Runway Growth Finance Corp. annual report, FY2023

Runway Growth Finance Corp. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. This is an annual report, not a standalone fourth-quarter report. Runway is an externally managed BDC and RIC that makes primarily senior secured loans to growth-stage companies. Its audited financial statements received an unqualified opinion from RSM US LLP.

Financial and portfolio highlights

MetricFY2023 / Dec. 31, 2023FY2022 / Dec. 31, 2022
Total investment income$164.2 million$107.8 million
Operating expenses$85.9 million$48.0 million
Net investment income$78.3 million; $1.93 per share$59.8 million; $1.46 per share
Net realized investment gain (loss)$(18.4) million$(1.1) million
Net change in unrealized investment gain (loss)$(15.5) million$(26.5) million
Net increase in assets from operations$44.3 million; $1.09 per share$32.3 million; $0.79 per share
Total assets / net assets$1.079 billion / $547.1 million$1.142 billion / $576.1 million
NAV per share$13.50$14.22
Debt outstanding, principal$519.3 million$559.3 million
Available liquidity$281.0 million, including $3.0 million cash and $278.0 million available under the credit facility, subject to borrowing-base capacityNot stated here on a comparable basis
Asset coverage ratio205%203%
Operating cash flow$112.4 million provided$359.8 million used

Investment income increased 52% year over year, primarily due to portfolio deployment and higher market rates. Operating expenses rose substantially, led by interest and other financing costs and higher management and incentive fees; net investment income increased 31%. Debt portfolio dollar-weighted annualized yield was 15.8%, versus 13.7% in 2022; this portfolio yield excludes company expenses and is not the return realized by shareholders.

At year-end, investments had a fair value of $1.067 billion, including $42.0 million of U.S. Treasury bills. Senior secured term loans were valued at $964.1 million. The debt portfolio had 29 companies; the broader portfolio included 52 companies. All debt investments were variable-rate, and 12.2% of FY2023 investment income was non-cash PIK interest. The company declared $73.3 million in distributions during 2023, or $1.81 per share across quarterly and supplemental distributions.

Material changes versus FY2022

  • Investment purchases fell to $200.5 million from $622.7 million, while sales and repayments rose to $296.4 million from $168.9 million. Operating cash flow consequently moved from a $359.8 million use to a $112.4 million source.
  • Debt principal outstanding declined by $40.0 million. Net assets fell $29.0 million, and NAV per share decreased from $14.22 to $13.50. The filing reports a 7.67% total return based on NAV for 2023.
  • Realized losses increased to $18.4 million, primarily from Pivot3 and certain equity and warrant positions. Unrealized losses narrowed to $15.5 million from $26.5 million.
  • Credit ratings shifted: 19 debt investments were rated 2 and nine rated 3 at year-end, compared with 30 rated 2 and four rated 3 in 2022; one investment was rated 4. No loans were on non-accrual at December 31, 2023, versus one in 2022.

Outlook, risks and unusual items

  • Management described venture-market activity as reduced and disrupted after an extended expansion, but viewed the later-stage venture ecosystem as generally healthy. The filing gives no earnings or portfolio-growth guidance. Management said available liquidity was sufficient for near-term capital requirements; distributions remain at the Board’s discretion.
  • In December 2023, the company completed a credit bid for Pivot3 assets in exchange for its loan. The transaction resulted in an approximately $17.0 million realized loss; the acquired asset was valued at $0.95 million at year-end.
  • After year-end, effective January 1, 2024, a $4.3 million Mingle Healthcare loan was placed on non-accrual, with a December 31 fair value of $3.8 million. In February 2024, the Board declared $0.47 per share in ordinary and supplemental distributions. The company also received a $7.1 million partial prepayment from MarleySpoon and entered an agreement to co-manage a new investment joint venture.
  • Key risks include borrower defaults and illiquid, privately valued assets; concentration (the five largest debt investments were 38% of debt portfolio fair value); rising financing costs and borrower stress from rates; and the high share of software and healthcare technology investments. Fair value relies substantially on unobservable inputs: $1.021 billion of investments were Level 3 at year-end.
  • Other notable considerations: $201.5 million of unfunded loan commitments remained, of which approximately $42.0 million was eligible to be drawn based on milestones. PIK and other deferred income may require distributions before cash is received. Oaktree-affiliated holders owned 40.7% of shares. Founder and CEO David Spreng was on medical leave; Greg Greifeld served as Acting CEO.

Important facts for investors to verify

  • Review subsequent reports for Mingle’s non-accrual status, collection prospects and any further deterioration in credit ratings or valuations.
  • Assess the Pivot3 recovery and the assumptions supporting fair values for Level 3 assets, particularly larger and more concentrated exposures.
  • Track net investment income against distributions, including the cash realization of PIK income and deferred incentive fees.
  • Check borrowing-base availability, asset coverage, credit-facility maturity and refinancing needs, and the cost impact of variable-rate borrowings.
  • Monitor portfolio concentration, unfunded commitments and governance or key-person developments. Management assessed internal controls as effective, but the auditor did not attest to internal-control effectiveness because the company qualified for the emerging-growth-company exemption.