Executive Summary / Key Takeaways

• Runway Growth Finance Corp. (RWAY) is a business development company (BDC) specializing in senior-secured loans to late-stage and growth companies, primarily in technology and healthcare, aiming to maximize total return through current income and capital gains.
• The recent acquisition of RWAY's investment adviser by BC Partners Credit is a transformative event, expected to significantly expand origination channels, diversify investment solutions (including structured equity and asset-based lending), and enhance the ability to participate in larger deals while maintaining a focused allocation to the BDC.
• Despite a decrease in Q1 2025 net investment income ($15.6M vs. $18.7M in Q1 2024) primarily due to falling interest rates and lower average debt principal, the company's debt portfolio yield remains robust (15.4% in Q1 2025), supported by floating rates and interest rate floors.
• Management is focused on a "credit-first" underwriting philosophy and disciplined portfolio management, evidenced by a stable weighted average risk rating (2.33 in Q1 2025) and strategies to preserve NAV on non-accrual loans, positioning the company for strong credit performance amidst market volatility.
• RWAY has adjusted its dividend policy to a $0.33 per share base dividend plus a targeted supplemental (up to 50% of NII exceeding the base), prioritizing building net asset value (NAV) while maintaining a sustainable yield, supported by ample liquidity ($315.4M available in Q1 2025) and expected elevated prepayment activity providing capital for redeployment.

Setting the Stage: A Credit-First Approach in the Dynamic Venture Ecosystem

Runway Growth Finance Corp. (RWAY) operates as a business development company, carving out a specialized niche in providing senior-secured debt financing to late-stage and growth-oriented private companies. Established in 2015, RWAY's core mandate is to generate attractive risk-adjusted returns for its stockholders, primarily through the current income generated by its loan portfolio, complemented by potential capital gains from associated equity and warrant positions. The company strategically targets high-growth sectors such as technology, healthcare, business services, and select consumer industries, leveraging its expertise to identify promising companies seeking flexible, non-dilutive capital solutions as an alternative to traditional equity raises.

Within the competitive landscape of private credit, RWAY positions itself against larger, more diversified players like Blue Owl Credit Income Corp. (OBDC), BlackRock (BLK), and Ares Capital Corporation (ARCC), as well as traditional banks and emerging AI-driven lending platforms. While larger competitors benefit from scale, broader funding sources, and potentially more advanced technological infrastructure for credit assessment and data processing, RWAY differentiates itself through a focused, credit-first investment philosophy and deep sector-specific relationships. Its ability to source non-sponsored deals, which often face less competition, allows for potentially more favorable terms. The company emphasizes originating investments at the top of the capital stack, aiming to reduce exposure to the volatility often associated with junior capital. This disciplined approach is a cornerstone of its strategy, particularly relevant in the current market environment characterized by evolving interest rates, fluctuating liquidity, and shifts in venture capital fundraising dynamics.

The venture ecosystem itself has undergone significant changes. Following a period of unprecedented capital raising and high burn rates in 2021, 2023 and 2024 saw a slowdown in venture funding, pushing companies to focus on profitability and seek non-dilutive options. More recently, sentiment has begun to shift again, with a renewed need for companies to demonstrate sustainable growth to attract investment or achieve exits. This backdrop increases the demand for the type of financing RWAY provides, even as borrowers become more realistic about valuations and terms. The overall venture debt market experienced significant growth in 2024, with deal value increasing dramatically, partly driven by large financings for AI companies, signaling potential tailwinds for the sector.

Operational Discipline and Portfolio Management

RWAY employs a rigorous operational framework to manage its investment portfolio and mitigate risk. A key tool is its five-level numeric investment rating system, used to characterize and monitor the quality of its debt investments. While new loans typically start at Category 2, the system allows for granular assessment, identifying potential concerns (Category 3), material underperformance (Category 4), and situations where the going concern is in question (Category 5). This proactive monitoring is crucial for upholding credit quality. As of March 31, 2025, the weighted average portfolio risk rating remained stable at 2.33, consistent with the prior quarter, indicating overall portfolio health despite market fluctuations.

