Operator: Good day, and welcome to the Fidus Investment Corporation First Quarter 2023 Earnings Conference Call. [Operator Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Shelby Sherard to begin the conference. Shelby, over to you.

Shelby Sherard: Thank you, Gavin, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation’s First Quarter 2023 Earnings Conference Call. Fidus issued a press release yesterday afternoon with the details of the company’s quarterly financial results. A copy of this 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 5, 2023, 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 undergoes 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.

Edward Ross: Good morning, Shelby, and good morning, everyone. Welcome to our first quarter 2023 earnings conference call. On today’s call, I’ll start with a review of our first quarter performance and our portfolio at quarter end and then give you an update on our views about market conditions in the lower middle market for the rest of 2023. Shelby will cover the first quarter financial results and our liquidity position. After we have completed our prepared remarks, we’ll be happy to take your questions. Our first quarter results demonstrate the enhanced earnings power of our portfolio, which derives from our success in building our portfolio of income-producing assets last year and from higher yields. Our first quarter performance also demonstrates the efficacy of our experience, industry knowledge and relationships with deal sponsors as we continue to build our portfolio without sacrificing quality, even though credit conditions remain tough and deal activity remained relatively slow in the lower middle market.

Our strategy of selectively investing in high-quality companies with defensive characteristics, and positive long-term outlooks that operate in industries we know well and generate strong free cash flow continues to produce a healthy and high-performing portfolio. We generated adjusted net investment income well in excess of the base dividend for the quarter. Adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee attributable to realized and unrealized gains and losses, increased 40.2% to $14.9 million or $0.60 per share compared to $10.6 million or $0.43 per share last year. A 52% increase in interest income drove this performance and reflected the positive combination of higher average debt investments and a debt yield of 14.3%, which is 240 basis points higher than the debt yield for the first quarter last year.

For the first quarter, we paid dividends totaling $0.66 per share, consisting of a base dividend of $0.41 per share, a supplemental dividend of $0.15 per share and a special cash dividend of $0.10 per share. As a reminder, we are distributing a special cash dividend of $0.10 per share each quarter this year to satisfy RIC requirements and to bring our spillover income in line with our target level. For the second quarter, on May 1, 2023, the Board of Directors declared dividends totaling $0.70 per share consisting of a base dividend of $0.41 per share, a supplemental dividend of $0.19 per share equal to 100% of the surplus and adjusted NII over the base dividend from the first quarter and a special cash dividend of $0.10 per share, which will be payable on June 28, 2023, to stockholders of record as of June 21, 2023.

Including the special cash dividend of $0.10 per share, we ended the quarter with an NAV of $484.6 million or $19.39 per share. In terms of originations for the quarter, we invested $51.5 million, further expanding our portfolio of debt securities that generate recurring interest income while also continuing to execute our strategy of co-investing in equity securities to add a margin of safety and the opportunity to generate incremental profits. This quarter, $40.2 million or a little more than 3/4 of total originations was invested in 3 new portfolio companies. In each case, the investments were made in connection with an M&A transaction, we also continue to support the M&A activity of our existing portfolio companies. In terms of repayments and realizations in the first quarter, we received proceeds totaling $15.9 million including $15.7 million in first lien debt repayments.

With net originations of $35.6 million for the quarter, the fair value of the portfolio at quarter end grew to $897.3 million equal to 103.7% of cost. We ended the first quarter with 78 active portfolio companies and 2 companies that have sold their underlying operations. Subsequent to quarter end, we invested $2.5 million in debt in a new portfolio company and exited our debt and equity investments in Rhino Assembly Company, recognizing a net realized gain of approximately $2.1 million. In terms of the total portfolio mix on a fair value basis, we ended the first quarter with debt investments of $772.8 million and equity investments of $124.5 million. Debt investments accounted for 86% of the total portfolio with first lien debt representing the majority of the debt portfolio.

