Chris Kotowski – Oppenheimer & Co. Vernon Plack – BB&T Capital Markets Robert Dodd – Raymond James Bryce Rowe – Robert W. Baird & Co. Fidus Investment Corp. (FDUS) Q3 2014 Earnings Conference Call November 7, 2014 9:00 AM ET.

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation’s Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder this conference is being recorded.

And I would like to introduce your host for today’s conference, Ms. Stephanie Prince from LHA. Please go ahead..

Thank you, Sam, and good morning everyone. Thank you for joining us for Fidus Investment Corporation's Third Quarter 2014 Earnings Conference Call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer.

Fidus Investment Corporation issued a press release yesterday afternoon with 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 like to remind everyone that today's call is being recorded.

A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company's website at fdus.com following the conclusion of this conference call.

I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included in the earnings release.

The conference call today will contain certain 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, November 7, 2014 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 SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements. I'd now like to turn the call over to Ed Ross.

Ed?.

Thank you, Stephanie, and good morning, everyone. Welcome to our third quarter 2014 earnings call. For today’s call, I will start by highlighting our results for the third quarter before discussing current market conditions, investment activity and the performance of our investment portfolio.

I will then turn the call over to Shelby, who will go into more detail about our financial results and liquidity position before we open up the call for questions. Turning to third quarter highlights we generated strong financial results, producing net investment income of $5.6 million or $0.41 per share.

Our adjusted net investment income as we define as net investment income excluding any capital gains and incentive fee attributable to realized and unrealized gains and losses was $5.6 million or $0.40 per share this quarter.

As of September 30, 2014, net asset value increased to $15.18 per share, and on September 30, we successfully completed a follow-on equity offering above NAV which increased our liquidity position by $32.4 million.

For the fourth quarter, the board of directors has declared a regular quarterly dividend of $0.38 per share, which is payable on December 19, 2014 to stockholders of record on December 5, 2014. In addition, the board declared another special dividend of $0.10 per share, also payable on December 19, 2014, to stockholders of record on December 5, 2014.

Over the last five quarters we have declared five special dividends but together totaled $0.62 per share. At September 30, estimated spillover income or taxable income in excess of distributions was $13.7 million.

Please note that we will incur a modest excise tax expense in the fourth quarter for any remaining spillover on our balance sheet at year end. Since the beginning, our primary objective has been to deliver long-term value to our shareholders in the form of stable and growing dividends including periodic special dividends.

We also have a goal of increasing our net asset value on a per share basis over time. Balancing these goals is important to us and the board. We’ll as before consider these objectives when making distribution decisions. Throughout 2014, we have seen an increase in M&A activity levels in our target lower middle-market.

M&A pipelines are reported to be strong and we expect to benefit from these higher levels of activity. Keep in mind when deals are M&A driven there are multiple constituents involved which can often result in a lengthening of transaction closing cycles as we have experienced this year.

As we said before at Fidus, we are patient and disciplined investors and we remain focused on capital preservation, and performing well over the long term. This discipline outweighs many other considerations and as a result a number of new investments we close will vary from quarter-to-quarter.

Now, I’d like to discuss our investment portfolio, as of September 30, we had debt and equity investments in 37 portfolio companies, at a total fair value of approximately $336 million, which equates to approximately 98% of costs.

As a remainder and important part of our investment strategy is to maintain meaningful equity positions in our portfolio companies, which can provide upside to our investment returns. Currently, we have equity positions in roughly 89% of our portfolio companies.

In the third quarter, we invested approximately $38 million, increasing the value of our investment portfolio by 23% on a cost basis year-over-year. The third quarter investments include two new portfolio companies. In July we invested $10.5 million in subordinated notes and common equity of U.S.

Green Fiber LLC, a leading manufacturer of residential recycled fiber installation products across the United States. And in early August, we invested $20 million in second lien notes in Pinnergy, a leading provider of fluid management and drilling services for oil and gas wells located throughout Texas and Louisiana.

