Runway Growth Finance Corp (RWAYL): Positioning for Long-Term Success

Published on March 11, 2025 | Ticker: RWAYL

Runway Growth Finance Corp (RWAYL) is a specialty finance company focused on providing senior secured loans to high growth-potential companies in technology, healthcare, business services, financial services, and other high-growth industries. The company has established itself as a reliable lending partner, leveraging its expertise and extensive network to support the financing needs of promising enterprises.

Company Background

Runway Growth Finance was formed on August 31, 2015 as Runway Growth Credit Fund Inc. and changed its name to Runway Growth Finance Corp. on August 18, 2021. The company elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940 and is structured as an externally managed, non-diversified closed-end management investment company. Runway Growth Finance has also elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code, aiming to provide attractive risk-adjusted returns to its shareholders primarily through current income on its loan portfolio and secondarily through capital gains on its warrants and other equity positions.

Investment Strategy

The company's investment objective is to maximize total return to its stockholders, with a focus on current income generation. Runway Growth Finance's portfolio is predominantly comprised of senior secured loans, with 100% of its debt investments bearing floating interest rates as of September 30, 2024. The company's debt investment portfolio had a dollar-weighted annualized yield of 15.9% for the third quarter of 2024, compared to 15.1% for the second quarter of 2024 and 18.3% for the comparable period in the prior year.

Capital Raising History

In its early years, Runway completed an initial private offering in December 2017, raising $275 million, and a second private offering between October 2019 and September 2021, raising an additional $181.7 million. The company then went public with an initial public offering (IPO) in October 2021, which raised net proceeds of $93 million. Concurrent with the IPO, Runway cancelled all undrawn commitments from the second private offering.

Portfolio Composition

As of September 30, 2024, Runway Growth Finance had investments in 57 portfolio companies, representing a diverse mix of industries and financing structures. The company's portfolio included 25 companies in which it held both debt and warrant investments, 3 companies with debt investments and shares of common stock, preferred stock, or a combination with warrants, 4 companies with debt investments only, 17 companies with warrant investments only, and 8 companies with shares of common stock, preferred stock, or equity interests only, or a combination with warrants.

The company's investment portfolio had a fair value of $1.07 billion as of September 30, 2024, consisting of the following asset classes:

Senior Secured Term Loans: $989.38 million (92.81% of total portfolio)

Second Lien Term Loans: $14.50 million (1.36%)
Convertible Notes: $0 (0%)
Preferred Stocks: $38.20 million (3.58%)
Common Stocks: $554,000 (0.05%)
Equity Interests: $6.73 million (0.63%)
Warrants: $16.74 million (1.57%)

The company's debt investments typically have stated terms of 36 to 60 months and bear interest primarily based on a floating rate index, subject to certain floors. The weighted average term of the debt investments was 58 months at origination and 33 months remaining.

Recent Investment Activity

In the third quarter of 2024, Runway Growth Finance funded $75.3 million in new and follow-on investments, including two investments in new portfolio companies and four investments in existing portfolio companies. The company also received $144.7 million in sales and prepayments from five portfolio companies and $2.4 million in scheduled principal repayments from one portfolio company.

Financials

Runway Growth Finance's net assets totaled $507.4 million as of September 30, 2024, with a net asset value (NAV) per share of $13.39. The company's leverage ratio and asset coverage were 1.08x and 1.92x, respectively, at the end of the third quarter of 2024, compared to 1.1x and 1.91x at the end of the second quarter of 2024.

During the third quarter, Runway Growth Finance generated total investment income of $36.7 million and net investment income of $15.9 million, or $0.41 per share. The company recorded a net unrealized gain on investments of $9.2 million in the quarter, primarily due to an increase in the fair value of its investments in Gynesonics and Snagajob.

For the most recent quarter, the company reported:

Revenue: $36.65 million
Net income: $25.05 million
Cash: $3.62 million

The company's operations are funded through a combination of net proceeds from securities offerings, debt borrowings, and cash flows from investment sales and repayments. As of September 30, 2024, the company had $302 million in outstanding borrowings under its secured credit facility and $247.3 million in unsecured debt under the 2026 and 2027 Notes, with a total asset coverage ratio of 192%.

Liquidity

As of September 30, 2024, Runway Growth Finance had two senior secured term loans on non-accrual status, representing 3.7% of its total investment portfolio. The company has a plan in place to preserve and restore the net asset value of these investments over the long-term.

Runway Growth Finance has approximately $248 million available under its Credit Facility, subject to borrowing base capacity. The company's weighted average portfolio risk rating remained stable at 2.48 in Q3 2024 compared to 2.47 in Q2 2024.

Post-Quarter Events

Subsequent to the third quarter, Runway Growth Finance continued to actively manage its portfolio, including the sale of its outstanding warrants in Dtex Systems for $1.9 million, the prepayment of Betterment Holdings' $8 million senior secured loan, and the partial prepayment of $2.1 million from FiscalNote Holdings. Additionally, Predactiv, formerly known as ShareThis, repaid its outstanding principal balance of $18.5 million on its senior secured loans.

Strategic Partnership

Importantly, in October 2024, Runway Growth Capital, the investment adviser to Runway Growth Finance, entered into a definitive agreement to be acquired by BC Partners Credit, the $8 billion credit arm of the alternative investment firm BC Partners. This transaction is expected to position Runway Growth Finance to deliver consistent, steady returns to stockholders by expanding the company's origination capabilities, strengthening its leadership team, and allowing it to tap into BC Partners' extensive resources and network.

The combination with BC Partners is expected to enhance Runway Growth Finance's capabilities by introducing structured equity preferred investment, asset-based lending, and the ability to operate in new strategies such as equipment leasing. This will provide more access and exposure to a broader range of investment opportunities and enable the company to strengthen its existing strategy of lending to high-quality late and growth stage companies.

Outlook and Guidance

Looking ahead, Runway Growth Finance is well-positioned to navigate the dynamic market environment. The company's focus on maintaining disciplined underwriting standards, proactively managing its portfolio, and leveraging its strategic partnership with BC Partners positions it for long-term success.

Runway Growth Finance's Board of Directors has declared a regular distribution for Q4 2024 of $0.40 per share. The Board has also passed their supplemental dividend program, and management believes it is prudent to focus their near-term capital allocation strategy on preserving and building NAV as they seek to accelerate growth and create value for shareholders.

The company remains committed to providing attractive risk-adjusted returns to its shareholders through its specialized lending expertise and diligent portfolio management. With the anticipated benefits from the BC Partners combination, Runway Growth Finance expects to enhance its capabilities and deliver consistent, steady returns to stockholders in the future.

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