Welcome to the Fidus First Quarter 2022 Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

And now I would now like to turn the call over to Miss Jody Burfening. You may begin..

Thank you, Hilda, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's first quarter 2022 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 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, May 6, 2022, 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 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 Ed. Good morning, Ed..

Good morning, Jody. And good morning everyone. Welcome to our first quarter 2022 earnings conference call. On today's call I’ll start with a review of our first quarter performance and our portfolio at quarter-end, then offer you an update of our views on deal activity in the lower middle market.

Shelby will cover the first quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

During the first quarter with deal activity in the lower middle market at reasonably healthy levels, we grew our debt portfolio through a combination of our strong relationships with deal sponsors. Our industry knowledge and our differentiated perspective on financing solutions.

While global supply chain disruptions and inflationary pressures on input cost labor and freight continue to weigh on many businesses operations and profitability we found solid opportunities to fit our strategy of investing in high quality, lower middle market businesses and possess resilient business models that generate excess levels of cash flow to service debt and then have positive launch from outlooks.

Adjusted net investment income which we define as net investment income excluding any capital gain incentive fee attributable to the realized and unrealized gains and losses was $10.6 million or $0.43 per share compared to $11.2 million or $0.46 per share last year.

Net asset value was steady at $48.5 million or $19.91 per share reflecting solid operating performance in net realized gains along with increased total dividend payout for the first quarter.

As you may recall last quarter, the board of directors recognizing the extremely strong portfolio performance and exceptionally high level of net realized gains in 2021 increased the base dividend from $0.32 per share to $0.36 per share and increased the supplemental dividend calculation from 50% of surplus income generated by our portfolio to 100%.

Fidus paid a base quarterly dividend of $0.36 per share, and a supplemental cash dividend of $0.17 per share for a total dividend of $0.53 per share during the first quarter.

For the second quarter on May 2 2022, the Board of Directors declared a base dividend of $0.36 cents per share and a supplemental dividend of $0.07 per share, equal to 100% of the surplus and adjusted NII over the base dividend from the first quarter, which will be payable on June 24 2022 to stockholders of record as of June 10 2022.

In terms of originations and repayments, after five consecutive quarters of elevated levels of repayments, we had net originations in the quarter of $91.2 million. We invested $114.4 million in debt and equity securities, all of which was invested in debt securities and new portfolio companies.

Following a trend that had started well before the pandemic, the largest percentage of debt investments was in first lien debt, amounting to $76.7 million for the first quarter.

In terms of new portfolio companies, we invested $101.2 million in seven of them, consisting of $10.8 million in first lien debt and common equity in AOM Intermediate Holdco, LLC doing businesses all over media leading provider of alternative out of home advertising across the C-store & gas station, retail, truckside & transit markets, among others.

$14.4 million in subordinated debt in common and preferred equity and CIH Intermediate, LLC, a technology based risk management firm that provides education and customized price risk management services to businesses affected by volatility in the agriculture markets.

$14.5 million in first lien debt and Fishbowl Solutions LLC, a leading provider of inventory management and manufacturing software, only $2.4 million in first lien debt and common equity and Micronics filtration Holding Inc. doing business as Micronics Engineered Filtration Group Inc.

a global provider of aftermarket and OEM filtration equipment and consumables for use in mining, chemical, wastewater and various other industrial end markets. $15 million in second lien debt and Quest Software US Holdings Inc., a global cybersecurity, data intelligence, and IT operations management software provider.

$19.1 million in first lien debt subordinated debt and preferred equity and Tedia Company LLC, a leading manufacturer of high-purity solvents and chemicals focused on laboratory, pharmaceutical and biotech end markets.

And $5 million in first lien debt and common equity in Zonkd, LLC, a leading supplier of products and services to the home furnishings industry.

In terms of repayments and realizations in the first quarter receipt proceeds totaling $23.2 million, of which $12.1 million, or little more than half of the total was due to the monetization of equity investments. Terms of sales and exits we received payment info of $6.8 million on our second lien debt and Mirage Trailers.

