SWK Acquisition And Healthcare Lending Expansion Will Support More Resilient Long-Term Earnings

Catalysts

About Runway Growth Finance

Runway Growth Finance provides growth lending solutions to high-growth companies across technology, healthcare and select consumer sectors.

What are the underlying business or industry changes driving this perspective?

• Completion of the SWK Holdings acquisition is expected to immediately scale the portfolio to roughly $1.2 billion and increase exposure to resilient healthcare and life sciences borrowers, supporting higher total investment income and more durable net investment income.
• Growing demand for minimally dilutive financing among commercial stage healthcare and growth technology companies should expand Runway's addressable market, sustaining elevated yields on first lien senior secured loans and supporting revenue growth.
• Enhanced origination reach through the BC Partners Credit ecosystem, combined with a clear focus on smaller average hold sizes and broader industry diversification, should improve portfolio risk-adjusted returns and stabilize net margins.
• Improved expense efficiency from greater scale, including management fee support from the adviser and potential access to lower-cost secured funding markets such as ABS, is likely to reduce the operating expense ratio and support earnings per share.
• Disciplined capital management, including an active share repurchase program and maintenance of spillover income and dividend coverage, positions the company to narrow any discount to NAV as earnings visibility improves and could translate into higher reported ROE and per share earnings over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Runway Growth Finance's revenue will decrease by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.9% today to 45.4% in 3 years time.
• Analysts expect earnings to reach $58.3 million (and earnings per share of $1.59) by about December 2028, up from $54.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 6.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.2x.
• Analysts expect the number of shares outstanding to decline by 3.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The planned SWK Holdings acquisition could be delayed further or fail to close due to extended regulatory or market disruptions such as a prolonged government shutdown. This would prevent the anticipated scale benefits, higher yielding healthcare exposure and expense efficiencies from materializing, limiting future revenue growth and constraining earnings.
• Rising portfolio risk indicators, including an increase in the weighted average risk rating from 2.33 to 2.42 and higher loan to value ratios, suggest that future credit losses could climb from currently low levels. This would pressure net interest margins and reduce net investment income if more loans migrate to nonaccrual status.
• Elevated prepayment activity driven by M&A exits and borrowers refinancing into cheaper capital sources may persist as markets normalize and interest rates fall. This could erode the high 16.8% portfolio yield and shrink the asset base faster than new originations can replace it, weighing on total investment income and earnings.
• Growing reliance on structured and toggle payment in kind features for growth stage borrowers exposes the company to the risk that accrued interest is not ultimately realized in cash. As PIK capitalizes into loan balances and pushes loan to value higher, any downturn in the venture and healthcare ecosystems could drive larger write downs, depressing revenue recognition and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.89 for Runway Growth Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $128.4 million, earnings will come to $58.3 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of $9.32, the analyst price target of $10.89 is 14.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.