Proceeds from repayments and realizations during the quarter totaled $13.1 million, including $9.1 million from Brook Furniture Rental as payment inflow on our subordinated notes and warrant investments. These repayments were driven by the sale of the company, also in the third quarter we realized the loss of our investment in S.B.

Restaurant for Elephant Bar. Subsequent to quarter end, we have invested a total of $23.7 million in three new portfolio companies.

These investments are in the retail energy marketing, the foodservice equipment manufacturing, and the aircraft component manufacturing industries, furthering the diversification of our portfolio, which continues to be an important goal at Fidus.

At quarter end our debt investments in Avrio remained a non-accrual and our debt investment Paramount Building Solutions remained on PIK non-accrual status. Turning to portfolio performance, we track several quality measures on a quarterly basis to help us monitor the overall stability, quality and performance of our investment portfolio.

In the third quarter, these metrics remained strong and in line with prior periods. First, we track the portfolio’s weighted average investment rating, based on our internal system. Under our methodology, a rating of one is outperformed, and a rating of five is an expected loss.

As of September 30, the weighted average investment rating for the portfolio was 1.9 on a fair value basis, in line with prior periods. As many of you know from a debt structuring perspective we look to maintain significant cushions to our borrowers’ enterprise value, in support of our capital preservation and income goal.

One metric we track is the credit performance of the portfolio, which is measured by our portfolio companies combined ratio of total net debt to Fidus debt investments to total EBITDA. For the third quarter this ratio was 3.6 times, consistent with past quarterly levels and which we believe is the prudent level of risk for our portfolio.

The third measure we track is the combined ratio of our portfolio companies total EBITDA, the total cash interest expense, which is an indicator that our portfolio companies, as a whole has significant cushion to meet their debt service obligations to us. In the third quarter, this metric was 3.4 times, which is also consistent with past levels.

Overall, we believe these metrics reflects our longstanding cautious and deliberate investment approach. And when evaluating our portfolio as a whole, we remained pleased with the overall quality and makeup of the portfolio.

In closing, we continued to emphasize, capital preservation with an eye toward selectively growing and further diversifying our investment portfolio.

Our focus remains on companies that we believe will perform well over the long-term with an emphasis on companies that operate in industries we know well, that generate excess free cash flow for debt service and investment and have positive long-term outlook.

Our investment strategy is supported by a strong foundation including our relationship-based, industry knowledge and ability to offer flexible capital solutions.

And looking forward, our target lower middle-market continues to be active and attractive as it is generally less competitive than the boarder markets due to its sheer size and fragmentation.

This approach has served our shareholders well and we believe that it will continue to result in both strong deal flow for investments and the generation of attractive risk-adjusted returns for our shareholders. Now, I’ll turn the call over to Shelby to provide some details on our financial and operating results.

Shelby?.

Thank you, Ed, and good morning everyone. I’ll review our third quarter results in more detail and close with comments on our liquidity position. In an effort to provide more color around any unusual or onetime items that occur during the current quarter, I will be providing comparative commentary versus the prior quarter Q2 2014.

Total investment income was $11.3 million for the three months ended September 30, 2014, an increase of $0.7 million over the $10.6 million of total investment income for the second quarter of 2014. Incremental interest income was a primary driver due to the increase in the size of the investment portfolio.

Total expenses were $5.7 million for the third quarter, an increase of $0.6 million versus the prior quarter due to $0.1 million increase in interest expense and $0.5 million increase in incentive fees.

In the second quarter of 2014, we reversed $0.4 million of capital gains incentive fees due to incremental unrealized depreciation, primarily related to non-accrual investments. Excluding capital gains incentive fees, expenses increased by $0.1 million in Q3.

Interest expense includes the interest paid on Fidus' SBA debentures, as well as the commitment fee on our line of credit, which is put in place in mid-June. As of September 30, 2014, the weighted average fixed interest rate on our SBA debentures was 4.5%.

