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
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / 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 capacity | Not stated here on a comparable basis |
| Asset coverage ratio | 205% | 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.