In addition received a distribution of $2.5 million and realized a gain of point $3 million on our equity investments related to the sale of the business. We receive proceeds of $2.2 million and realized the gain of $0.2 million related to the sale of Frontline Food Services.

And we received proceeds of $7.1 million in realized a gain of $6.1 million related to the exit of our equity investment in SpendMend. Subsequent to the end of the quarter, we invested a total of $19.5 million in two new portfolio companies.

We invested $8.5 million in first lien debt and made a commitment up to $1 million of additional first lien debt. In Choice Technology Solutions LLC, doing business as Choice Merchant Solutions LLC, a leading omnichannel global payments platform.

We invested $11 million in second lien debt of Virtex enterprises, LP, a leading vertically integrated electronic manufacturing services provider. We also received $10.9 million in repayment consisting of payment in full of $8.8 million, including a prepayment penalty on our first lien debt investment in Comply365 LLC.

We received a distribution of $2.4 million from our equity investment in TransGo, and realized a gain of $1.9 million related to the sale of the business.

The fair value of the portfolio at quarter end was $812 million equal to 112.8% of cost, reflecting the underlying solid performances of our portfolio companies and net originations for the quarter. We ended the first quarter with 74 active portfolio companies and 10 companies that have sold their underlying operations.

Including net originations of $91.2 million, our overall portfolio remains healthy and well-structured to produce recurring income, and through our equity investments to provide us not only with incremental profits, but also a reasonable margin of safety.

From a risk perspective, our portfolio including a net addition of four portfolio companies remains well positioned for the current investment environment. Our residual investments in Green Fiber and K2 are non-accrual.

With net originations primarily in first lien debt during the quarter, our portfolio on a fair value basis remains weighted in favor of first lien debt. In terms of the total portfolio mix on a fair value basis, net investments increased 80% of the total compared to 77% as of December 31 2021.

Total yield on debt decreased from 12.3% last quarter to 11.9%. Our outlook for 2022 is unchanged from the perspective we shared with you last quarter.

We still expect continued healthy deal activity in the lower middle market driven by both M&A and re-financings, and we continue to see several opportunities to monetize equity investments, and some of our portfolio companies have initiated strategic alternative discussions.

Having grown our debt portfolio during the first quarter after five consecutive quarters of heightened repayments, we believe we are well positioned to further increase income producing assets going forward.

In doing so, we will adhere as always to our proven underwriting standards, our focus on high quality businesses, and our long term goal of generating attractive risk adjusted returns while delivering value to our stockholders. 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 first 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 Q4 2021. Total investment income was $20.5 million for the three months ended March 31.

A $3.6 million decrease from Q4 primarily due to a $1.6 million decrease in interest income including pic, a $1.4 million decrease in fee income and a $0.6 million decrease in dividend income.

The decrease in interest income was driven by a decrease in average debt investment balances outstanding given higher volume of repayments in Q4 and new Q1 investments being more back end weighted in addition to lower weighted average yield on debt in Q1 versus Q4.

Total expenses including income tax provision were $10.2 million for the first quarter, approximately $11.5 million lower than the prior quarter primarily due to a $9.3 million decrease in the capital gains incentive fee accrual.

Note the capital gains incentive fee is accrued for GAAP purposes, however, is only payable annually in arrears to the extent that cumulative realized gains exceed realized losses and unrealized appreciation.

Excluding the accrued capital gains incentive fees, total expenses in Q1 were $9.9 million a $2.2 million decrease versus Q4 due to a $1.6 million decrease in income incentive fees and the annual excise tax accrual which was $0.5 million in Q4.

In Q1, we repaid $20 million of SBA debentures in our second SBIC fund and borrowed 41.5 million of SBA debentures in our third SBIC fund. So, net incremental SBA debentures of 21.5 million.