Net investment income, or NII, for the three months ended September 30, 2014, was $5.6 million or $0.41 per share, slightly above second quarter. Adjusted NII was $0.40 per share in Q3 versus $0.37 per share in Q2.

Adjusted NII is defined as net investment income, excluding any capital gains incentive fee expense, or reversal attributable to realized and unrealized gains and losses on investments.

A reconciliation of NII to adjusted NII can be found in our earnings press release that was issued yesterday afternoon and is also posted on the IR page of our website.

For the three months ended September 30, 2014, Fidus realized gains of $1.3 million, related to the realization of our warrant investment in Brook Furnitures and other escrow payments, which were offset by the $8 million of realized losses related to E-Bar.

Recognizing the loss on E-Bar resulted in net realized losses, which were offset by the reversal of unrealized depreciation on the statement of operation. As a result, in Q3, Fidus recorded a net loss on investments of approximately $0.3 million versus the net loss of $2.1 million in Q2.

Our net asset value at September 30, 2014 was $15.18 per share, which reflects payment of the $0.38 per share regular dividend in June and two special dividends of $0.05 each in July and August. Turning now to portfolio statistics, as of September 30, our total investment portfolio had a fair value of $336.5 million or approximately 98% of costs.

Consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 65% subordinated debt, 21% senior secured loans, and 14% equity and warrant securities in line with second quarter. Our average portfolio company investment on a cost basis was $9.3 million at the end of the third quarter.

We have equity investments in approximately 89% of our portfolio companies, with an average fully diluted equity ownership of 7.8%. Weighted average yield on debt investments was 13.8% as of September 30.

The weighted average yield is computed using the effective interest rate for debt investments at cost, including the accretion of original issue discount, and loan origination fees, but excluding investments on non-accrual.

Repayment activity over the past 18 months has impacted the portfolio yields, as some higher yielding loans have been paid off and replaced with loans priced at current market rates, which are lower than the rates on the more mature loans.

As of September 30, our liquidity and capital resources included cash and cash equivalents of $8.5 million, and unfunded SBA commitments of $29.5 million. In addition, we have access to $50 million of SBA leverage, and $30 million line of credit.

On September 30, we issued 2 million shares above NAV in a secondary offering at an offering price of $17 per share. Please note, that while the shares were issued on September 30, the net proceeds of $32.4 million are receivable as of quarter end and were received on October 3..

Taking into account, the equity offering and investment activities subsequent to quarter end, we currently have roughly $134 million of liquidity. Now, I will turn the call back to Ed for concluding comments.

Ed?.

Thanks, Shelby. As always, I’d like to thank our team and the board of directors at Fidus for their dedication and hard work, and our shareholders for their continued support. I will now turn the call back over to Sam, for Q&A.

Sam?.

Thank you. (Operator Instructions) Our first question comes from Chris Kotowski with Oppenheimer. Your line is open..

Hi, I guess two things, one is that it was kind of tumultuous quarter in terms of credit spreads on the more widely syndicated loans.

And I am wondering, I’d like your thoughts on that in terms of both, A, does it reflect any fundamental deterioration in the economy as you see it through your portfolio companies, and then, B, has it affected the spreads on new loans in a positive way or has it thus far not been an event in your market..

Sure, sure. Well, the last actually statement you just mentioned I think is pretty relevant, as you know, the broader market is a very different than the market that we’re playing in. And so it’s – so I think there is a pretty big difference.

I would say in the lower middle-market what we have seen, of late is what I would call stability, but it’s stability at lower rates as you know than maybe 12 months ago, and for sure 24 months and 36 months ago. But I think there is prudent and rational behavior if you will, but we are seeing yields that are lower than they were 12 months ago.

Our hope is that stability and that things stay rational and prudent and leverage levels stay at the levels that they are today, because quite frankly what we’re seeing is pretty attractive opportunities, just in the lower rates..

