Ladies and gentlemen, thank you for standing by. And welcome to the Runway Growth Finance Fourth Quarter and Fiscal Year Ended 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Quinlan Abel, Assistant Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good evening, everyone. And welcome to the Runway Growth Finance Conference Call for the fourth quarter and fiscal year ended December 31, 2023. Joining us on the call today from Runway Growth Finance are Greg Greifeld, Acting Chief Executive Officer of Runway Growth Finance and Deputy Chief Investment Officer and Head of Credit of Runway Growth Capital; and Tom Raterman, Acting President and Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's fourth quarter and fiscal year ended 2023 financial results were released just after today's market close and can be accessed from Runway Growth Finance's Investor Relations Web site at investors.runwaygrowth.com. We have arranged for a replay of the call at the Runway Growth Finance web page. During this call, I want to remind you that we may make forward-looking statements based on current expectations. These 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 uncertainties surrounding rising interest rates, changing economic conditions and other factors we identified 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 Web site. With that, I will turn the call over to Greg.

Thanks, Quinlan, and thanks, everyone, for joining us this evening to discuss our fourth quarter results. Today, I'll touch on 2023 highlights, provide an overview of the operating environment, discuss our key takeaways from the fourth quarter, 2023 as a whole and share our outlook for the year ahead. In 2023, Runway took a measured approach, which delivered on our strategy and set the stage for us to take advantage of more favorable market conditions in 2024. Throughout 2023, Runway generated strong risk adjusted returns, preserved leading credit quality and reduced our leverage to free up dry powder for new deals in a more lender friendly market in 2024 while also supporting existing portfolio companies. Since the fourth quarter of 2022, Runway has expanded its return on equity by 33 basis points to 13.1% and annualized dividend yield by 186 basis points to 15.1%. These strong returns are underpinned by what we believe to be the least risky portfolio in the venture debt space with 99% senior secured first lien loans. Runway remains committed to driving shareholder value, which is enforced by our strong and consistent base dividend and ongoing supplemental distributions. Turning to investment activity. 2023 was a transitional year as companies and sponsors adjusted to the new normal of higher interest rates, tighter covenants, lower valuations and generally lower amounts of both debt and equity capital. Our actionable pipeline remains strong. But few deals met our underwriting criteria as companies held unrealistic expectations, particularly in the first half of 2023. As a reminder, we aspire to help the best companies access non-dilutive capital to fuel growth. We are not a lender of last resort to help fix a troubled situation or give management teams one last chance to swing for the fences. We believe our operating results speak…

Thanks, Greg, and good evening, everyone. Reflecting on 2023, we are proud of Runway's performance amidst a challenging operating environment for our portfolio companies and fundraising environment across the venture landscape. We completed eight investments in the fourth quarter, representing $154.6 million in funded loans. Our weighted average portfolio risk rating increased to 2.39 in the fourth quarter from 2.24 in the third quarter of 2023. Four portfolio companies moved from Category 2 to Category 3 during the quarter. Our rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating. Our portfolio continues to be concentrated in first lien senior secured loans focused on the latest stage, highest quality companies in the venture debt market. With 99% of our portfolio with a weighted average risk rating of 3 or better, we're focused on maintaining a high bar for evaluating investments. In line with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the third quarter and the current quarter. We found that our dollar weighted loan-to-value ratio slightly increased from 24.7% in Q3 to 27.8% in Q4. Our total investment portfolio had a fair value of approximately $1.03 billion, excluding treasury bills, flat from $1.01 billion in the third quarter of 2023 but a decrease of 9% from $1.13 billion for the comparable prior year period. As of December 31, 2023, Runway had net assets of $547.1 million decreasing from $570.5 million at the end of third quarter of 2023. NAV per share was $13.50 at the end of the fourth quarter compared to $14.08 at the end of the third quarter of 2023. Included in our Q4 2023 investor presentation is a detailed NAV bridge. The decline in NAV is…

[Operator Instructions] And our first question for today will be coming from Finian O'Shea of Wells Fargo.

Just a question sort of higher level on the investments [Indiscernible] [filed] and nonaccruals. So you've always described the strategy as growth that where you're lending to more so profitable companies that are transitioning or pivoting into something, but which makes them unprofitable, but that there's a core business with franchise value that mostly covers you. So in the sort of cases that are going wrong, can you touch on -- is it more related to the new venture or the core business that sort of falls off from your underwriting?

And specifically this quarter, we now have the one name on nonaccrual Mingle Health, as Tom spoke about on the call, that is a position that has been in our portfolio for quite some time. It is a smaller portfolio to a smaller company, which was in line with our strategy as we were originally building the book. This one has had some bumps along the road, as you can imagine, not only in terms of regulatory headwinds dealing with COVID but also some just operational issues. We do believe that there is material value here in excess of what we are owed. The situation is very fluid right now but we are working with them to make sure that we get the right security on this company for them to maximize the value.