Overall, our portfolio remains healthy from a credit perspective. Cost pressures and supply chain challenges are showing signs of easing. By and large, our portfolio companies are performing reasonably well, doing what they need to do to navigate current economic uncertainties, especially those with pricing power. We are, however, dealing with select company performance issues, which led us to place one additional company on nonaccrual during the quarter. As of March 31, nonaccruals represented 2% of the total portfolio on a fair value basis. As a reminder, we have residual debt investments in 2 legacy portfolio companies that were previously sold as part of the nonaccrual list. Importantly, our nonaccruals are all isolated company-specific issues versus related to macroeconomic factors applicable to the entire portfolio.

As always, we are managing our overall portfolio in a proactive manner and more specifically, working closely with the financial sponsors and management teams of our portfolio companies. In summary, thus far, 2023 is unfolding as we thought it would, and our proven investment strategy and underwriting standards continue to serve us well. Although the pace of new deal activity in the lower middle market has been slower than it was in 2021 and most of 2022, we are continuing to find attractive opportunities to invest in high-quality, high cash flow generating companies and grow our portfolio. With an expanding portfolio of income-producing assets and the benefits of our balance sheet in a widening spread environment, our portfolio remains very well positioned to generate adjusted NII in excess of base dividends and to grow net asset value over the long term, supporting our long-term goals of preserving capital and generating attractive risk-adjusted returns for our shareholders.

Now I’ll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Shelby Sherard: 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 2022. Total investment income was $29.1 million for the 3 months ended March 31, a $1.6 million increase from Q4, primarily due to a $1.9 million increase in interest income, including PIK, and a $0.2 million increase in dividend income, partially offset by a $0.6 million decrease in fee income. The increase in interest income was driven by an increase in average debt investment balances outstanding as well as an increase in the yield on our debt investments, given increase in interest rates on variable rate loans.

Total expenses, including tax provision, were $14.3 million for the first quarter, a $0.7 million lower than Q4, driven primarily by a $1.4 million decrease related to the annual excise tax accrual that occurs in Q4, offset by a $0.6 million increase in income incentive fee and a $0.3 million increase in interest expense related to incremental debt outstanding, both SBA debentures and borrowings under our line of credit. We ended the quarter with $446.6 million of debt outstanding comprised of $165 million of SBA debentures, $250 million of unsecured notes, $15 million outstanding on our line of credit and $16.6 million of secured borrowings. Our debt-to-equity ratio as of March 31 was 0.9x or 0.6x statutory leverage, excluding exempt SBA debentures.

The weighted average interest rate on our outstanding debt was 4.2% as of March 31, 2023. Net investment income, or NII, for the 3 months ended March 31 was $0.59 per share versus $0.51 per share in Q4. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized and losses on investments, was $0.60 per share in Q1 versus $0.51 per share in Q4. Turning now to portfolio statistics. As of March 31, our total investment portfolio had a fair value of $897.3 million. Our average portfolio investment on a cost basis was $11.1 million, which excludes investments in 2 portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 76.3% of our portfolio companies with an average fully diluted equity ownership of 3.9%.

Weighted average effective yield on debt investments was 14.3% as of March 31 versus 13.8% at December 31. 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, 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 $36.4 million, $5 million of available SBA debentures and $85 million of availability on our line of credit, resulting in total liquidity of approximately $126.4 million. Now I’ll turn the call back to Ed for concluding comments. Ed?

Edward Ross: 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 Gavin for Q&A. Gavin?

Operator: [Operator Instructions]. And your first question comes from the line of Mickey Schleien of Ladenburg.

Operator: Your next question comes from the line of Robert Dodd of Raymond James.

Operator: Your next question comes from the line of Bryce Rowe of B. Riley.

Operator: Your next question comes from the line of Erik Zwick of Hovde Group.

Operator: [Operator Instructions]. And there are no further questions at this time. So I’d like to hand back to Ed.

Edward Ross: Thank you, Gavin, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our second quarter call in early August. Have a great day and a great weekend.

Operator: That does conclude our conference for today. Thank you for participating. You may now all disconnect.

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Q1 2023

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