Ladies and gentlemen, thank you for standing by, and welcome to the Runway Growth Finance Third Quarter 2022 Earnings Conference Call. Please be advised that today's conference 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 third quarter ended September 30, 2022. 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 third quarter 2022 financial results were released just after today's market close and can be accessed from Runway Growth Finance's Investor Relations website at investors.runwaygrowth.com. We have arranged for our playback 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, the uncertainty surrounding the COVID-19 pandemic, changing economic conditions and other factors we identified from time to time 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 third quarter results. I'd like to start by providing an overview of the quarter, operational highlights and a brief market update. Runway Growth generated record third quarter originations and net investment income results fueled by disciplined execution against our strategic initiatives. Our success underscores our credit-driven investment process, which provides the downside protection of debt with the potential for upside of equity. Runway Growth's weather-proof platform has been built to navigate all operating environments. This call marks a little over a year since Runway Growth went public. As we prepared for life as a public company, we believe we had significant opportunity for portfolio growth, ROE expansion and to build what we believe to be the most stable portfolio among our venture lending peers. We knew that we would do this by deploying leverage to accelerate prudent portfolio growth, while partnering with the highest quality late-stage companies in the venture market. Over the last year, Runway Growth has delivered gross fundings of $585 million, resulting in 55% net portfolio growth; expanded ROE 130 basis points to 10.1%, nearly quadrupled our leverage ratio to 0.6 times; strengthened our balance sheet with diversified capital sources; recorded zero realized credit losses; and increased our dividend per share for four consecutive quarters from $0.25 to $0.36 per share. This has been a historic year for our company and we believe there is ample room to run for the balance of 2022 and into 2023. Runway Growth represents a compelling opportunity for investors that are looking for stable returns generated from partnering with some of the highest quality growth companies in the market. Now let's dive deeper into the third quarter. We are pleased with our ability to originate and…

Thanks, David, and good evening, everyone. Runway Growth completed nine investments in new and existing portfolio companies in the third quarter representing $216 million in new commitments, which included $161 million in funded loans. Runway's weighted average portfolio rating increased to 2.2 from 2.1 in the second quarter. As a reminder, our risk rating system is based on a scale of one to five, where one represents the most favorable credit rating. At quarter end, we continue to have only one portfolio company rated five and on non-accrual status. We attribute this to the partnerships we form with portfolio companies. We conduct extensive due diligence and risk analysis that meaningfully informs our underwriting and subsequent monitoring programs. This order of operation optimizes deal terms for us along with our borrowers. If one of our companies goes on nonaccrual status, we evaluate ways we can work with management to bring it back to a performing loan, while best protecting our interests as the lender. Our mission is to support passionate entrepreneurs that lead best-in-class, late-stage companies by positioning them for success from term sheet to final payment. At the end of the third quarter, our total investment portfolio, excluding U.S. treasury bills, had a fair value of approximately $910.2 million, compared to $807.7 million at the end of second quarter and $586.4 million for the comparable prior year period. This represents a sequential increase of approximately 13% and a year-over-year increase of 55%. As of September 30, 2022, Runway Growth had net assets of $573.7 million, decreasing slightly from $579.4 million at the end of the second quarter. NAV per share was $14.12 at the end of the third quarter compared to $14.14 at the end of the second quarter. We're pleased with our stable NAV, which we feel reflects industry-leading…

Thank you. [Operator Instructions] Our first question will come from the line of Mickey Schleien from Ladenburg. Your line is open.

Yeah, good evening. David, a couple of questions. You talked about the fact that your investment thesis in the sector remains intact in terms of the attractiveness of the type of funding you provide. I just want to further understand how is the volatility in the market? And in particular, the rising interest rate environment, whether we're looking at LIBOR or SOFR sort of impacting the organic demand for your capital as opposed to refinancings, which we understand it will be suppressed under this environment.

Yeah. So great question. The major tailwind is, as we highlighted, that debt remains cheaper than equity. And as you pointed out, debt is getting a little bit more expensive with rising interest rates. But equity is dramatically more expensive with valuations half of where they were, and now, in today's market, coming with onerous terms. So venture-backed companies, particularly the best ones, the ones that could raise equity if they want to, are deciding not to and are looking at debt as a better solution -- a less expensive solution. Certainly, less expensive from dilution. However, the cost of interest is higher, but it's not a meaningful portion of the expense budget for any of these companies. The average loan to value is sub-20%. And interest is just not a big factor in terms of their consideration. And you have to consider from their point of view, it's really what are they going to do with the money and what's the return on the investment. And if they can double their top line without giving up any additional equity and in the process, double the value of their business, that's far exceeds the cost of the interest. So we really have not had a huge amount of pushback or people looking for fixed rates. I mean we're really fortunate to have zero fixed rate loans, and we just don't do that. So -- and the feedback from the market is, of course, we don't like rising rates, but it's still cheaper than equity and we still get a really good return on our investment.

