Ladies and gentlemen, thank you for standing by. And welcome to the Runway Growth Finance Fourth Quarter 2022 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Mary Friel, Assistant Vice President, Business Development and 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, 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 fourth quarter and fiscal year 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 a replay of the call at the Runway Growth Finance webpage. 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 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 the rising interest rates, the impact of the COVID-19 pandemic, changing economic conditions and other factors we identify in our SEC filings. 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 the 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 fourth quarter results. I’d like to start by providing fourth quarter 2022 highlights, then I will discuss broader market dynamics and the outlook for 2023. 2022 was a pivotal year for Runway. It was our first full calendar year as a public company. We believe our investment thesis was validated and we demonstrated the value in pursuing a portfolio that focuses on the latest stage companies in the venture market. Despite a volatile backdrop, Runway continued to prudently deploy leverage to fuel non-diluted growth for its portfolio companies, while delivering five consecutive quarters of dividend increases to our shareholders. Since inception, we have built a track record of lending to what we believe to be the highest quality, late and growth stage companies. I want to take a moment to summarize our very successful year. Runway delivered record originations of $878 million. We expanded leverage more than seven-fold to 0.97 times. We grew ROE 165 basis points to 10.3%. Increased our base dividend per share to $0.40, marking an 11% increase from our prior quarter and 60% increase since our initial public offering. Additionally, we declared a supplemental dividend of $0.05 per share payable with the first quarter dividend, along with our intention to pay a similar dividend in each quarter of 2023. We recorded zero realized credit losses. We expanded our investment in finance teams by over 40% and we grew our strategic footprint with new offices in Boston and Dallas. Now let’s turn to our fourth quarter results. Runway closed 2022 with record fourth quarter portfolio growth. We completed 12 investments in new and existing portfolio companies. This represents $327 million in new commitments, including $233 million in funded loans. Runway is committed…

Thanks, David, and good evening, everyone. Runway completed 12 investments in new and existing portfolio companies in the fourth quarter, representing $327 million in new commitments, which included $233 million in funded loans. Runway’s weighted average portfolio rating improved to 2.1% from 2.2% in the third quarter. As a reminder, our risk rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating. At quarter end, we continue to have only one portfolio company rated 5 and on non-accrual status. At the end of the fourth quarter, our total investment portfolio, excluding U.S. treasury bills, had a fair value of approximately $1.1 billion, compared to $910.2 million at the end of the third quarter and $684.5 million for the comparable prior year period. This represents a sequential increase of approximately 24% and a year-over-year increase of 65%. As of December 31, 2022, Runway had net assets of $576.1 million, increasing from $573.7 million at the end of the third quarter. NAV per share was $14.22 at the end of the fourth quarter, compared to $14.12 at the end of the third quarter. We are 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 reflects the base rate plus the credit spread set at the time of closing or signing of the term sheet. In the fourth quarter, we received $16 million in principal repayments, a decrease from $55 million in the third quarter of 2022. We expect prepayment activity to remain relatively low, given equity valuations and a…

Thank you. [Operator Instructions] And our first question comes from the line of Mickey Schleien with Ladenburg.

Yes. Good evening, everyone. David, I wanted to ask you about the Internet and Direct Marketing Retail segment. I realize it’s not particularly large, but obviously, we are all aware of the headwinds that the consumer is facing and I am curious whether this segment, I am curious how this segment is performing in light of those headwinds?

Yeah. Thanks for the question, Mickey. So of the different sectors that we focus on and just as a quick reminder, it’s within tech, we really like mission-critical enterprise technology, we like life sciences and healthcare broadly, and the third bucket that would be the one we are kind of being most cautious on is the consumer and we have always focused on recession-resistant businesses. And so for something in the consumer space for us to do it today, it’s going to have to be recession-resistant and have very impressive momentum and economics and the new deal that was done in the last quarter meets those standards and that’s Madison Reed, and you are right, it was not a very big loan, but the company is really very well run, has really good economic metrics and is quite recession resistant. They built a fantastic business direct-to-consumer and then through COVID actually raised quite a bit of equity to roll out an omnichannel approach where they have these color bars in big cities with a very small footprint a great economic model. And most importantly, the revenue model is mostly on a subscription basis where a woman primarily could pay a fixed monthly charge and come into the color bar as much as they want or on a a regular basis. So it’s the smallest part of our portfolio. It’s the highest bar to get into the portfolio today, but we do think that selectively there is room for continued investment in that space.

That’s good to hear, David, and I appreciate that transparency. You mentioned in your prepared remarks a focus on more sponsored deal flow and I don’t recall off the top of my head what proportion of the portfolio is sponsored today, but to the extent there’s headwinds developing in your portfolio. Anything anecdotal you can tell us about how sponsors are behaving in the portfolio in terms of supporting your portfolio companies?

Yeah. Of course. The comment that I made in the prepared remarks was referring to PE-backed companies. So a different category of sponsor than the traditional VC and we did two deals in Q4 with PE sponsors, one that was sponsored by Mainsale and one that was sponsored by BlackRock and we really like their backing. They are obviously very sophisticated and are very committed to their companies and our great counterparty for us. So we plan to continue to look for more PE-sponsored companies. The broader question you asked is about within the portfolio, how are sponsors behaving? And I would say that in venture land you are seeing a lot of VCs doing triage on their portfolios and deciding that the limited amount of capital that they have access to even though there is a lot of dry powder in the system right now. But most VCs are thinking, okay, this is going to have to last us a long time and we are really only going to feed our very best companies and the ones that don’t make the cut will be nice to them and let them know we still love them, but we are going to let them know we don’t have additional dry powder. So for our companies, we have really advised them to test that and go back to their venture investors and ask how much dry powder do you have and is it still good, and if possible, actually, do around. And so we have seen situations where VCs have backed out of what were otherwise commitments. And as a result, you will see occasionally, what we call a down and dirty or a wipe out round where the go-forward investors, say, we will continue to invest, but we are not going to let the guys that aren’t investing right our coattails. So we are going to do around that really wipes those folks out. So it’s a mixed bag. We are lucky because we really focus on the latest stage companies and our average company, as a reminder, is doing more than US$50 million, 5-0 U.S. dollar of revenue and they have raised over $100 million of venture equity. So the investors, for the most part, are very committed and they are going to think twice before flushing $100 million down the toilet. They might be more prone to flush a company where they have only invested a little bit. So the venture industry is very choppy, it’s very mixed and you are finding a lot of VCs remaking on prior commitments, but that’s a phenomenon that’s happening much more at the earlier stages than the late stages.

That’s also good to hear. I appreciate that. Just one question. Well, a question on liquidity. The -- I appreciate that you expanded the credit facility, but even with that expansion, your liquidity relative to your unfunded commitments is pretty tight, but within those unfunded commitments, there’s a lot of discretion. Can you give us a sense of, of how much of those unfunded commitments are at Runway’s discretion and your comfort with your liquidity level?

Sure, Mickey. This is Tom. Total unfunded is $315.7 million. What’s eligible at 12/31 to be funded because of milestones and other requirements was only $56 million. And then out of that $315 million, $316 million, $131 million have been of those expire during 2023. So we believe that we have got more than adequate liquidity to cover that and we have expanded the credit facility. We also believe we will continue to have access to the debt capital markets.

Well, I…

That’s -- I am sorry.

Well, I was going to say, Mickey, I would add another phenomenon that’s hard to put numbers on, but we have seen a couple of companies that have had access, because they achieved the milestones actually decide not to take the available capital, because they had done a really good job of cutting their burn and they no longer need the capital and don’t want to pay interest on money they don’t need. Again, impossible to quantify that, but I think we will see more of that as we go through the year in 2023.

Okay. Well, that’s not a bad equation then.

No.

And just a question on the portfolio, you have one investment calls for cadence, which has been marked at 80% of amortized costs for a couple of quarters and now Mingle Healthcare is also down at that level. Those are pretty distressed valuations generally speaking. I don’t know if that’s being impacted by market technicals or if there’s anything you can tell us about how those companies are progressing.

Yeah. It’s not really a market technical thing. It’s more specific to each of those companies and without giving details, I think that, they are stumbling and so we are trying to be conservative in our valuations, and for some of those companies, we will use scenario analysis as the best way to come up with the value. And keep in mind our value is reconfirmed by a third-party and then reconfirmed again by our auditors and our audit committee. So it’s a fairly extensive process, and in both cases, there are just things happening at those businesses that we think will come to fruition, which will put the credit in a better position, but until they happen, we are conservative on valuation.

Okay Understand. That’s it for me this evening. I appreciate your time. Thank you.

Yeah. Thank you, Mickey.

Thank you. [Operator Instructions] And our next question comes from the line of Erik Zwick with Hovde Group.

Thank you. Good evening, everyone. I wanted to start first with a question on the leverage and the comments you made, that you believe you can safely increase the leverage up to 1.3 times, and I am curious, just given the amount of economic uncertainty, is that more of a mid- and long-term target, and in the near-term you would stick within kind of the initial range with that 1.1 times is the top, is that independent, I mean, I guess, even here in the near-term, could we see you move closer to that 1.3 times, if you are seeing attractive origination opportunities?

Yeah. Thanks, Erik. Not an unanticipated question, of course. This is something that we look at continuously and evaluate continuously. And our thought and our process in expanding that range starts really with the quality and the stability of the income and the cash flow that’s coming off the portfolio, a portfolio that is well seasoned and very late stage, 99% first-lien loans and a portfolio that has the majority, 90%-plus in our number two rating. So we are very confident in the quality of the portfolio and as we first became a public company, we used a narrower range, because we thought it was prudent to demonstrate our ability to build a quality portfolio to the -- to our public investors. Now that we have done that and we see that we can support more leverage, we are going to be very judicious about adding it. But -- and we don’t intend to raise equity below NAV. So the way we can take advantage of these opportunities that are presenting themselves, and as David mentioned, the economic terms and the non-economic terms are improving. So we may well exceed that 1.1 times opportunistically and then we will see how things season out over time.

It’s great. I appreciate the commentary there. And turning to the non-sponsor portion of the portfolio, curious just about the, I guess, maybe a two-part question. One, just the general underwriting, how that differs from the sponsor side, just given that there’s not a big fund behind these? And two, the second part is, how that potentially plays out in a stressed economic environment in terms of how you would manage them and work out, find resolutions and situations that don’t work out optimally from based on original expectations?

Yeah. Of course. Well, so first of all, as it relates to the underwriting, if there is not a sponsor and we really define that as, to be sponsored, the company needs to have an investor or more than one investor that could be called and we will return the call and actually provide capital on a very short notice. So that’s what VCs are meant to do. That’s what PE firms do. And a non-sponsored company could be an owner-operated business and it could even be a public company or it could be a private company that had venture investors, and they may still sit on the Board, but they are out of dry powder and have no ability to support the company. And if that is the case, either of those things, if for whatever reason, there’s no deep pocket to call in an emergency then our underwriting is going to be much more focused on liquidity, path to profitability, a predictability of revenues and we are going to -- everything is going to be a lot tighter, I would say, and that is how we underwrite these. And so they are going to be a little more mature. They are very often even they are older and have been around a long time. And in some cases, they have been profitable for years and years and years and then they decide there’s a growth initiative that justifies an investment, and perhaps, even dropping out of profitability. But after a year or two, they will return, and of course, we are going to analyze that extremely closely to make sure that we believe it and understand the scenarios of what would happen if for whatever reasons, that return to profitability takes longer than planned. So the underwriting is…

Thank you for that -- the detail there. That was very informative. One last one for me and then I will step aside. Curious if you could expand or provide a little more detail into the term and I quote similar with regards to the supplemental dividend, curious if you have a methodology in mind for how you determine that on a quarterly basis. I know a number of other BDCs have come out with some sort of percentage relative to adjusted NII to the regular dividend, curious if you are thinking about it in a similar fashion or maybe some other way?

Well, at this point, when we came into 2023 with a bit of a spillover, spill-back dividend and as the Board looked at it and we looked at the portfolio as it stands today and the cash flow that’s coming off of it, the thought would be to stay in that $0.05 range for the balance of the year. So no formula at this point, we will see as we to spend a full year now to get the top end or close to the top end of our leverage range.

Thank you so much for taking my questions.

Thank you. [Operator Instructions] Next question comes from the line of Bryce Rowe with B. Riley.

Hi. Thanks. Good evening. I wanted to maybe ask the dividend question a different way and hearing the supplemental being put in place here, I assume that does not preclude you all from further kind of regular base dividend increases as we work through 2023?

That’s correct. That’s a good assumption.

Okay. That’s helpful, Tom. And then, looking at, I guess, the revenue stream here this quarter, I think, in past presentations, you have kind of broken out what prepayment income would have been and perhaps there just wasn’t much here in the fourth quarter. But just curious if there’s a component of prepayment income within the interest income bucket?

Not really significant. The prepayment fees were, as you can see, about just under $700,000. But there wasn’t a significant amount of prepayment in the fourth quarter and we kind of expect that to be the status quo for the near-term.

Okay. Okay. That was it for me. I appreciate the answers.

Sure. Thanks, Bryce.

Thank you. And that concludes today’s Q&A segment. I would now like to hand the call back over to CEO, David Spreng, for any closing remarks.

Thank you, Operator. We believe that our success in 2022 is validation of the execution and investment strategy we pursued. While we expect a challenging backdrop during the next year, the Runway team and myself are confident in our ability to generate stable earnings and drive shareholder value in any market environment. Thank you all for joining us today and for your support and we look forward to updating you on first quarter 2023 results in May.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.