Finance
Runway Growth Finance Delivers Steady Earnings In Tough Macro Environment (NASDAQ:RWAY)
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Guido Mieth/DigitalVision via Getty Images
After my initial article on Runway Growth finance (NASDAQ:RWAY) I was eagerly waiting the next batch of results to see how the company has been performed over the last quarter. Now that some time has passed post the collapse of SVB and several other smaller banks we could get a peek into the impact, if any, this has had on the Venture Capital (VC) markets in general and the roster of clients on the RWAY rolodex in particular.
Let’s dig in.
Earnings
Total Investment income came in at $39.3m (vs $36.8m last quarter) whilst net investment income settled at $18.2m (vs $18.4m last quarter). On a per share basis this net income figure translated into 45c for the period which was in line with consensus and flat on a quarter-on-quarter basis. Expense growth jumped a bit too however, higher interest expense was the largest driver here, management fees were a bit higher and incentive fees were a tick lower. The expense figure of $21.1m was up from $18.4m in Q4 2022.
Overall higher costs offset higher income and resulted in flat earnings for the quarter-on-quarter period.
Investments/Portfolio
Over the quarter there were seven new loans issued for a total of $12.9m and at the same time $10.2m worth of repayments were received. There were some losses on investments too which totalled $1.18m. The total investment book rose to $1.16bn from $1.14bn last quarter.
Quarterly Activity (Company Presentation)
Of the portfolio 95% sits in senior secured loans and the remaining 5% is in warrants and equity related investments spread out in forty-nine portfolio companies. Mark to market changes in this smaller part of the portfolio from certain restructuring efforts weighed on the Net Asset Value (NAV) of the portfolio. The realised loss and what looks like an unrealised depreciation on investments (loss) figure weighed in too and caused NAV to dip to $14.07 from $14.22 last quarter. These figures are highlighted below and was a turnaround from the last quarter where realised/unrealised gains or losses were a positive $132k.
Portfolio Reconciliation (Earnings Release)
This tells me two things, firstly the debt portion of the book (95% of the portfolio) is steady. It’s the equity/warrant part which is of course subject to far more volatility and mark to market pricing which is causing some pain this quarter. Although an unwelcome weight to earnings now this is the part of the portfolio that stands to post potentially larger gains when economic activity and business conditions stabilize and turn positive again.
LTV and Loss ratios vs industry and peers (Company Presentation)
Losses are part of the lending game as we know, they are par for the course. It’s comforting to know however that loss rates are RWAY are well contained and a lot lower than the VC and direct lending industry as a whole.
Commentary
What was interesting to note was that the entire $12.9m of new loans deployed came from existing agreements where original draws were delayed. On top of this they still have about $63m worth of loans approved but undrawn that can be used this year. This points to pretty conservative positioning by management as they haven’t brought ‘new’ loans or customers onto the balance sheet. At the same time though it does provide some line of site to where we can see some growth come from for the rest of year should no new loans or customers come onto the books from here. It seems to me that for the first quarter anyway management have adopted a wait and see attitude.
I’m going to assume that this conservative behaviour has something to do with the current ‘state of things’ in the market and economy and I’m pretty comfortable that management are playing it safe until we get more clarity on whether or not inflation and interest rates have in fact peaked, how the economy eventually digests all the current hikes and of course whether we see a recession or not as the year progresses.
Leverage bumped up a little but is still below the 1.1x level the company said they’d like to get to and well below the peer group average which is around the 1.3x mark. So, there still is flexibility and leeway with some room to maneuver if an opportunity presents itself.
