Core Viewpoint - The Zacks SBIC & Commercial Finance industry is facing challenges due to declining interest rates, which may lead to margin compression and lower investment income, while asset quality remains at risk from prolonged high rates affecting borrowers' repayment ability [1][5][8]. Industry Overview - The Zacks SBIC & Commercial Finance industry consists of companies that provide financing to small and mid-sized privately held firms, often underserved by traditional banks [3]. - These companies offer customized financing solutions, including senior debt instruments and equity capital, for various transactions such as buyouts and growth initiatives [4]. Key Themes - **Declining Interest Rates**: The Federal Reserve has lowered interest rates to 3.75–4%, which will likely reduce loan yields for many industry players with floating-rate loans, impacting net investment income [5]. - **Loan Origination and Refinancing**: Despite the challenges, loan origination and refinancing activities are expected to improve due to rising demand amid economic growth [6]. - **Asset Quality Concerns**: The industry may experience asset quality deterioration as prolonged high interest rates could hinder portfolio companies' ability to service debt [8]. - **Regulatory Changes**: The 2018 amendment to the Investment Company Act eased leverage limits, allowing companies to increase their debt-to-equity leverage, providing more funding flexibility [9][10]. Industry Performance - The Zacks SBIC & Commercial Finance industry ranks 209 out of over 250 Zacks industries, placing it in the bottom 14%, indicating underperformance in the near term [11][12]. - Over the past year, the industry has collectively lost 13%, while the S&P 500 and Zacks Finance sector have gained 14.2% and 9.7%, respectively [15]. Valuation Metrics - The industry has a trailing 12-month price-to-tangible book (P/TB) ratio of 0.96X, significantly lower than the S&P 500's 12.55X, indicating a substantial discount compared to the broader market [17][18]. Company Highlights - **Ares Capital Corp. (ARCC)**: A specialty finance firm focusing on U.S. middle-market companies, with a market cap of $14.5 billion and total debt of $15.6 billion as of Sept. 30, 2025. The company has seen growth in total investment income and is expected to continue this trend [19][21]. - **Hercules Capital, Inc. (HTGC)**: A specialty finance company providing venture capital to technology and life science firms, with a market cap of $3.3 million and a total investment portfolio valued at $4.31 billion as of Sept. 30, 2025. The company is expected to benefit from rising demand for customized financing [22][24]. - **Runway Growth Finance Corp. (RWAY)**: Focuses on providing senior secured loans to growth-stage companies, with a market cap of $357.4 million and a total investment portfolio valued at $946 million as of Sept. 30, 2025. The company is expected to sustain growth in investment income amid favorable regulatory trends [26][28].

Core Insights - The analysis focuses on future-oriented industries where culture, technology, and valuation intersect, particularly in gaming and digital assets [1] Group 1: Industry Focus - The sectors covered include gaming publishers such as Nintendo, Capcom, and Square Enix, which are pivotal in reshaping global entertainment [1] - Digital assets like XRP, Bitcoin, and Ethereum are highlighted as transformative forces in global finance [1] Group 2: Consumer Brands - Selected consumer brands such as Monster Beverage, Sprouts, and Macy's are analyzed, emphasizing the importance of brand and consumer behavior in driving long-term value [1] Group 3: Analytical Approach - The analytical methodology combines Discounted Cash Flow (DCF) and relative valuation with macroeconomic and narrative context, aiding in identifying early investment opportunities [1]

Core Insights - Runway Growth Finance Corp. reported revenue of $36.75 million for the quarter ended September 2025, marking a year-over-year increase of 0.3% and a surprise of +5.36% over the Zacks Consensus Estimate of $34.88 million [1] - The company's EPS for the same period was $0.43, compared to $0.41 a year ago, resulting in an EPS surprise of +13.16% against the consensus estimate of $0.38 [1] Financial Performance Metrics - Investment income from non-control/non-affiliate sources included interest income of $30.72 million, exceeding the average estimate of $30.06 million from two analysts [4] - Dividend income from non-control/non-affiliate sources was reported at $0.25 million, surpassing the two-analyst average estimate of $0.19 million [4] - Payment in-kind interest income was $4.22 million, compared to the estimated $4.01 million by two analysts [4] Stock Performance - Over the past month, shares of Runway Growth Finance Corp. have returned -1.7%, while the Zacks S&P 500 composite has changed by +1.3% [3] - The stock currently holds a Zacks Rank 2 (Buy), indicating potential for outperformance in the near term [3]

