Ladies and gentlemen, thank you for standing by, and welcome to the Runway Growth Finance Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Taylor Donahue, [ph] Investor Relations. Please go ahead.

Thank you, operator. Good evening, everyone, and welcome to the Runway Growth Finance Conference Call for the third quarter ended September 30, 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 and Chief Financial Officer and Chief Operating Officer. Runway Growth Finance's third quarter 2023 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 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 uncertainties surrounding rising interest rates, the impact of the COVID-19 pandemic, 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 website. With that, I will turn the call over to Greg.

Thanks, Taylor, [ph] and thanks, everyone, for joining us to discuss our third quarter results. Before starting my prepared remarks, we want to provide an update on David Spreng, Runway Growth's Chairman, Founder and Chief Executive Officer, who is on a medical leave of absence. We are pleased to share that David is doing well and has resumed select responsibilities at our external adviser, Runway Growth Capital. We look forward to and are hopeful for David's return in the first half of 2024 and appreciate the ongoing support the investment community has provided during his recovery process. Today, I'll provide third quarter 2023 highlights speak to the market environment and lastly, discuss our outlook heading into 2024. Our third quarter results demonstrate the resilience of our credit-first investment approach that has been a guiding principle for Runway Growth since inception. While the U.S. economy has performed better than expected in 2023, market uncertainty remains elevated as the effects of a higher interest rate environment and tighter financial conditions play out. Our focus on underwriting low loan-to-value loans to high-quality companies has allowed us to build a portfolio that can continue to succeed and not just survive. We have always favored opportunities that have limited downstream financing risk, which has proven crucial for portfolio companies with unknown timing for exits or that require additional capital raises. Our patience in deploying capital during 2023 has been strategic and the current environment is more lender-friendly than earlier this year. We expect this lender-friendly environment to continue into 2024 and we are beginning to see an increase in favorable investment opportunities. We believe Runway has maintained its position as a preferred venture debt lender with a steady hand enforced by our ability to deliver industry-leading credit performance with a late-stage portfolio focused on recession-resistant…

Thanks, Greg, and good evening, everyone. Runway completed six investments in the third quarter, representing $40.8 million in funded loans. Runway's weighted average portfolio risk rating increased slightly to 2.24 in the third quarter from 2.21 in the second quarter of 2023. 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 one portfolio company rated five in our nonaccrual status, which is Pivot3. As we've said on earlier earnings calls, we are in the late phases of our Pivot3 resolution and expect next steps to be completed prior to year-end. Looking across markets more broadly, we expect ongoing uncertainty to weigh on the United States economic trajectory as we approach 2024. While forecasts indicate that the probability of a soft landing has increased, we anticipate a challenging environment as the market grapples with the impact of higher for longer interest rates. We believe Runway's track record of effectively managing risk is a differentiator. Our team's priority is to deliver superior credit performance while preserving capital to maximize risk-adjusted returns for our shareholders. A key variable in that equation is our proactive approach to portfolio monitoring. Runway connects with each of its portfolio company management teams, at least quarterly and often every six weeks. Our team takes a proactive approach to address problems and has difficult conversations early when optionality remains the highest. In line with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the second quarter and current quarter. We found that our dollar weighted loan-to-value ratio slightly increased from 24.2% in Q2 to 24.8% in Q3. Our total investment portfolio had a fair value of approximately $1 billion, decreasing…

[Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Yes. Good afternoon, Greg and Tom, I wanted to start with a high-level question. As you mentioned, venture debt funding is down this year. And I think that's mostly the impact of SVB and lenders raised the underwriting bar. Looking out into next year, I appreciate your comments on the need for liquidity that may drive demand. But to what extent do you think a potential recession next year could continue to depress deal volume as lenders in your space keep the bar high?

Yeah. So I think that without a doubt, a combination of macroeconomics as well as SVB and other industry-specific shocks have had impact on deal volume this year. However, as we've seen in that PitchBook Data, volume for late-stage equity deals is down as well. And we believe that that's driven by companies having raised substantial amounts of capital in 2020 and 2021 who realized that the market has changed, they needed to make that capital last for longer and as such, have made substantial cuts to their P&L in order to have the capital last for longer. And we do think that in the middle or second half of next year, these companies are going to reenter the market, needing additional capital for growth, and we do expect that to be a substantial tick-up in volume.

