Runway Growth Finance Corp.'s Q3 2025 Earnings Call: Contradictions on Loan Terms, Prepayment Activity, and Yield Profile Amid SWK Merger

Date of Call: November 6, 2025

Financials Results

• Revenue: $36.7M total investment income (up from $35.1M in Q2 2025); $15.7M net investment income (up from $13.9M in Q2 2025)

Guidance:

• SWK acquisition expected to close early 2026 (SEC review may delay timing).
• Pro forma portfolio projected ~ $1.2B and healthcare & life sciences exposure rising to ~31% of portfolio.
• Target leverage approximately 1.1x (middle of target range) and adviser agreed to maintain base management fee at 1.5%.
• Transaction expected to generate mid-single-digit run-rate net investment income accretion in the first full quarter post-close.
• Anticipate modest ROE expansion, improved dividend coverage and greater expense efficiency.
• Continue $25M share repurchase program while preserving base dividend of $0.33 per share.

Business Commentary:

• Financial Performance and Investment Activity:
• Runway Growth Finance reported total investment income of $36.7 million and net investment income of $15.7 million for Q3 2025, showing an increase from the previous quarter and year-over-year.
• During the quarter, the company completed 11 investments representing $128.3 million in funded loans, contributing to the growth in investment income.

• The increase in investment income is attributed to elevated prepayment income and a higher average yield on the investment portfolio.

  

• Portfolio Optimization and Merger Announcements:

• The weighted average portfolio risk rating increased to 2.42 in Q3, reflecting the company's efforts to enhance the risk profile by diversifying and reducing average hold sizes.
• Runway Growth Finance announced a definitive merger agreement to acquire SWK Holdings, which is expected to scale their portfolio by $242 million and expand their position in healthcare and life sciences.

• The acquisition is aimed at enhancing earnings power and financial profile, as well as increasing the overall asset base, contributing to a more diversified portfolio.

• Leverage and Liquidity Management:

• Runway's leverage ratio and asset coverage stood at 0.92x and 2.09x, respectively, at the end of Q3 2025, suggestive of a stable financial position.
• The company maintains total available liquidity of $371.9 million, providing it with the capacity to support future growth initiatives.

• Effective liquidity management allows Runway to explore inorganic growth opportunities and restructure its balance sheet for optimal growth.

• Dividend and Share Repurchase Strategy:

• The company declared a regular distribution of $0.33 per share for the fourth quarter, despite achieving net investment income of $0.43 per share.
• Runway has a share repurchase program in place, with $25 million authorized for repurchase, which is set to expire in May 2026.
• The dividend decision reflects a strategic approach to managing earnings power and maintaining shareholder value amidst changing market conditions and prepayment dynamics.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "We anticipate this transaction will generate mid-single-digit run rate net investment income accretion"; "we continue to cover our base dividend of $0.33 per share"; management repeatedly highlighted scaling to ~$1.2B pro forma, sector diversification to ~31% healthcare, and expected expense efficiencies and ROE expansion, indicating an overall constructive tone on the acquisition and outlook.

Q&A:

• Question from Melissa Wedel (JPMorgan Chase & Co, Research Division): Given the SWK close likely in 2026, how should we think about origination activity and repayment activity in 4Q? Should we think of that as a net exit quarter ahead of the onboarding of the other portfolio?
  Response: Expect Q4 repayments to be relatively muted versus Q3 and continued originations using Runway's pipeline and BC Partners Credit platform.

• Question from Melissa Wedel (JPMorgan Chase & Co, Research Division): Can you give a sense of the yield profile between the two portfolios and where you expect that to shake out once combined?
  Response: SWK's portfolio has a slightly higher yield than Runway's; full pro forma yield details will be provided in the N-14 filing.

• Question from Mickey Schleien (Clear Street LLC): Which portfolio companies were the main drivers of the realized loss and the unrealized portfolio depreciation? Do these reflect sector problems or were they idiosyncratic?
  Response: Losses were mainly in the equity portfolio and were largely idiosyncratic.

• Question from Mickey Schleien (Clear Street LLC): Was there some theme across the equity portfolio that drove those losses?
  Response: No sector theme—drivers included warrant expirations and liquidations of IPO shares at below carrying cost.

• Question from Mickey Schleien (Clear Street LLC): You discussed prepayment activity in your remarks. What's driving that activity and do you expect it to continue next year?
  Response: Prepayments are driven by M&A and borrowers refinancing to cheaper capital; a normal course of prepayments is expected to continue.

• Question from Mickey Schleien (Clear Street LLC): What share of recent deals came from the BC Partners ecosystem and how do those opportunities differ from your legacy pipeline?
  Response: There is a meaningful split; BC Partners brings larger checks aligned with Runway's three sectors, while Runway maintains its legacy pipeline and disciplined deal selection.

