Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (formerly GSV Growth Credit Fund Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
Business Model: Externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and treated as a Regulated Investment Company (RIC). The company focuses on providing senior secured loans and hybrid debt/equity financing to rapidly growing private companies, primarily in technology, life sciences, and healthcare sectors.
Capital Status: As of December 31, 2017, the company had closed on capital commitments of $275.0 million, issuing 8,666,667 shares for a total purchase price of $130.0 million. There is no established public market for the common stock.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total Investment Income | $3,189,839 | $0 |
| Total Operating Expenses | $5,031,385 | $902,980 |
| Net Investment Loss | $(1,841,546) | $(902,980) |
| Net Change in Unrealized Appreciation | $405,251 | $(61) |
| Net Decrease in Net Assets from Operations | $(1,436,295) | $(903,041) |
| Total Assets | $149,339,677 | $4,185,660 |
| Total Net Assets | $127,040,377 | $3,476,672 |
| Net Asset Value (NAV) per Share | $14.66 | $10.38 |
| Portfolio Yield (Debt Only) | 16.9% (Annualized) | N/A |
Portfolio Composition (Dec 31, 2017):
- Senior Secured Term Loans: $64.0 million (Fair Value)
- Warrants/Equity: $4.2 million (Fair Value)
- U.S. Treasury Bills: $72.5 million (Fair Value)
- Cash and Cash Equivalents: $8.1 million
Material Changes vs. Prior Period
- Investment Activity: The company commenced portfolio investment activities in 2017, funding eight portfolio companies with $67.5 million in debt and equity investments. In 2016, the portfolio consisted solely of U.S. Treasury Bills.
- Expense Growth: Operating expenses increased significantly to $5.0 million in 2017 from $0.9 million in 2016, driven primarily by management fees ($3.6 million) and professional fees ($0.5 million) associated with the ramp-up of operations.
- Net Asset Value: Despite a net investment loss, the NAV per share increased from $10.38 to $14.66, primarily due to the issuance of $125.0 million in common stock during the year.
- Unrealized Gains: The company recorded a net unrealized appreciation of $405,251 in 2017, largely attributed to an increase in the fair value of warrants for Aspen Group, Inc.
Guidance, Outlook, and Risks
Outlook and Strategy: The company intends to continue deploying capital into senior secured loans and warrants for high-growth private companies. It plans to offer investors a "Spin-Off" option after the third anniversary of the initial closing, allowing them to exchange shares for a public BDC or a liquidating fund. No dividends were declared or paid in 2017 or 2016.
Key Risks and Contingencies:
- RIC Qualification: The company anticipates difficulty satisfying asset diversification requirements as it builds its portfolio. Failure to qualify as a RIC would subject the company to corporate-level income tax.
- Liquidity: Investments in private companies are illiquid. The company may need to sell assets at disadvantageous prices to meet distribution requirements or liquidity needs.
- Valuation Uncertainty: Portfolio investments are valued at fair value using unobservable inputs (Level 3), which involves significant management judgment and may differ materially from realized values.
- Management Fees: The base management fee is capped at actual operating expenses of the adviser, but the structure includes an incentive fee based on net investment income and capital gains, which may create conflicts of interest.
- Unfunded Commitments: As of December 31, 2017, the company had $11.5 million in unfunded loan commitments to existing portfolio companies.
Investor Verification Checklist
- Capital Deployment Rate: Verify the speed at which the $275 million in capital commitments are being called and deployed into the portfolio.
- RIC Status Compliance: Monitor quarterly reports for confirmation of continued RIC qualification and adherence to asset diversification tests.
- Portfolio Credit Quality: Review the investment rating system (1-5 scale) for any downgrades; currently, 40% of the debt portfolio is rated "2" (performing at plan) and 5.5% is rated "3" (performing below plan).
- Expense Ratio: Track the annualized ratio of net operating expenses to average net assets, which was 12.46% in 2017, to assess the impact of fees on net returns.
- Spin-Off Timeline: Confirm the timeline and regulatory approvals required for the potential Spin-Off transaction to a public BDC.