Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (a Business Development Company and Regulated Investment Company)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2018
Overview: The Company is an externally managed, non-diversified closed-end investment company focused on lending to and investing in small, fast-growing U.S. companies. As of September 30, 2018, the Company had total capital commitments of $275 million, with $115 million remaining undrawn.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 |
|---|---|---|
| Total Investment Income | $5,516,079 | $13,295,692 |
| Net Investment Income | $3,104,934 | $7,432,886 |
| Net Increase in Net Assets from Operations | $3,598,582 | $7,191,100 |
| Net Asset Value (NAV) per Share | $15.07 | $15.07 |
| Total Net Assets | $163,546,317 | $163,546,317 |
| Cash and Cash Equivalents | $13,388,816 | $13,388,816 |
| Reverse Repurchase Agreement (Liability) | $44,775,000 | $44,775,000 |
| Unfunded Loan Commitments | $20,000,000 | $20,000,000 |
Portfolio Composition (Fair Value): Total investments were $194.35 million. Non-control/non-affiliate investments (Senior Secured Term Loans, Preferred Stock, Warrants) totaled $142.86 million (87.4% of net assets). U.S. Treasury Bills totaled $51.49 million (31.5% of net assets).
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased significantly from $1.15 million (3 months ended Sep 30, 2017) to $5.52 million (3 months ended Sep 30, 2018), driven by capital deployment and a larger invested balance.
- Profitability Turnaround: The Company reported a net investment income of $3.10 million for the three months ended Sep 30, 2018, compared to a net investment loss of $165,096 in the same period in 2017.
- Expense Increases: Operating expenses rose to $2.41 million (3 months 2018) from $1.32 million (3 months 2017). Increases were primarily due to higher management fees, the accrual of incentive fees ($479,538), and interest expense.
- Portfolio Expansion: The number of portfolio companies increased from 8 (Dec 31, 2017) to 13 (Sep 30, 2018). Significant new investments included loans to CareCloud Corporation ($25M), Aria Systems ($25M), and Aginity ($7M).
- Capital Activity: The Company issued 1,997,337 shares in September 2018 for $30 million in gross proceeds, increasing total shares outstanding to 10,853,816.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Company declared a dividend of $0.35 per share on November 1, 2018, payable November 15, 2018. For the nine months ended Sep 30, 2018, total dividends declared were $3.48 million ($0.39 per share), with the majority reinvested via the dividend reinvestment plan.
- Subsequent Events: Post-period, the Company funded loans to RealWear Inc. ($5M), AllClear ID Inc. ($5M), and Drawbridge Inc. ($15M). It also drew $4M on its CIBC credit facility.
- Asset Quality: As of September 30, 2018, 61.5% of the debt portfolio was rated "2" (Performing at plan), and 3.9% was rated "4" (Performing materially below plan, requiring close monitoring). No loans were on non-accrual status.
- Valuation Risk: 87.4% of the portfolio consists of Level 3 assets (private debt and warrants) valued using unobservable inputs (e.g., discounted cash flow models, Black-Scholes). Valuations are subject to significant management judgment.
- Liquidity and Leverage: The Company has a $60 million credit facility with CIBC (maturity Sept 2019). As of Sep 30, 2018, there were no borrowings outstanding under this facility, but a $44.8 million reverse repurchase agreement was outstanding.
Investor Verification Checklist
- Capital Deployment: Verify the pace of capital drawdown against the $115 million in remaining undrawn commitments to assess future investment capacity.
- Portfolio Concentration: Review the top 5 portfolio companies (Aria Systems, CareCloud, RedSeal, eSilicon, AllClear ID) which represent a significant portion of net assets.
- Valuation Methodology: Scrutinize the Level 3 valuation inputs, particularly for the Mojix Inc. investment which showed a decline in fair value and is rated "4".
- Fee Structure Impact: Analyze the impact of the 20% incentive fee on net investment income, noting that $479,538 was accrued in Q3 2018.
- Dividend Sustainability: Confirm that net investment income continues to cover the quarterly dividend rate of approximately $0.35 per share.