Okay. I appreciate the clarification. Could you give us some insight into what drove this quarter's unrealized depreciation?

Yes, Mickey, it's Tom. There were some broad changes in the debt marks and then really changes in the public equity marks. There was one in particular for CareCloud that had a fairly sizable movement. But there was no wholesale change in terms of credit quality or methodology that was driving that.

Okay. Tom, were there any outsized contributors to the fee income, which, despite the level of exits, still seems pretty significant?

Well, there was a significant amount of end-of-term payments, so there was a fair amount of acceleration of the OID there, and then prepayment fees were really the big driver on that.

Okay. My last question, it looks like those exits and repayments were weighted towards the end of the quarter. Is that right? Or am I misinterpreting the numbers?

Deal volume, either in or out, tends to be weighted toward the end of the quarter. We did have one prepayment at the beginning of the fourth quarter, a partial prepayment on Brivo. That's kind of the exception to the rule. But most of those come at the end of the quarter.

Okay. Those are all my questions this afternoon. I appreciate your time. Thank you.

Our next question comes from the line of Melissa Wedel with JPMorgan. Your line is open.

Good afternoon. Thanks for taking my questions today. I appreciate the transparency you provided in the investment activity so far in 4Q. It actually sounds like a pretty busy quarter so far, and we're only about five weeks into it. Given that a lot of activity tends to be skewed towards the back end of this quarter, just wondering if you have any additional commentary on sort of activity yet to come this quarter versus what you've already seen and then any color on sort of repayment activity that might pull inside with that?

Yes. So we definitely do echo the sentiment that it has been a busy start to the quarter. We do have line of sight that there should be some additional activity for the rest of the quarter as folks, with the beginning of that trend, are starting to look towards their budgets for the next year, realizing that there is growth opportunity with the need to actually fund it and we expect that trend to continue.

And then as to repayments, Melissa, there isn't anything in particular outside of the normal pace. I think it's going to be substantially less. We would expect it to be substantially less than Q3.

Okay. That's helpful. Thank you. If I could follow up on two particular near-term maturities, if we're looking at this right, it looks like you might have a couple coming due in the fourth quarter around Circadence and Mingle, both of which are marked at a bit of a discount to cost. I'm just wondering if there's anything that we should read into that in terms of repayment or refinancing?

Yes. I think both of those names are actively looking to refinance, as you might expect, with the maturities coming up. We are also determining if there is a structure that makes sense for them to stay on our books. Since they are credits that we have known for a period of time, we have seen them weather through a variety of cycles and just know the names intimately.

[Operator Instructions] Our next question comes from the line of Bryce Rowe with B. Riley. Your line is open.

Thanks. Good evening. I wanted to maybe just ask about the buyback you just talked about. And I guess, paired up with the lower balance sheet leverage that you're working with right now, Greg and Tom, can you kind of talk about the prospects for some active buyback activity relative to the pipeline and what origination volume might look like? It sounds like you've got some good opportunities as we go into 2024, and so just kind of curious where you'd kind of prefer to spend the money or put the money? Thanks.

Yeah. Thanks, Bryce. I think in general, our first preference is always to return capital to shareholders via distributions, and that means using our leverage capacity to grow the portfolio. That said, there are times where we're trading at such a discount to NAV that the investment opportunity is compelling and making an investment in ourselves is a good use of our leverage capacity. So looking forward, the Board and our team thought that as we look forward for the next year, that we wanted to have the ability to set some parameters and be opportunistic to use our leverage capacity to enhance return on equity by use of the share repurchase.

Okay. That's helpful, Tom. And if maybe you could kind of touch on the dividend declaration here and the supplemental that we're going to see in the fourth quarter. Obviously, you've paid one throughout 2023. Any thoughts on kind of how you plan to think about '24 in terms of a supplemental or was it more of a '23 event? Thanks.

I think as we get into 2024, we'll certainly take a look at the interest rate environment and the yield on the portfolio. We would like to be able to continue some form of supplemental dividend. It would be our thought to keep the base dividend as is and continue to distribute incremental income through that supplemental dividend. So it's our objective to grow to a point where we can return more than the base. And if the portfolio grows, we would expect to be able to do that.

