Runway Growth Finance Corp: Wall Street Bullish on This 15%-Yielding Alternative Bank
January 31, 2025
RWAY Stock Up 20% Since November
Things are looking up for Runway Growth Finance Corp (NASDAQ:RWAY).
In President Donald Trump’s second inauguration address, he promised a “golden age of America.” This new gilded age involves pro-business policies, including the reduction of the corporate tax rate to 15%.
Coupled with strong economic gains and lower interest rates, this should help the U.S. economy beat expectations in 2025. According to Goldman Sachs Research, U.S. gross domestic product is expected to expand at 2.5% in 2025; higher than previous guidance of just 1.9%. (Source: “The US economy is poised to beat expectations in 2025,” Goldman Sachs, November 20, 2024.)
A brighter economic outlook should also benefit business development companies (BDCs), or what we call “Alternative Banks” at Income Investors. They provide capital to small- and medium-sized businesses to help them grow their operations.
Why don’t these companies use traditional banks?
They typically generate revenue anywhere from $50.0 million to more than $100.0 million on an annual basis. That might sound like a lot to you and me, but it’s too small for big banks.
In addition to being a life line for U.S. businesses, BDCs are also great for passive income investors. Because of a federal loophole, Alternative Banks pay little to no corporate tax on their earnings. In exchange for this carrot, they have to legally distribute at least 90% of their ordinary taxable income to shareholders. This results in some of the biggest dividend payouts on Wall Street.
One BDC that has been performing well of late, and has great potential, is Runway Growth Finance Corp.
About Runway Growth Finance Corp
Runway is a specialty BDC that originates and invests anywhere from $30.0 million to $150.0 million in (primarily) late-stage and growth companies. (Source: “Third Quarter 2024 Investor Presentation,” Runway Growth Finance Corp, November 12, 2024.)
The vast majority (99%) are secured by first-lien investments, the remainder are in warrants and other equity-related investments. Runway invests in the technology, health-care and information services, business services, financial services, and select consumer services and products industries.
As you’d expect, this BDC’s objective is to maximize total returns by generating current income from debt investments and capital gains from warrants received with those debt investments.
Since its inception in 2015, Runway has closed 82 transactions, funded $2.2 billion in commitments, and made 47 exits. Its current portfolio includes 40 companies with $1.5 billion in assets under management (AUM). Of its debt portfolio, 100% have floating rates.
Some of the current or former companies that Runway has invested in include CloudPay, Fidelis, JW Player, Marley Spoon, and Ouster. (Source: “Portfolio,” Runway Growth Finance Corp, last accessed January 21, 2025.)
Investment Advisor Being Acquired
Back in October 2024, Runway Credit Capital, the investment advisor to Runway Growth Finance Corp, announced it was being acquired by BC Partners Credit, the $8.0-billion credit arm of BC Partners. (Source: “Runway Growth Capital Announces Combination with BC Partners Credit,” Runway Growth Capital, October 21, 2024.)
Following the closing of the transaction, Runway will remain the investment adviser to investment funds, including Runway Growth Finance Corp.
The combined companies are expected to enhance Runway Growth’s financing capabilities for a wider range of companies. Shareholders are expected to benefit from this increased exposure and access to a much larger number of investment opportunities.
Delivers Strong Q3 Results
For the third quarter ended September 30, 2024, Runway Growth Finance Corp reported total investment income of $36.7 million; that’s down from $43.7 million in the same prior-year period, but up from $27.0 million in the third quarter of 2022. (Source: “Runway Growth Finance Corp. Reports Third Quarter 2024 Financial Results,” Runway Growth Finance Corp, November 12, 2024.)
Total investment income was $20.7 million, or $0.41 per share, a slight decrease from $21.7 million in the third quarter of 2023 but 65% over the $12.5 million recorded in the third quarter of 2022.
During the quarter, Runway completed two investments in new portfolio companies, four investments with existing companies, and one investment with a joint venture (JV), representing $75.3 million in funded activities.
Commenting on the results, David Spreng, Founder and CEO said, “Runway Growth delivered strong financial performance in the third quarter, reporting sequential net investment income growth and solid originations.”
“As we near the end of 2024, we believe the Company is positioned to accelerate growth and drive long-term shareholder value.”
Paid Q4 Dividend of $0.40/Distribution
Because Runway Growth has to pay out a substantial portion of of its available earnings on a quarterly basis, shareholders are on the receiving end of a reliable distribution. For the fourth quarter, the BDC declared a distribution of $0.40 per share, or $1.60 per share on an annual basis, for a forward yield of 15.18%. (Source: “Runway Growth Finance Corp. Announces Fourth Quarter Regular Dividend of $0.40,” Runway Growth Finance Corp, November 5, 2024.)
Keep in mind, its payout will vary depending on its earnings.
| Period | Distribution/Share |
| Q3 2024 | $0.45 |
| Q2 2024 | $0.47 |
| Q1 2024 | $0.47 |
| Q4 2023 | $0.46 |
| Q3 2023 | $0.45 |
| Q2 2023 | $0.45 |
| Q1 2023 | $0.45 |
| Q4 2022 | $0.36 |
In addition to a legally mandated strong distribution, Runway Growth Finance also returns value to shareholders through dividend buybacks. In the third quarter of 2024, it repurchased 644,763 shares under a previously authorized share repurchase program.
RWAY Expected to Close in on Record High
President Trump’s business policies will be good for Wall Street in general, which includes RWAY. Moreover, analysts think the acquisition of Runway Growth Finance Corp BC Partners will also be a boon for the stock
Since announcing the acquisition at the end of October, RWAY has rallied an impressive 18%. Conservative Wall Street analysts think that equally impressive gains are in store for the stock.
Of those providing a 12-month share price target on RWAY, the average is $11.82, with a high estimate of $13.50. This points to potential gains of between 2.7% and 17.4%. The high price target of $13.50 per share would put the stock within striking distance of its February 2024 record high of $13.74 per share.
Chart courtesy of StockCharts.com
The Lowdown on Runway Growth Financial Corp
Runway Growth Finance Corp is a great BDC operating in a large, growing market for the debt financing of late- and growth-stage companies. A whopping 99% of the company’s debt is secured by first-lien investments and 100% of its debt is floating rate.
The BDC reported strong third-quarter results and also provided a robust fourth-quarter 2024 portfolio update, which included seven investments in new and existing portfolio companies.
Runway is on track to close its business combination with BC Partners in the first quarter of 2025, positioning it to deliver enhanced growth drivers for long-term returns.
Further out, Runway is strategically positioned to benefit from current market and economic conditions as more late-stage companies turn to the private markets for the crucial capital needed to fund their next phase of growth.