Okay..

So hopefully that is helpful but there is – I think that the broader market is different, it reacts differently for sure. There is still ample capital in our market but what we are seeing is pretty rational behavior at this point..

Okay. And then, the other obvious big event of the quarter was the decline in energy prices and you do have a couple of energy credits in the portfolio. And I wonder if you could talk about the exposure to the weakness in oil prices..

Sure, no, it’s a very good question and one we are focused on. I think the good news at this point is, I guess, couple of things, both the companies that we have exposure to have – definitely exposure to oil prices, but also natural gas, which have not been hit like the oil and gas market, I mean, the oil market, in particular.

I think, at the moment, we feel very good about the both of those companies, their position in the marketplaces that they served, and also the relative – our relative risk position. So, I think, I’ll leave it there. But it’s a very good question, one, we will remain focused on here and the (inaudible) we focused on.

But at the moment we like the constructive of the portfolio, and in particular those investments as well..

Okay, that’s it from me. Thank you..

Absolutely, good talking to you, Chris..

Thank you. Our next question comes from Vernon Plack with BB&T Capital Markets. Your line is open..

Thank you, and good morning. Ed, just not withstanding the lumpiness of this business, I'm curious in terms of some of your comments and given your latest equity raise and given the strong third quarter that you had in terms of new investments.

Could we expect to see, perhaps, your investment pace pick up here over the next, say, three or four quarter? I know, just looking back you did $85 million on originations in 2012, you did 149 in 2013, 2014, I think, it’s around 62 year-to-date, and I'm – it seems so that maybe the pace is going to be pickup, at least, over four quarter basis?.

Sure, sure. It’s a great question, Vernon. What I would say is a couple of things. And as you noted and we discussed, the first-half of this year, I think, was more of an anomaly, it was pretty slow for us. But there were more than a couple of surprises on the new investment front where deals just didn’t take place that we thought would happen..

Yes..

I think, we remain pretty active right now. We've obviously invested in three companies this quarter. And we are looking – we have some portfolio companies that are being acquisitive, and we also have new investment opportunities that we’re working hard on.

So that – from that perspective, we are excited about the opportunities we are seeing and we are excited about the opportunity to hopefully participate in this increased level of M&A activity. Offsetting that and worth discussing right, I mean, it’s hard to predict that these deals are ultimately going to close, number one..

Yes..

And so it’s just lumpy and unpredictable. The second piece is, we have a portfolio that is continuing to mature. And so repayments is a natural part of the business going forward.

And we do have several companies that are also looking to participate in this more active M&A environment, which we don’t think is a bad thing, but it does offset the ultimate growth in the portfolio when that happens as you well know. So we have that to deal with as well, so there is a balance, but I do think our investment phase.

I think the first-half of the year was somewhat of an anomaly, I don’t think that would be norm at all. I do think we are excited about the opportunities that we are seeing right now, but we will have some repayments as well, which will ultimately offset some of that growth..

Okay, great.

And any changes to your equity participation in these deals, has there been any change in terms of your ability to participate on the equity side?.

Edward Ross:.

And those – so we have as you know, a blend in our portfolio both funded sponsor deals – fundless sponsor deals, and also no sponsors. And quite frankly, the equity opportunities are as good or better for sure in these fundless and no sponsor opportunities.

So – but we are – the only place where I see us not participating in the equity is when there is not an opportunity. So maybe when we are refinancing a balance sheet or undergoing a recapitalization, where there is just not an opportunity to invest in the equity. And for the right risk adjusted returns, we will do that as well.

It’s more just, what’s the quality of the underlying company and asset, if you will..

Okay. That’s helpful. Thank you..

Thank you. Good talking to you, Vernon..

Thank you, Ross..

Thank you. Our next question comes from Robert Dodd with Raymond James. Your line is open..

HI, everybody.