Financial Data and Key Metrics Changes - Total investment income for Q3 2025 was $36.7 million, up from $35.1 million in Q2 2025, while net investment income increased to $15.7 million from $13.9 million [15][16] - The weighted average portfolio risk rating rose to 2.42 in Q3 2025 from 2.33 in Q2 2025 [15] - The dollar-weighted loan-to-value ratio increased from 29.6% to 31.4% [15] - The total investment portfolio's fair value decreased by 7.7% to $946 million from $1.02 billion [16] - NAV per share decreased by 1.9% to $13.55 from $13.66 [18] Business Line Data and Key Metrics Changes - The company completed 11 investments totaling $128.3 million in Q3 2025, focusing on technology, healthcare, and select consumer sectors [7][10] - The acquisition of SWK Holdings is expected to scale the portfolio by approximately $242 million, increasing exposure in healthcare and life sciences from 14% to 31% [9][11] Market Data and Key Metrics Changes - The company noted a competitive environment in private markets, with increased competition affecting pricing and origination activity [9][34] - The venture debt space is experiencing spread compression, although not as severe as in broader markets [34] Company Strategy and Development Direction - The company aims to enhance its portfolio through both organic and inorganic growth, with a focus on diversification and risk mitigation [8][9] - The acquisition of SWK Holdings is seen as a strategic move to enhance earnings power and diversify the asset base [9][20] - The company is committed to maintaining a disciplined approach to growth while leveraging the BC Partners credit platform for sourcing opportunities [8][10] Management's Comments on Operating Environment and Future Outlook - Management expects a muted repayment activity in Q4 2025 compared to Q3, with origination opportunities being actively pursued [25] - The integration of SWK is anticipated to enhance the company's financial profile and shareholder value, with expected accretion in earnings [20][55] - The ongoing government shutdown may delay SEC regulatory approval for the merger, with a projected close in early 2026 [22][55] Other Important Information - The company repurchased 397,983 shares during the third quarter under a $25 million stock repurchase program [22] - A regular distribution of $0.33 per share was declared for Q4 2025 [23] Q&A Session Summary Question: Expected closing date of the SWK merger and origination activity in Q4 - Management indicated that repayments would be muted in Q4, with origination activity utilizing the existing pipeline and BC Partners credit platform [25] Question: Integration of SWK portfolio and yield profile - The SWK portfolio is expected to have a slightly higher yield than Runway's existing portfolio, with plans to explore upsizing the best loans post-merger [27][29] Question: Drivers of realized loss and unrealized portfolio depreciation - Losses were primarily in the equity portfolio, with no specific sector theme identified [30] Question: Prepayment activity and expectations for next year - Prepayment activity is driven by M&A and refinancing options, with expectations for normal prepayment rates moving forward [31] Question: Competitive dynamics in venture debt space - Management noted spread compression in the venture debt space, but not as severe as in other markets [34] Question: Integration of SWK team post-merger - The SWK team will assist with the transition and new originations during the integration period [35] Question: Dividend declaration and earnings power - The board's decision on the dividend was based on anticipated prepayment activity and the need to cover the base dividend with Q4 earnings [38][40] Question: Characteristics of loans added to the Kadma JV - Loans added to the Kadma JV are growth loans, suited for that vehicle due to specific characteristics [46] Question: Accretion from the SWK merger - The merger is expected to be accretive in the first full quarter after closing, with potential for OID accretion [55][56]

