fourth quarter, 2021. The majority of the decline in NAV per share was the result of the decline in valuations of our public equity portfolio. In the first quarter, we received 8.4 million in prepayments inclusive of interest, fees, and proceeds from the exercise and sale of warrants, which compares to 94.1 million in the fourth quarter of 2021. The slower pace of prepayments resulted from increasing credit spreads in the bank market, volatility in both public and private equity markets, which slowed potential refinancings and slowed M&A markets. We do have a number of portfolio companies that are evaluating an M&A process and could see a number of deals completed in coming quarters. In the first quarter, we generated total investment income of 19.3 million and net investment income of 12.5 million, compared to 16.4 million and 11.5 million in the first quarter of 2021, driven by an increase in the size of our portfolio of 164.1 million, or approximately 28%. Our debt portfolio generated a dollar weighted average annualized yield of 12.2% for the first quarter 2022 as compared to 13.5% for the first quarter 2021. Moving to our expenses, for the first quarter, total operating expenses were 6.8 million, increasing from 4.9 million for the first quarter of 2021, driven by an increase in debt financing fees due to our increased leverage and fees incurred pertaining to amendments of our credit facility that has resulted in more favorable terms. Our performance-based incentive fee was 1.3 million for the first quarter, compared to 1.0 million for the first quarter of 2021. Our base management fee was 2.6 million up from 2.1 million in the first quarter of 2021 due to the increase in average size of our portfolio. Runway had a realized loss of 0.4 million for the first quarter, which compares to a realized loss of 0.2 million for the first quarter of 2021. We recorded net unrealized depreciation of 9.2 million in the first quarter, which was the result of the decline in value of our equity portfolio driven primarily by two public holdings. Turning to our liquidity, Our total available liquidity as of March 31, 2022 was 132.5 million including unrestricted cash and cash equivalents and a borrowing capacity of 129 million under our credit facility subject to existing terms and conditions. This compares to 158.7 million and 154 million respectively at December 31, 2021. Weighted average interest expense was 3.9% at the end of the first quarter, increasing from 3.8% for the fourth quarter 2021. End of period leverage was 26.1% and asset coverage was 483% as compared to 13.4% and 582% at the end of fourth quarter 2021 respectively. As mentioned earlier, all investments in the first quarter were funded with proceeds from our revolving credit facility as part of our ongoing strategy to fund prudent portfolio growth with leverage. Subsequent to quarter end, we amended our credit facility with KeyBank to extend the maturity and increase the current size of the credit facility to $225 million and the accordion provision to $500 million. We anticipate reaching our core leverage target for the portfolio, which is between 0.8 and 1.1 times, by the fourth quarter of this year or the first quarter of 2023. Before considering prepayments, we have the ability to grow our portfolio by approximately $500 million without exceeding our core leverage targets and returning to the equity markets. A quick note on interest rate sensitivity. Our loan portfolio is comprised of nearly 100% floating rate assets and will benefit from increasing interest rates as levels continue to move beyond our contractual interest rate floors. Slide 20 of our investor deck provides a look at our earnings as rates increase. As mentioned on our fourth quarter call in early March, our board of directors approved a stock repurchase program in late February to acquire up to 25 million of Runway Growth's common stock. The program expires on February 23, 2023. Management and the Board wanted to have a program in place to strategically buy back shares as the company sees fit based on the market dynamics underpinning our overarching goal of creating long-term shareholder value. Finally, on April 28, 2022, our board declared a dividend distribution for the second quarter of 2022 of $0.30 per share, an 11% increase from our first quarter dividend of $0.27 per share and second consecutive quarter increase in our dividend as a public company. We expect that with continued portfolio growth driven by increased leverage, we will be able to continue to expand the dividend in coming quarters. This concludes our prepared remarks. We'll now open the line for questions. Operator?

Ladies and gentlemen, if you have a question at this time, please press the star 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ken Ocean with Wells Fargo. Please go ahead.

Hi, everyone. I think that's me. First question on the credit profile. I think a name came off, not a cruel, correct me if I'm wrong. You still had some portfolio and maybe headwinds, however. So seeing if you could break down how much idiosyncratic this was versus market or in base rate or multiple market based?

Yeah, absolutely. So, this is David. I'll make a first comment on the specific company and then turn it over to Tom. So, the company that went off accrual as of 1-1-22 is Mojex. And for us, it's a really positive story. We're super fortunate that we've had very, very few credit situations. Because of our focus on very late stage, less risky companies and our underwriting discipline and our portfolio monitoring. But Mojex is a company that went on non-accrual, stayed there for a while. We worked very closely and I would say patiently and productively with the equity sponsors to find a solution. And very happy to say today, like hours ago, we received a wire for full return of principal and interest. So went off of non-accrual in January and was repaid in full today. So it's a great example of our, I would guess, skills in working with the rare event of a trouble. Let me turn it over to Tom to talk about financial stuff.