We ended the quarter with 395.9 million of debt outstanding, comprised of 128.5 million of SBA debentures, 250 million of unsecured notes and 17.4 million of secured borrowings. Our debt-to-equity ratio as of March 31 was 0.8 times or 0.6 times statutory leverage excluding exempt SBA debentures.

The weighted average interest rate on our outstanding debt was 3.7% as of March 31. Net investment income or NII for the three months ended March 31 was $0.42 per share versus $0.10 per share in Q4.

Adjusted NII which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.43 per share in Q1 versus $0.49 per share in Q4.

For the three months ended March 31, we recognized approximately 6.9 million of net realized gains, primarily from our equity investments in SpendMend and Mirage Trailers. Turning now to portfolio statistics. As of March 31, our total investment portfolio had a fair value of 812 million.

Our average portfolio company investment on a cost basis was 9.7 million, which excludes investments in 10 portfolio companies that sold their operations are in the process of winding down. We have equity investments in approximately 82.1% of our portfolio of companies with an average fully diluted equity ownership of 4.3%.

Weighted Average effective yield on debt investments was 11.9% as of March 31. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue, discount and loan origination fees, but excluding investments on nonaccrual, if any.

Now I'd like to briefly discuss our available liquidity. As of March 31, our liquidity and capital resources included cash of $86.1 million, 21.5 million of available SBA debentures and 100 million of availability on our line of credit, resulting in total liquidity of approximately 207.6 million.

Now we'll 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 over to Hilda for Q&A.

Hilda?.

Thank you.[Operator Instructions]. And we have a question from Matt Jayden [ph] from Raymond James. Please go ahead..

Hey, Adam, Shelby morning, and hope all is well.

Ed, wanted to start out on the credit outlook, be interested kind of how you see the credit outlook for year end 22 today versus how it changed versus, maybe six or nine months ago?.

Sure, great question. Obviously, there's a there's a lot going on in the world today, whether it's geopolitical or obviously inflation and rising interest rates. But for us, obviously, the portfolio complexion has changed. For us, from senior debt portfolio is now almost 70% of our data portfolio.

So that's a good thing, as we think about the ebbs and flows of different businesses were invested in. But what I would suggest is, our portfolio, the quality of our portfolio today is maybe as good as it's ever been, we feel great about what we've seen in their ability to deal with the issues of today.

And so obviously, we're being very thoughtful and deliberate as we move forward as we originate new investments, but also as we manage our portfolio. But we great about the quality of the portfolio today and don't expect any material changes to the negative at this point..

Got it. That's helpful. Maybe following up on the portfolio composition, surprising given the healthy level of originations in the corner, it looks like equity balance at cost was pretty much flat. I'd be interested in kind of any high level color on what you're seeing in terms of deal flow for equity co-invest opportunities..

Sure. I think if I'm not mistaken, we did make incremental equity investments last quarter the tune of just shy of $5 million. So we're continuing to invest in the or make co-investments in our portfolio of companies when it makes sense. And doing it to a degree that obviously we're comfortable with and we like.

So our cost basis has not changed materially. Nor is our fair value something we're you know, very, very proud of.

We would, we do see a fair bit of M&A activity still taking place, a large majority of the activity in Q1 was M&A driven, and we are also seeing continued M&A activity from both a realization perspective as well as a new investment perspective. So we would expect that that trend to continue.

So as I think about equity as a percentage of costs for us, as we move forward, I think10%, or a little less is, is the goal for us. And that's what we would expect going forward..

Great. Last one for me just, again kind of following up on the Q1 originations. I'd be interested in that.

Do you think any of that was kind of a pull forward from what was already a strong Q4? Or was that primarily, underwritten in Q1?.

Sure, great question. I mean, let me talk about the market for a second and also talk about originations and, and repayments for that matter.

But overall, what I would say is, that's an activity was solid, though there was pull forward from Q4 for sure, probably two or three of those investments, really, were originated in Q1 and just took longer to close. What we're seeing in Q2, this thus far reflects, pretty similar stance.