I kind of following on some Vernon’s question with a little bit, if it’s – I don’t know, obviously, Q4 started off very strongly, in the past the quarter has gone from being – the range is, anything from very back-end loaded to not back-end loaded tool, usually when there’s some kind of tax or some other kind of events this time we’ve got obviously the election is turning out a different way.

Do you think the politics are likely to result in some delays in the hopes, maybe tax policy changes in more favorable to sellers, or do you think that’s just not a factor?.

Edward Ross:.

So, I think that’s what's driving today's market. I would not expect the people that have decided to sell our company, I would not expect for them to push off and hope for better tax situation.

I think the driver today is that, there is a fair bit of equity capital out, there is a fair bit of strategic interest in a lot of assets, and there is always debt capital. And so it’s a good time to be a seller, and that’s what's driving it.

I don’t see tax changes, or potential tax changes changing the kind of decision-making, if you will of owners of company at this point..

Okay. Thanks a lot..

But we’ll be surprised, that would be my view..

Okay. And secondly, I mean you just mentioned again in response within I mean, the opportunities in fundless and non-sponsored transactions in principal are for better returns in terms of obviously there’s high risk as well.

How would you characterize the flow of information from portfolio companies in those different situations, obviously if there is a fully mature established once I think you would get better information about the relative status of the company as is ongoing versus of non-sponsored deal, not only in principal or risks, whereas but in hindsight obviously speaking of one of your competitors, sometimes you don’t get as good quality as information, you don’t see problems coming as soon.

Is that fair to say that, so you’re more prone to surprises in one than the other, and how doses that affect your underwriting approach to those kind of opportunities as well?.

Well, you started with the point that there is, I think there is a better return opportunity.

But there is a more of a – more risk typically in those situations, because we are in most cases acting as an institutional supporter of that company, not that we aren’t as a mezz, but when you have a sponsor involved, they are looked upon for those types of circumstances where you need incremental capital.

So but what I would tell you is on fundless sponsor deals, on every deal, I mean, our approach is pretty hands on. And we attend quarterly board meetings with every portfolio company, maybe other than a couple of orphaned equity, opportunities in our portfolio.

And so – and we – we received monthly financial results and when things aren’t going well, we are in contact, or discussions with both the sponsor and the management team often, as often as we need to be. And so from my perspective there is not a difference in information flow.

And it may get some of the smaller companies, sometimes it’s harder to get information. And when that’s the case, you’ve got to – from my perspective, you’ve got to be working with the company closely, visiting the company and really touching it versus just relying on information. So it comes – and every situation is different.

But we are putting hands on from a portfolio management perspective, especially when things aren’t going exactly right..

Okay, perfect. Thank you.

And just one final housekeeping one, if I can, on the excise tax for the fourth would be about a $0.5 million give or take?.

That’s about right, give or take, particularly given that we had $13.7 million of spillover today and has a special dividend that obviously reduced the spillover luggage in the right ballpark, not taking into account before activities..

Okay, got it. Thank you..

Thank you, Robert. Good speaking with you..

Good to talk to you..

Thank you. Our next question comes from Bryce Rowe with Robert W. Baird. Your line is now open..

Thanks. good morning..

Good morning, Bryce..

How are you?.

Doing well, thanks..

Good.

So could you help me walk through the math of change in spillover income quarter-over-quarter from an absolute dollar perspective?.

Yes. So let me – if I kind of simply it in terms of kind of, typically you see amount of special dividends, that if you kind of assume, we basically cover, it’s the amount of special dividend that’s really driving the decline in the spillover.

So we kind of take spillover as of $13.7 million as of 9/30, with a special dividend of $0.10, on approximately 16 million shares that would reduce the existing spillover by $1.6 million to get us this adjusted spillover of $12.1. million..

Okay.

And if we think about it at the end of the second quarter to the end of the third quarter, does the net realized losses impact the level of spillover income, I'm assume then?.

