Mid-sized private companies are more 'cautiously optimistic' but no one knows where the economy is headed, lender says

By Steve Gelsi

Runway Capital expects more lending activity in the second half of 2023 to companies with more than $100 mln in revenue, but the outlook remains uncertain

Runway Growth Capital expects its deal pipeline for loans to late-stage private companies to pick up steam in 2023 after a slower start to the year.

As a provider of venture debt via senior term loans of $10 million to $100 million to technology, consumer and life sciences companies, Runway Growth Capital has a window into the middle-market businesses that help make up the backbone of the U.S. economy.

"Our borrowers are still cautiously optimistic," Runway Growth Capital founder David Spreng told MarketWatch. "There's a conservative, weather-the-storm mentality with a Plan B so they'll be ready to invest in the business if opportunities present themselves, or maybe do an acquisition."

The first quarter and second quarters were "purposely slow" for Runway Growth Capital amid the U.S. regional-bank crisis, uncertainty around the number and amount of Federal Reserve interest rate hikes, and the debt ceiling debate in Congress.

At the moment, the firm's pipeline of loans is more healthy, although companies remain keen on containing expenses and preparing for multiple outcomes.

"It's a difficult environment because no one knows where the economy is going," said Spreng, who is also CEO and chief investment officer of the firm with $2.3 billion in total loan commitments since it was founded in 2015. "We...have been deploying capital more slowly. It'll pick up in the second half."

Runway Growth Capital typically handles 10 financings a year to companies that prefer issuing debt rather than selling equity to venture capital or private equity firms investors. This year it's on track to do eight.

Spreng launched Runway Growth Capital after working as an investment banker at Solomon Brothers, in asset management for Lloyd's Bank, and venture capital funding in Silicon Valley.

"I had realized that being one of 3,000 venture capital firms in Silicon Valley was difficult and not as rewarding as I'd hoped," Spreng said. "I wanted to do something more impactful.""

He saw a market opportunity to provide debt to revenue-generating companies that needed more capital to reach the next stage of their life through initial public offerings, profitability, or a merger with a larger company.

Unlike venture capitalists who typically get a seat on the board and an ownership stake in their portfolio companies, debt offers a way for company founders to raise capital without diluting their equity ownership.

"Companies were staying private longer and they were outliving the ability of early-stage venture funds to provide capital," Spreng said. "Borrowers wanted inexpensive, late stage money."

Nowadays, Runway Growth Capital operates out of offices in Menlo Park, Calif., Chicago and New York City. It issues private loans and manages a public business development company, Runway Growth Finance Corp. (RWAY).

Some examples of 2023 transactions by Runway Growth Capital include a $40 million senior secured loan to Elevate Services Inc., a software and services provider to legal departments at large companies, as well as a $50 million loan to Madison Reed, a hair color specialist focused on the female market.

Its average borrower generates well above $100 million in revenue, is 13 years old and has raised $150 million in venture capital backing.

Looking ahead, Runway Growth Capital plans to hire two more employees in addition to the 28 people now working at the firm.

While economists and pundits debate whether the U.S. economy will head into a recession, Runway Growth Capital is seeing good credit quality among its borrowers.

"We don't have anybody [among borrowers] that's absolutely that's missing their numbers," Spreng said. "I can't even call this a soft landing. It's better than anyone expected."

Also read: Megabank head count holds nearly steady in second quarter as lenders compete for business

-Steve Gelsi

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08-01-23 1526ET

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