I think deals are maybe a little bit harder to get over the finish line. There are potentially more issues out there, like performance issues, in some cases that get in the way of deals, but we expect continued pretty good activity levels, nevertheless.

So the market today seems to be primarily focused on companies that that have not been meaningfully impacted by COVID-19 or the supply chain issues and overall inflation dynamics that obviously many companies are experiencing and facing.

And, in fact, what we're, we're continuing to see a premium paid for those businesses that are operating without meaningful incident or concern of those issues. There's obviously a fair bit of pent up demand and a lot of liquidity designed to invest in high quality assets.

In fact, I would say private equity and private debt, war chest for lack of a better word, or near record levels today. So, as I would, as I sit here today, I would suggest activity levels are still reasonably solid in the lower middle market, but obviously, nowhere near last year.

From an investment originations perspective, we most of our originations are first lien investments; obviously, we're also making, opportunistic second lien and subordinated debt investments in superlative companies and situations. And we expect to continue to do that.

As we move forward, we expect Q2 be an overall solid origination quarter, but maybe not as strong as Q1 in the aggregate. We've made two new platform investments so far this year, as I mentioned, and we, we do expect some additional origination activity this quarter, as well.

And having said all that, we know we're continuing to be very deliberate and careful, but at the same time taking advantage of the best opportunities that we're uncovering.

And so from a repayment perspective, we are -- we're seeing very little on the debt side, and a little bit of that has to, has to do with that just our portfolio is much younger than it's been in the past.

And we're not seeing anywhere near the activity levels that we saw last quarter, or last year, and we're expecting this quarter to kind of reflect the same thing as last quarter, which is a good thing. So hopefully, that's helpful on the market and overall origination and repayment activity..

Yes, certainly. That's it for me and Shelby I appreciate the time this morning..

Thank you. Appreciate it Matt..

Thank you. Our next question comes from Ryan Lynch from KBW. Please go ahead..

Hey, good morning, Ed and Shelby..

Hey, good morning, Ryan..

Hey, first question I just had was just on kind of how you guys are evaluating kind of the current marketplace. Obviously, there's some a lot of dynamics going around a lot of uncertainties in the broader economy today.

Has that changed your investment focus on the types of businesses you guys are willing to invest in? Or are you guys just digging in further on those potential risks, because one of the issues I think is that a lot of especially with a lot of heavy inflation and labor issues is, is those are have just started in 2022.

And, and the financial impacts haven't really are basically unknown on how that's going to go through.

So how are you kind of managing those pretty big unknowns when you guys are looking to deploy capital today?.

Sure, it's a great question. Ryan, I think, for us, and thankfully, I think for sometimes most companies have had been working at adjusting to the, what I would call the new normal, and are finding ways to prosper. And what that means, in many cases, needing to raise prices to offset price increases.

So having pricing power is a very important element of managing this risk. And thankfully, what we feel well positioned given almost all of our portfolio of companies have exhibited pricing power in this market. So, first and foremost, I would say that, and thankfully, we've been focused on those companies that have more pricing power.

Secondly, we do focus on businesses that have free cash flow businesses, no different than before, in a relatively stable demand characteristics. And I think that strategy has and will continue to serve as well, and help mitigate, some of the risks that you've highlighted.

And then other pieces of the puzzle for us that are really important are investment, structuring, which is 40% to 60% equity cushions and somewhat a minimum depending on the situation in the company, and then, how we're underwriting is there's no change there from our perspective in terms of enterprise value, our level cushions, interest, coverage, and whatnot.

So again, we feel we're going to kind of stick to our knitting, focused on companies that operate in industries, we know well and the companies that are quite frankly being less affected or expected to be less affected by the environment that we're all living in.

We also do focused on opportunistic situations where there's strong asset bases, and also we feel good about that strategy as we move forward as well. So hopefully, that's helpful. You there, Ryan..

Yes, that's helpful. On the new terms for deals out specifically regarding yields and spreads. I'm just curious as risk free rates have continued to move higher, and obviously the forward curve shows them significantly higher than where they are today.

