Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (formerly GSV Growth Credit Fund Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2017
Business Overview: The Company is an externally managed, non-diversified, closed-end investment company regulated as a Business Development Company (BDC) and electing to be treated as a Regulated Investment Company (RIC). It focuses on lending to and investing in middle-market companies in the United States, primarily through senior secured loans and warrants. The Company changed its name on June 13, 2017.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | As of June 30, 2017 |
|---|---|---|
| Total Assets | $41,614,644 | $41,614,644 |
| Total Net Assets | $41,355,798 | $41,355,798 |
| Net Asset Value (NAV) per Share | $13.78 | $13.78 |
| Total Investment Income | $131,382 | - |
| Total Operating Expenses | $2,254,153 | - |
| Net Investment Loss | $(2,122,771) | - |
| Net Decrease in Net Assets from Operations | $(2,120,874) | - |
| Cash and Cash Equivalents | - | $4,984,163 |
| Total Investments at Fair Value | - | $36,379,158 |
| Unfunded Loan Commitments | - | $5,500,000 |
Material Changes vs. Prior Period
- Capital Deployment: The Company transitioned from a pre-investment phase to active deployment. As of December 31, 2016, the portfolio consisted solely of U.S. Treasury Bills ($2.99M). By June 30, 2017, the Company held $11.39M in non-control/non-affiliate investments (loans and warrants) and $24.99M in U.S. Treasury Bills.
- Revenue Generation: Investment income increased from $0 in the prior period to $131,382 for the six months ended June 30, 2017, driven by interest income from new loans and Treasury Bills.
- Operating Expenses: Expenses rose significantly to $2.25M for the six months ended June 30, 2017, compared to $0 in the prior period. This increase is primarily due to the commencement of operations, including management fees ($1.48M), professional fees ($270.9K), and administrative costs.
- Net Asset Value: NAV per share increased from $10.38 at December 31, 2016, to $13.78 at June 30, 2017. This increase was driven by capital contributions ($40M raised) which outweighed the net operating loss of $2.12M.
- Portfolio Composition: The portfolio now includes three portfolio companies: Mojix, Inc. (14.40% of net assets), SendtoNews Video, Inc. (8.35%), and Placecast, Inc. (4.79%).
Guidance, Outlook, and Risks
- Outlook: The Company intends to maximize total return through current income on its loan portfolio and capital appreciation on warrants. It plans to continue deploying capital from its $226.25M in committed capital (as of June 30, 2017).
- Management Commentary: Management notes that the net investment loss is expected during the initial deployment phase due to fixed operating costs and management fees calculated on capital commitments before full investment income is realized. No dividends were declared or paid during the period.
- Risks and Contingencies:
- Valuation Risk: Portfolio investments are Level 3 assets valued using unobservable inputs (discounted cash flow models, Black-Scholes for warrants), introducing subjectivity.
- Interest Rate Risk: 100% of the debt portfolio bears variable interest rates (LIBOR-based). A 200 basis point increase could increase annual investment income by approximately $230,000, while a decrease could reduce it by $67,000.
- Liquidity: Investments are restricted as to resale. The Company holds significant cash ($4.98M) to fund future commitments.
- Regulatory: The Company must maintain RIC status to avoid corporate-level taxation, requiring distribution of at least 90% of taxable income.
- Subsequent Events: Between July 1 and August 10, 2017, the Company funded additional loans to Aspen Group, Inc., eSilicon Corporation, and Mojix, Inc., and closed on $5.25M in additional capital commitments.
Investor Verification Checklist
- Capital Commitments: Verify the total committed capital of $226.25M (as of June 30) and the drawdown schedule to ensure sufficient liquidity for future investments.
- Expense Ratio: Review the annualized ratio of net operating expenses to average net assets (40.21% for the six months ended June 30, 2017) to understand the impact of start-up costs on returns.
- Valuation Methodology: Scrutinize the Level 3 valuation inputs (e.g., origination yields of 14.9%-19.4% and volatility assumptions of 20%-70%) used for the private debt and warrant investments.
- Portfolio Concentration: Note that the top three portfolio companies represent approximately 27.5% of net assets, with the remainder largely in U.S. Treasury Bills.
- Dividend Policy: Confirm that no distributions were made and assess the timeline for future distributions based on the deployment of capital and generation of investment income.