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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing-by and welcome to the Runway Growth Finance First Quarter 2023 Earnings Conference Call. Please be advised that today's conference call is being recorded.
I would now like to hand the conference over to Mary Friel, Assistant Vice President, Business Development and Investor Relations. Please go ahead.
Thank you, operator. Good evening, everyone, and welcome to Runway Growth Finance conference call for the first quarter ended March 31, 2023.
Joining us on the call today from Runway Growth Finance are David Spreng, Chairman, Chief Executive Officer, Chief Investment Officer and Founder and Tom Raterman, Chief Financial Officer and Chief Operating Officer.
Runway Growth Finance's first quarter 2023 financial results were released just after today's market closed and can be accessed from Runway Growth Finance's Investor Relations website at investors.runwaygrowth.com. We have arranged for a replay of the call at Runway Growth Finance's web page.
During this call, I want to remind you that we may make forward-looking statements based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements. Including and without limitation, market conditions caused by uncertainty surrounding rising interest rates, the impact of the COVID-19 pandemic, changing economic conditions, and other factors we identify in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained on this call are made as of the date hereof and Runway Growth Finance assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of SEC related filings, please visit our website.
With that, I will turn the call over to David.
Thank you, Mary, and thank you all for joining us this evening to discuss our first quarter results. I would like to start by providing first quarter 2023 highlights, and I'll discuss broader market dynamics and our outlook.
In the first quarter, Runway demonstrated its ability to be a steady hand in banking industry disruptions that caused shockwaves throughout the market. We attribute that to our weather improved portfolio focused on recession-resistant industries and our roster of seasoned team members who have experienced traversing every economic cycle.
We want to take a moment to address the volatility we've seen in the banking sector since our last call, which began with the closure of Silicon Valley Bank. As stated previously, Runway had no deposits or loans with SVB, nor did we participate in any credit facilities agented by or that included SVB as a lender. SVB's lending portfolio was particularly concentrated in early-stage companies. Given our focus on the latest stage companies in the venture ecosystem, the recent banking disruptions did not financially impair Runway's portfolio. We anticipate continued headwinds in the banking sector and we will remain proactive in communicating with our portfolio companies and managing our capital structure.
Industry-wide, we've seen public and private investors adjusted our approach to risk management for the expectations of a potential hard landing recession. We believe this dynamic positions Runway as a preferred lender in the venture debt space. Our priority has always been to deliver stable earnings while mitigating risk in any market environment. Runway continued to execute its disciplined strategy and we delivered stable earnings, as well as attractive risk-adjusted returns. Since inception, we believe our team has built the most stable portfolio in the venture debt space. We did this by underwriting first-lien investments in the highest-quality late-stage companies that operate in the recession-resistant industry sectors we know best.
With looming macro concerns, we remain confident in the durability of our strategy, the experience of our team and the strength of our portfolio which we believe positions the company for continued success throughout 2023.
Turning to the first quarter operating results. Runway completed seven investments in existing portfolio companies, representing $12.9 million in funded loans. Our originations and deployment activity reflects first quarter seasonality and the conviction with which we evaluate investments, which we mentioned in our last call. That said, we continue to see healthy demand from quality companies with clear path to profitability, seeking to use debt as non-dilutive growth capital. Runway's credit bar has never been higher and the team remains extremely selective in adding new companies to Runway portfolio.
We remained in our core leverage range of 0.8 to 1.1 times only slightly increasing our ratio from 0.97 to 1.04 times in the first quarter. Runway has the lowest leverage ratio among the public venture debt peers and ample dry powder to deploy. However, our approach to building a weather-proof platform has always been quality over quantity. We believe this selectivity in deploying capital will generate better terms and return-on-equity.
Runway delivered total investment income of $39.3 million and net investment income of $18.2 million in the quarter. This represents an increase of approximately 104% and 46% respectively from the prior year period. Net assets were $569.8 million at the end of the first quarter, down 5% from $597.5 million in the prior year period and down 1% from $576.1 million at the end of Q4 2022. Tom will provide a deeper look at our strong credit quality, but our weighted-average portfolio risk rating remained constant at 2.1 in Q1 2023.
Turning now to structuring and underwriting. As demonstrated by our weighted-average active loan-to-value at origination of 17.4% across the portfolio, underwriting is a key component of our credit-first approach. With a proven track-record across multiple economic cycles, Runway has built its underwriting process around the core principles of low loan-to-value, a thorough understanding of our borrowers past profitability and value-creation as well as the structural protections and covenants that enable effective monitoring and communication.
In an environment with higher base rates and growing concern over potential economic weakness, the importance of capital preservation and providing a margin of safety for both our and our portfolio companies' balance sheets cannot be overstated. We continue to see the value in pursuing a growth mindset while establishing guardrails, such as thoughtful covenants and limitations on loan-to-value. These measures limit downside risk for both us and our borrowers. We believe our traction balances are effective and allow us to work with borrowers to mitigate risk for us and them. Management prides itself on being a good partner and helping borrowers work-through problems when they arise while simultaneously preserving credit quality and safeguarding our shareholders.
In step with previous quarters, we calculated the loan-to-value for loans that were in our portfolio at the end of Q4 2022 and Q1 2023 and found that our dollar-weighted loan-to-value ratio increased modestly to 24% in Q1 from 23% in Q4. We continue to employ a conservative approach to valuation. As you can see a primary focus heading into this year was to mitigate risk and support our existing portfolio companies. Runway is focused on senior secured and almost exclusively first-lien loans is important for two reasons; the first is because this focus empowers us to be a good partner to our borrowers and the second is that it gives us control and being a fiduciary for our investors capital. Ultimately that means minimizing losses. The focus on first-lien loans protects our investors from situations in which a second-lien lender might find itself subordinated to any external party and precluded from taking action to preserve the value of alone. We follow-up our rigorous underwriting with proactive monitoring of our portfolio companies. Our communication cadence with portfolio companies is built into the terms of each loan. We do not take a one-size fits-all approach. Portfolio monitoring is built on a core set of requirements for all portfolio companies and is customized to ensure we are positioned to protect our investors capital and avoid any potential losses in the portfolio. Additionally, each position in our portfolio undergoes a comprehensive valuation process internally on a quarterly basis and periodically by a third-party, which offers confidence in our markets.
Turning to the market outlook. According to recent Pitchbook data, US late-stage venture equity deal value slowed to $11.6 billion in Q1. While this data provides a snapshot for BC equity market trends, Runway is not dependent on venture equity dynamics. We believe that our focus on late-stage companies including non-sponsored borrowers with defined paths to profitability insulates us further from downstream financing risk. Across the ecosystem, the largest concern for companies is surrounding access to capital, as they navigate through a slower-growth environment. That's where venture debt can provide a very strong value proposition because relative to equity which continues to be expensive and can come with onerous terms, debt remains an ideal option to fuel growth and minimize dilution. Venture debt is not however rescue financing, though it replace equity when the capital structure and business operations require in equity solution. We are mindful that existing portfolio companies may need additional support to navigate dynamic economic conditions, however, as the lender, we are confident in our ability to provide that helping hand. We can support our current portfolio companies and continue to prudently grow our loan book.
Our pipeline continues to expand as we see more quality companies come to Runway to explore creative financing solutions, while they assess future banking relationships and face fundraising challenges. We will continue to be extremely thoughtful as we evaluate opportunities in the current market environment.
I will now turn it over to Tom.
Thanks, David, and good evening, everyone. Runway completed 7 investments in the first quarter, representing $12.9 million in funded loans. Runway's weighted average portfolio risk rating held constant at 2.1 in the first quarter compared to the fourth quarter of 2022. As a reminder, our rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating. At quarter-end, we continued to have only 1 portfolio company rated 5 and on non-accrual status.
During the quarter, we restructured our terms with Gynesonics and split our investment between a senior secured first lien loan and preferred equity, which has priority over all other equity. We also received fee contributions from the restructuring. The amended agreement attracted additional junior equity investment to support the company's growth and development. We're pleased with this result and that our entire investment remains first-out in the current capital stack.
Our total investment portfolio, excluding US treasury bills at a fair value of approximately $1.1 billion, holding constant from the fourth quarter of 2022 and increasing 49% from $754.3 million for the comparable prior year period. As of March 31, 2023, Runway had net assets of $569.8 million, decreasing from $576.1 million at the end of the fourth quarter of 2022. NAV per share was $14.07 at the end of the first quarter compared to $14.22 at the end of the fourth quarter of 2022. We're pleased with our stable NAV, which we feel reflects industry-leading levels of scrutiny.
With respect to interest rates, our loan portfolio is comprised of 100% floating rate assets, which will continue to benefit from higher rates. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing of the term sheet. In the first quarter, we received $10.2 million in principal repayments, a decrease from $16 million in the fourth quarter of 2022. Runway generated total investment income of $39.3 million and net investment income of $18.2 million in the first quarter of 2023 compared to 19.2 and $12.5 million in the first quarter of 2022, largely driven by the increase in the size of our portfolio. Our debt portfolio generated a dollar weighted average annualized yield of 15.2% for the first quarter 2023 as compared to 12.2% for the first quarter of 2022.