Financial Data and Key Metrics Changes - Total investment income for Q3 2025 was $36.7 million, an increase from $35.1 million in Q2 2025, while net investment income rose to $15.7 million from $13.9 million in the previous quarter [15][16] - The weighted average portfolio risk rating increased to 2.42 in Q3 2025 from 2.33 in Q2 2025, indicating a slight deterioration in credit quality [15] - The dollar-weighted loan-to-value ratio increased from 29.6% to 31.4% [15] - The total investment portfolio's fair value decreased by 7.7% to $946 million from $1.02 billion in Q2 2025 [16] - NAV per share decreased by 1.9% to $13.55 from $13.66 at the end of Q2 2025 [18] Business Line Data and Key Metrics Changes - The company completed 11 investments totaling $128.3 million in Q3 2025, focusing on technology, healthcare, and select consumer sectors [7][10] - The acquisition of SWK Holdings is expected to scale the portfolio by approximately $242 million, increasing exposure in healthcare and life sciences from 14% to 31% of the overall portfolio [9][11] Market Data and Key Metrics Changes - The debt portfolio generated a dollar-weighted average annualized yield of 16.8% in Q3 2025, up from 15.4% in Q2 2025 [16] - Total available liquidity was $371.9 million, including unrestricted cash and cash equivalents, with a borrowing capacity of $364 million [18] Company Strategy and Development Direction - The company aims to enhance its portfolio through both organic and inorganic growth, with a focus on diversification and risk mitigation [8][9] - The merger with SWK Holdings is seen as a strategic move to enhance earnings power and diversify the asset base [9][21] - The company is committed to maintaining a disciplined approach to growth while leveraging the BC Partners credit platform for sourcing opportunities [8][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the integration of SWK Holdings and its potential to enhance the company's market position [14][21] - The company anticipates a muted repayment activity in Q4 2025, with origination activity expected to remain strong [26] - Management acknowledged competitive pressures in the venture debt space but noted that spread compression has not been as severe as in broader markets [36] Other Important Information - The company declared a regular distribution of $0.33 per share for Q4 2025, with net investment income of $0.43 per share [24][40] - The merger with SWK is structured as a tax-free reorganization with an estimated purchase price of approximately $220 million [22] Q&A Session Summary Question: What is the expected closing date of the SWK merger and its impact on origination and repayment activity? - Management expects repayments to be muted in Q4 2025, with origination activity utilizing the existing pipeline and BC Partners credit platform [26] Question: What is the yield profile of the SWK portfolio compared to the existing portfolio? - The SWK portfolio has a slightly higher yield than the existing portfolio, with complete pro formas to be provided in the N-14 filing [27][29] Question: What were the main drivers of realized losses in the portfolio? - Losses were mainly in the equity portfolio, driven by idiosyncratic factors such as expirations of warrants and liquidations of IPO shares [31] Question: How does the company plan to integrate the SWK team? - The SWK team will assist with the transition and new originations during the integration period [37] Question: Will the merger be accretive in 2026? - Management expects the merger to be accretive in the first full quarter after closing [57]

Financial Data and Key Metrics Changes - Total investment income for Q3 2025 was $36.7 million, an increase from $35.1 million in Q2 2025, while net investment income rose to $15.7 million from $13.9 million [15][16] - The weighted average portfolio risk rating increased to 2.42 from 2.33 in the previous quarter [15] - The dollar-weighted loan-to-value ratio increased from 29.6% to 31.4% [15] - The total investment portfolio's fair value decreased by 7.7% to $946 million from $1.02 billion [16] - NAV per share decreased by 1.9% to $13.55 from $13.66 [18] Business Line Data and Key Metrics Changes - The company completed 11 investments totaling $128.3 million in Q3 2025, including new investments in Federal Hearings and Appeals Services and DigiCert Inc. [10][11] - The acquisition of SWK Holdings is expected to scale the portfolio by approximately $242 million, increasing exposure