Runway Growth Finance Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Runway Growth Finance Third Quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Quinlan Abell, Assistant Vice President Investor Relations. Please go ahead.

Thank you, operator. Good evening, everyone, and welcome to the Runway Growth Finance conference call for the third quarter and in September 30th, 2024. Joining us on the call today from Runway Growth Finance are David Sprang, Chairman, President and Chief Executive Officer, Greg Greifeld, Managing Director, Deputy Chief Investment Officer and Head of Credit of Runway Growth Capital, and Tom Raderman, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's Third Quarter 2024 financial results were released just after today's market closed and can be accessed from Runway Growth Finance's Investor Relations website at .runwaygrowth.com. We have arranged for a replay of the call to be available on the Runway Growth Finance webpage. 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, market conditions caused by uncertainty surrounding interest rates, changing economic conditions, and other factors we identified in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those 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, Quinlan, and thanks everyone for joining us this evening. Tonight, we want to detail our third quarter financial results and share more about the recently announced combination between Runway Growth Capital, the investment advisor to Runway Growth Finance, and BC Partners. We believe this transaction is set to position Runway Growth Finance to deliver consistent, steady returns to stockholders. Additionally, on tonight's call, we plan to offer an overview of the investment environment and discuss our outlook heading into 2025. We are pleased with our steady execution in 2.3, which demonstrates the underlying strength of our BDC. We executed on attractive investments with new and existing portfolio companies. We completed two investments with new companies, four investments with existing companies, and one investment with the joint venture, representing 75.3 million in funded loans. Additionally, Runway delivered total investment income of 36.7 million and net investment income of 15.9 million or 41 cents per share, which covered our base dividend for the quarter. Subsequent to quarter end, Runway Growth Capital, our investment advisor, entered into a definitive agreement to be acquired by BC Partners Credit as a long-term strategic investment. BC Partners Credit is the $8 billion credit arm of BC Partners, an alternative investment firm with over 40 billion in assets under management. Following the transaction, Runway Growth Capital will continue to operate independently and remain the investment advisor to Runway Growth Finance. The current leadership and investment teams will remain in place. We believe our investors and borrowers alike will benefit from Runway Growth Capital's joining BC Partners industry leading platform due to our combined scale, resources, expertise, and network. Further, we anticipate this will enable us to accelerate originations in our ideal transaction size. We believe that the combination will enhance our capabilities by introducing structured equity preferred investment, asset-based lending, and the ability to operate in new strategies such as equipment leasing. It is also set to strengthen our sponsor relationships through fund finance and other fund level offerings. We expect both the wider funnel and additional solutions to help our team further diversify our portfolio across both financing products and size of investments. For our shareholders, this translates to more access and exposure to a broader range of investment opportunities designed to enhance value and the potential for attractive risk adjusted returns. To reiterate, this transaction positions the current leadership of Runway Growth Capital and Runway Growth Finance to execute its long-term vision. We believe it will enable us to strengthen our existing strategy of lending to high quality late and growth stage companies. For the last several quarters, we've made it clear that we are focused on re-accelerating our portfolio expansion with selectivity and prudence, and this focus manifested in several ways throughout the year. Namely, we have established an operational infrastructure that positions Runway for the opportunities that we believe to be ahead. Through both our joint venture and our proposed transaction with BC Partners, we have meaningfully expanded origination channels, investment solutions, and potential growth strategies for both the advisor and the BDC. This has all been done while consistently driving originations and executing attractive investments that augment our portfolio. As we have said before, these efforts will not necessarily result in linear portfolio expansion quarter to quarter, but we are confident that we are positioning our portfolio and stockholders for long-term returns. With that, I'll turn it over to Greg.