Moving to our expenses. For the first quarter, total operating expenses were $21.1 million, increasing from $6.8 million for the first quarter of 2022. The majority of this increase was driven by higher interest expense and debt fees, with the balance made up of an increase in performance-based incentive fees and management fees. Runway had a net realized loss of $1.2 million in the first quarter compared to a net realized loss of $0.4 million for the first quarter of 2022. We recorded net unrealized depreciation of $5.1 million in the first quarter compared to net unrealized depreciation of $9.2 million in the first quarter of 2022. Weighted average interest expense was 7.3% at the end of the first quarter, increasing from 6.5% during the fourth quarter of 2022. End-of-period leverage was 104% and asset coverage was 196% as compared to 97% and 203%, respectively, at the end of the fourth quarter of 2022. All investments in the first quarter were funded with leverage as part of our strategy to generate non-dilutive portfolio growth.
Turning to our liquidity. At March 31, 2023, our total available liquidity was $131.3 million, including unrestricted cash and cash equivalents and borrowing capacity of $128 million as compared to 93.8 and $88 million, respectively, on December 31, 2022. We had unfunded loan commitments to portfolio companies of $302 million, the majority of which were subject to specific performance milestones, $63 million of those commitments are currently eligible to be funded. During the quarter, we further enhanced liquidity by increasing our credit facility pursuant to the accordion feature by $75 million to a total of $500 million, subject to the terms and conditions as reflected in the credit facility agreement. Subsequent to quarter-end, we completed a $25 million private placement of three-year unsecured notes. We also received full prepayment of our $30 million loan to Mustang Bio. With ample dry powder that fortifies our balance sheet, Runway remains well positioned to selectively deploy capital at increasingly favorable terms for the remainder of the year.
Finally, on May 2, 2023, our Board declared a regular distribution for the second quarter of $0.40 per share as well as a supplemental dividend of $0.05 per share, payable with the regular dividend. As communicated last quarter, Runway intends to pay a similar supplemental dividend for each remaining quarter of 2023, subject to future approval from the Board of Directors.
This concludes our prepared remarks. We'll now open the line for questions. Operator?
[Operator Instructions] Our first question comes from the line of Erik Zwick of Hovde Group.
I wanted to start maybe first just on leverage. You mentioned that the investments in the first quarter were funded with leverage and you moved a little bit closer to your kind of preferred target range of 0.8% to 1.1%. I know you've mentioned David, in the right environment, consider going higher. So just curious how you frame your current leverage profile today face-to-face with how you see the environment for additional fundings as well as kind of how the pipeline shapes up today?
Sure. I can take the leverage comment. And as David said, the pipeline is certainly as strong and as high quality as it's ever been. We don't feel an extraordinary amount of pressure to grow the portfolio anyway other than prudently and selectively as we have really throughout our history. So if you look at our unfunded commitments that are available to be drawn, which is about $63 million and our liquidity today, which is over $200 million, given the note offering and prepayments, we feel that we're in pretty good shape. We will likely drift up over 2% or slightly over that 1.1%. I don't think we feel any pressure to step outside of that range, outside of some very, very attractive opportunities. So I think we're comfortable with being at the upper-end of the stated range going forward and expect that we'll be there bouncing around that 1.1% for the remainder of the year.
And then I just wanted to move on I was looking at Slide 21 and the -- so actually, I want to move on to Slide 22. Just looking at the potential impact that higher rates would have on the portfolio and it seems that the Fed is maybe moving to a potential kind of pause and hold period, looking at the SOFR curve, it would actually suggest that by July rates, the SOFR curve starts to come down at that point, which I guess is in a big disagreement with what the Fed is saying at this point. So curious from your perspective, what that potentially means for the yield and the opportunity to grow net investment income just due to the higher rates of how you kind of face that prospect today.
Well, I think looking at our capital structure, you'll see that we're still primarily floating rate debt, probably 60%, 65%. And at least in the short-term, any financing that we would add would be under the revolving credit facility. So we'd really have a perfect match there with assets because 100% of our loans are floating rate. I think that in that circumstance, as you see rates coming down, that would likely be a signal that we have a view toward where the economy is going to go. Now it may mean that the economy is headed toward a hard landing, but then we'll be better able to judge the portfolio growth, how much we want to add and if we want to step into that expanded range, which would then impact return on equity positively.
Right. I guess I would add Erik, the other side of interest rates is if they do increase dramatically, which is not what you're seeing on that curve, but if they do, there is a point at which it becomes prohibitive for pre-profit companies to service their debt or at least makes it a bit more of a hurdle. We have not seen that yet. And it's probably less of a factor with the latest stage companies where we play, where our companies are much, much closer to profitability. They have a clear plan and path to profitability and whether their interest rate is 11%, 12% or 13%, it isn't really going to move the needle. So we're not seeing a lot of pushback yet. But if rates were to, for some reason, go up dramatically, there probably will be a point that we might have to look at slightly different structures. But again, we're not seeing that as of yet.
And you're right, kind of it does seem if the Fed does go to a hold at a higher for longer level, but that would be kind of beneficial and maybe a sweet spot here for you now, as you mentioned, but companies being able to withstand this higher interest burden, but going too much higher could certainly change that. I guess the last question from me and then I'll step aside. Just in terms of the purchase of the treasury bills in the quarter, curious kind of what the maturities were on those and if that was just a strategy to park some cash short-term after either some prepayments or whether it's part of a longer-term strategy to have those investments?
It's not a long-term strategy to have treasuries on the balance sheet. We wanted to frankly beef-up our liquidity given the noise and the disruption in the banking system at that point. So we wanted to have excess liquidity, if you will, live in very short-term treasuries. So those were seven-day treasuries, and we have subsequently liquidated those treasuries and paid down our revolver.
Our next question comes from the line of Bryce Rowe of B. Riley.
Wanted to maybe ask about kind of the dividend policy and any thoughts around maintaining the supplemental kind of given what happened late in the first quarter? Any thought to not paying the supplemental and retaining that capital as NAV?
It's something we certainly evaluate at every quarter and as we move along. I think the view of the Board right now is that we made a commitment to pay that supplemental dividend out. And so unless there's a dramatic change, I think it's our view to maintain that supplemental dividend, but the Board will make that decision every quarter.
And then just I saw in a subsequent event, there might have been an amendment that came in with one of your portfolio companies. Curious what you're hearing, what you're seeing with your portfolio companies in terms of trying to get or even need support given what's happened from a macro perspective.
Tom, do you want to address the specific company and I can speak to the general environment?
Sure. So I think there were a couple of things. One, and you might be referring to Mustang Bio, which was an early termination of public company, it had good liquidity. And I think as we met with them and their Board evaluated it, they decided to prepay that loan. That also happened before quarter-end with TRACON. So is that the activity we're referring to, Bryce?
Well, it was that as well as I guess, the smaller loan with Marley Spoon.
Yes. Well, first off, congratulations to the Marley Spoon team for successfully negotiating the SPAC transaction and we all look forward as do they in to joining the Frankfurt Exchange as a public company and moving off the Australian exchange. That's a really good outcome as we sat down and we had a seat at the table, our loan agreements give us a seat at the table. There's $34 million coming in junior to us right away and then there's the prospect of additional capital coming in and potentially reducing that loan amount. But we thought it was appropriate to give them some relief in the form of a temporary PIK adjustment in order to give them time to close that deal and make sure that the SPAC investors were all lined up. So we're pleased with it. We did have a seat at the table, and we think it provides a lot of strength to that credit, and we look forward to the completion of that later in the year.
I'd add from a general point of view, we have not seen any kind of an uptick in requests for amendments or relief. The Q1 was very consistent with previous quarters and our sector, really, really late stage is very much different from the world where SVB operated in terms of their venture debt book. And as we said in our opening remarks, none of our companies had lending relationships with SVB. We had a number of companies that had depository relationships but have since diversified those. So basically, no impact on our portfolio from SVB.
[Operator Instructions] Our next question comes from the line of Melissa Wedel, JPMorgan.
I was hoping that you could walk through the restructuring that took place in 1Q around Gynesonics. I know that you touched on that earlier, but could we walk through kind of what triggered that and then anything else in the portfolio beyond what's been disclosed where you feel like there might be some restructuring activity.
