Runway Growth Finance (RWAY) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for H1 2023 detail the company's financial position, operational results, and cash flows, reflecting stable assets, a slight net asset decrease, and significant investment income growth Statements of Assets and Liabilities | Financial Metric | June 30, 2023 (Unaudited, in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total investments at fair value | $1,095,321 | $1,126,309 | | Total assets | $1,141,641 | $1,141,766 | | Total debt, less unamortized costs | $547,273 | $548,957 | | Total liabilities | $567,743 | $565,714 | | Total net assets | $573,898 | $576,052 | | Net asset value per share | $14.17 | $14.22 | - Total assets remained stable at approximately $1.14 billion between December 31, 2022, and June 30, 2023, while total net assets decreased slightly from $576.1 million to $573.9 million, resulting in a decrease in Net Asset Value (NAV) per share from $14.22 to $14.17[9] Statements of Operations | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $41,895 | $25,025 | $81,205 | $44,257 | | Total operating expenses | $22,219 | $10,546 | $43,283 | $17,319 | | Net investment income | $19,676 | $14,479 | $37,922 | $26,938 | | Net realized/unrealized gain (loss) | $2,644 | $(15,296) | $(3,618) | $(24,902) | | Net increase (decrease) in net assets | $22,320 | $(817) | $34,304 | $2,036 | | Net investment income per share | $0.49 | $0.35 | $0.94 | $0.65 | | Net increase (decrease) in net assets per share | $0.55 | $(0.02) | $0.85 | $0.05 | - Total investment income for Q2 2023 increased by 67.4% year-over-year to $41.9 million, driven by a larger portfolio and higher interest rates, leading to a 35.9% increase in net investment income to $19.7 million for the quarter[11] Statements of Changes in Net Assets - For the six months ended June 30, 2023, net assets decreased from $576.1 million to $573.9 million, primarily due to dividends paid to stockholders ($36.5 million) exceeding the net increase in net assets from operations ($34.3 million)[13] Statements of Cash Flows | Cash Flow Activity (in thousands) | For the Six Months Ended June 30, 2023 | For the Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $71,591 | $(73,017) | | Net cash (used in) provided by financing activities | $(39,612) | $75,130 | | Net increase (decrease) in cash | $31,979 | $2,113 | | Cash and cash equivalents at end of period | $37,740 | $6,810 | - The company experienced a significant positive shift in operating cash flow, generating $71.6 million in the first half of 2023 compared to using $73.0 million in the same period of 2022, mainly driven by lower purchases of investments ($63.5 million vs. $233.5 million)[15] Schedule of Investments | Investment Type | Fair Value (June 30, 2023, in thousands) | % of Total Portfolio | Fair Value (Dec 31, 2022, in thousands) | % of Total Portfolio | | :--- | :--- | :--- | :--- | :--- | | Senior Secured Term Loans | $1,030,136 | 94.05% | $1,080,121 | 95.90% | | Second Lien Term Loans | $14,064 | 1.28% | $13,654 | 1.21% | | Preferred Stocks | $35,010 | 3.19% | $12,682 | 1.13% | | Common Stocks | $2,250 | 0.21% | $3,097 | 0.27% | | Warrants | $13,861 | 1.27% | $16,755 | 1.49% | | Total Investments | $1,095,321 | 100.00% | $1,126,309 | 100.00% | - As of June 30, 2023, the investment portfolio's fair value was $1.095 billion, with senior secured term loans comprising the vast majority at 94.05%, and the portfolio is concentrated in the Health Care Technology (45.36% of net assets) and Application Software (32.20% of net assets) industries[127][203] Notes to Financial Statements - The company operates as a Business Development Company (BDC) and a Regulated Investment Company (RIC), primarily lending to high growth-potential companies[61][62] - The vast majority of the company's investments are considered Level 3 assets, meaning their fair value is determined using unobservable inputs and significant management judgment, as they lack readily available market quotations[82][132] - The advisory agreement with Runway Growth Capital LLC (RGC) includes a tiered base management fee (1.50% per annum for Q2 2023) and a two-part incentive fee based on income and capital gains, subject to an 8% annualized hurdle rate[106][110] - As of June 30, 2023, the company had total debt outstanding of $557.3 million and unfunded loan commitments to portfolio companies of $234.3 million[141][166] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes increased investment income to capital deployment and rising rates, while maintaining stable asset quality and a strong liquidity position with a 203% asset coverage ratio | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total Investment Income | $41.9 million | $25.0 million | | Net Investment Income | $19.7 million | $14.5 million | | Net Increase (Decrease) in Net Assets | $22.3 million | $(0.8) million | - The dollar-weighted annualized yield on the debt investment portfolio increased to 16.69% for Q2 2023, up from 15.11% in Q2 2022, reflecting the impact of higher interest rates[203] - As of June 30, 2023, the company had $227.7 million in available liquidity, comprising $37.7 million in cash and $190.0 million available under its Credit Facility, with an asset coverage ratio of 203%[239][240] - The company's internal rating system shows 79.4% of the debt portfolio at fair value is rated '2' (Performing at or reasonably close to plan), with 14.8% rated '3' (Performing below plan), and one loan to Pivot3, Inc. remains on non-accrual status[208][209] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to valuation risk from illiquid investments and interest rate risk, with a 200 basis point rate increase potentially boosting annual investment income by $20.3 million - The company's investments are primarily illiquid and valued at fair value as determined by the Board of Directors, leading to inherent valuation uncertainty[254] - As of June 30, 2023, 100% of the company's performing debt portfolio carried variable interest rates, and a hypothetical 200 basis point increase in interest rates could increase annual investment income by a maximum of $20.3 million[256] - The company's net investment income is sensitive to the spread between the variable rates on its assets and the rates on its borrowings, which include both floating-rate (Credit Facility) and fixed-rate (Notes) debt[255][258] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls identified - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[262] PART II. OTHER INFORMATION Item 1. Legal Proceedings Neither the company nor its investment adviser, RGC, are currently subject to any material legal proceedings or known threats - There are no material legal proceedings pending or threatened against the company or its adviser, RGC[266] Item 1A. Risk Factors The report highlights risks from economic slowdowns and bank failures, noting that while the company had no direct exposure, some portfolio companies experienced temporary disruptions - The company identifies economic slowdowns and bank failures as a key risk, noting that while it had no direct exposure to the failed banks in March and May 2023, some of its portfolio companies were affected[269] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the reporting period, the company made no unregistered sales of equity securities, except those issued via its Dividend Reinvestment Plan - No unregistered sales of equity securities occurred during the quarter, except as part of the Dividend Reinvestment Plan[270] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None[271] Item 5. Other Information No director or officer entered into a Rule 10b5-1 trading plan or other non-Rule 10b5-1 trading arrangement during the quarter - No director or officer entered into a Rule 10b5-1 trading plan during the period[273] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including amendments to bylaws, custody agreements, and required CEO/CFO certifications