Runway Growth Finance (NASDAQ:RWAY) & Sixth Street Specialty Lending (NYSE:TSLX) Critical Review

Sixth Street Specialty Lending (NYSE:TSLX) and Runway Growth Finance (NASDAQ:RWAY) are both small-cap finance companies, but which is the better investment? We will compare the two businesses based on the strength of their valuation, risk, analyst recommendations, profitability, institutional ownership, dividends and earnings.

Volatility & Risk

Sixth Street Specialty Lending has a beta of 0.62, meaning that its share price is 38% less volatile than the S&P 500. Comparatively, Runway Growth Finance has a beta of 0.7, meaning that its share price is 30% less volatile than the S&P 500.

Analyst Recommendations

This is a summary of current ratings for Sixth Street Specialty Lending and Runway Growth Finance, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Sixth Street Specialty Lending	0	3	5	0	2.62
Runway Growth Finance	2	3	2	0	2.00

Sixth Street Specialty Lending presently has a consensus target price of $19.83, suggesting a potential upside of 12.88%. Runway Growth Finance has a consensus target price of $8.40, suggesting a potential upside of 30.03%. Given Runway Growth Finance’s higher possible upside, analysts clearly believe Runway Growth Finance is more favorable than Sixth Street Specialty Lending.

Profitability

This table compares Sixth Street Specialty Lending and Runway Growth Finance’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Sixth Street Specialty Lending	21.79%	11.33%	5.16%
Runway Growth Finance	5.82%	11.73%	5.55%

Dividends

Sixth Street Specialty Lending pays an annual dividend of $1.68 per share and has a dividend yield of 9.6%. Runway Growth Finance pays an annual dividend of $1.32 per share and has a dividend yield of 20.4%. Sixth Street Specialty Lending pays out 176.8% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Runway Growth Finance pays out 1,200.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Institutional & Insider Ownership

70.3% of Sixth Street Specialty Lending shares are held by institutional investors. Comparatively, 64.6% of Runway Growth Finance shares are held by institutional investors. 3.8% of Sixth Street Specialty Lending shares are held by company insiders. Comparatively, 1.0% of Runway Growth Finance shares are held by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Earnings and Valuation

This table compares Sixth Street Specialty Lending and Runway Growth Finance”s top-line revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Sixth Street Specialty Lending	$132.14 million	12.63	$209.99 million	$0.95	18.50
Runway Growth Finance	$137.33 million	1.97	$34.05 million	$0.11	58.73

Sixth Street Specialty Lending has higher earnings, but lower revenue than Runway Growth Finance. Sixth Street Specialty Lending is trading at a lower price-to-earnings ratio than Runway Growth Finance, indicating that it is currently the more affordable of the two stocks.

Summary

Sixth Street Specialty Lending beats Runway Growth Finance on 9 of the 16 factors compared between the two stocks.

About Sixth Street Specialty Lending

Sixth Street Specialty Lending, Inc. (NYSE: TSLX) is a business development company. The fund provides senior secured loans (first-lien, second-lien, and unitranche), unsecured loans, mezzanine debt, and investments in corporate bonds and equity securities and structured products, non-control structured equity, and common equity with a focus on co-investments for organic growth, acquisitions, market or product expansion, restructuring initiatives, recapitalizations, and refinancing. The fund invests in business services, software & technology, healthcare, energy, consumer & retail, manufacturing, industrials, royalty related businesses, education, and specialty finance. It seeks to finance and lending to middle market companies principally located in the United States. The fund invests in companies with enterprise value between $50 million and $1 billion or more and EBITDA between $10 million and $250 million. The transaction size is between $15 million and $350 million. The fund invests across the spectrum of the capital structure and can arrange syndicated transactions of up to $500 million and hold sizeable positions within its credits.

About Runway Growth Finance

Runway Growth Finance Corp. is a business development company specializing investments in senior-secured loans to late stage and growth companies. It prefers to make investments in companies engaged in the technology, life sciences, healthcare and information services, business services and select consumer services and products sectors. It prefers to investments in companies engaged in electronic equipment and instruments, systems software, hardware, storage and peripherals and specialized consumer services, application software, healthcare technology, internet software and services, data processing and outsourced services, internet retail, human resources and employment services, biotechnology, healthcare equipment and education services. It invests in senior secured loans between $10 million and $75 million.