The company's approach to managing credit risk is further demonstrated by its handling of non-accrual loans. When principal or interest payments become materially past due or collection in full is improbable, loans are placed on non-accrual status, ceasing interest recognition until payments are current or collectibility is restored. As of March 31, 2025, RWAY had two loans on non-accrual status: Mingle Healthcare Solutions, Inc. (fair value $2.4M, 49% of cost) and JobGet Holdings, Inc. fka Snagajob.com, Inc. (fair value $2.6M, 68% of cost). These represented a small portion (0.5%) of the total investment portfolio at fair value. Management's strategy for these positions, such as the plan for Snagajob focused on preserving and restoring NAV, underscores their commitment to protecting asset value even in challenging situations.

RWAY's operational focus extends to managing its liquidity and capital structure. The company maintains ample liquidity to fund its operations, make new investments, and cover unfunded commitments. As of March 31, 2025, total available liquidity stood at $315.4 million, comprising cash and cash equivalents ($18.4M) and availability under its Credit Facility ($297.0M).

The Credit Facility, recently extended to March 2029, provides $550.0 million in total commitments (with a $50.0M accordion feature) and bears interest at a floating rate (Adjusted Term SOFR plus a margin), offering flexibility for funding. The company also utilizes fixed-rate unsecured notes, totaling $247.3 million as of March 31, 2025, providing stability to its funding costs. The asset coverage ratio of 201% as of March 31, 2025, demonstrates compliance with regulatory requirements and provides a buffer for debt holders.

Recent Financial Performance and Portfolio Dynamics

RWAY's financial performance in the first quarter of 2025 reflected the prevailing market conditions and portfolio activity. Total investment income was $35.4 million, a decrease from $40.0 million in the comparable prior-year period. This decline was primarily attributed to the impact of falling interest rates on the floating-rate portfolio and a decrease in the average outstanding principal on interest-earning debt investments, including the movement of the JobGet loan to non-accrual status. Non-recurring income from sources like prepayment fees also saw a decrease, contributing to the year-over-year change.

Operating expenses totaled $19.8 million in Q1 2025, down from $21.3 million in Q1 2024. This reduction was mainly driven by lower performance-based incentive fees, which are directly linked to net investment income, and decreased interest and other debt financing expenses. Management fees remained relatively stable.

Net investment income for the quarter was $15.6 million, compared to $18.7 million in Q1 2024. The decrease in net investment income mirrored the trends in investment income, primarily influenced by the factors mentioned above. On a per-share basis, net investment income was $0.42 in Q1 2025, down from $0.46 in Q1 2024.

Beyond recurring income, the portfolio generated a net realized gain of $6.1 million in Q1 2025, primarily from the sale of the investment in Gynesonics, Inc., partially offset by a loss on Quantum Corporation . This contrasts with no significant realized gains or losses in Q1 2024. The net change in unrealized gain/loss on investments resulted in a $19.8 million loss in Q1 2025. This was largely due to the release of a prior unrealized gain upon the realization of the Gynesonics investment and decreases in the fair value of certain portfolio companies, including JobGet Holdings, Inc., Marley Spoon SE (MMTPY), and zSpace, Inc., partially offset by a release of prior unrealized loss on Quantum Corporation (QMCO).

The debt portfolio's dollar-weighted average annualized yield was 15.4% for Q1 2025. While this was lower than the 17.4% yield in Q1 2024, it represented an increase from 14.7% in Q4 2024, illustrating the quarter-to-quarter variability influenced by the timing and volume of prepayment-related income. Management anticipates fewer prepayments going forward compared to recent elevated levels, which will temper yield spikes but also reduce the acceleration of accreted income.

