Business Development Companies (BDCs) have demonstrated resilience amid rising interest rates, unlike REITs that have struggled. This is due to BDCs offering higher yields. While the REIT sector (VNQ) has declined, the BDC ETF (BIZD) has performed well, returning 16% over the past year. As investors search for high-yielding investments, Runway Growth Finance (NASDAQ:RWAY) is an often-overlooked BDC that offers a compelling opportunity.
Who Is Runway Growth Finance?
Runway Growth Finance (RWAY) is a BDC that focuses on investments in technology, life sciences, healthcare, and select consumer services. They provide fixed-rate debt and floating-rate loans to companies in their portfolio. This approach has allowed them to thrive in the current high rate environment. RWAY’s emphasis on late-stage and growth companies, strong insider ownership, and a diversified portfolio sets them apart from other BDCs.
Growing & Diversified Portfolio
RWAY’s portfolio is largely concentrated in Healthcare Technology, with application software and human resource & employment services also playing significant roles. The company’s loans are primarily invested in first-lien loans, providing it with favorable positioning in the event of defaults. Additionally, RWAY has a conservative balance sheet and a low debt-to-equity ratio, indicating financial stability.
Strong Management Team
While externally managed, RWAY has a dedicated and experienced management team. The interim CEO, Greg Greifeld, brings valuable expertise from his prior roles at JPMorgan. The team’s ability to navigate economic downturns and its commitment to providing consistent dividends are essential for long-term investors.
Conservative Balance Sheet
RWAY has a well-laddered debt maturity schedule and sufficient liquidity to cover its debt obligations. Unlike some of its peers, RWAY’s debt does not mature until 2026, reducing the risk of refinancing at higher rates. The company’s proactive approach to managing its portfolio and conservative financial policies further strengthen its position.
RWAY offers an attractive dividend yield of over 12% at present. The company has consistently raised its dividend and declared supplemental dividends, demonstrating its commitment to rewarding shareholders. RWAY’s strong financial performance, growing net investment income, and increase in its net asset value contribute to its ability to sustain its dividend payments.
Rising non-accrual loans remain a key risk for BDCs, including RWAY. While the company has reported no credit losses so far in 2023, ongoing volatility and potential recessionary concerns could lead to an increase in non-accrual status for some portfolio companies. Investors should closely monitor this risk.
Despite being a relatively new and lesser-known BDC, RWAY presents an appealing long-term investment opportunity. Its focus on high-yielding sectors, conservative balance sheet, and strong management team position it for future growth. With a current dividend yield of over 12% and trading at a discount to its net asset value, RWAY is a compelling option for investors seeking high-income investments in the BDC space.