Thanks, David. I will offer a market overview, discuss the performance of our portfolio, and then home in on the venture ecosystem. While still in the early innings of its taper, we believe the Federal Reserve's recent rate cuts are an encouraging sign to borrowers across the BDC's landscape, who are often subject to floating rate loans. This does not change our approach to investments, and we believe potential rate cuts over the quarters to come will only benefit our pipeline and ability to execute on loans to high-quality companies with sound fundamentals. As we enter this dynamic rate environment, we will continue to maintain our disciplined underwriting standards. That said, as borrowers experience improved conditions, we will follow through on our strategy to be opportunistic with deployment as we focus on diversifying our portfolio. As some of our large share deals refinance, we will replace them with smaller loans. We are confident in our ability to execute on that objective, and in the third quarter, we were pleased to fund seven investments in high-growth potential software and business processing technology companies, which included investments to two new companies. Our new investments during the quarter included the completion of a $23 million senior secure term loan to Snap Mobile, and we partnered with Vista Credit on a senior secure term loan to Vizinia. Our portion of the financing was $45.3 million. Snap provides a software platform designed to help schools and organizations fundraise, manage their rosters, and sell merchandise. Vizinia provides business processing and technology solutions to the life insurance and annuity industry. These companies exemplify the high-performing technology industries within our late-stage senior weighted loan portfolio. Our joint venture purchased a portion of our airship loan, resulting in a $5 million equity investment in the JV subsidiary. We believe we are making steady progress on expanding and diversifying our portfolio, and we expect to meaningfully add new investments to the portfolio over the coming months and quarters as our loans mature. Lastly, I want to touch on credit quality. Our weighted average portfolio risk rating remains stable at 2.48 in the third quarter, compared to 2.47 in the second quarter of 2024. We continue to proactively monitor our portfolio for potential issues that may arise regardless of market conditions, and we uphold our commitment to supporting borrowers throughout the entire lifetime of a loan. Further, we believe that our focus on originating investments at the top of the capital stack, while avoiding situations with significant downstream financing risk and junior capital at play, reduces our risk of exposure to the volatility often associated with investing in earlier-stage companies. Now, I'd like to take a moment to focus on U.S. venture equity deal activity during the third quarter, which continue to experience high deal counts contrasted with low deal value to ongoing liquidity constraints. According to recent pitch book data, late-stage deal value is 53% lower than it was at the peak levels in 2021. As noted previously, companies at the later stages of venture have been the most apt to lengthen runway and the most cautious to stay out of the markets to spend further dilution. Despite the Fed's recent rate cuts, many late and growth-stage companies continue to face fundraising pressure and liquidity constraints in the third quarter, as the economy grapples with some uncertainty associated with the U.S. election cycle.

We

anticipate the market for borrowers would gradually improve over the coming quarters and will benefit our strong pipeline. Further, our ability to capitalize on attractive new opportunities in the dynamic environment that shaped 2024 is a testament to our deep sector relationships, along with our targeted outreach and marketing efforts. We expect that continued rate cuts, combined with Runway Growth Capital's pending transaction with BC Partners, will serve as tailwinds for the company as we focus on amplifying our reach and the breadth of our investments moving forward. With that, I will now turn it over to Tom to dive deeper into our financials.

Thank you, Greg, and good evening, everyone. During the third quarter of 2024, Runway continued to expand deal flow, completing two investments in new companies and five investments in existing companies, representing 75.3 million in funded loans. As Greg mentioned, our weighted average portfolio risk rating remains stable at 2.48 in the third quarter, compared to 2.47 in the second quarter of 2024. Our rating system is based on a scale of one to five, where one represents the most favorable credit rating. As with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the second quarter and at the end of the third quarter. In comparing this consistent grouping of loans based on investments held in the prior quarter, we found that our dollar weighted loan to value ratio increased from .7% to .6% sequentially. Our total investment portfolio had a fair value of approximately $1.07 billion, an increase from $1.06 billion in the second quarter of 2024, and an increase of .5% from 1.01 billion for the comparable prior year period. Our loan portfolio continues to be comprised almost exclusively of first lien senior secured loans. As of September 30th, 2024, Runway had net assets of 507.4 million, increasing from 506.4 million at the end of the second quarter of 2024. NAV per share was $13.39 at the end of the third quarter compared to $13.14 at the end of the second quarter of 2024. Our loan portfolio is comprised of 100% floating rate assets. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing of the term sheet. In the third quarter, we received $75 million in principal repayments, an increase from $25.3 million in the second quarter of 2024. We generated total investment income of 36.7 million and net investment income of $15.9 million in the third quarter of 2024 compared to $34.2 million and $14.6 million in the second quarter of 2024. Our debt portfolio generated a dollar weighted average annualized yield of .9% for the third quarter of 2024 as compared to .1% for the second quarter of 2024 and .3% for the comparable period last year. Moving to our expenses, total operating expenses were 20.8 million for the third quarter up 6% from 19.6 million for the second quarter of 2024. We recorded a net unrealized gain on investments of 9.2 million in the third quarter compared to a net unrealized loss of 6.3 million in the second quarter of 2024. The net change in unrealized gain on investments was primarily due to an increase in the fair value of our investments in gyneconics and snagajub. As of September 30th, 2024, we had two loans on non-accrual status, mingle healthcare and snagajub. Our loan to mingle healthcare has a cost basis of $5 million and a fair market value of $2.6 million or 53% of cost, while our loan to snagajub has a cost basis of $42.7 million and fair market value of $37.3 million or 87% of cost. At the end of the third quarter of 2024, our leverage ratio and asset coverage were 1.08 and 1.92 times respectively compared to 1.1 and 1.91 times at the end of the second quarter of 2024. As of September 30th, 2024, our total available liquidity was 251.6 million including unrestricted cash and cash equivalents and we had borrowing capacity of 248 million. This reflects an increase from 249.8 million and 241 million respectively on June 30th, 2024. At quarter end, we had unfunded financing commitments to portfolio companies of 260.4 million, the majority of which were subject to specific performance milestones. During the third quarter, we experienced one prepayment totaling $75 million and scheduled amortization of $0.6 million. The prepayment included full principal repayment of our senior secured term loan to cloud pay. In October, we continued to monitor and manage our portfolio to yield long-term benefits for our stockholders. Subsequent to quarter end, on October 16th, 2024, the company sold its outstanding warrants and DTEK systems for proceeds of $1.9 million and on October 9th, 2024, Betterment Holdings prepaid its outstanding principal balance of $8 million on the company's senior secured loan. Additionally, at the end of October, we received a partial prepayment of $2.1 million from Fiscal Note Holdings and Predactive, formerly known as Share This, repaid its outstanding principal balance of $18.5 million on its senior secured loans. As discussed last quarter, prepayments enable the runway to deploy capital across our pipeline to drive portfolio replenishment and expansion. We believe our level of prepayments in the latter half of 2024 demonstrates the health and strong performance of our borrowers. As mentioned on our previous earnings call, on July 30th, 2024, our Board of Directors approved a new stock repurchase program of $15 million, which will expire on July 30th, 2025, or earlier if we repurchase the total amount of stock authorized for repurchase under the program. During the quarter, runway repurchased 644,763 shares of the company's stock. As David touched on earlier, subsequent quarter end, runway growth capital entered into a definitive agreement to be acquired by BC Partners Credit. We have filed a preliminary proxy statement seeking our stockholders approval of the new investment advisory agreement that the BDC will enter into in connection with the transaction. More information is available in the proxy materials we have and will file with the SEC. Finally, on November 5th, 2024, our Board of Directors declared a regular distribution for the fourth quarter of 40 cents per share. Additionally, the Board has paused our supplemental dividend program. Management and the Board believe it is prudent to focus our near-term capital allocation strategy on preserving and building NAV as we seek to accelerate growth and create value for our shareholders. With that, operator, please open the line for questions.

Thank you. In order to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster.

Our first question comes from the line of

Finian O'Shea with WFS, your line is now open.

Hey everyone, good afternoon. A couple of questions on the advisor merger to start. Is BC Partners buying just the oak tree steak or the whole thing? And then also, it looks like it's being bought from a fund again, so maybe is it less strategic than another sort of fund investment? And if you could kind of opine on what that means for the future of the company, thank you.

Sure, Fin, thanks for the question. They are buying the whole thing, oak trees, steak in the advisor, as well as all of the other shareholders. There aren't many, most of the remainder of the advisor is owned by myself and Tom and Greg, and so they will be buying 100% of the advisor. And it is being acquired by a fund, but I believe that the intention is for it to be a long-term holding and a strategic part of their best, of their growth plan, and we're very much looking forward to working with Ted Goldthorpe and his team. It's really important to us, and it's a part of our plan. It expands our origination capability. It extends our leadership team. It fortifies our position in the market and allows us to participate in other types of financing that we don't currently do and lets us tap into their originations, which has already been quite active in showing us deals. We'll be announcing some very soon, but most importantly, it positions us to be able to deliver for shareholders in terms of increased share value and increased return on their investment.

Okay, thank you.

Our next question comes to the line of Melissa Waddell with JP Morgan. Your line is now open.

Good afternoon. Thanks for taking my questions. I wanted to follow up on the question about the acquisition by BC Partners. I think one of the things that you indicated in the press release and then in the earlier announcements was that it expands the offerings and the types of solutions. I'm curious, I think there's a lot to understand about just sort of the earnings profile going forward of the portfolio as you diversify into other solutions and other products. How do you expect that to impact sort of the asset yield on the portfolio?

Thanks, Melissa. And you know, I do think it's key for us to say that this, while is expanding the product suite that we're able to offer potential borrowers, does not change our return target in terms of the asset level on both the levered and unlevered basis. And we expect it to provide a similar stream of income to what we've seen historically.

Okay, as we look at sort of the environment going forward, I think we've heard a range of outlooks in terms of what the M&A environment could be. As you start to look forward to additional rate cuts or just a new administration coming in that may be pro-growth, are you seeing any changes in the market thinking that this is an environment where you could see additional turn in terms of exits from your portfolio as companies get acquired? Or is there still quite an overhang on valuation in the space where you operate?

Thanks, Melissa. So we're really optimistic about the current environment. I think getting the election behind us and having some certainty there is important. The view that interest rates are most likely on a downward trajectory has brought a lot of positivity and optimism to the market. And when we combine that with the deal flow that we're seeing from BC, we feel really good about what's happening and we're hearing that from the entrepreneurs in the market. Now, on the other hand, you contrast that with some of the difficulties that are taking place in the venture equity market where there is money being invested, but quite often it's at a down round. I think we're at an all time high for down rounds in terms of percentage of all rounds. And one way to avoid a down round is to use debt. So more and more people are coming to us. Greg, you wanna add some more color?

Yeah, the one thing I would add in terms of M&A is since we play in the latest stage of venture and growth companies, for the most part, not only are borrowers potential targets from much bigger companies, but they're also acquirers. And as we see potential financing becoming cheaper in terms of rates potentially coming down, seeing greater certainty in terms of antitrust and other things like that, we do believe that there's not only gonna be a significant use case for us to potentially upsize our loans to existing portfolio companies as they look to do M&A, but also have opportunities to finance new companies who are out there looking to go back and find additional M&A opportunities.

Okay, understood. One final question if I could. In the press release today, I think you identified maybe about $30 million of repayments and I guess post quarter end. Can you help contextualize that for us? Fourth quarter can be a seasonally busy one. Are you surprised, not surprised to see $30 million rotate out in the first month of fourth quarter? Thank you.

Thanks, Melissa. Earlier in the year, we talked about a level of, our expectations for the level of prepayments during the third and fourth quarter. And as always, what happens is you tend to get a lot of prepayments at the beginning of the quarter and you replace the assets at the end of the quarter. So these were transactions that make good strategic sense. One was refinancing of us out and the other was a sale of one of the company's business units. So we weren't surprised. We expected them and there are other M&A transactions that are announced that could yet close this quarter and add to that prepayment. So no surprise and we're working to redeploy those assets.

Thank you.

Okay, thank you. Your next question comes to the line of Mickey Schlein with Leidenberg-Thelman. Your line is now open.

Yes, good afternoon, everyone. Most of my questions have been asked, but I just wanted to quickly get your insight on Snagajob, which is now valued much closer to par. Can we expect that investment to go back on a cool soon or some other expected outcome in the near future?

Thanks, Mickey. In our strategy with Snagajob is to really preserve and restore NAV. And so there is a plan in place that will lead to protecting the NAV. I don't expect that in the short term, it will be back on an accrual basis. We would expect over the long term that it does return to a cool status, but in the short term, we'll stay on a non-accrual, but there is a plan in place that really protects the value of the asset for us.

I understand. Those are all my questions this afternoon. Thank you for your time.

Thank you. Your next question comes to the line of Fannie and O'Shea with WFS. Your line is now open.

Hey, everyone, just a follow-up on just housekeeping question on the merger. Should we expect any deal-related expenses when it closes and what that might look like?

Thanks, Finn. So under the 40 Act, all of the transaction expenses, cost of the proxy, cost of legal around that, anything related to the transaction from a deal cost perspective is borne by the advisor. That's

very helpful. Thank you so much.

Thank you. I'm showing no further questions at this time and we now like to turn it back to David's for closing remarks.

Thank you, operator. We are pleased with the momentum achieved during the third quarter and believe Runway is advantageously positioned to meaningfully accelerate originations. With the partnership of BC partners, we look forward to executing on attractive investments that diversify our portfolio and drive long-term returns for our stockholders. Thank you all for joining us today. We look forward to updating you on our fourth quarter and full year 2024 financial results in March.

This does conclude the program and you may now disconnect.