I think, correct me, you know this better than I do. The – so we realized the Avrio, I mean, not the Avrio, the E-Bar loss. The tax years for rec [ph] are not calendar year, they are October year end. And so we had – that happened before October, and so some of the gains that we had at the end of last year were kind of lumped in with a loss on E-Bar.

And so, when you add those together, that reduced us from a higher level, I think we’re move in a 17 range, down to 13. So we’ve now passed that October month end.

That was I would think about it?.

That’s right, that’s right. With the realization of the E-Bar loss in the third quarter offset some gains that we had in the fourth quarter of last year. So from a net capital gain loss perspective, we’re now kind of flat, and so really our remaining kind of spillover that recurring part is related to the ICTI, Investment Company Taxable Income..

Okay..

And then the question of dividend reduction..

Right, that’s helpful.

And so the timing of the exit on Elephant Bar, was it adding anyway to being able to push loss into that year, or that year in terms of the accounting?.

The reality of it is, I don’t know, I’m sure you haven’t followed that. E-Bar went into bankruptcy in June and exited in August. And that way and we’re still kind of – for sure bothered by it. But the company has just really struggle.

And so, it was a place, where the senior debt was also impaired in a meaningful way, and so that’s what happens here in the third quarter, that was the driver, there just weren’t any value there, but it did help with the situation, yes..

Okay, that’s helpful. And then any commentary on the kind of the weighted average yield for newer investments so far here in the fourth quarter.

And then have you had any repayment activity up to this point?.

Very good question, Bryce. Let me look at some here. The yields thus far have been very much in the – well, call it just over, I would say on a blended basis, just over 12%. And when we look at what’s happened through Q3, our rates were over 12% as well on a blended basis.

So we have – I would say and what we’re looking at is kind of 12% to 12.5% and maybe even a little bit higher as we move forward through the quarter depending on what happens..

Okay. That’s helpful.

And again, any repayment activity thus far into November 7?.

No, there has not been..

Okay..

There has not been, yet. But, again, I made this comment earlier, we do have several company that are evaluating strategic alternatives, I don’t, just like originations really it’s hard to predict both the timing and weather, those transactions take place.

But we would expect repayments over the next two months to five months, there are several repayments over the next two to five months for sure..

Okay.

And then, just last question on the SBA use here early into the fourth quarter, obviously you haven’t drawn onto SBA debentures, and quite some time, just wondering – just curious as to how you thought about timing there? And also wanted to ask if, all of the investments over the last year or so, could have fit into SBIC, even if you didn’t do the debenture?.

Sure. I'm going to start with that last one real quickly, not all of them would bid in the SBIC. So second quarter investment did not, and I know a large add-on we did in January, a significant piece of that did not.

So it’s a blend, but by and large, I would say, 80% of the opportunities that we ultimately close typically do and then it don’t hold me to that percentage, but that’s what it feels like. But clearly, there is some that you not for different reasons.

From a strategy standpoint, you’re right, I mean, we’ve had, as you know, cash on the balance sheet over the past year that repayments, which create liquidity to reinvest if you are at the SBIC levels or add those funds – fund levels if you will.

As we go forward what – when investment opportunity does fit the SBA criteria, we are clearly going to try to invest those dollars at an SBIC subsidiary.

We like having liquidity the holding company for opportunistic investments, as well as opportunity that maybe are larger in size and we may want to split up the investment and put part in the SBIC and part at the holding company. But when possible, we’re investing at the SBIC level.

And then the other point would be, sometimes depending on repayment levels from what funds you may or may not have cash available to invest at a certain fund. So that moves things around a little bit, which is – which drove out some of the decision-making quite frankly here recently.

Does that make sense?.

Okay, thank you. Okay. I appreciate it. Good talking..

Good talking to you as well..

Thank you. At this time, there are no further questions. I would like to turn the call back over to Ed Ross for further remarks..

Thank you, Sam, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter and year-end call on early March. Have a great day, and a great weekend..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect..