Runway Growth Finance Corp. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022. Runway is an externally managed business development company (BDC) and regulated investment company (RIC) that primarily lends to high-growth private companies. The financial statements received an unqualified audit opinion from RSM US LLP; the auditor did not attest to internal control effectiveness.
Business and portfolio
- At year-end, investments had a fair value of $1.126 billion across 49 portfolio companies; debt investments comprised 56 loans to 35 companies. Senior secured term loans were $1.080 billion, or 95.9% of total portfolio fair value; second-lien loans were $13.7 million.
- Debt portfolio yield was 13.71%, compared with 13.77% in 2021. This portfolio yield excludes company expenses and is not the return investors receive.
- About 99% of debt investments carried variable rates. Healthcare technology, application software and internet software and services were the largest disclosed industry exposures by fair value.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Investment income | $108.6 million | $71.4 million |
| Operating expenses | $48.8 million | $26.9 million |
| Net investment income | $59.8 million; $1.46 per share | $44.5 million; $1.30 per share |
| Net realized gain (loss) | ($1.1 million) | $4.2 million |
| Net unrealized appreciation (depreciation) | ($26.5 million) | ($3.0 million) |
| Net increase in assets from operations | $32.3 million; $0.79 per share | $45.6 million; $1.33 per share |
| Net asset value per share | $14.22 | $14.65 |
- Interest and dividend income rose with portfolio growth and higher market rates. Expenses also increased, notably interest expense ($13.8 million versus $2.6 million) and management and incentive fees. Unrealized depreciation drove the decline in operating results.
- Cash and cash equivalents were $5.8 million. Net cash used in operating activities was $359.8 million, reflecting investment deployment; net cash provided by financing activities was $360.9 million, leaving cash up $1.1 million for the year.
- Debt principal totaled $559.3 million: $337.0 million drawn on the credit facility, $70.0 million of 2026 Notes and $152.25 million of 2027 Notes. Year-end asset coverage was 203%, above the applicable 150% minimum. The credit facility commitment was $425 million at year-end.
- Declared distributions totaled $51.6 million, or $1.26 per share; $40.7 million was paid in cash and the balance reinvested in shares. The filing states 2022 distributions were from income, not return of capital.
Material changes, outlook and risks
- Portfolio fair value grew from $729.5 million to $1.126 billion. The company funded $396.5 million in 14 new portfolio companies and $226.2 million in 12 existing companies, and received $159.2 million in loan repayments or sale proceeds.
- One Pivot3 loan was on non-accrual at year-end, with $19.2 million funded principal and $9.3 million fair value. The prior year had seven loans on non-accrual, across Mojix and Pivot3. The filing’s disclosures use different denominators for the current exposure: 1.61% of net assets in the MD&A and 0.8% of total investments in a note.
- Most investments are private and valued using significant unobservable inputs; Level 3 investments were $1.112 billion. Fair value estimates may differ materially from realizable sale values. The year’s $26.5 million net unrealized depreciation was attributed principally to Pivot3 debt and common-stock markdowns in Brilliant Earth and Quantum.
- Management gave no specific earnings or portfolio guidance. It cited uncertainty from inflation, rising rates, capital-market disruption and economic conditions. Higher rates can increase floating-rate investment income, but also raise borrowing costs and may weaken borrowers’ ability to pay. A hypothetical 200-basis-point rate move could change annual investment income by up to +$21.9 million or −$20.6 million before considering funding-cost effects.
- Risks include speculative, generally unrated or below-investment-grade lending; covenant-lite loans; sector and borrower concentration; illiquidity and valuation uncertainty; leverage and refinancing needs; and RIC distribution and diversification requirements. OCM, affiliated with Oaktree, owned approximately 52% of shares. No material legal proceedings were reported.
- After year-end, the company increased its credit facility commitment by $50 million, amended liquidity-covenant and other terms, and reported a $10 million TRACON loan prepayment. In February 2023 it declared a $0.40 ordinary and $0.05 supplemental distribution per share.
Important facts for investors to verify
- Reconcile the reported non-accrual percentage and denominator, and assess Pivot3’s recovery outlook and collateral value.
- Review the Level 3 valuation assumptions and drivers of the $26.5 million unrealized depreciation, particularly the largest markdowns.
- Confirm borrowing-base availability and covenant headroom against $315.7 million of unfunded loan commitments; only a portion was currently eligible to draw.
- Assess whether net investment income and cash collections support distributions, including the supplemental 2023 payment, given PIK income and leverage costs.
- Track portfolio concentration, credit performance, refinancing needs and the effect of interest rates on both borrowers and the company’s funding costs.