Business Overview and History
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. The company has established itself as a trusted partner for entrepreneurs and investors alike, navigating the evolving venture capital landscape with a disciplined approach and a keen eye for emerging opportunities.
Runway Growth Finance Corp. was formed on August 31, 2015, as a Maryland corporation. Initially named Runway Growth Credit Fund Inc., the company changed its name to Runway Growth Finance Corp. on August 18, 2021. Runway Growth is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940 and has also elected to be treated as a regulated investment company (RIC) under the Internal Revenue Code.
The company's primary investment objective is to maximize total return to its stockholders through current income on its loan portfolio and capital gains on its warrants and other equity positions. Runway Growth focuses on lending to and selectively investing in high growth-potential companies across various sectors, including technology, healthcare, business services, financial services, select consumer services and products, and other high-growth industries in the United States.
Runway Growth's journey as a public company began with its initial private offering in December 2017, where it issued 18.24 million shares of common stock to stockholders for a total purchase price of $275 million. The company continued to expand its capital base through multiple closings under its second private offering from October 2019 to September 2021, accepting aggregate capital commitments of $181.7 million and issuing an additional 9.62 million shares of common stock.
A significant milestone in Runway Growth's history was its initial public offering on October 25, 2021. The company issued 6.85 million shares of its common stock at a public offering price of $14.60 per share. Runway Growth's common stock began trading on the Nasdaq Global Select Market under the symbol "RWAY" on October 21, 2021, marking its transition to a publicly-traded entity.
Since its inception, Runway Growth has steadily built a diverse portfolio of investments, focusing on high-growth potential companies in technology, healthcare, business services, financial services, and other sectors. The company's investment strategy is centered on providing senior secured loans, typically ranging from $10 million to $100 million, to late- and growth-stage companies that are seeking an alternative to traditional equity financing.
Runway Growth's portfolio is composed primarily of non-control, non-affiliate investments, with a smaller portion of affiliate and control investments. As of September 30, 2024, the company's total investment portfolio had a fair value of approximately $1.07 billion, a 5.5% increase from $1.01 billion in the comparable prior year period. The portfolio is predominantly comprised of senior secured term loans, accounting for 92.8% of the total fair value, with the remaining investments in second lien term loans, convertible notes, preferred stocks, common stocks, and warrants.
Financial Snapshot
Runway Growth has demonstrated strong financial performance, generating total investment income of $110.9 million and net investment income of $49.1 million for the nine months ended September 30, 2024. The company's net asset value (NAV) per share stood at $13.39 as of September 30, 2024, compared to $13.50 as of December 31, 2023.
For the fiscal year 2023, Runway Growth reported revenue of $55.88 million, net income of $44.34 million, operating cash flow (OCF) of $112.44 million, and free cash flow (FCF) of $112.44 million. In the most recent quarter (Q3 2024), the company reported revenue of $36.651 million, net income of $0 million, OCF of $29.426 million, and FCF of $29.426 million. The decrease in revenue from the prior year 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 loans to Snagajob, Inc. and Mingle Healthcare Solutions, Inc. moving to non-accrual status.
The company's balance sheet remains healthy, with total assets of $1.08 billion and total liabilities of $532.1 million as of December 31, 2023. Runway Growth's leverage ratio and asset coverage were 1.08x and 1.92x, respectively, as of September 30, 2024, indicating a strong liquidity position. The debt-to-equity ratio stood at 0.93x as of September 30, 2024.
Liquidity Position
As of September 30, 2024, the company had total available liquidity of $251.6 million, including $3.6 million in cash and cash equivalents and $248 million in available borrowing capacity under its credit facility. The company had $549.25 million in total debt outstanding, including $302 million under the credit facility and $247.25 million in unsecured notes.
Investment Portfolio Composition
As of September 30, 2024, Runway Growth's investment portfolio consisted of investments in 57 portfolio companies, with a fair value totaling $1.07 billion. The portfolio is diversified across various industries, with the largest concentrations in Application Software (47.65% of net assets), Healthcare Technology (41.18% of net assets), and Internet Software and Services (31.31% of net assets). Other significant industry exposures include System Software (22.65% of net assets), Data Processing Outsourced Services (21.61% of net assets), and Property Casualty Insurance (15.10% of net assets).