Have you started seeing any pushback on spreads that that you guys are going to market with and/or hadn't started seeing borrowers start pushing for more fixed rate, debt solution versus floating rate, just love to hear your opinion on any changes and kind of the market dynamics right now, as you're approaching borrowers?.

Sure. Great question, Ryan. I’ll tell you in the lower middle market, we have not seen any real pushback on spreads at this point in time. But I do envision at some point, there'll be some compression. I don't think it'll be overly meaningful. But that's always the case, especially with competition out there.

I would also say we have not seen a push for fixed rates, at least with regard to our first lien investments. So we have not seen any push or requirements to be competitive in the market from that perspective. So no real change. Obviously, there is a big, increase in short term rates this week.

But again, as we're working today, and as we were over the last year, year and a half we have not seen any, any real push is there in our market..

Okay. That's good to hear. I appreciate the time today. Thanks..

Sure. Nice talking to you..

Thank you. Our next question comes from Bryce Rowe from Hovde Group. Please go ahead..

Thanks. Good morning, Ed and Shelby..

Good morning, Bryce, how are you?.

I'm good. Appreciate it. Let's see I'd maybe I'll start with you Shelby. Can you kind of just remind us, how you're viewing the SBA and the access to the future SBA debentures? Obviously, you've been a little bit more active here recently using those debentures.

So if you could just kind of break down, what's left on to and how much more you have to go on three, even if there is some available beyond the 21.5 that you have available to you right now..

Sure. So big picture, our second SBIC fund, we're currently in wind down mode. So that kind of means we'll opportunistically use cash proceeds from repayments as they come in, to kind of continue to pay down SBA debt and the second fund, and then the third fund, we are still within our investment period.

And so again, opportunistically, as the pipeline grows and we have SBIC eligible investments, we'll seek to put those in the third fund. And so that's why you kind of saw the pay down that you did in the first quarter of fund to debt, and then borrowings under fund three debt because we were able to deploy more capital.

So at the end of March, on the third fund, we had about 78.5 million of SBA debentures outstanding. And so that fund can go up to 175 million, that's subject to certain SBA approvals, and a little bit further equity capital commitments, but we have plenty of room to grow on the third fund, but a little bit less than 100 million.

And then on the second fund, we currently have 50 million. And again, you'll kind of probably see that come down, as we have to pay it. Next payment window will be September 1.

And so we'll just evaluate, does it make sense to redeploy cash to the BDC and make investments there? Or does it make sense to continue to pay down debt over time?.

That's, that's a great rundown. I appreciate it. And then maybe another question for me, looking at spillover income obviously, it bumped up here in the quarter sounds like you'd get some more realized activity in the pipeline.

Just just curious how you're thinking about that as it bumps higher prospects for maybe a special at some point in 22 or early 23? Just any, any color around that would be helpful? Thanks..

Sure. Yes Bryce obviously, it's early in the year, if you will but obviously the same time, we did see a nice pop in our spillover position. We did not factor in our spillover position to the base dividend, or, obviously the supplemental given our new methodology. We are continuing to monitor the position at this point.

There continues to be, as you know, uncertainty in the U.S., and we liked the idea of having a very large spillover position for a rainy day. And I think we're, but we're monitoring kind of the overall situation and, and are continuing to think about it as we move forward.

But right now, we're in a place where we don't need to do make any adjustments of any significance. And so, we, we like, like, the position we're in and we also like the fact that, we were able to raise the dividend in a very base dividend, a very meaningful way last quarter.

And obviously, we'll continue to evaluate both the base and supplemental dividends as we move forward..

Great, thanks for the time, guys..

Thank you. Good luck to you Bryce..

Thank you. [Operator Instructions] And we show no further questions. Thank you. I would like to turn the call back to Mr. Ross for final remarks..

Thank you, Hilda. And thank you everyone for joining us this morning. We look forward to speaking with you on our second quarter call in early August 2022. Have a great day. And have a great weekend..

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect..