Ladies and gentlemen, thank you for standing-by and welcome to the Runway Growth Finance Second 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 second quarter ended June 30th, 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 as well as Tom Raterman, Acting President, Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's second quarter 2023 financial results were released just after today's market close and can be accessed from the Runway Growth Finance's Investor Relations website 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 Greg.

Thanks, Mary. And thanks everyone for joining us to discuss our second quarter results. I met many of you on our IPO roadshow in the fall of 2021. And it's good to be here today. On July 31, we announced that David Sprang, Runway Growth’s Chairman, Founder and Chief Executive Officer is taking a temporary leave of absence to undergo treatment for a medical condition. Personally, I joined Runway in 2016. And my friendship with David dates back even further. The entire team has David and his family in our thoughts and prayers. David has instilled immense leadership in this team and we're positioned to navigate this temporary transition. As we stated last week, I will be serving as Acting CEO in addition to my existing responsibilities during David's leave, Julie Persily, our newly appointed lead Independent Director will serve as Acting Chair and Tom Raterman serve as Acting President, in addition to his responsibilities as CFO and COO of the company. We are all focused on advancing Runway strategy in the coming weeks. Runway has and will remain open for business. Today, I'll provide second quarter 2023 highlights, speak to the market environment. And lastly discuss our outlook for the year. During the second quarter, Runway maintained a robust pipeline of more than $2 billion. These are investment opportunities with late stage companies in recession resistant industries that we know best. I'm proud of the team's diligence in evaluating these opportunities, and are active portfolio management in parallel. These two practices have been essential in building what we believe to be the most stable portfolio in the venture debt industry. Companies are increasingly exploring the use of debt as a minimally diluted alternative to equity financing, which bodes well for us as a preferred partner known for sophisticated financing…

Thanks Greg. And good evening, everyone. On a personal note, I want to reiterate that our thoughts and prayers are with David and his family. David is a good friend and business partner. We're all wishing him a speedy recovery. Runway completed four investments in the second quarter representing $50.9 million in funded loans. Runway’s weighted average portfolio risk rating held relatively constant at 2.2 in the second quarter, compared to first quarter of 2023. As a reminder, our 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 basis, which is Pivot3. While the likelihood of a recession has diminished slightly, we expect volatility to continue in the second half of 2023 given industry concerns around credit performance, ongoing elevated interest rates, and tightening financial conditions. We believe the most important thing we can do to preserve our strong credit performance is consistently actively manage our portfolio. Runway is in frequent communication with all of our portfolio companies. We regularly interact with our companies because we are offering more than just capital. We offer strategic counsel, financial expertise, and an operational network that differentiates us from our peers. Our relationships with portfolio companies, aid and evaluating credit on an ongoing basis. Each position in our portfolio undergoes a comprehensive quarterly valuation review internally and periodically by Kroll or valuation Research Corporation, our third party evaluation providers. These are among the top valuation firms in the world. And their review provides an additional layer of validation in our analysis. We focus on important characteristics like business model, operating leverage, quality of sponsors and timeline for profitability. We believe this process demonstrates our conservative approach…

[Operator Instructions] Our first question will come from Erik Zwick of Hovde Group.

Thank you. Good afternoon, everyone. I appreciate the commentary about expecting kind of the quality of deals to increase in the back half of this year and into ‘24. It's a kind of curious with respect to the pipeline at the $2 billion today. Are there any particular industries that are more heavily representative, where you're seeing very attractive opportunity today? And then second, just wondering if you could provide any thoughts on the pull through rate of the current pipeline as well as time?

Yes, hey, this is Greg, thanks. Thanks for the question. I think overall, just to really reiterate, we are definitely seeing continued strength of the pipeline, on a broad base across the industries that we cover between enterprise software, life sciences, medical devices, as well as next generation consumer. I think we might see a bit of a skew towards some of the technology side of the house, but in general, broad base strength of the pipeline.

Thanks. If you could provide any thoughts just kind of on the pull through rate, kind of the timing of realization of the current pipeline.

Yes, I think we should see it continue to accelerate through the back half of the year. Historically, Q4 has been our biggest quarter. But we already are seeing strength in this quarter as well.

Great, thank you. But I just noticed that that PIK income has increased now three quarters in a row up to about $6 million now. I'm curious if you could talk about what's driven that. And whether that expectation would continue in the back half of the year.

Yes, thanks. Thanks, Erik. So PIK income has increased. And we think about PIK income in two ways. We use it offensively and we use it defensively. And offensively, particularly in a rising rate environment, we'll use it to be competitive in order to win a transaction, maintain our spreads, for instance, for the long run, but perhaps give a little temporary relief, as the companies come out of the box as a new portfolio company. And so roughly half or so of our PIK transactions are offensive, and then the rest are defensive. And so defensive is when we work with our portfolio companies. We understand their cash flow forecast, we understand their current performance, and we may give some temporary relief. We don't necessarily give PIK permanently, we like to keep it temporary. But we're, I think we'll see some more requests. But we're really sensitive to that PIK number right now. And we don't anticipate it going up in any material manner. It will fluctuate a bit, but we're not looking to increase it substantially.

[Operator Instructions] Next question will come from Melissa Wedel of JPMorgan.

Good afternoon. Thanks for taking my questions today. I first want to say I appreciate your firm candor and timely communication around the evolving situation with David and I hope you'll pass on or wishes for a full and speedy recovery to him. At the risk of being in delicate, is there anything that we should be thinking about in terms of a potential timeline around his return or how long you two might need to be serving in a temporary role?

Well, I think, Melissa, the most important thing is we haven't missed a beat as is everyone knows David, he wants to be back in the saddle as quickly as possible. But if you look at the team of David, Greg and Tom, we've really been growing this business together since the first private close on the fund, so we've been together six or seven years. And we haven't missed a beat, we've issued multiple term sheets in the last week, the investment process continues. And the train is on the tracks and running on time. So we too wish David a speedy recovery. And we'll welcome him back when he's ready.

Okay, I appreciate that. And then the additional color on sort of business as usual and issuing term sheets, quarter-to-date. Going back to the repayment activities that you guys shared in the press release, certainly noted that the repayments or the pre payments exceeding the new deals so far, I know it's only one month into the quarter. Should we be thinking about you guys sort of deploying capital gradually over the back half and then to ‘24 and ramping leverage given your outlook for an increasing level of quality over that timeframe? And then on the repayments, is there anything that we should be thinking about in terms of sort of outsized acceleration of OID?

So, one of the things I think we've said on calls before with respect to repayments as we have a late stage portfolio, and these companies can be attractive refinancing candidates, can be attractive trade sale candidates. And we've had two companies successfully enter into and incomplete spec transactions. So we're not seeing anything like the level of pre payments that we saw in 2021. But there is the prospect for continued repayments given the late stage and the quality of the portfolio. So we will continue to ramp the portfolio steadily throughout the year, Q3 tends to be our softest quarter. So it will be more weighted to Q4. And that's kind of our normal seasonal pattern. So with those pre payments, you will see some acceleration of OID with that.

Next question will come from Bryce Rowe of B. Riley Securities.

Hi. Thanks. Good afternoon, Tom and Greg, appreciate you taking the question here. Maybe want to just to drill down on some of the Melissa's line of questioning there and get a feel for the visibility into the pipeline and repayment. Just curious if some of the recent repayment activity, you had kind of surprised you. Did you have some visibility into it? And then wanting to ask about balance sheet leverage. I think you guys have talked about your initial range out of the IPO up to 110%, debt to equity with some level of comfort to go above and beyond that. Just kind of curious how you're feeling about balance sheet leverage today. Now that we're another quarter removed from what happened in March in the first part of the year.

Thanks Bryce. Appreciate your question. With respect to the pre payments, we have some visibility to prepayment activity, none of the pre payments in Q2, or even Q3 to dates that are in our subsequent events were surprises. We were in pretty close touch with our portfolio companies. It's one of the tenets of our whole approach to risk management. So that that gives us a pretty good idea whether a company might be considering refinancing or is looking at a potential M&A transaction. So we do expect to see some more repayment activity into this quarter and into fourth quarter. I don't think there'll be any surprises. I think we have a good feel for what is in process and frankly, we're pleased with the impact on the portfolio and on the P&L of the repayments that we've had to date. Now it did bring our leverage down a little bit. We're within our range, we're still comfortable growing outside of that range. So we've said that the initial range was at 0.8 to 1.1. That's lower than most of our peers. And we believe our portfolio, frankly, is higher quality and later stage, and that takes some additional leverage. So as we start seeing higher quality deals, and we're not changing the bar, but we're seeing more activity so that yes, those deals that go to close, will pick up throughout the year and into in the first quarter. So we were comfortable going up to that 1.25.

Okay. That's helpful. And then maybe a follow up, Tom. You added to existing portfolio companies with fundings here in the second quarter, you've got a new platform coming in here in the third quarter, in terms of how the kind of the pipeline looks, are you kind of more inclined to stick to existing portfolio companies? Or are you -- did you expect to add some other platforms along the way here? Thanks.

We expect to add new names to the portfolio, we're going to support our names, we've got about $100 million, little over $100 million out of that unfunded commitment that's available, we would expect to see some usage on that which will support and then we'll continue to evaluate new names, as we talked about, we have Greg mentioned, we have a pipeline in excess of $2 billion. And we've got term sheets outstanding that we will work diligently to win them to close.

Thanks for the question. And sorry to jump in. But to contextualize, we do believe that we are in a continuously evolving market that is becoming continuously lender friendly, not only in terms of pricing, but also structure. Some of the focus on the existing portfolio to date has been being judicious with our capital and making sure that we are structuring the right deals. And that should be taken as a sign that we believe that going into the back half of this year, as well as next year, there will be a number of attractive opportunities as this market does continue to move towards us.

I see no further questions in the queue. I will now like to turn the conference back to Greg Greifeld. Closing remarks.

Thank you, operator. Runway second quarter operating performance speak to our team's discipline as we expand our portfolio and maintain a robust pipeline. Looking to the second half of 2023, we will apply the same level of rigor in our evaluation and remain selective as we assess future opportunities for growth. Thank you all for joining us today. We will close the call by wishing David our best. David has instilled leadership across all levels of the Runway team, which gives us immense confidence in our ability to execute. We are open for business and focused on advancing our strategy in the interim.

This concludes today's conference call. Thank you all for participating. You may now disconnect. And have a pleasant day.