Recent Performance and Outlook
In the third quarter of 2024, Runway Growth executed on attractive investments, completing two investments in new companies and five investments in existing companies, representing $75.3 million in funded loans. The company delivered total investment income of $36.7 million and net investment income of $15.9 million or $0.41 per share, which covered their base dividend for the quarter.
The weighted average portfolio risk rating remained stable at 2.48 in Q3 2024, compared to 2.47 in Q2 2024. The dollar-weighted average annualized yield on the debt portfolio was 15.9% for Q3 2024, compared to 15.1% for Q2 2024 and 18.3% for the comparable prior year period. As of September 30, 2024, Runway Growth had two loans on non-accrual status.
Looking ahead, Runway Growth's Board of Directors 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.
Navigating the Venture Landscape with Strategic Partnerships
In a significant development, Runway Growth Capital, the investment adviser to Runway Growth Finance Corp., recently announced a definitive agreement to be acquired by BC Partners Credit, the $8 billion credit arm of the alternative investment firm BC Partners. This strategic transaction is expected to enhance Runway Growth's capabilities by introducing structured equity, preferred investments, asset-based lending, and the ability to operate in new strategies such as equipment leasing.
The combination with BC Partners is also set to strengthen Runway Growth's sponsor relationships through fund finance and other fund-level offerings, further diversifying the company's portfolio across both financing products and size of investments. Investors and borrowers alike are expected to benefit from Runway Growth's access to BC Partners' industry-leading platform, which will provide additional scale, resources, expertise, and a broader network of opportunities.
Runway Growth's management team, including CEO David Spreng, Deputy CIO Greg Greifeld, and CFO Tom Raterman, will remain in place to execute the company's long-term vision. The transaction is subject to customary closing conditions, including Runway Growth's stockholder approval of the new investment advisory agreement.
Navigating the Evolving Venture Landscape
The venture capital landscape has experienced significant shifts in recent quarters, with late-stage deal value declining by 53% from peak levels in 2021 due to ongoing liquidity constraints. Many late- and growth-stage companies have been cautious about tapping the public markets, preferring to extend their runways and avoid further dilution.
However, Runway Growth has navigated these challenges effectively, leveraging its strong sector relationships and targeted outreach efforts to identify attractive new opportunities. The company's ability to capitalize on the dynamic environment is a testament to its disciplined underwriting and portfolio management approach.
As the Federal Reserve continues to adjust interest rates, Runway Growth is well-positioned to benefit from the improved conditions for borrowers. The company's focus on originating investments at the top of the capital stack, while avoiding situations with significant downstream financing risk, helps to mitigate volatility often associated with earlier-stage companies.
Outlook and Key Considerations
Runway Growth's strategic partnership with BC Partners, combined with its seasoned management team and disciplined investment approach, positions the company for continued success in the dynamic venture capital landscape. The company's strong liquidity position and diversified portfolio provide a solid foundation for growth, while the expanded product suite and origination channels are expected to further enhance Runway Growth's ability to deliver attractive risk-adjusted returns to its shareholders.
The partnership with BC Partners is expected to enable Runway Growth to accelerate originations in their ideal transaction size and further diversify their portfolio across both financing products and size of investments. This strategic move is anticipated to strengthen the company's competitive position in the market and provide access to a broader range of investment opportunities.
However, investors should be mindful of the inherent risks associated with Runway Growth's focus on late- and growth-stage companies, including potential credit quality issues, valuation challenges, and exposure to macroeconomic uncertainties. Additionally, the successful integration of the BC Partners acquisition and the adoption of new financing strategies will be critical to the company's long-term performance.
Overall, Runway Growth Finance Corp. (RWAY) has demonstrated its ability to navigate the evolving venture capital landscape, and the strategic partnership with BC Partners is poised to further strengthen the company's position as a leading provider of flexible capital solutions to high-growth potential companies. With a solid financial foundation, a diversified investment portfolio, and an expanded set of capabilities, Runway Growth is well-positioned to capitalize on the opportunities presented by the dynamic venture capital market while managing the associated risks.