in healthcare and life sciences from 14% to 31% [9][11] Market Data and Key Metrics Changes - The debt portfolio generated a dollar-weighted average annualized yield of 16.8%, up from 15.4% in the previous quarter [16] - Total available liquidity was $371.9 million, including unrestricted cash and cash equivalents [18] Company Strategy and Development Direction - The company is focused on both organic and inorganic growth, with a definitive merger agreement to acquire SWK Holdings to enhance its portfolio and earnings power [5][9] - The strategy includes diversifying the portfolio through smaller position sizes and expanding financing solutions [7][11] - The company aims to maintain a disciplined approach to growth while leveraging the BC Partners credit platform for sourcing opportunities [6][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the merger with SWK Holdings, anticipating it will enhance earnings power and financial profile [20][21] - The company expects to see a normal course of prepayments and is optimistic about origination activity in Q4 2025 [26][33] - Management acknowledged competitive dynamics in the venture debt space, noting some spread compression but not as severe as in broader markets [37] Other Important Information - The company declared a regular distribution for Q4 2025 of $0.33 per share, with net investment income of $0.43 per share [24][42] - The merger is structured as a NAB-for-NAB transaction with an estimated purchase price of approximately $220 million [21] Q&A Session Summary Question: What should be expected regarding origination and repayment activity in Q4? - Management indicated that repayments would likely be muted compared to Q3, with ongoing origination opportunities available [26] Question: What is the yield profile expected after integrating the SWK portfolio? - The SWK portfolio is expected to have a slightly higher yield than the current portfolio, with pro formas to be provided in future filings [27][28] Question: What drove the realized loss and unrealized portfolio depreciation? - Losses were primarily in the equity portfolio, attributed to idiosyncratic factors rather than sector-wide issues [31][32] Question: What is driving prepayment activity, and is it expected to continue? - Prepayment activity is driven by M&A activity and companies finding cheaper refinancing options, with expectations for normal prepayment rates moving forward [33] Question: How will the SWK team be integrated into the company? - The SWK team will assist with the transition and new originations during the integration period [38] Question: Will the merger be accretive in 2026? - Management expects the merger to be accretive in the first full quarter after closing [59] Question: What stage of development do typical SWK investments target? - SWK targets growth-stage companies that are generating revenue but are generally pre-profit [62]

Company Overview and Strategy - Runway Growth's disciplined investment approach has maintained a low annualized loss rate of 7 bps, offset by realized gains on warrant and equity investments[8] - The company focuses on maintaining low loss rates, with a cumulative net loss rate of 61 bps since inception[8] - Runway Growth aims for portfolio expansion through non-sponsored deals, offering less competition and favorable terms[8] - The company emphasizes a credit-first underwriting approach and a scaled credit platform[8] Financial Performance and Portfolio - The fair value of the investment portfolio is $946 million[27] - Senior secured first lien term loans constitute 91% of current investments by fair market value (FMV)[28] - Total loan commitments amount to $3.2 billion, with an average loan commitment of $34.2 million[31] - The portfolio is highly diversified across industries, with application software representing 24% of the portfolio's fair value[34] - The weighted average risk rating of the portfolio is 2.42, with 69% of the portfolio rated as Category 2[63] Growth and Future Prospects - The acquisition of Runway Growth Capital by BC Partners Credit enhances financing solutions, expands origination channels, and augments access to capital[12] - The company anticipates mid-single-digit run-rate NII accretion in the first full quarter following the SWK transaction closing[14] - Venture debt deal value increased by 4.9% during the quarter, driven by AI excitement and outsized deals[24]

Investment Portfolio - As of September 30, 2025, the total fair value of investments was $945.964 million, a decrease from $1,076.840 million on December 31, 2024[240] - Senior secured loans comprised 90.66% of the total portfolio as of September 30, 2025, valued at $857.636 million[240] - The company held investments in 54 companies as of September 30, 2025, down from 57 companies at the end of 2024[239] - The fair value of preferred stock/units decreased to $37.386 million as of September 30, 2025, from $82.641 million at the end of 2024[240] - The ending investment portfolio as of September 30, 2025, was $945.964 million, down from $1,066.100 million as of September 30, 2024[243] - As of September 30, 2025, 64.35% of the debt investment portfolio was rated 2, indicating acceptable business prospects and compliance with covenants[244] - The investment portfolio's beginning value was $1,076.840 million as of September 30, 2025, compared to $1,067.009 million as of September 30, 2024[243] Financial Performance - For the three months ended September 30, 2025, the dollar-weighted annualized yield on debt investments was 16.83%, compared to 15.92% for the same period in 2024[241] - Total investment income for the three months ended September 30, 2025, was $36.7 million, unchanged from the same period in 2024, while for the nine months, it decreased to $107.3 million from $110.9 million[251][252] - Net investment income for the three months ended September 30, 2025, was $15.7 million, a slight decrease from $15.9 million in 2024, with per share figures of $0.43 and $0.41 respectively[260] - The net realized loss on investments for the three months ended September 30, 2025, was $1.3 million, attributed to losses on specific investments, while there were no realized gains or losses in the same period of 2024[262] - The net realized gain on investments for the nine months ended September 30, 2025, was $3.2 million, with gains from Gynesonics, Inc. offset by losses on other investments, while there were no realized gains or losses in 2024[263] - Total operating expenses for the nine months ended September 30, 2025, were $62.0 million, slightly up from $61.7 million in 2024, with per share expenses increasing to $1.67 from $1.57[255] Regulatory and Management - The company has elected to be treated as a regulated investment company (RIC) and a business development company (BDC) under relevant regulations[233] - The company is externally managed by Runway Growth Capital LLC, which provides investment advisory services[236] - The company is subject to various regulatory requirements, including the need to invest at least 70% of its assets in qualifying assets[233] Mergers and Acquisitions - The company is in the process of merging with SWK Holdings Corporation, with potential impacts on business operations and shareholder interests[234] - On October 9, 2025, the company entered into a Merger Agreement with SWK Holdings Corporation, involving multiple merger steps to consolidate operations[292] - The consummation of the Mergers is subject to customary closing conditions, including the effectiveness of the Registration Statement and approval by SWK's stockholders[299] - The Key Stockholder owns approximately 69.9% of the outstanding shares of SWK Common Stock and has agreed to vote in favor of the Merger Agreement[300] Liquidity and Debt - As of September 30, 2025, the company had $371.9 million in available liquidity, including $7.9 million in cash and cash equivalents, and $364.0 million available under its Credit Facility[273] - The company had a total of $1,162 thousand in forgone interest income from loans on non-accrual status as of September 30, 2025[246] - As of September 30, 2025, the company had $450.3 million in debt outstanding, with $25.0 million due within the next year[276] - The company completed $12.0 million of additional debt commitments from October 1, 2025, through November 6, 2025[291] Risk Factors - The company anticipates potential risks related to economic downturns, interest rate volatility, and competition for investment opportunities[229] - A hypothetical 200 basis point increase in interest rates could increase investment income by a maximum of $15.5 million, while a decrease could reduce it by a maximum of $8.8 million[304] - Investments denominated in foreign currencies are subject to risks associated with currency exchange rate fluctuations, which may be exacerbated by current economic conditions[308] Shareholder Returns - The company declared dividends of $13.0 million and $39.5 million for the three and nine months ended September 30, 2025, respectively, with the majority distributed in cash[286] - The company repurchased 1,213,391 shares for an aggregate purchase price of $12.5 million under the Fourth Repurchase Program as of September 30, 2025[284]

Investment Income - Total investment income for Q3 2025 was $36.7 million, unchanged from Q3 2024[4] - Net investment income for Q3 2025 was $15.7 million, or $0.43 per share, compared to $15.9 million, or $0.41 per share in Q3 2024[6] - For the three months ended September 30, 2025, total investment income was $36,747,000, slightly up from $36,651,000 in the same period of 2024[33] - Net investment income for the three months ended September 30, 2025, was $15,736,000, compared to $15,875,000 for the same period in 2024[33] Investment Portfolio - The investment portfolio had an aggregate fair value of $0.9 billion, comprising $878.8 million in loans and $67.2 million in equity-related investments[10] - The dollar-weighted annualized yield on average debt investments for Q3 2025 was 16.8%[5] - Total investments at fair value were $945,964,000, down from $1,076,840,000, with non-control/non-affiliate investments valued at $931,915,000[31] Financial Position - As of September 30, 2025, total assets amounted to $963,346,000, a decrease from $1,091,355,000 as of December 31, 2024[31] - Net asset value per share decreased by 0.8% to $13.55 as of September 30, 2025[13] - The net asset value per share as of September 30, 2025, was $13.55, down from $13.79 as of December 31, 2024[31] - Total liabilities decreased to $473,820,000 from $576,486,000 as of December 31, 2024[31] - The company’s credit facility debt was $186,000,000, reduced from $311,000,000[31] Investment Activity - The company completed 11 investments totaling $128.3 million during the quarter[7] - Net realized loss on investments was $1.3 million for Q3 2025, compared to no net realized gains or losses in Q3 2024[8] - The company reported a net increase in net assets resulting from operations of $8,019,000 for the three months ended September 30, 2025[33] Liquidity and Dividends - As of September 30, 2025, the company had approximately $371.9 million in available liquidity[14] - The company declared a fourth quarter 2025 dividend of $0.33 per share[3] Future Plans - The proposed acquisition of SWK Holdings is expected to enhance the company's healthcare and life sciences exposure[3] - The company plans to hold a conference call on November 6, 2025, to discuss its third quarter financial results[25]

Core Insights - Runway Growth Finance Corp. reported total investment income of $36.7 million and net investment income of $15.7 million for Q3 2025, maintaining similar levels compared to Q3 2024 [4][6][7] - The company declared a fourth quarter dividend of $0.33 per share, reflecting its ongoing commitment to return value to shareholders [3][13] - The investment portfolio as of September 30, 2025, had a fair value of $0.9 billion, with a focus on senior secured loans [9][11] Financial Performance - Total investment income for Q3 2025 was $36.7 million, unchanged from Q3 2024 [4] - Net investment income for Q3 2025 was $15.7 million, or $0.43 per share, compared to $15.9 million, or $0.41 per share, in Q3 2024 [6][8] - Operating expenses increased slightly to $21.0 million in Q3 2025 from $20.8 million in Q3 2024 [6] Investment Activity - The company completed 11 investments totaling $128.3 million during the third quarter, net of refinances [7][10] - The investment portfolio included $878.8 million in loans, with 97.6% being senior secured loans [9] - The company experienced a net realized loss on investments of $1.3 million in Q3 2025, compared to no realized gains or losses in Q3 2024 [7] Net Asset Value - As of September 30, 2025, the net asset value per share was $13.55, a decrease of 0.8% from $13.66 as of June 30, 2025 [11] - Total net assets at the end of Q3 2025 were $489.5 million [11] Liquidity and Capital Resources - The company had approximately $371.9 million in available liquidity, including $7.9 million in cash and $364.0 million in borrowing capacity [12] - The core leverage ratio improved to approximately 92% from 105% in the previous quarter [12] Recent Developments - The company announced a proposed acquisition of SWK Holdings, which is expected to enhance its healthcare and life sciences exposure [3] - The merger agreement with SWK Holdings includes provisions for share conversions and cash considerations for SWK shareholders [16][17]