FDUS - NASDAQ

Good day, and welcome to the Fidus Investment Corporation's fourth quarter 2025 earnings conference call. All participants will be in listen-only mode. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Dave, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's fourth quarter 2025 earnings conference call. With me this morning are Edward H. Ross, Fidus Investment Corporation's chairman and chief executive officer, and Shelby Elizabeth Sherard, chief financial officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable, based on estimates, assumptions, and projections as of today, 02/27/2026, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus Investment Corporation undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Edward. Good morning, Edward.

Good morning, Jody. And good morning, everyone. Welcome to our fourth quarter 2025 earnings conference call. On today's call, I will start with a review of our fourth quarter performance and our portfolio at quarter end, and then share with you our outlook for 2026. Shelby will cover the fourth quarter financial results and our liquidity position. After we have completed our prepared remarks, we will be happy to take your questions. During the fourth quarter, deal flow was strong, driven by a healthy M&A environment compared to earlier in the year. This resulted in originations of $213,700,000, the highest amount of capital we have invested in a quarter. From our perspective, this quarter's surge in origination was primarily related to the demand that had been pent up since Liberation Day was announced last April, which essentially froze decision-making across wide swaths of the economy and activity in the M&A market for a period of time. Once rattled markets began to settle down early in the summer, deal flow picked up in the third quarter. Also contributing to the fourth quarter surge for Fidus Investment Corporation were a few deals that spilled over from the third quarter. Over the course of 2025, we invested a total of $498,200,000 in new and existing portfolio companies, a higher amount than in 2024. Net originations in 2025 amounted to $210,200,000. As a result, we grew the total portfolio to $1,300,000,000 on a fair value basis, extending our track record of steady portfolio growth since we went public in 2011. As we further build out the portfolio, we continue to apply our strict underwriting standards in selecting investments in niche market leaders in the lower middle market with proven business models that generate recurring revenue and cash flow, coupled with well-defined value creation strategies. In addition, we continued to structure our debt investments with significant loan-to-value cushions. Fidus Investment Corporation's debt portfolio continues to perform well. In the fourth quarter, adjusted NII grew 5.1% to $19,400,000, boosted by higher average income-producing assets and a 60% increase in fee income compared to the prior year Q4 2024. On a per share basis, adjusted NII was $0.52 compared to $0.54 for Q4 2024. We continue to over-earn our base dividend of $0.43 per share and continue to pay out excess earnings. Total dividends paid in the fourth quarter were $0.50 per share. We ended the year with estimated spillover income of $1.01 per share. For the quarter, the board of directors declared a total dividend of $0.52 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.09 per share, equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on 03/30/2026 to stockholders of record as of 03/20/2026. Net asset value grew 13.2% to $741,900,000 at quarter end compared to $655,700,000 as of 12/31/2024. On a per share basis, net asset value was $19.55 as of 12/31/2025 compared to $19.33 as of 12/31/2024. With respect to originations in the fourth quarter, $121,500,000, or a little more than half of the $213,700,000 in total originations, was invested in eight new portfolio companies, primarily in connection with M&A transactions. We invested $206,500,000, or 97%, in first lien securities. In addition, we invested $3,200,000 in equity securities, giving us opportunities to enhance returns. Proceeds from repayments and realizations totaled $84,700,000 for the fourth quarter, resulting from a mix of M&A and refinancing activity. Subsequent to the quarter end, we have invested an additional $7,000,000 in one new portfolio company, executed numerous small add-on investments, and realized a $3,400,000 gain on the exit of our equity investments in CIH Intermediate LLC. We ended the year with a portfolio totaling $1,300,000,000 on a fair value basis, or 102% of cost. First lien investments comprised 86% of our debt portfolio, reflecting the ongoing migration of our debt portfolio towards first lien securities, and our equity portfolio stood at $142,300,000, or 10.7% of the total portfolio on a fair value basis at quarter end. Our portfolio remains well diversified by industry, consisting of a mix of manufacturing, distribution, and services companies. Given the current environment, we wanted to address our software and tech-enabled services portfolio. Worth noting, we have been investing in software companies for over ten years at Fidus Investment Corporation, alongside leading private equity firms, and it has been a strong performing industry vertical for us. As with all investments we make, we underwrite with an acute focus on determining the value proposition of a business and its overall durability—meaning its ability to thrive and generate cash flows over our investment period and beyond. With regard to software-related businesses, this includes evaluating and ultimately getting comfortable not only with the company's growth prospects and market position, but importantly, each company's technology