Conclusion
I’d call this a solid and steady quarter for RWAY in what is a challenging environment, within an ever tougher macro backdrop. Despite some small losses and higher expenses, earnings remained flat which is testament to the earnings power they have built since they started the business. Lower than target leverage and significantly lower than peer group leverage helps reduce the risk somewhat versus other investments in this space, as does the fact that 95% of the book is in steady senior secured and first lien debt where the loan to value (LTV) of the underlying companies is a meagre 17.4%
Summary (Company Presentation)
During the conference call the point was made that the current supplemental dividend of 5c per quarter is likely to be maintained subject to any significant adverse occurrence and that once leverage reaches 1.1x its likely to stay around that area which implies the business will in all likelihood run at below peer group averages for the foreseeable future at least, perhaps even permanently.
For a more in-depth overview of the risks associated with RWAY please see my prior article here.
Other than those mentioned there I’d add that the equity investment in underlying companies clearly does show that veering away from the core top of stack debt strategy does carry some additional risk, the true merits of which will only be truly presented in an environment where interest rates are lower and the business environment is stronger, I’m sure that this part of the cycle is coming at some point but it’s worth noting the impact this can have on NAV for one thing and the opportunity cost of not having those assets sit in more immediately return generating assets for another.
I consider the reiteration of the supplemental dividend as management saying they are comfortable with how the business is performing in the current environment and as a result am happy to keep nibbling as the share price swings provide opportunity.
I’ll say again though that these investments are higher risk and that liquidity in this name is also quite small due to the large key shareholders here. So keep that in mind when deciding on your position size should you choose to invest here.
At current prices we have a dividend yield of 16% and a discount to NAV of over 20%. If you purchase or add to your position before the close of business on the 11th of May, you’re still in line to collect 45c in income which boosts the yield considerably from a year-on-year perspective to $2.25 for a yield on cost of 20% assuming all remains the same.
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Finance
Making a business case for AI
![Making a business case for AI](https://fortune.com/img-assets/wp-content/uploads/2024/06/CFO-Daily-veteran-tech-CFO-Mark-Hawkin.jpg?resize=1200,600)
Good morning. If you’re a CFO, you’ve been in a board meeting—or will be very soon—communicating your plan to invest in AI. For some insight into that process, I sat down with veteran tech CFO Mark Hawkins. His first piece of advice? “Clearly and unambiguously define the use case.”
“The less difficult it is to understand, the more credible the opportunity,” he explained. “When people can’t explain it, as a seasoned executive, it creates a yellow flag for me.”
Hawkins spent more than 40 years in corporate finance, most recently as president and CFO of Salesforce, which then appointed him president and CFO Emeritus, a position he held through November 2021. He’s also been CFO at Autodesk and Logitech, and he held various positions at Dell and Hewlett-Packard (HP).
Bringing it back to AI, it’s important for CFOs to share with board members “the math, the ROI, the metrics of success” to help build credibility but also be transparent about any risks, and work on building trust, Hawkins said. “It would be wise to really articulate the governance framework for technology,” he added.
It’s also important to make clear the opportunities and potential outcomes—and how those align with the company’s overarching goals and principles.
“When you’re presenting to a super-sophisticated group of technologically advanced people, and most of them could have deep engineering and science backgrounds, it’s a different level of dialogue,” Hawkins continued. Use cases often require additional details, for example.
By 2027, spending on AI software likely will grow to $297.9 billion, with a compound annual growth rate of 19.1%, according to Gartner. The firm’s research also found that boards are asking about AI more than three times as often as considerations tied to cloud computing.
During our conversation, I asked him his personal thoughts on AI, which he compared to electricity, also “a big paradigm.” Artificial intelligence, he said, is going down the path of augmenting people’s abilities and productivity, a journey that potentially includes significant value creation and a chance to create business models that don’t yet exist.
Hawkins also took a moment to reflect a bit on his own journey, including when, at age 21, he joined HP—at the time, a $3.1 billion company. In 2023, its annual revenue was $53.7 billion.
“It was the beginning of my journey into technology,” Hawkins said, “and I’ve been there ever since.”