Sure. So Gynesonics has been a portfolio company for a reasonable period of time. Gynesonics was through mid to late fourth quarter, had initiated a regular way capital raise, and they were making progress on that. As we got deeper into first quarter and there was more capital markets uncertainty, more kind of locked up in the venture markets, concerned about the economy, their regular way capital raise turned into an opportunity for a couple of the existing sponsors to really clean-up the deadwood and take a bit of a heavy hand on that cap table and at the same time, bring in new equity to support the company's growth and development. In order to close that transaction, help facilitate it and give the company the room to grow and execute their business plan, we still remain at the top of the capital stack. The entire investment still remains senior to any other capital, including the new equity that came in junior to us. We broke that into two pieces, the senior secured term loan and then a senior preferred equity piece, which was in effect to reduce the cash interest burden there. And it gave us substantial upside in the business, and there was also some other upside that we received. So we think that's a good outcome for the company and the sponsors, and we expect to see them to continue to execute on our business plan.
As to other names in the portfolio, as David indicated, we're not seeing any more or less activity from an amendment standpoint than we would normally see and we're confident in all of our processes and decision-making that led to that restructuring of Gynesonics.
So with that said, that we don't see anything specific, I think we believe or anticipate that there will be more situations where there is a fracturing of the equity syndicate. Our average company is 14 years old. So you can imagine that people that started 14 years ago were out of money and the people that did the most recent round had high expectations for return. And so that can lead to a fracturing of the syndicate and can also have a wipe-out round situation, which is essentially what you saw at Gynesonics, where the folks with dry powder they will go forward, but folks without capital, without an ability to participate are going to get wiped out and I would be shocked if we don't see more of that. It's very typical at the end of a venture cycle and is to be expected and isn't necessarily a bad thing for us, the strengthening of the syndicate, which will result from the strong investors going forward and the weak investors being weeded-out is actually a good thing. And we've got to deal with it in terms of valuations and request for us to provide some accommodation, but it's part of the business. We don't see any specific situations now, but would not be surprised if we do see some pop-up over the course of the year.
Just looking at the portfolio now, obviously, there was a tick-up, I think because of that particular transaction in exposure or portfolio allocation to preferred, as we go through the cycle and you potentially see more of these situations come to pass, how do you think about portfolio allocation to preferred and common equity? Is there some sort of cap that you think about as being reasonable for the portfolio?
They could be extremely interesting investments, but that's not what you folks are paying us to do. This is a credit-first current return-focused investment fund, and that's where our commitment lies. So we don't have any stated cap, but the preference would be zero. This is not a structured equity fund or anything like that. It's focused on current return, senior secured first lien loans, and we prefer to keep it that way. So simple answer is we'll try to avoid any of it. But when it's required, we'll try to make the most of it and I'd say we're quite adept and skilled at understanding what's the best way to structure something like that so that we maximize the return. So simple answer, Melissa is we're hoping not to have any more, but I don't think that's realistic.
One last follow-up then on that, if I could. Are there other vehicles at Runway that could participate that are perhaps more inclined to hold a preferred or an equity position or is that sort of a standard approach across all of the product offerings your way.
We have one other fund, which is a private LPGP fund, which has a strategy that's very similar to the BDC. So we don't have any kind of a structured equity, restructured debt or preferred focused fund that would be a potential place for one of those. So the answer is, unfortunately, no. I think the time for those is pretty interesting, and you've seen a lot of them raise, and we see a lot of those folks out in the market, but they're not really competitive with us because they tend to focus on more troubled situations and we're really, especially for new loans, trying to make sure that we're lending to the very best companies we can and make it clear that our type of capital is not rescue finance.
[Operator Instructions] Our next question comes from the line of Mickey Schleien of Ladenburg.
Just a quick question on the investment yield you show on Page 16 of the presentation. The weighted average declined 30 basis points and obviously, reference rates have been climbing substantially. I was hoping you could expand on what caused that and I realize there were movements in the portfolio. But was there anything else we should be aware of that caused that move directionally and which could affect the outlook for the balance of the year.
A lot of it just has to do with the composition and the origination in the prior quarter, Mickey. And so our average SOFR spread probably came down a little bit in fourth quarter, which then flowed through into first quarter. That's part of just our purposeful and intentional strategy of being very late stage and upmarket. So some of those transactions are going to end-up having a little tighter yield vis-a-vis where we might have been 24 months ago.
[Operator Instructions] I'm showing no questions at this time. I'd like to turn the call back over to Mr. David Spreng for any closing remarks.
Great. Thank you, operator. Runway's first quarter operating performance is indicative of the high-quality durable portfolio we have constructed to navigate the current environment. Our team remains confident in our disciplined approach of deploying leverage to drive prudent portfolio growth while partnering with the latest stage companies in the venture market. We believe that Runway is well-positioned to thoughtfully grow earnings and shareholder value in any market environment. Thank you all for joining us today. We look forward to updating you on second quarter 2023 results in August. Goodbye.
Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.