So, David, with those comments you just gave us in mind, how would you characterize the size of your pipeline today versus a year ago? And perhaps even more importantly, the quality of the pipeline.

Yeah, I'm glad you added that. So the quantity has never been bigger and the quality, and this is subjective, but has never been higher. So the higher -- I would say, the highest quality of companies are coming to us. And one of the reasons is, of course, the expense that's associated with equity, but also the fact that some of the folks that were most active in providing, let's call it, the latest possible stage pre-exit money have exited the market, hedge funds, for example, even SoftBank. Some of the funds that were honestly a competitor to us, because if you could raise equity capital at $2 billion, then that's really not very dilutive. And it gives you a nice press release that it makes the employees feel good and all of that kind of stuff, but we're not seeing that today. So there's less competition from equity. And as a result, the quality of the companies we're seeing has never been higher.

I appreciate that. My final question, I'm not sure how to look at the performance of your portfolio companies relative to the typical BDC. In this economic environment, we're -- I mean, we're generally seeing BDC portfolios producing revenue growth more or less in line with inflation, but margins coming down. Is that also true in your venture space? Or are these companies at such high growth trajectories that they haven't been affected yet by the slowdown in the economy and the sort of cost input -- increases that we've seen?

Well, it's difficult to generalize. We have a very diversified portfolio across three broad segments: tech, life sciences and consumer. On whole, the portfolio is still very much in growth mode. I think you're seeing some companies having changed their forecast for 2022. But by and large, for the most part, I mean, out of roughly 30 companies, call it, five -- four or five have reduced their plans. So most companies are still achieving the revenue plans that they put together at the end of last year, early this year. And I'd say we're seeing that impact more in the consumer than we are in the tech and life sciences verticals.

And David, I'm sorry to keep asking questions. But based on what you just commented, have you started to see 2023 projections for these companies? And are they being more conservative relative to where they were before?

So we, of course, have a 2023 plan for every company, but we haven't really started to see the official, let's call it, Board-approved plan yet. So I can't really give you feedback. Just in talking to companies, I would say, they're taking a cautionary view. Of course, they still want to grow and they're still going to continue to invest in growth, but they're being a little bit more thoughtful on it, and there's probably a plan B. And I'd say especially as it relates to hiring, because it's one of the biggest expenses for almost all of our companies, that is being paced, I would say. Like we'll hire, but only when we really need it and maybe a little bit slower than we might have otherwise. So bottom line, my answer to your question is, no, we have not started to see 2023 official plans yet.

Okay. That's it for me this evening. I appreciate your time. Thank you very much.

Thank you.

Thank you. Our next question will come from the line of Casey Alexander from Compass Point. Your line is open.

Hi, good evening. And thank you for delaying your call till 6 o'clock. I know it's pain but with everybody else diving in at 5 o'clock it's actually less stressful at 6 o'clock. So I appreciate that.

Well we appreciate you too.

You actually had reasonably almost robust sales and repayments of investments compared to much of what we've seen across the venture debt universe, especially relative to your size. Could you give us some color as to where they came from, what some of the circumstances are? Because your ability to recycle is as important as your ability to originate, and seeing paybacks in this environment is actually quite encouraging.

Yeah. Well, let me just make an overall comment, and then Tom can provide some details. But prepayments are very difficult to plan or project. We get -- if there's an M&A transaction that's been in the works, we'll know about that. Certainly, if a company is looking to go public, we'll know about that. We did have one company that actually did get public by SPAC. So we're -- we get a little bit of warning, but it's hard to plan. And so it is an inevitable part of our business. And I think we're going to see less M&A activity, less -- certainly fewer IPOs and probably fewer of any SPACs. So I expect the volatility to probably slow down a bit over the next year, but I think we're going to see more private-to-private mergers, where two venture companies will merge together. And that can be a good situation for us because it usually gives us the option to decide if we want to stay in or if we want to get refinanced out. So I don't know, Tom, do you want to add some color on specifics?

I would just say that some of -- there were two refinances, both of which we participated in, one of which was a broader syndication. This is for the SPAC company that allowed us to reduce our exposure a little bit. And because it was the right thing to do for the company to diversify its funding sources, but still stay in the loan. I think in terms of predictability, there are some very attractive late-stage companies that are in process of always evaluating opportunities and that could flow through. So we do expect some level of recycle, probably more from M&A and less from refinance. There are some loans that are now converting into the end of the interest-only period and will start amortizing. But again, hard to predict, but we do expect the opportunity to recycle. We'll be -- it won't be as robust as 2021, but it will still be reasonably meaningful.

Okay. Secondly, and this is just kind of an oddity that I noticed. In the second quarter, your PIK income jumped up about $2.5 million over the first quarter. And then in this quarter, it dropped right back, actually to a level even lower than where it was in the second quarter. And I'm just curious how that cadence occurred in terms of PIK income? And was it just a one quarter pass that you gave a company? Or how that came about?