Sheryl Estrada
sheryl.estrada@fortune.com
Leaderboard
Matt Lesmeister was promoted to CFO at flyExclusive, Inc. (NYSE American: FLYX), a private charter jet company, effective June 25. He will succeed interim CFO Billy Barnard. Lesmeister joined the company on May 30 as EVP and chief of staff and has 14 years of public company experience across various finance roles. Most recently, he served as VP of transformation and strategy at Fox Factory Holding Corp., Before that, Lesmeister served in various roles of increasing responsibility at United Technologies Corporation.
Kevin Nihill was named CFO at Rhinebeck Bancorp and Rhinebeck Bank (Nasdaq: RBKB). Nihill replaced former CFO, Michael McDermott, who retired from the bank after 23 years. Nihill most recently served as EVP and CFO at St. Mary’s Bank. He also served as SVP and treasurer at Berkshire Bank.
Big Deal
Mercer recently published new research about the impact of AI on productivity. The findings, created in partnership with Oxford Analytica, suggest that AI may boost developed markets’ GDP growth up 0.5%, with emerging markets potentially seeing a 0.2% boost in GDP growth.
Another key finding is sectors will experience different AI-enabled productivity boosts: finance and insurance (14%), information and technology (13.4%), manufacturing (6.9%), health care and social assistance (6.3%), transportation and warehousing (5.7%), and hospitality and food service (3.1%, according to Mercer.
Going deeper
“Federal Reserve governor says AI is ‘not going to replace’ central bankers—at least not yet,” is a new Fortune report by Michael del Castillo. He writes: “Lisa Cook, a Federal Reserve governor, isn’t afraid of losing her job to robots anytime soon. Speaking at an Economic Club of New York event on Tuesday, Cook said that when you’re a central bank governor every word counts in a way that not only caught her off guard at first but that likely will catch AI off guard for quite some time.”
Overheard
“By taking a human-first approach and developing AI tools that solve problems everyday people experience, businesses can reach a global audience with broad demographics.”
—Matthieu Rouif, CEO and cofounder of Photoroom, an AI-powered photo-editing app, writes in a new Fortune opinion piece.
Finance
‘Females In Finance’ Collective Marks 1 Year And 1000 Members At NYSE
![‘Females In Finance’ Collective Marks 1 Year And 1000 Members At NYSE](https://imageio.forbes.com/specials-images/imageserve/667b8127c005c1d6dcb1879e/0x0.jpg?format=jpg&height=900&width=1600&fit=bounds)
FIF Collective marks one year and 1000 members at NYSE June 24th
Muriel Siebert, known as the ‘First Woman of Finance,’ was the first woman ever to own a seat on the New York Stock Exchange in 1967. She was a passionate advocate for gender equality and remembered as a woman who refused to take no for an answer. Known to have famously threatened the NYSE Chairman with the installation of a portable toilet on the trading floor if a women’s restroom was not granted, and her public appearances with her Chihuahua ‘Monster Girl,’ named in tribute to how neither one was intimidated by ‘the big dogs,’ she had an unyielding confidence and determination that cultivated a rare respectability for women of her era. So rare, she remained the only woman in a ratio of 1365:1 at the NYSE for over a decade.
FIF Collective
Fast forward 57 years later, and it seemed like the perfect fit for the ‘Female in Finance Collective (FIF), led by group CEO Meghan McKenna, to gather in the Muriel Siebel room at the NYSE on June 20th to celebrate its one-year birthday and surpassing its 1000 member milestone. The Collective, is described as ‘an invite-only, highly selective group of Founders, CEOs, CFOs, VPs of Finance, VC Partners, and leaders, with a mission to advance the profiles of women through board seats, job opportunities, networking, learning, and great parties around the world.’
McKenna, like Siebert, is described by many as a woman to whom it is impossible to say no. She is known for her brash humor, charming confidence, low tolerance for inequality, and unwavering belief that change is possible. She equates these attributes to her college basketball career and her humble upbringing in the Bronx as the daughter of a New York Police Officer. “I’ve always stayed true to what I know is right and stood up for others around me,” she says, “that hasn’t always been an easy path to take. I have worked in teams where I was told I was ‘tough to manage,’ just for being honest. But I stay true to my values. We owe that to ourselves and other women.”
McKenna, who founded FIF shortly before starting a new role as a Managing Director at Stifel Bank, says that although the idea had floated in her head for many years, it was the pause between roles that gave her the headspace to make it happen. Yet she was not ready to exit a career she loves and was looking for a home to combine her experience, talent, and FIF, which she found at Stifel. “This is an industry that can be more performative than meaningful when it comes to gender equity, but Stifel has walked the walk when it comes to supporting women,” she says. “My network is my net worth and the team at Stifel really understand and support that. They see the broad industry value FIF creates for everyone.”
FIF founding team, From left: Christian Brosnan, Amy Kux, Jean Brosnan, Meghan McKenna, Angie … [+]
She says FIF was born after two decades of seeing countless gaps and lost opportunities for women and bottom-line impacts on business. “Women are not progressing at a rate that makes sense for their capabilities and industry needs,” she says. The effect of this is backed by data, such as the 2022 World Economic Forum’s ‘Global Gender Gap Report,’ which revealed females in finance remain one of the most untapped business resources. The share of women in global C-suite roles in the financial services industry worldwide reached 18.4 percent in 2023, and predictions from a recent Statista Study estimate a growth to 21.8 percent by 2031.
For McKenna and the team at FIF, the idea of waiting another near-decade for a mere 3.4 percentage point increase in female representation is not a reality they are willing to accept. Yet the trillion dollar question remains, how can we improve this? While there is no magic bullet solution, they believe the right place to start, is to look to each other and initiate a collective effort for change.
The cost equals the commitment
FIF is not alone in this mission. There has been a widespread proliferation of communities and programs promising to empower women and accelerate their professional success, an approach many consider crucial for women. Yet unlike many of these networks, which incur sizable membership fees and restrict their events to women, FIF takes a different approach. McKenna says she wanted a ‘personally free network for qualifying women. “This is a network of decision-makers and investors who bring merit she says, “I want them to bring their passion to this mission at no cost but their commitment to cultivate change.”
A strategy for sponsors and allies
Instead, the monetization will come via paid talent matching and a sponsorship program for events and seminars open to men and women. This strategy appears to work well for McKenna, who has fostered a growing partner ecosystem of over 30 sponsors in year one, including names like Deloitte, Amazon, KPMG, Samsung Next, Netsuite, Davis Polk, and Ramp, hosted 12 events across the cities of New York, San Francisco, Boston and Washington DC.
FIF sponsors gathering at NYSE to mark 1 year From left: Iris Chen- Cross Country Consulting, … [+]
Ken Egan, Partner at Cross Country Consulting, shares that he finds this approach effective as it focuses on bottom-line impacts and brings others along on the journey. In doing so, there is an organic allyship, something that critics of female-only networks often highlight as a missing link. “I have attended events and seen the value FIF brings,” he says, “This is a tough industry for women, and businesses in knowing how best to support but often showing up is half the battle. FIF forces people out of their comfort zones in a healthy way and creates a conscious and intentional level of connection.”
The burden of proof over potential
For venture capitalist Marissa Hodgdon, CEO of Sidelines.Vc, the nature of that intent is critical. She shares that a key challenge women in the finance industry face is the burden of ‘proof over potential.’ The ‘you know what you know’ effect that has worked very favorably for white males, who continue to receive more than 90% of annual VC dollars. She believes they will continue to do so unless women create a new wave of intentional change. Hodgdon, who is partnering with FIF to bring investment and advisory opportunities to the Collective, says, ‘we need to be targeted in putting opportunities for advisory roles and investment in front of women. FIF is the perfect forum for us to do this. A high caliber network of well-informed women creating change for themselves.”