Great. Appreciate the time. Thanks.

Our next question comes from the line of Erik Zwick with Hovde Group. Your line is open.

Good afternoon, guys. I wanted to start with, I guess, kind of another question on leverage but coming at it from a different perspective. You mentioned you're starting to see increasing opportunities for investment and the environment remains very lender-friendly and also noted, well, the probability of a soft landing has increased and there's still some uncertainty out there in the market. So just curious how you think about leverage today. Is this an opportunity? Given the lender-friendly environment that you would consider taking leverage up to capitalize on that opportunity? Or does some of the caution in the economic outlook maybe give you some pause in terms of maybe keeping leverage where it is today? I'm curious how you kind of frame the current environment?

Yes. Thanks. Erik, we're very comfortable with our leverage range of 0.8 to 1.1. In fact, we said that we would expand beyond that range, up to 1.25. And as we see high-quality opportunities in a more certain economic environment, we'll cross that 1.1 to the 1.25. I think as it stands right now, 0.8 to 1.1 is good. But if the lender-friendly environment continues to develop, and if the portfolio remains performing as it is, very high quality, and we see some more certainty and understanding around what's happening in the macroeconomic environment, we'll think about expanding beyond that. But it is our objective to use leverage to grow the portfolio.

That's helpful. Thank you. And curious if you could maybe provide some color to the lender-friendly environment you keep referring to in terms of maybe the types of leverage covenant spreads and things that you're seeing today and how that's changed over the past six to 12 months.

Yeah. So I think the short answer, which is the best answer, is all of the above. We're seeing companies looking for much more reasonable attachment points in terms of quantum, and the implied LTV covenants are definitely something that we're having ability to not only have tighter covenants but have more covenants. And then I think just an interesting anecdote is this has now happened twice this quarter where there's companies that have had access to delayed draw portions of the debt who have looked at the use of proceeds relative to the incremental cost of this debt which, for perspective, it was underwritten with a 1% SOFR floor, which now SOFR is north of 5%, substantially higher, and just can't justify that additional expense and have actually asked us if we can extend out that delayed draw period. These are things that we will evaluate on a case-by-case basis. But I think a key takeaway here is we like to say that we're investing in the best companies. And I think that this is a key proof that we're lending to businesses that are very prudent in their own use and allocation of capital.

[Operator Instructions] Our next question comes from the line of Vilas Abraham with UBS. Your line is open.

Hi, everyone. Most of my questions have been asked and answered, but just maybe one or two here. So just in your comments here, it sounds like next year, we should be a bit more new portfolio investment from Runway versus the last couple of quarters where it was much more weighted towards follow-on investments. Is that a fair characterization of how we should think about it?

I do think that there will be some follow-on activity and many of our loans do have milestone-based delayed draws, which we expect these companies to gain accessibility to the capital next year. But I do think that we do expect in the middle of next year to see new deal activity to tick up meaningfully.

Okay. And just one more, on Pivot3, I think you mentioned in your prepared remarks that that's going to come to a resolution here shortly. Market looks like $11 million -- $11.6 million last quarter. Is there any thoughts around how that market is looking heading into a resolution there?

So I think the first point is I would use a clarification on the word resolution. We don't expect this to be the final resolution. We expect this to be the next step along our process of monetization, which will require us to change the accounting treatment. So you will see a change on the books. In terms of what the impact on the mark will be, ultimately, that will be driven by the facts and circumstances at that time when we do move the position over. And as the quarter unfolds, we should have much greater clarification in terms of the magnitude of that.

I'm showing no further questions in the queue. At this time, I would now like to turn the call back over to Greg Greifeld, Acting CEO, Deputy CIO and Head of Credit, for closing remarks.

Thank you, operator. Third quarter operating performance demonstrates Runway's meticulous underwriting practices. Credit quality remains our top priority. We are pleased with the composition of our portfolio and will continue to be selective given the current market landscape. Thank you all for joining us today. We wish you a safe and healthy end of the year, and we look forward to updating you on our fourth quarter and full year 2023 financial results in March 2024.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.