• Question from Mickey Schleien (Clear Street LLC): Could you describe competitive dynamics and pricing pressures in the venture debt space currently?
  Response: Some spread compression has occurred but materially less than in broader middle-market and syndicated markets; pressure should ease as rates decline.

• Question from Mickey Schleien (Clear Street LLC): How do you plan to integrate the SWK team into your platform?
  Response: The SWK team will provide transition services, assist with portfolio relationships and support originations during integration.

• Question from Mickey Schleien (Clear Street LLC): Are the SWK shareholders locked up post-merger and what is the lockup schedule?
  Response: There is no formal lockup; a key shareholder agreement exists and its elements are disclosed in SEC filings.

• Question from Casey Alexander (Compass Point Research & Trading, LLC, Research Division): You declared a $0.33 dividend while NII per share was $0.43; why no special distribution and how did the Board decide?
  Response: Board maintains base dividend policy and will pay up to 50% of the delta between NII and the base dividend to manage prepayment timing and expected rate changes, expecting Q4 earnings to cover the base dividend.

• Question from Casey Alexander (Compass Point Research & Trading, LLC, Research Division): Does the SWK team currently have the ability to make new loans and do you have any say on loans they would make pre-close?
  Response: Interim operating covenants require coordination—loan modifications and new opportunities are handled with Runway's investment team and investment committee.

• Question from Erik Zwick (Lucid Capital Markets, LLC, Research Division): Can you provide characteristics of the loan added to the Cadma JV and why it was a good fit for that vehicle versus the primary portfolio?
  Response: The loan was a growth-stage loan that was better suited to the JV structure; some deals are partially allocated to the BDC while others fit the JV.

• Question from Erik Zwick (Lucid Capital Markets, LLC, Research Division): PIK income comprised ~11.5% of total investment income this quarter—what's the split between structured PIK versus credit-related PIK and thoughts on the level?
  Response: Some structured PIK contributed this quarter (including two deals from Q4 2024); management did not provide a detailed numerical split on the call.

• Question from Erik Zwick (Lucid Capital Markets, LLC, Research Division): How long is structured PIK typically provided for—does it roll off after a period?
  Response: PIK terms are bespoke—often a partial PIK toggle for 1–2 years or a small permanent PIK component depending on borrower cash flows.

• Question from Erik Zwick (Lucid Capital Markets, LLC, Research Division): When you structure PIK, do you underwrite differently versus a loan without PIK?
  Response: Yes—underwriting focuses on loan-to-value including modeling accrued PIK to ensure acceptable LTV over the loan life.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): Do you expect the SWK deal to be accretive in 2026?
  Response: Yes—expected to be accretive in the first full quarter after closing.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): Will you re-evaluate SWK's fair values and is there potential for OID accretion or discount accretion post-close?
  Response: Runway will adopt SWK's fair value mark at closing; there is prospect for OID accretion over time.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): Will shares be issued based on NAV per share or current market share price?
  Response: This is a NAV-for-NAV merger; shares will be issued based on NAV determined 48 hours before closing.

• Question from Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division): At what development stage are the companies SWK invests in?
  Response: SWK targets similar growth-stage, revenue-generating healthcare/life sciences companies—typically generating meaningful revenue and still in growth (pre-profit) phase.

Contradiction Point 1

Loan Terms and Prepayment Activity

It involves differing explanations of loan terms and prepayment activity, which are crucial for understanding the company's financial health and risk profile.

What's driving the prepayment activity? Will this continue next year? - Mickey Schleien(Clear Street LLC)

2025Q3: We're seeing M&A activity and some companies outgrowing our cost of capital leading to refinancing options. While prepayments are a normal part of our business cycle, we do expect a normal course of prepayments to continue. - Greg Greifeld(CIO)

What portion of the prepayments came from LIBOR-linked loans versus equity (e.g., PIK), and was the majority from LIBOR or equity? - Cory Johnson(UBS Investment Bank, Research Division)

2025Q2: These are short-term swaps. Typically, these are 3- or 6-month swaps. Some of the larger LIBOR swaps were done at longer tenors, but again, our assumption is that they are short-term and were set up, effectively, to protect against short-term rate spikes. - Greg Greifeld(CIO)

Contradiction Point 2

Yield Profile and Impact of SWK Merger

It involves the expected yield profile and impact of the SWK merger on the company's financial performance, which are critical factors for investors evaluating potential returns.

Can you compare the yield profiles of the two portfolios and the expected outcome after combination? - Melissa Wedel(JPMorgan Chase & Co, Research Division)

2025Q3: The yield profile will be slightly greater than the SWK portfolio, which has a slightly higher yield than ours. Once the portfolios are combined, we'll have complete pro formas in the N14 when filed shortly. - Thomas Raterman(CFO, COO, Secretary & Treasurer)

What is the normalized loan yield level expected going forward? - Douglas Harter(UBS)

2025Q1: We are maintaining our target of 8.5% to 9% yield and have a strong pipeline to meet that. - Tom Raterman(CFO and COO)