Fidus Investment Corporation

Ladies and gentlemen, thanks for standing by and welcome to the FIDUS fourth quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Ms. Burfening. Thank you. Please go ahead, ma'am.

Thank you, Felicia, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's fourth quarter 2020 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. The 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. 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, February 26, 2021, the statements are not guaranteed the 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. Bytus 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 fourth quarter 2020 earnings conference call. I hope all of you, your families, friends, and coworkers are staying healthy and well. I'm going to open today's call with commentary about the state of our portfolio at year end. I'll then review fourth quarter highlights and share our views on deal activity in the lower middle market during the first quarter of 2021. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. When I look back at 2020 and recall the uncertainties we were facing toward the end of the first quarter due to the pandemic, we did not know at that time what the ultimate impact on our portfolio companies' business operations would be. We indicated that we believed the vast majority of our portfolio companies had resilient business models that could absorb economic stress. We believe that our strategy of selectively investing in companies with defensive characteristics, including strong free cash flow and positive long-term outlooks, would enable our portfolio to weather the storm, even under unprecedented adverse business conditions. I'm pleased to report that our portfolio overall has, in fact, weathered the storm thus far and performed well in a difficult year, a testament to the success of our strategy. Due to the great uncertainties we were all facing, we also made a deliberate decision to manage the business with great caution, focused on maintaining a strong liquidity position and preserving capital. This decision has served us well. After writing down the fair value of the portfolio in the first quarter to reflect negative impacts of the pandemic, Over the remainder of the year, our portfolio continuously improved, a trend that continued in Q4 for a number of our portfolio companies, which resulted in pronounced appreciation in the fair value of our debt and equity investments. NAV at year-end increased $21.2 million, or 5.4%, to $410.8 million, or from $389.6 million at the end of the third quarter. We ended the year with NAV per share of $16.81, just 4 cents shy of the level at the end of 2019. Our assessment of portfolio risk based on company operations has also steadily improved since the first quarter. At that time, we considered a little more than 80% of the portfolio to be in the low to medium risk range. For the fourth quarter, our view is that 94% is in the low to medium risk range categories. While many of the companies in our portfolio found ways to capitalize on competitor weaknesses and or heightened in-market demand, They are overall finding ways to persevere in the current business environment and to remain well-positioned for long-term success. We ended the year with one portfolio company on PIC non-accrual status and our non-accrual balance is less than 1% of the portfolio on a fair value basis. As you may recall, the pandemic had particularly severe repercussions on Accent's business in 2020. In Q4, we realized a loss of $36.1 million on Accent Food Services. In terms of our portfolio construction and metrics, the fair market value of our investment portfolio as of December 31, 2020, was $742.9 million, equal to 108.1% of cost, and compared to 99.9% of cost for the third quarter and 98.3% for the first quarter. We ended the fourth quarter with 66 active portfolio companies and three companies that have sold their underlying operations. During 2020, we continued to increase the mix of first lien debt investments in the portfolio and at year end, first lien debt accounted for 25.2% of the portfolio on a fair value basis compared to 14.1% as of December 31st, 2019. The breakdown of the rest of the portfolio by investment type as of December 31st was as follows. Second lien debt, 44.7%, subordinated debt, 14.5% and equity investments, 15.6%. Our portfolio remains well structured to remain healthy during difficult times. In addition, our equity investments continue to give us the opportunity to enhance returns over the long term. Turning to our results for the fourth quarter, we reported adjusted net investment income, which we defined as net investment income excluding any capital gain, incentive fee attributable to realized and unrealized gains and losses, of $10.7 million, or $0.44 per share, compared to $8.3 million, or $0.34 per share, for the same period last year, completing a year of sequential gains in adjusted NII. On December 18, 2020, Vitus paid a regular quarterly dividend of $0.30 per share and a supplemental dividend of $0.04 per share to stockholders of record as of December 4th, As you may recall, last April our Board of Directors reduced the quarterly dividend from $0.39 per share to $0.30 per share. We made this very difficult decision to reflect the unprecedented uncertainties we were all facing at that time and the challenges some of our portfolio companies were contending with due to the pandemic. As a result of the steady improvement in the overall health of the portfolios since then, The Board has increased the base quarterly dividend by 1 cent to 31 cents per share and implemented a supplemental quarterly dividend for 2021 equal to 50% of the surplus in adjusted NII over the base dividend for the prior quarter. This formula results in a surplus of 14 cents per share from Q4, generating a first quarter supplemental