Runway Growth Finance Corp. (RWAY) is a leading provider of flexible capital solutions to late- and growth-stage companies seeking an alternative to raising equity. Headquartered in Menlo Park, California, the company has carved out a unique niche in the venture lending space, offering senior secured loans and other tailored financing options to high-growth businesses across various industries.
Company Background
Founded in 2015 as a Maryland corporation, Runway Growth Finance Corp. was initially structured as an externally managed, non-diversified closed-end management investment company. Originally named Runway Growth Credit Fund Inc., the company underwent a name change to Runway Growth Finance Corp. on August 18, 2021. The company's primary focus is on providing senior secured loans to high growth-potential companies in technology, healthcare, business services, financial services, select consumer services and products, and other high-growth industries.
Runway Growth Finance's investment objective is twofold: primarily to maximize total return to its stockholders through current income on its loan portfolio, and secondarily through capital gains on its warrants and other equity positions. This strategy has allowed the company to build a diverse and robust investment portfolio over the years.
Growth and Milestones
The company's growth trajectory has been marked by several significant milestones. In December 2017, Runway Growth Finance completed its initial private offering, issuing 18.24 million shares of its common stock to stockholders for a total purchase price of $275 million. This was followed by multiple closings under its second private offering between October 2019 and September 2021, during which the company accepted aggregate capital commitments of $181.7 million and issued an additional 9.62 million shares of its common stock.
A pivotal moment in the company's history came with its initial public offering in October 2021. Concurrent with the IPO, Runway Growth Finance issued 6.85 million shares of its common stock at a public offering price of $14.60 per share, receiving net cash proceeds of $93 million. This marked the company's debut on the public markets, with its common stock beginning trading on the Nasdaq Global Select Market under the symbol "RWAY" on October 21, 2021.
Investment Strategy
Runway Growth Finance's investment strategy is centered around providing senior secured loans, typically ranging from $10 million to $100 million, to late-stage and growth-stage companies. The company's portfolio is diversified across sectors, including technology, healthcare, business services, financial services, and select consumer products and services. As of September 30, 2024, Runway Growth Finance's total investment portfolio stood at approximately $1.07 billion, with a dollar-weighted annualized yield on its debt investments of 15.9%.
The company's disciplined underwriting approach and rigorous risk management have been key to its success. Runway Growth Finance utilizes a proprietary investment rating system to closely monitor the credit quality of its portfolio, which has remained relatively stable, with a weighted average portfolio risk rating of 2.48 as of the end of the third quarter of 2024.
Recent Developments
In the third quarter of 2024, Runway Growth Finance completed seven new investments, including two with new portfolio companies, totaling $75.3 million in funded loans. This activity demonstrates the company's ability to identify and capitalize on attractive opportunities, even in a dynamic market environment.
One of the highlights of the quarter was the announcement of Runway Growth Capital's combination with BC Partners Credit, the $8 billion credit arm of the alternative investment firm BC Partners. This strategic partnership is expected to enhance Runway Growth Finance's origination capabilities, investment solutions, and capital formation, positioning the company for continued growth and value creation.
Financials
Runway Growth Finance's financial performance in the third quarter of 2024 reflected its consistent execution, with total investment income of $36.7 million and net investment income of $15.9 million, or $0.41 per share. The company's net asset value stood at $13.39 per share as of September 30, 2024, up from $13.14 at the end of Q2 2024.
For the third quarter ended September 30, 2024, Runway Growth Finance reported total investment income of $36.7 million, net income of $25.0 million, operating cash flow of $25.9 million, and free cash flow of $25.9 million. This compares to total investment income of $34.2 million and net investment income of $14.6 million, or $0.37 per share, in the prior quarter.
The decrease in investment income for the third quarter compared to the prior quarter was primarily due to falling interest rates and a decrease in the average outstanding principal on interest-earning debt investments as a result of loan repayments and two loans moving to non-accrual status.
Runway Growth completed seven investments in the third quarter, including two new portfolio companies, representing $75.3 million in funded loans. This compares to $75.5 million in new investments in the prior quarter. The company received $75 million in principal repayments during Q3, up from $25.3 million in Q2.
As of September 30, 2024, Runway Growth Finance had investments in 57 portfolio companies. The investment portfolio was composed of 92.81% senior secured term loans, 1.36% second lien term loans, 3.58% preferred stocks, 0.05% common stocks, 0.63% equity interests, and 1.57% warrants.
The company's debt investment portfolio had a dollar-weighted annualized yield of 15.50% for the nine months ended September 30, 2024, down from 16.00% for the same period in the prior year. This decrease was primarily due to falling interest rates and a decrease in the average outstanding principal on interest-earning debt investments as a result of loan repayments and two loans being placed on non-accrual status.
As of September 30, 2024, Runway Growth Finance had two senior secured term loans on non-accrual status, representing 3.70% of the total investment portfolio at fair value. The two non-accrual loans had a combined cost basis of $47.70 million and a fair value of $39.90 million. From being placed on non-accrual status, the company would have recognized an additional $4.10 million in interest income that was not recorded.
During the three and nine months ended September 30, 2024, Runway Growth Finance declared and paid dividends of $17.30 million and $54.90 million, respectively, to its stockholders. The company pays quarterly distributions to stockholders out of assets legally available for distribution, with the goal of maximizing total return to stockholders primarily through current income on its loan portfolio.
Liquidity
Looking ahead, Runway Growth Finance remains well-positioned to navigate the evolving venture lending landscape. The company's strong liquidity position, with $251.6 million in total available liquidity as of the end of the third quarter, provides ample resources to fund its pipeline of attractive investment opportunities.
As of September 30, 2024, Runway Growth Finance had $3.62 million in cash and cash equivalents and $248 million available under its revolving credit facility. The company had $302.00 million of outstanding borrowings under the credit facility and $247.30 million of unsecured debt outstanding under its 2026 and 2027 Notes.
The company's asset coverage ratio, a measure of leverage, was 192% as of September 30, 2024, providing significant capacity for additional borrowings if needed to fund new investments. Runway Growth Finance intends to continue funding its operations and investment activities through a combination of cash flows from operations, debt financing, and potential future equity offerings.
The company's current ratio and quick ratio both stand at 0.390480202190396, indicating its ability to meet short-term obligations.
Future Outlook
Runway Growth Finance's Board of Directors has declared a regular distribution for Q4 2024 of $0.40 per share. The Board has 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 pending combination with BC Partners Credit is expected to enhance Runway Growth Finance's competitive advantages, enabling the company to leverage the extensive resources, expertise, and relationships of its new strategic partner. This strategic alignment is anticipated to drive increased origination volume, diversify the company's financing solutions, and ultimately deliver enhanced value to its shareholders.
Runway Growth Finance expects the partnership with BC Partners to position them to be able to deliver increased shareholder value and returns on investment. The company also anticipates that the potential for additional rate cuts and the partnership with BC Partners will serve as tailwinds as they focus on amplifying their reach and the breadth of their investments going forward.
In conclusion, Runway Growth Finance's proven track record, disciplined approach, and strategic initiatives position the company as a leading player in the dynamic venture lending space. As the company continues to navigate the evolving market landscape, investors can look forward to Runway Growth Finance's steadfast commitment to supporting high-growth businesses and delivering consistent, risk-adjusted returns.