And then also we're seeing a lot of broadly challenging venture. Is this -- can you talk about the sort of high level backdrop? Is there sort of a headwind on VC fundraising that's finally working its way through and impacting companies that way or just more of what we're seeing here is more run of the mill or idiosyncratic?

I think there definitely are overall segment headwinds in terms of funds having less dry powder than they might have anticipated, having to take longer to raise that next fund than they may have anticipated. And as we said in our prepared remarks, 2023 really was a transitional year as the funds and the companies realize that new normal of less plentiful and smaller dollar amounts available for them, which has led to a lot of internal work making sure that cost structures have been changed to meet the new normal in terms of actual available to liquidity as well as making sure that they're engaging in R&D and other look forward projects that they actually will have the ability to fund through fruition. So in long and short, there definitely are some market headwinds in terms of capital having been less available. However, on the whole, we think that, that leads companies to be stronger having to face this and ramp down their burn.

And our next question today will be coming from Melissa Wedel of JP Morgan.

I wanted to start with Pivot3, in particular. I know this one has been on nonaccrual for a while or had been on nonaccrual for a while. But even as a quarter ago, I think you guys had that mark like 65% about of costs. Just trying to understand how that so quickly unrivaled to a full write-down in the fourth quarter?

So speaking specifically about that name. As we had mentioned, we are exploring an IP monetization strategy with them, which we believe still has viability, and we believe still has the chance for success. However, just looking at the time frame and potential additional capital required, we realized that we have less confidence in that capital being raised in the near term. We've been clear from the beginning that we're not in the business of funding risk capital for IP litigation. We're in the business of recovering capital. So just feedback around the time frame, not the viability of that has led us to revisit the mark as we have transitioned through a credit bid away from the loan.

I also wanted to try to reconcile some of the comments that you're making about expecting elevated prepayment activity, particularly in the back half of '24, but also noting that there were a lot of investments that were sort of meeting your thresholds to make it into the portfolio. Should we be thinking about 2024 as a flat, maybe deleveraging year for the portfolio?

So as we think about just the pattern we look forward, the pattern of prepayments and we look forward, we have a sense as to what will come. The theme for this year really for us is sticking to our knitting, not changing the standards, focusing on the portfolio that we have in place. There's obviously a significant number of deals in the pipeline that we could do. We always ask should we do them. So I think in terms of the portfolio, we'd like it to be flat, at least flat, if not slightly up. We'd like to see our leverage slightly over 1 by the end of the year but we're not going to compromise our credit standards in this environment to get there.

And the only thing I would add to that completely agree to add another idiom of beyond sticking to our knitting, we really view the portfolio as a marathon not a sprint. Our view is to, and goal is to have, liquidity and access to capital to make the best loans to the best companies as the market has the availability for it.

Our next question today will be coming from Bryce Rowe of B. Riley.

I wanted to maybe start around the unrealized depreciation in the quarter beyond what you saw from CareCloud. I think, Greg, you mentioned -- or maybe Tom, you mentioned four companies that went from an internal rating of 2 to 3, and assume that there might have been some fair value mark associated with that. Can you maybe talk about some of that fair value mark process in the quarter, again, away from CareCloud and I guess the reversal of the unrealized depreciation that you already had on Pivot3?

Well, by far, the two largest components were CareCloud and Pivot3. There was also a marked change in the equity portfolio that was roughly $1 million on our warrant position in Aria. And the rest were really nothing significant, frankly, even in the names that went from 2 to 3. I would say, as a whole, we probably adjusted our discount rates up just a bit, which had that impact. But there was nothing that was really monumental or alarming. It was just kind of natural drift outside those three that we talked about like adding the equity piece in Aria.

Maybe just a question or two around the joint venture. Can you talk about maybe the type of investment that will go into the joint venture, is it similar to what you would put in your own portfolio? And then what type of kind of equity debt do you expect to, I guess, as a capital structure for that joint venture?

Well, first of all, I just want to say, we are delighted to have this joint venture with Cadma. Cadma is run by some Silicon Valley veterans who really know the ecosystem and the venture lending market very well. And then, of course, being part of Apollo, one of the world's largest alt investment managers that's quite significant. In terms of the amount that we're putting in, initially, we're each putting in $35 million in equity and then we've arranged financing to take it up potentially to $200 million or even more. So that's the initial cap structure that we're thinking about. And in terms of the focus, it's really largely what we're doing. We view this as an opportunity, particularly in a situation where we can't, won't go to the equity markets as an opportunity to continue for us to stay in the market with those late stage companies where the deals tend to be larger, diversify the portfolio through that JV, through our interest in the JV and add a new earnings stream.

And Tom, in terms of kind of helping us think about how that could ramp. I mean like you said, you all will typically underwrite maybe larger deals, dollar value deals. And so it theoretically wouldn't take but a few to really ramp that thing off. Am I thinking about that the right way?

To some extent. I think our view is also to build diversification and Cadma's view to is to build diversification within the JV. So I think you should think of it as an equity ramp through the balance of this year. We don't intend to sell any loans from our book into that joint venture at this point, and I don't think that's going to change. So I would view it as steady ramp through the year but keeping diversification in that JV relative to the size as it grows.

The next question is coming from Eric Zwick of Hovde Group.

Maybe to start with a follow-up on kind of Bryce's question on the JV. Just curious if the partnership with Cadma, and you mentioned kind of relationship with Apollo as well. Does that broaden the kind of sourcing funnel at all or any benefits from that partnership as well?

It's certainly a strategic partnership for us and we expect to see many benefits beyond just one of expanding sources of capital.

And then just with regard to the current pipeline. Can you provide any color in terms of the mix as it kind of pertains to new investments versus add-ons and are there any particular industries that you're seeing are more active today in the pipeline?

I'd say the pipeline is definitely weighted more towards new investments. We always are mining the portfolio to see opportunities to give more money to the best companies outside of our already scheduled delayed draws. In terms of sector, I think we're seeing a lot of opportunity across the gamut of the three legs of our investing universe technology, life sciences as well as consumer and expect the split to remain consistent throughout this year.

And last one from me, just curious about your appetite to use the repurchase authorization kind of in '24 at all?

I think that's really a function of where the stock trades. I mean there are two ways to return capital to shareholders. One is to build the book and continue to grow the dividend and the other is to repurchase shares. Ultimately, we'd like to get to the point where we can kind of raise equity. So if we get trading closer to NAV we’re -- at some point, hopefully, above NAV here, I would expect to see usage under that program to be less significant.

Our next question will be coming from Mickey Schleien of Ladenberg.

Not to beat a dead horse, but I have a few more questions on the JV. First, Tom, could you repeat what you said was the debt-to-equity target for the JV?

Initially, it's going to be $70 million in equity, which will be comprised of 50%, so $35 million from each of us and then will grow to at least with that equity base up to $200 million, so another $130 million in debt.

And Tom, what is your target return on invested capital on the JV?

So the asset level returns are really going to be the same as what we're looking at in the core portfolio, they shouldn’t vary significantly, so you just apply the leverage. And we would think that we get very similar return on equity if not a little greater on that because there is more leverage.

And I just want to confirm, Cadma is 100% owned by Apollo. Is that right?

That's a question for Apollo really so, but Cadma is definitely part of Apollo.

And how does Oaktree feel about Runway working with Apollo, given Oaktree and Apollo, obviously are competitors?

Oaktree continues to be a very supportive partner and they understand that we're going to do things to expand our footprint, our access to capital and they embrace it. Obviously, Oaktree is on our Board, and they were fully supportive of the program. And it's something that we've talked about and has had a fairly meaningful gestation period.

And the JV is not going to be competing with any other part of Apollo. Is that correct?

That's our objective, yes.

And how will you allocate deal flow between the BDC and the JV?

So our goal in the BDC is really to increase our diversification in the portfolio. There are certain limitations under our lending agreements that where it drops out. So there's a series of limitations, deals over a certain dollar amount, we lose in our borrowing base for the key bank revolver to the extent we hit concentrations in various industries or maturities, things like that. The JV will pick those up first and allow us to maximize the availability under our revolver and effectively utilize our leverage there. So that's really the focus on the allocation is making sure that we're using our leverage effectively and using the assets effectively to gain leverage.

And just lastly, last quarter, you gave us a little bit of an update on David's -- the expectation for David Spreng to returns to day-to-day involvement with the company. Anything you can say on that at this time?

Really, no change. We expect David to be back later this year. I know he certainly appreciates all the well wishes he's received, and Greg and I speak with David quite frequently.

Our next question will be coming from Casey Alexander of Compass.

I missed quite a bit of this call because I had another conference call that started at 4.45, so I apologize for that. I do want to confirm that if I read the release correctly, in the fourth quarter, you did not repurchase any shares?

That's correct.

And I'm curious why after the Oaktree offering in November when the stock was quite weak, how come you chose not to repurchase some shares in that window?

Well, Casey, we looked at how the stock traded, we looked at the opportunities for us to deploy capital. And the stock really moved back, in our opinion, into a trading range where we felt it could stand on its own and decided to reserve that dry powder -- either in the program itself or the dry powder on our balance sheet for a period where there was a greater need.

I'll get the rest of this from the transcript. I'm sorry, I got here late, and I don't want to ask you to repeat anything that you've already said.

Thank you. And at this time, there are no more questions in the queue. And I would like to turn the call back over to Greg Greifeld for closing remarks. Please go ahead, sir.

Thank you, operator. We see immense opportunity for growth in the year ahead and believe we are well positioned to provide essential support for high quality, late stage companies that are faced with a variety of nuanced funding challenges. Thank you all for joining us today. We look forward to updating you on our first quarter 2024 financial results in May.

This concludes today's conference call. Thank you for participating. You may all disconnect.