Yeah, Finn, the change in NAV from 1465 to 1445 was really driven, about 17 cents of that was driven by change in the public equity holdings, primarily the value of our holding in Brilliant Earth and in CareCloud.

Okay, that's helpful. Thank you. Just a follow-up, David, you gave some high-level color on how the market is behaving given the events that have been more intense post-quarter. But a question, sorry if I missed it, is how does this impact your outlook or ambitions for reaching target leverage? When do you think the... that milestone would be reached, you know, now versus where you thought it would last quarter?

Yeah, so it's a great question. I think we have a more pessimistic view on what's happening in the venture equity markets than a lot of people. And, you know, we're in the trenches seeing late stage venture backed companies struggling to to achieve the valuations that they hope for. As a result, equity is more expensive than it has been and makes our value prop even better. And so our funnel has never been better. So we're very optimistic about our ability to continue to originate very strong loans to an even higher quality of company and continue our focus on, you know, really late stage, lower risk companies in the industry sectors that we know well. and then continue to underwrite and monitor and manage those in a way to continue our success as having the lowest credit losses in the industry. So in terms of timing, we see nothing really has changed, but we are, I think, less optimistic than a lot of people in terms of their view on the venture equity side of things.

Great. That's all for me. Thanks so much.

Thank you.

Thank you. Your next question comes from the line of Brock Vanderbleet with UBS. Please go ahead.

Hey, good afternoon. Hopefully you can hear me. I'm on the road traveling. How would you say this location compares to 2000? How does this rate so far on the Richter scale?

Yeah, it's nowhere near as severe as 2000, Brock. I mean, you know, in 2000, you saw, I mean, 95% of the public market value wiped out in certain sectors, you know, including internet companies and telecom companies. And, you know, we're not seeing that, you know, and that's from a public perspective. On the private side, you know, the companies are much more real. You know, in the late 90s and 2000, there were a lot of just concepts that were getting funded and were built on a house of cards, really, where it required hundreds of millions of dollars of capital to achieve the plan. And when liquidity dried up, those died. We're not seeing that today. So I don't think this correction or reset or whatever you want to call it is anywhere near that severe. But it is going to, you know, force VCs to consider where they put their money. And we're already seeing them coaching their companies to extend their runway and to look at ways to add capital to their balance sheets or whether that be through equity or through debt. And in almost any environment, the best companies are going to be able to raise money. But for the next year and below, it's becoming increasingly a challenge. And I think you'll see that at all layers of the cake, from limited partners on down, from institutional investors that are suffering from a denominator effect to the Let's say there's 2,900 venture firms out there and 100 of them can raise money anytime they want. So that's a whole lot, 2,800 VCs that are figuring out where they're going to get their next fund. So they're being a little more thoughtful about how they dole that out. So all across the ecosystem, you're seeing folks being just much more thoughtful about how they invest. But answer your question, Brock, it's nothing new. like 2000, 2001. Yes.

Got it. Okay. And just as a follow-up, you mentioned the tick-up in LTV. It's not surprising. Do you have any sense of the variability of that or obviously the upside that we can see in that metric over time? How should we think about that?

Yeah, so the change in LTV we reported was a 3.9% increase in LTV against a decline of 5.8% in total enterprise value. And that means that the median public peer group for the comps is down. And so there'll be some volatility in that. The reason that the LTV change is less than the decline in the enterprise value is because these companies are still continuing to grow. So there's a mitigating factor there, while on one hand, The multiple is going down. On the other hand, the companies are still performing very well, and we would expect that to continue just because of the quality of the companies that we lend to.

Got it. Thanks for the call.

Thanks, Brock. Once again, if you would like to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Again, that's star one to ask a question. Your next question comes from the line at Mickey Schlein with Leidenberg. Please go ahead.

Yes, good morning. I'm sorry, good afternoon, David and Tom. Just one question from me. When we look at the forward LIBOR and SOFR's curves, as steep as they are, nominal rates on debt and debt liabilities for portfolio companies could go up fairly sharply over the near term. And I'd like to hear or understand how much of that increase do you think private lenders like Runway will keep versus some spread compression to help support borrowers through these volatile times?

Yeah, so I guess I would say on the existing portfolio, you know, we've worked very hard to create a weatherproof portfolio, something that's very much recession resistant, and we're constantly looking at the ability of the portfolio to deal with things like increasing interest rates or wage inflation. And we're looking all the time at fixed versus variable costs and how companies can reduce their burn if they have to based on different economic scenarios. In terms of spread compression, We're certainly not seeing that yet. If rates go up several hundred basis points, you know people are going to be asking for it. But a couple of years ago, rates were where we're forecasting to go. So we think we're going to be able to pass those through. You may see situations where you know, people negotiate a little bit of a tighter spread, but a bigger back-end fee or bigger warrants. And we're certainly open to discussing that. But our number one criteria is credit quality. And, you know, if we end up, you know, giving somebody a 25 basis point better rate and get a a back-end fee that makes up for it so that our overall return is the same, but we decrease risk in the process. You know, that's something we're open to. But so far, we've not seen it.