That was the collection of the income that had been PIKed -- the interest that had been PIKed on Mojix. If you remember, Mojix was a long-time category five and non-accrual loan. We had a long-term plan to work with that company and see it through to sale. And it was sold in second quarter, and therefore, we were able to recognize all that previously deferred PIK income. So it's not -- it was the second quarter aberration.

All right. Great. Thank you. That explains it. All right, thank you for taking my questions.

Yeah, of course. And we should clarify. As a normal course of business, our loans are cash paid. So that was that workout situation where we just got it all after five years. So all right, we can go to the next call, please.

Thank you. Our next question will come from the line of Bryce Rowe from B. Riley. Your line is open.

Thanks very much. Good evening, thanks for taking my question. I wanted to, Tom, ask you. It looks like you're almost a bit more asset sensitive here at the end of September than you were at the end of June. I think if you look in the presentation from last quarter to this quarter, that 200 basis point move in LIBOR will have a positive impact of $0.34 on NII versus $0.30 last quarter. I mean not a huge jump, but just curious what's driving the increased asset sensitivity.

Well, the portfolio is still floating rate, but now we've added during the second -- during the third quarter, $100 million in fixed rate notes. So as the interest rate goes up, we're not fully matched SOFR to SOFR as if it were financed against the revolving credit facility. So we'll get the benefit of those two new fixed rate tranches in our capital structure.

Okay. That's helpful. Thanks. And then, David, I think in your prepared remarks, you mentioned spreads being stable here, which is a good sign, but other terms might be shifting to in the favor of lenders. So I just wanted to see if you could possibly expand on that comment.

Yeah, of course. So spreads are pretty stable, which is good. The terms that we see improving our in covenants and in warrant coverage, where we're just able to get marginally better warrant position. And importantly, and the thing we care the most about, is just able to get either more covenants or tighter covenants, which we view as beneficial to both the lender and the borrower. And we've been pretty successful at communicating that to potential borrowers and convincing them that a properly structured covenant package makes sense for both parties.

Great. That's helpful. Thanks. And then maybe one more for me, Tom. You highlighted the increased commitment level for the revolver, just curious if you're adding lenders to that? Or is that existing lenders upping their commitments?

No. We are adding lenders and the -- there's (inaudible) $500 million on the facility, we were at $425 million at the end of Q3. And we're always looking to diversify that lender base, and we'll continue to do that, as well with all of our, frankly, sources of debt.

Great, thanks so much. That's it for me.

Thank you.

Thanks, Bryce.

Thank you. [Operator Instructions] Our next question will come from the line of Melissa Wedel from JPMorgan. Your line is open.

Good evening. Thanks for taking my question. The first is actually more of a clarification. I want to make sure I heard you right in your prepared comments. I think you said subsequent to quarter end, there were 2 transactions that were closed for $56 million of funding. Is that right?

I think it's $64 million of funding.

$64 million, I think, yeah.

$64 million, okay.

But yes, close subsequent to the end of the quarter.

Got it. Okay. Appreciate that. And then in thinking about a really active third quarter, is there anything we should be thinking about in terms of kind of the timing of those fundings and when they were added to the portfolio? I think sometimes we can see things get kind of skewed towards the back half of the quarter and maybe not fully contribute to the P&L. Was anything -- is there anything we should be aware of on that?

As we always say, that deals tend to close at the end of the quarter and that was really true for the third quarter as well, and it was I think just a great testament to our origination team and the pipeline now that we're out of the box in the fourth quarter with two deals closing in the first month. But typically, and I would expect this will remain the case for the balance of the fourth quarter, that deals end up closing at the end of the quarter.

Yeah. Understood. And if I could sneak in one last question. You mentioned your exposures in terms of industries in tech and life sciences and consumer. [Technical Difficulty] And thinking specific to consumer, given sort of the macro uncertainties out there, concerns about weakening of the consumer into '23, is there anything that you're looking at differently with your consumer-related companies or prospective consumer investments?

Well, expectation that we're going to be living through an economic downturn and that the business model of the company needs to be resilient to that. Obviously, we're going to spend more time ensuring that there is adequate capital to weather any storm. And we're not going to take excessive downstream financing risk. And it's one of the benefits of being, very often, the last money that the company needs before they exit or get profitable is that we can really do a lot of scenario analysis on how much it's going to take to get to that point. And so -- we've been historically consistently thoughtful and cautious about not doing anything that is an element of fad or subject to consumer whims and that kind of stuff. So really just continuing to focus on recession-resistant stuff, capital-efficient business models and world-class management.

Thank you.

Thank you. I'm actually not seeing any further questions in the queue. I'd like to turn the call back over to David for any closing remarks.

Thank you, operator. At Runway Growth, we're focused on building a high-quality portfolio that will generate stable and attractive long-term shareholder value. We have the team in place to execute on our strategy and deliver for years to come. Thank you all for joining us today and for your support. We hope everyone stays safe and healthy, and we look forward to updating you on fourth quarter and full year results in March.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.