Strategic Expansion and Outlook

A pivotal development for RWAY is the recent acquisition of its investment adviser, Runway Growth Capital, by affiliates of BC Partners Credit, which closed in Q1 2025. This strategic combination is expected to significantly enhance RWAY's capabilities and market position. Management anticipates that leveraging BC Partners' scale, resources, expertise, and network will lead to an expanded origination funnel and the ability to participate in larger deals (total loan sizes of $30M-$150M), while maintaining a focused allocation of $20M-$45M to the BDC. This is intended to drive portfolio diversification across industries and investment sizes. Furthermore, the partnership is expected to broaden RWAY's product suite to include structured equity, asset-based lending, and potentially equipment leasing, offering more comprehensive solutions to borrowers and enhancing the ability to win deals.

Management is optimistic about the outlook for the venture debt market. They observe a shift in borrower sentiment towards prioritizing sustainable growth and seeking non-dilutive capital, especially as equity remains expensive. Potential future rate cuts are also viewed as a positive factor that could benefit the pipeline and execution of new loans. While acknowledging that broader market uncertainty may still lead to deal delays, the company believes it is well-positioned to capitalize on opportunities as they arise, focusing on high-quality companies with sound fundamentals.

RWAY's capital allocation strategy is centered on building and preserving NAV while providing a sustainable return to stockholders. The company has adjusted its dividend policy, establishing a base quarterly dividend of $0.33 per share and targeting a supplemental dividend of up to 50% of the net investment income that exceeds the base dividend. This approach aims to provide a consistent yield less susceptible to fluctuations in variable income, while allowing for the potential growth of spillover income. The company also maintains an active share repurchase program, recently approving a new $25 million authorization, signaling management's view that the stock is undervalued and presenting an opportunity to enhance shareholder value. Expected elevated prepayment activity in the near term is anticipated to provide capital for redeployment into new opportunities and contribute to near-term dividend coverage stability.

Risks and Challenges

Despite a clear strategic path and operational strengths, RWAY faces inherent risks and challenges. Market volatility, particularly in the venture ecosystem and broader economy, can impact portfolio company performance and valuations, potentially leading to further unrealized depreciation or credit deterioration. Interest rate fluctuations, while offering potential upside on floating-rate assets, also increase funding costs on floating-rate liabilities and introduce uncertainty. The illiquid nature of private investments presents valuation risk, as fair values are determined in good faith by the Board and may differ significantly from values realized upon exit.

Credit risk remains a primary concern, as evidenced by the loans on non-accrual status. While these currently represent a small portion of the portfolio, further economic headwinds or company-specific issues could lead to additional non-accruals or realized losses. The strategy to preserve NAV on troubled loans, while prudent, may not always result in full recovery.

The challenge of efficiently deploying capital from expected prepayments is significant. While prepayments provide liquidity, the pace of high-quality originations must keep pace to maintain portfolio size and earnings power. The goal of diversifying the portfolio through smaller, more numerous deals requires a robust and consistently performing origination engine. Successfully integrating the capabilities and deal flow from the BC Partners acquisition is crucial for realizing the anticipated benefits and accelerating growth.

Conclusion

Runway Growth Finance is strategically positioned at an inflection point, leveraging its established credit-first investment philosophy and deep sector expertise alongside the expanded capabilities brought by the BC Partners Credit acquisition. The company's focus on senior-secured lending to late-stage growth companies in resilient sectors provides a foundation for current income, while its disciplined underwriting and proactive portfolio management aim to mitigate credit risk.

While recent financial performance reflects the impact of falling rates and portfolio dynamics, including unrealized losses and non-accrual loans, the underlying debt portfolio yield remains attractive. The strategic imperative is clear: utilize enhanced origination channels and a broader product suite to accelerate thoughtful portfolio growth and diversification. The revised dividend policy signals a commitment to NAV preservation and a sustainable yield, supported by ample liquidity and expected capital inflows from prepayments. The successful execution of the BC Partners integration and the ability to consistently source and underwrite high-quality opportunities will be critical factors determining RWAY's ability to deliver enhanced long-term value for its stockholders.