risk, including AI risk over the past three years or so. At Q4 2025, our software and tech-enabled services portfolio—so our portfolio exposed to AI opportunities and risks—was $464,000,000, which comprised 92% first lien debt, 4% junior debt, and 4% equity. This portfolio is well diversified across 28 total names, and all but one are backed by financial sponsors we know well, who have significant expertise in the space, resulting in an average exposure per name of $17,000,000. The weighted average loan-to-value for this portfolio was 37%, well below our total portfolio weighted average loan-to-value of 44%. In addition, substantially all of our first lien investments are highly structured investments with at least two maintenance covenants. In short, we feel extremely good about the health of this portfolio and its long-term outlook. In addition, the characteristics of our overall portfolio remain quite positive from a credit quality and capital preservation perspective. We ended the year with nonaccruals accounting for less than 1% of the total portfolio on a fair value basis and 2% on a cost basis. Overall, our portfolio is healthy and well-structured to deliver both high levels of recurring income and capital gains from monetizing equity. In summary, in the fourth quarter and over the course of 2025, we demonstrated that our model clearly continues to work well and that our long-standing sponsor relationships, investment strategy, and industry knowledge in the fragmented lower middle market continue to differentiate Fidus Investment Corporation. Looking ahead, we are starting the year with a decent level of deal flow. We expect activity levels will pick up during the year as some private equity owners are likely to need to bring certain portfolio companies to market. As we deploy capital, we intend to stay focused on our long-term goals of generating attractive risk-adjusted returns for our shareholders and growing net asset value over time. Now I will turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Edward, and good morning, everyone. I will review our fourth quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q3 2025. Total investment income was $42,200,000 for the three months ended December 31, a $4,900,000 increase from Q3, primarily driven by a $2,000,000 increase in interest income as a result of increased average debt investments outstanding, which includes $300,000 of accelerated amortization of closing fees related to debt repayments; a $3,500,000 increase in fee income given an increase in investment activity in Q4; which was partially offset by an $800,000 decrease in dividend income from equity investments. Total expenses, including tax provision, were $22,500,000 for the fourth quarter, $2,600,000 higher than Q3, primarily driven by a $1,400,000 increase in income tax provision related to the annual excise tax accrual in Q4; a $1,800,000 increase in interest expense related to higher average debt balance outstanding, including the $100,000,000 add-on to our 6.75% notes due in March 2030; and an $800,000 increase in base management and income incentive fees given the increase in assets under management and higher investment activity in Q4; offset by a $600,000 decrease in the capital gains fee accrual and a $500,000 decrease in G&A expenses. G&A expenses in Q3 were higher due to some one-time items related to the exit of our former debt investment in U.S. Green Fiber. Net investment income, or NII, for the three months ended December 31 was $0.53 per share versus $0.49 per share in Q3. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.52 per share in Q4 versus $0.50 in Q3. For the three months ended December 31, we recognized approximately $1,500,000 of net realized losses related to a realized loss on the exit of our debt investments in U.S. Green Fiber, which was partially offset by realized gains related to the sale of our equity investments in Auldinger Company and Garlach Printing and Converting. We ended the quarter with $658,300,000 of debt outstanding, comprised of $237,500,000 of SBA debentures, $325,000,000 of unsecured notes, $83,900,000 outstanding on the line of credit, and $12,000,000 of secured borrowings. Our net debt-to-equity ratio as of December 31 was 0.8x. Our statutory leverage, excluding exempt SBA debentures, was 0.6x. The weighted average interest rate on our outstanding debt was 5.2% as of December 31. Turning now to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $1,300,000,000. Our average portfolio company investment on a cost basis was $13,400,000, excluding investments in six portfolio companies that sold their operations or are in the process of winding down. We have equity investments in approximately 85.4% of our portfolio companies, with an average fully diluted equity ownership of 1.9%. Weighted average effective yield on debt investments was 12.6% as of December 31, versus 13% at the end of Q3. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, excluding investments on nonaccrual, if any. Now I would like to briefly discuss our available liquidity. In Q4, we used the net proceeds from the $100,000,000 debt add-on to fully redeem the remaining $100,000,000 of notes due in January 2026. In December, we exercised the accordion feature on our line of credit and increased our borrowing capacity from $175,000,000 to $225,000,000. In Q4, we issued accretive shares under our ATM program and raised $31,500,000 of net proceeds. As of December 31, our liquidity and capital resources included cash of $79,600,000, $141,200,000 of availability on our line of credit, and $84,000,000 of available SBA debentures, resulting in total liquidity of approximately $304,800,000. Now I will turn the call back to Edward for concluding comments.

Thanks, Shelby. As always, I would like to thank our team and the board of directors at Fidus Investment Corporation for their dedication and hard work, and our shareholders for their continued support. I will now turn the call over to Dave for Q&A. Dave?

We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Robert James Dodd with Raymond James. Please go ahead.

Hi, everybody, and congratulations on another good quarter. I do want to touch on software. I really appreciate the extra disclosure you gave on that this quarter. But before I get to that, on the activity levels, I mean, a really strong back half to the year. Is there any spillover of deals, given how busy you were in Q4, into Q1? Or should we expect after that ramp and the kind of the release of the pent-up demand in the back half last year, should we expect Q1, maybe Q2—the first half of 2026—to be much more modest in terms of new portfolio company activity, maybe? I mean, maybe there will always be some add-ons. But can you give us any color on how much of that was in the back half?

Sure. It is a great question. Q4 was a quarter where most things kind of came to fruition, if you will—very different than Q3 for us. There was a pretty healthy amount of deal flow towards the end of Q3, and then I again think it was pent-up demand in Q4. I think now in Q1 2026, deal flow is a little more modest in nature. We believe it is somewhat due to seasonal patterns. Our current expectations are for an increase in both deal flow and activity throughout the year. We are, as we sit here today, working hard on new investment opportunities as well as add-on investment opportunities. Is Q1 going to be anything like Q4? I do not think so. But I do think we will have some real investment activity here in the last month. From a repayments perspective, there will be some repayments, but as I sit here today—no crystal ball—repayments will be less than originations. Our expectation would be some growth this quarter, but nothing like the growth in Q4. Hopefully that is helpful. It is picking up a little bit, and we expect it to pick up a fair bit more as the year goes on.

Perfect. Thank you. That is very helpful. On the software, you gave the incremental information that AI has been part of a key risk assessment for three years. There is obviously a big potential difference in risk between something that is a piece of application software that just sits on top of an OS somewhere versus something that might be running the operations at a specialty manufacturing plant or something like that. Obviously, those face very different risks. Can you give us some color on the type of businesses that you have? I mean, yes, you expect them to thrive, you expect them to be resistant, but why?

Sure. It is an important topic, so let me give you some more thoughts. First and foremost, we believe the recent headlines—although meaningful and serious—on the market dislocation in software have been blown out of proportion from our perspective. When we think about software companies and AI risk, it is important to remember that not all businesses are the same. There are varying degrees of quality out there, and that has to do with every type of lower middle market company or larger market company for that matter. For us, we look for characteristics that provide long-term barriers to entry—elements that help protect the viability and durability of a company's value proposition and, ultimately, its revenues and cash flows. What are we looking for? We are looking for companies that have things like data moats—think about enterprise solutions that serve as a system of record for critical operating data, which is hard to replicate. Think about vertical markets—specialized industry software that is complex and requires deep industry and process expertise. Regulated sectors—software that tracks, audits, and secures data. Deep relationships—contractual revenue streams and trusted customer relationships, which typically create high switching costs. And then, obviously, management. Management is critical. You want a management team that is leveraging their market positions and their incumbency positions to embrace change and create value for their customers. Those are the types of things we look for from a qualitative perspective. Just to touch a little bit more on the portfolio—some of this will be duplicative—but all deals are backed by high-quality sponsors with proven track records in the space. That is a critical component for us. Nearly all of our portfolio companies are currently adding AI features to products and using AI tools to reduce operating costs. Nearly all of our portfolio debt investments are structured as first lien. Our current weighted average loan-to-value for this portfolio is 30%. The current average contractual duration—so maturity date—is approximately 2.5 years for our software and tech-enabled services portfolio. Lastly, the portfolio is performing very well and currently marked—all the debt investments as a whole—at 100% of cost. We feel good about it. Hopefully that gives you some more color and context on the types of things we look for.

Got it. It does. And thank you for that, and that is it for me.

I want to make sure I heard you there, Robert. That is it?

It is for me. Yes. Thank you. Sorry. No more questions. Thank you. Good talking to you.

And the next question comes from Mickey Schleien with Spear Street Capital. Please go ahead.

Yes. Good morning, everyone. Edward, thanks for the insight into your software sector. I just want to ask whether Fidus Investment Corporation has any focus on ARR loans or are these mostly cash flow loans?

ARR loans are part of our portfolio and have been a focus. The context that we give you: about 22% of our software portfolio today, or 7.5% of our total portfolio, are ARR loans. As we sit here today, a few that are not in that percentage were previous ARR loans that are now EBITDA loans. When we structure an ARR loan, we force growth through covenants. We have covenants that require growth, and we also force a transition to cash flow—meaning EBITDA positive and EBITDA support for the interest expense—as we move forward.

Thanks for that clarification. And, Edward, 3% of the portfolio's value is in Fansteel, and you have held that a long time. It has been a great investment, but it is your largest single investment, and I would like to understand how comfortable you are holding it at this level from the perspective of portfolio risk.

It is a great question. In summary, we are extremely comfortable with that position. The long-term outlook for that business—they are a leader in their space. It is a growing business, and their portfolio of products is also growing. Again, they are differentiated in the market, and we see them being able to maintain that differentiation. I feel great about the business and the outlook. I hear you on that, but we are very comfortable with the position today, and obviously there will be a day when we will look to monetize it, but we feel good about it today.

And the outlook for dividends from Fansteel—I think you had two quarters of dividends in 2025. Can we expect that to continue, or are they in growth mode and they need to reinvest their capital?

It is a great question. As you know, we are not in control of those dividends at all. I would view them as more episodic in nature, but also reoccurring annually in some way, shape, or form. That is what the history has been, and that is what our expectation would be going forward. The last point I would make is they are very well positioned to make distributions—meaning very underlevered to no leverage and plenty of liquidity to do those types of things.

My last question: can you give us an update on the average floors in your floating rate debt portfolio? In other words, how much exposure do you have to still declining forward SOFR?

Sure. Most of our floors that we have been originating over the last three to four years are in the 2% range, Mickey.

Okay. So that is—

Kind of somewhat of a market convention from our perspective, but that is a large majority of what we have today.

So if the Fed were to cut a couple more times this year, that would still flow through your portfolio?

Yes, it would. Remember, about 25% of our debt investments are fixed-rate debt investments, so not a 100% flow-through. But if SOFR is reduced this year, then yes, we would expect some decline in total yields.

Okay. I understand. Those are all my questions this morning. Thank you very much for your time.

Thank you. Good talking to you, Mickey.

And the next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

On your comments earlier in terms of increased deal flow from M&A and so forth, is this really driven just by private equity firms seeking to get an exit so they can get liquidity back to their LPs? Or do changes in the tax or regulatory structure start affecting some of this M&A activity?

Great question. I would say a large preponderance of the comment comes from more just pent-up demand from a PE perspective. The average hold for the PE portfolio has expanded, as you know, and there is a desire for LPs to get capital back. That is probably the biggest driver by a long shot from our perspective.

And then a follow-up on the software questions from Robert. Are you seeing that the software companies are deleveraging, or are private equity firms trying to just unload them? I am just trying to get a sense as to what they are doing financially.

Great question. From our perspective, what we are seeing in our portfolio is growth, which is what you would expect and a critical component of our underwriting. We are seeing deleveraging, whether it is an ARR loan or an EBITDA-based loan. At the same time, we are seeing sponsors continue to look at high-quality software names, and we are also looking at them. In the lower middle market and what we are experiencing at the operating level—where we are financing transactions and what have you—it is somewhat status quo. Everyone is fully aware of the concerns out there. We have been aware of the concerns, and the bar probably only gets higher for everyone, including us. But we feel very good about the portfolio and the outlook of the portfolio, and so no one is doing anything drastic or reacting in a huge way. Clearly, if you get into the liquid markets, that is different. A lot of loans have traded down. Some folks are taking advantage of them. Some folks are trying to loosen up their exposures, if you will. But that is not the market that we play in. We are one investment at a time and really working with each portfolio company. We are not seeing performance issues right now. Hopefully that gives you some context and is helpful.

Great. Helpful and nice quarter. Thank you.

Thank you, Chris. Good talking to you.

Again, if you have a question, please press star then 1. Our next question comes from Paul Conrad Johnson with KBW. Please go ahead.

Yeah. Good morning. Thanks. I am just curious—within the lower middle market, from your experience, either observations of other restructurings or within your own book—what has been the typical average recovery rate on just a regular first lien direct lending lower middle market loan historically, and how you think about that in terms of software going forward? Has that traditionally been in line with direct lending recoveries? With everything going on with compressed EV multiples, etc., potentially compressing margins, what are your thoughts on potential recoveries if we were to start to see some turbulence in that sector?

Great question. I think recoveries in the lower middle market are similar to the broader market. I do not have that data in front of me and do not want to misspeak, but I think in first lien loans, recoveries have been generally more in the 60% to 85% range, depending on vintage or what have you. We fully understand the risks and are paying attention more than most, I would argue, but we are not seeing the concerns that are in the marketplace. As I stated at the beginning of the discussion with Robert, we feel good. We do not see changes in recoveries or drastic changes in values of businesses. Clearly today, a lot of software companies—my guess is the equity value has been hit by what is going on in the market. But at 12/31, our loan-to-value is 37%. There is a huge cushion there between 37% and our security to weather a storm, and we do not think these companies—these are very value-added, high-quality businesses that we have invested in—we do not see the value dissipating overnight by any stretch of the imagination. If there were problems, I would expect them to react in a similar fashion as a normal restructured deal or bad deal from a recovery perspective. Hopefully that is helpful. That is trying to give you a little color.

That is. Thank you very much. That is all for me.

Thank you, Paul. Good talking to you.

And the next question comes from Dylan Haynes with B. Riley Securities. Please go ahead.

Great quarter. Thanks for taking the question. I was wondering about software and tech names in terms of deployments and what the private markets are looking like, given the BDC headlines and markdowns of specific tech names. How has this impacted pricing and yield? Is there anything—any new trends—we could take advantage of for deployments?

It is a great question. We are continuing to look at best-in-class software names—niche market leaders that have competitive positions and, quite frankly, product and service positions that are differentiated enough to get us comfortable to invest. We are looking for those kinds of names. We do expect there to be—and I am looking forward, it has not really happened yet—some unique opportunities that come about due to the recent dislocation in the markets. I do think it will trend down a little bit. Though we think our overall portfolio positioning is where we want it, if the right opportunities come along, at the margin, we are interested in continuing to invest in the sector and will do so at the margin. It is a focus of ours. It is something we have had a lot of success with. There are very differentiated companies and opportunities out there, and we want to continue to focus on that group. As they come up, yes, we will try to take advantage of it. The public markets are different, and the liquid software names that you see from a debt perspective—that is a different market, different underwrite, different type of situation, and it is really not the market we play in or what we are seeing right now, but we do expect some dislocation.

Got it. Thank you.

Thank you. Good speaking with you, Dylan.

This concludes our question-and-answer session. I would like to turn the conference back over to Edward H. Ross, CEO, for any closing remarks.

Thank you, Dave. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call in early May. Have a great day and a great weekend.