The power of possibility
Much of the focus on financial leadership centers on business models—revenues, costs, niches, and leverage. However, what women often need are new mental models. Gaingels CEO Jennifer Jeronimo sees her firm’s partnership with FIF as a catalyst to create a new sense of possibility. Addressing the audience at the NYSE event, she gave the analogy of Roger Bannister, who shocked the world with the power of the possibility by breaking the record for the four-minute mile, once deemed hopelessly impossible, yet achieved by over 1000 runners since. Jeronimo wants to bring that same power of possibility to women in the VC realm and diversify the face of an industry that often looks and sounds the same.
FIF Collective CEO Meghan McKenna joins Judy Shaw Floor Talk at NYSE June 20th 2024 to celebrate 1 … [+]
What’s next for FIF?
Seaaoned finance exec and fractional CFO Amy Kux, a founding member of FIF says, “I have been part of many networks over the course of my career, but FIF is one of the only communities that promotes helping one another as its mission, and we cannot waver on that.”
This is an important factor for McKenna and the team at FIF as they look to the future and consider opportunities to grow the collective across new cities in the USA and international . McKenna says they will not put scale above substance and instead stay focused on their core values and strategic objectives by continuing to listen to one another. “We are a group of women who have created this as a labor of love and bootstrapped our way to now. We are not salaried, we do this voluntarily and most of us have full time jobs. Of course we want to grow and monetize to better resource and reinvest, but for now our core focus is not on headline growth but ensuring we maintain a high caliber community. That is what makes FIF so impactful.”
Muriel Siebert once said, “you create opportunities by performing not complaining.” For the women at FIF Collective this is a mantra for the next stage, as they look to build a future for females in finance by proving the power of connection, and collectively challenging the status quo.
Finance
These 2 Finance Stocks Could Beat Earnings: Why They Should Be on Your Radar
![These 2 Finance Stocks Could Beat Earnings: Why They Should Be on Your Radar](https://cdn.benzinga.com/files/imagecache/1024x768xUP/images/story/2024/06/25/yorgos-ntrahas-lp8zlyazjy8-unsplash.jpg)
Wall Street watches a company’s quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.
Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive earnings surprises.
Hunting for ‘earnings whispers’ or companies poised to beat their quarterly earnings estimates is a somewhat common practice. But that doesn’t make it easy. One way that has been proven to work is by using the Zacks Earnings ESP tool.
The Zacks Earnings ESP, Explained
The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.
Now that we understand the basic idea, let’s look at how the Expected Surprise Prediction works. The ESP is calculated by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, with the percentage difference between the two giving us the Zacks ESP figure.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 28.3% annual returns on average, according to our 10 year backtest.
Stocks with a ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), or the top 15% and top 5% of stocks, respectively, should outperform the market; Strong Buy stocks should outperform more than any other rank.
Should You Consider AGNC Investment?
The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. AGNC Investment (NASDAQ:AGNC) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $0.56 a share 27 days away from its upcoming earnings release on July 22, 2024.
AGNC has an Earnings ESP figure of +5.66%, which, as explained above, is calculated by taking the percentage difference between the $0.56 Most Accurate Estimate and the Zacks Consensus Estimate of $0.53. AGNC Investment is one of a large database of stocks with positive ESPs.
AGNC is just one of a large group of Finance stocks with a positive ESP figure. Healthpeak (NYSE:DOC) is another qualifying stock you may want to consider.
Healthpeak is a Zacks Rank #3 (Hold) stock, and is getting ready to report earnings on July 25, 2024. DOC’s Most Accurate Estimate sits at $0.44 a share 30 days from its next earnings release.
For Healthpeak, the percentage difference between its Most Accurate Estimate and its Zacks Consensus Estimate of $0.44 is +1.15%.
Because both stocks hold a positive Earnings ESP, AGNC and DOC could potentially post earnings beats in their next reports.
To read this article on Zacks.com click here.
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