dividend of 7 cents per share. On February 9, 2021, the Board of Directors, therefore, declared a base quarterly dividend of $0.31 per share and a supplemental quarterly dividend of $0.07 per share. The base quarterly dividend and the supplemental cash dividend will be payable on March 26, 2021 to stockholders of record as of March 12. Turning to originations and repayments. I mentioned on the third quarter call that M&A activity in the lower middle market was very high, particularly for companies that were not meaningfully impacted by the pandemic. As a result, and as anticipated, we had an extremely busy quarter in terms of investment activity. In terms of originations, we invested $103.9 million in debt and equity securities during the quarter. Of the $103.9 million, 58.5 million, or 56%, was in first lien debt investments, and we invested in seven new portfolio companies. These were $9.1 million in first lien debt, common equity and preferred equity, and Applied Data Corporation, a leading provider of fresh item management technology for grocery and convenience stores. $11 million in first lien debt and common equity in Comply365, LLC, a leading provider of SAS enterprise content and compliance management solutions for the aviation and rail markets. $21.5 million in first lien debt and common equity in DataGuides, Inc., a provider of automated data discovery, classification, protection, and continuous monitoring software. $8.2 million in first lien and revolving debt in Elements Brands, LLC, an e-commerce platform dedicated to developing consumer products brands. $9.3 million in first lien debt in Common Equity and Hallmark Healthcare Solutions, Inc., a software as a service company offering physician compensation and workforce management solutions for health systems, academic medical centers, and physician groups. $6.8 million in first lien debt and preferred equity in HealthFuse LLC, a leading provider of revenue cycle vendor management solutions to hospitals and health systems. And $13.5 million in second lien debt and common equity in Pool and Electrical Products LLC, a leading regional distributor of pool equipment and supplies. These investments in new portfolio companies share the defensive characteristics critical to the success of our strategy. Resilient business models with recurring and reoccurring revenue streams and strong cash flow generation to service debt and positive outlooks for growth over the long term. They also operate in industries we know well, in these cases in software or tech-enabled services, business services, and healthcare services. In addition to investing in new portfolio companies, we refinanced our $20 million second lien debt investment in Wheel Pros during Q4. In terms of repayments and realizations, we received proceeds of $100.7 million. In terms of exits, we exited our debt and equity investments in Pew Lubricants LLC, receiving payment in full of $26.6 million, including a prepayment penalty on our second lien debt investment and realized a gain of approximately $0.5 million on our equity investment. We exited our equity investment in Who Knew It, LLC and realized a gain of approximately $0.2 million. We received payment in full of $4.3 million on our first lien debt in Global Plasma Solutions, Inc. We exited our debt and equity investments in Control Scan, Inc. We received payment in full of $6.8 million on our subordinated debt investment and realized a gain of approximately $0.7 million on our equity investments. We exited our debt and equity investments in BCC Group Holdings, Inc. We received payment in full of $18.5 million, including a prepayment penalty on our subordinated debt investment and realized a nominal gain on our equity investment. And as I mentioned, we refinanced our $20 million second lien debt investment in Will Prose, Inc. Subsequent to year end, we closed $42 million of investments, including investments in three new portfolio companies, primarily in first liens, debt, and equity, and received proceeds of $60.6 million in repayments and realizations. Before I close with comments about the market, I wanted to highlight the exit of our debt and equity investments in FDS. FDS was acquired and combined with Calculex Inc. and Argonne Corporation under a new holding company, Spectra A&D Holdings. FDS is an avionics company that we controlled for the past several years and this exit and effective reinvestment of the proceeds into a now much larger and better positioned company was well executed by our team. Importantly, the new company is now very well positioned for the future. As a result of the transaction, we now have a first lien debt investment and a meaningful minority equity investment alongside a private equity group that focuses on the aerospace and defense space. This was a nice transaction for FDUS and all stakeholders involved. After the flurry of deal activity in the fourth quarter, M&A in the lower middle market has moderated a bit in the first quarter. Nonetheless, we have had some deal flow held over from 2020, and we believe we'll have a decent level of investments in the first quarter. Repayments, on the other hand, will likely be slightly higher than the fourth quarter. While we are not discounting the uncertainties that are still with us around the strength and pace of the economic recovery, We have demonstrated success in redeploying proceeds into portfolio companies that provide us with a high level of current and recurring investment income and equity upsides. Our steadfast commitment to our underwriting disciplines, improving investment strategy, will continue to serve us well as will our conservative approach to managing the business for the long term. Focused on generating attractive risk-adjusted returns, and preserving capital in the interest of our shareholders. I'll now turn the call over to Shelby for fans.