Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (formerly GSV Growth Credit Fund Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2017
Business Model: 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). The Company invests primarily in senior secured loans and warrants of middle-market, high-growth companies in the United States.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | As of Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $1,150,107 | $1,281,489 | - |
| Total Operating Expenses | $1,315,203 | $3,569,356 | - |
| Net Investment Loss | $(165,096) | $(2,287,867) | - |
| Net Decrease in Net Assets from Operations | $(165,732) | $(2,286,606) | - |
| Net Asset Value (NAV) per Share | - | - | $14.32 |
| Total Net Assets | - | - | $81,190,066 |
| Cash and Cash Equivalents | - | - | $4,743,515 |
| Total Investments at Fair Value | - | - | $76,419,141 |
| Capital Commitments (Total) | - | - | $254,531,500 |
Note: The Company had no investment income or operating expenses for the comparable periods in 2016 as investment activities had not yet commenced.
Material Changes vs. Prior Period
- Portfolio Deployment: The Company transitioned from a cash-holding entity to an active investor. As of December 31, 2016, the portfolio consisted solely of U.S. Treasury Bills ($3.0 million). By September 30, 2017, the Company held $38.4 million in non-control/non-affiliate investments (loans and warrants) and $38.0 million in U.S. Treasury Bills.
- Capital Raise: The Company significantly increased its capital base. During the nine months ended September 30, 2017, it issued 5,333,334 shares of common stock, raising approximately $80.0 million in gross proceeds. Total capital commitments reached $254.5 million.
- Operating Loss: The Company reported a net investment loss for the nine months ended September 30, 2017, primarily due to management fees and professional expenses incurred during the ramp-up phase, which exceeded the investment income generated from the newly deployed capital.
- NAV Growth: Despite the net investment loss, the NAV per share increased from $10.38 at December 31, 2016, to $14.32 at September 30, 2017, driven largely by the accretion of original issue discounts and the influx of new capital.
Outlook, Risks, and Management Commentary
- Investment Strategy: Management continues to deploy capital into senior secured term loans and warrants. The portfolio is concentrated in six companies across Professional Services, Information Technology, Software & Services, Media, and Diversified Consumer Services.
- Unfunded Commitments: As of September 30, 2017, the Company had $15.5 million in unfunded loan commitments to existing portfolio companies. Subsequent to the period end (October 4, 2017), $1.5 million of these commitments were funded.
- Fee Structure: The Company pays a base management fee of 1.75% annualized on capital commitments and gross assets. An incentive fee structure exists with a 2.0% quarterly hurdle rate (8.0% annualized) and a 20% catch-up, though no incentive fees were earned in this period.
- Risks:
- Valuation Risk: 100% of the portfolio investments (excluding Treasuries) are Level 3 assets, valued using unobservable inputs (discounted cash flow models, Black-Scholes for warrants). Values are subject to significant management judgment.
- Interest Rate Risk: 100% of the debt portfolio bears variable interest rates based on LIBOR. A 200 basis point increase could increase annual investment income by approximately $770,000.
- Liquidity: Investments in private companies are illiquid and restricted as to resale.
- RIC Status: The Company must maintain RIC status to avoid corporate-level taxation, requiring distribution of at least 90% of taxable income. No dividends were declared in this period.
Key Facts for Investor Verification
- Capital Deployment Pace: Verify the rate at which the $254.5 million in committed capital is being called and deployed into the portfolio to assess future fee generation and income potential.
- Level 3 Valuation Methodologies: Review the specific unobservable inputs (e.g., discount rates, volatility assumptions) used to value the $38.4 million in private debt and warrants, as these significantly impact NAV.
- Expense Ratio Trajectory: Monitor the annualized ratio of net operating expenses to average net assets (19.70% for the nine months ended Sep 30, 2017) to determine when the fund will achieve operating leverage as the portfolio matures.
- Unfunded Commitments: Track the drawdown of the $15.5 million in remaining unfunded commitments to understand immediate cash flow requirements.
- Dividend Policy: Confirm the timeline for the first dividend declaration, as the Company has not yet paid distributions despite generating investment income.