Thank you, David. That's helpful. That's all from me this afternoon. Thanks, Mickey.

Thank you. Your next question comes from the line of Melissa Weddle with J.P. Morgan. Please go ahead.

Good afternoon. Appreciate you taking my questions today. I'm curious to hear you talk about the health portfolio companies in terms of their ability to sort of weather the impact of higher inflation. And, you know, what are you seeing in terms of cash burn rates and other sort of KPIs that you think are relevant to your portfolio?

Okay. Yeah. Thanks, Melissa. That's a great question. And as I said, it's something that we spend a lot of time thinking about both for the existing portfolio and for new investments. We're fortunate that Most of our companies don't have big cost of goods sold, but certainly we, just like pretty much the rest of the economy, see wage inflation. It's certainly not new to Silicon Valley. That's been a fact of life for a long time. We've done some work, which I think Tom can talk about in terms of the impact that that is having on our portfolio and how it may play out. But we feel really good about where we are positioned today with a strategy that starts with recession-proof industries and then ends up with a weather-proof portfolio. And maybe, Tom, if you want to comment on that.

The key is really starting with a very low loan-to-value so that the debt portion of these borrower's capital structure is really quite small. We're at 16%-ish at the time of origination. But when we look at the percent of interest as a percent of the total cash burn, we are definitely in our weighted average was about 10, 11% in terms of the total burn. So the interest is a small component and it's also You know, the cash burn as a multiple of revenue is less than one time. And, you know, it's the interest expense is a percent of the cash balance is probably on average less than a third. So these borrowers are in pretty good shape going into it. And I think from an overall inflation standpoint, we look at them not just from the expense perspective, but we look at them from a revenue perspective. So this is done up front during the underwriting process. And so it's tearing apart that revenue and that product to make sure that it truly is mission critical and it can withstand potentially passing on price increases. And that's across the life sciences portfolio and in our tech portfolio, where oftentimes these are mission-critical, enterprise-level software companies that you just can't bump out and say, oh, I'm going to put that at the bottom of the pile when it comes to renewals because our expenses have already increased.

That makes sense. Separate question. The exits and repayments were quite low this quarter. I'm just wondering if I know those vary quite dramatically from quarter to quarter, but are you expecting any sort of maybe a little bit of a catch-up period on that over the next few quarters just to normalize off of what was a very low level in 1Q?

Yeah, absolutely. And it's a great question. And as we always say, and as you alluded to, and you know well, it's very difficult to predict prepayments. But I think we see certainly more than we had in Q1 coming over the subsequent quarters. It's difficult to predict exactly. But we have a number of extremely strong companies in our portfolio that could refinance us or could be acquired. And that's the kind of thing that's hard to predict. But I do think that you're right in assuming that it'll probably go up from here.

Okay. And one last question, if I could. With the issuance of the unsecured, Can you remind us how you think about sort of ideal funding split between a revolver or similar facility and unsecure? Thank you.

Yeah. Well, the $70 million unsecure note offering was our inaugural unsecure note offering, and we used the 482 market, and we were pleased. We went out for $50, and we were able to accept offers for $70 million. of notes. We wish it would have been 170 million in retrospect, but that's not where the market was. But so we will go out for more unsecured paper at some point during this year. One, to extend our maturities. Two, to increase that fixed rate component. And three, because at least as it stands today, we do have a limit of 80% secured financing. So we'll use a combination of fixed and floating rate and we'll be very opportunistic about when we do it. We have now an effective N2, the generic BDC shelf, so we can really access any market for unsecured. We could do registered, unregistered. We could do $25 par, $1,000 par. So we're going to be opportunistic about it. But today, with the amendments to the revolver, it's the cheapest source of funding. But I would think over time, we would want to get to a mix of about 50% unsecured and 50% secured.

Great. Thank you so much.

Thanks, Melissa. Thank you. Once again, if you would like to ask a question, please press the star 1 on your telephone keypad and wait for your name to be announced. Again, that's star 1 to ask a question. And I'm showing no further question at this time. I will now turn the call back over to our CEO, Mr. David Sprang, for closing remarks.

Thank you, operator, and thank you all for joining us today and for your support of runway growth. We hope everyone stays safe and healthy and look forward to updating you on our second quarter results in August.

And this concludes today's conference call. Thank you for participating. You may now disconnect.