Fidus Investment Corporation

Good day and thank you for standing by. Welcome to the FIDA's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to your speaker today, Jody Berferning.

Thank you, Lisa, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's first quarter 2021 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherrod, Chief Financial Officer. Vitus 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 FBUS.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, cash flows of FIDX Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, May 7, 2021, 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. BIDIS 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, Jodi, and good morning, everyone. Welcome to our first quarter 2021 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 a review of our first quarter performance and portfolio at quarter end, and then share with you 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. Our first quarter results demonstrate the stability of our portfolio and the effectiveness of our strategy to build a well-diversified portfolio of debt and equity investments in lower middle market businesses that we believe will produce high levels of recurring income and offer us the opportunity to participate in equity gains, thereby preserving capital and generating attractive risk-adjusted returns over time. We carefully select companies that have strong yet defensible market positions, resilient business models that generate free cash flow and have positive long-term outlooks for growth over the long term. Our first quarter operating results were solid, with our portfolio performing well and generating adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee trivial to realized and unrealized gains and losses of $11.2 million, or 46 cents per share. This compares favorably to adjusted NII for the fourth quarter of last year of 44 cents per share. FIDUS paid a base quarterly dividend of 31 cents per share and a supplemental cash dividend of 7 cents per share to stockholders of record as of March 12th, on March 26, 2021. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter, under which 50% of the surplus in adjusted NII over the base dividend from the prior quarter is distributed to shareholders. For the second quarter, the surplus is 15 cents per share. Therefore, on May 3, 2021, the Board of Directors declared a base quarterly dividend of $0.31 per share and a supplemental quarterly cash dividend of $0.08 per share. The base quarterly dividend and the supplemental cash dividend will be payable on June 28, 2021 to stockholders of record as of June 14, 2021. NAV continued to improve as a result of both our solid operating performance and the underlying portfolio fair value appreciation. We ended the quarter with net asset value of $413 million, or $16.90 per share, a level that is, I'd like to point out, above the NAV of our portfolio as of December 31st, 2019, before we were all dealing with the pandemic. Deal flow activity during the first quarter was at reasonable levels, driven by both M&A and refinancing opportunities. In terms of originations, we invested $63.1 million in debt and equity securities. $56.9 million, or 58.5%, was invested in first lien debt. Investments in new portfolio companies consisted of $7.5 million in first lien debt and common equity in Garlock Printing and Converting, a converter of plastic film into flexible packaging solutions. $6.5 million in first lien debt in core business technology, provider of revenue management and payment solutions to government, healthcare, and education sectors. We also made a $2 million delayed draw term loan commitment to this company, which was unfunded at close. $8.9 million in first lien debt in Ziva, Inc., a global provider of intelligent cloud-based direct spend management software solutions. We also made a $.4 million delayed draw term loan commitment to this company, which was unfunded at close. And finally, $17 million in subordinated debt and common equity in Lifespan Biosciences, Inc., a global provider, developer, and distributor of antibodies and related reagents, primarily to the academic and pharmaceutical research markets. The remaining $19.2 million consisted of add-on investments in six portfolio companies, primarily related to recapitalizations of two In terms of repayments and realizations, we received proceeds totaling $98.6 million, collecting another quarter of relatively strong M&A activity and higher debt refinancing volume. In terms of exits, we received payment in full of $15.6 million, including a prepayment penalty on our first lien debt in Bandon Fitness, Inc. We received payment in full of $6.6 million, including a prepayment penalty on our first lien debt in Alzheimer's Research and Treatment Center, LLC. We received payment in full of $10 million on our subordinated debt investment in OMC Investors and reinvested $5 million in new second lien debt. We exited our debt and equity investments in FDS, Avionics, Corp receiving payment in full of $5.1 million on our revolving and subordinated debt investments and realized a gain of $0.9 million on our equity investment. We received $0.1 million in first lien debt and common equity of the Acquirer Spectra Aerospace and Defense Acquisition, Inc. We received payment in full of $20.4 million on our second lien debt in Wheel Pros Inc., including prepayment penalties. We received payment in full of $4.2 million on our first lien debt in French Transit LLC. We exited our debt and equity investments in Software Technology LLC, receiving payment in full of $10 million on our subordinated debt investments and realized a gain of approximately $1.4 million on our equity investment. And we exited our debt and equity investments in Rohwer Corporation, receiving payment in full of $14 million on our subordinated debt investments and realized a gain of approximately $0.9 million on our equity investment. Subsequent to quarter end, we invested $11 million in first lien debt of Wynonna Foods, Inc., a leading provider of natural and processed cheese products, sauces, plant-based alternatives. We invested $5.5 million in first lien debt and $1 million in common equity of Level Education Group, LLC, doing business as CE for Less, a leading provider of online continuing education for mental health and nursing professionals. We exited our debt investment in Kaizen Company, LLC, doing business as Outward Hound, and received payment in full of $15 million on our second lien debt, which includes a prepayment fee. We invested $25.5 million in first lien debt, common equity, and made a commitment up to $2 million of additional first lien debt of ISI PSG Holdings LLC doing business as Incentive Solutions Inc., a tech-enabled incentive rewards, and digital marketing firm that facilitates and optimizes its clients' indirect sales channel strategies. We exited our debt investment in MedShirt Assurance Holdings LLC and received payment in full of $8 million on our second lien debt, and we exited our debt investment in Virginia Tile Company LLC, and we received payment in full of $12 million on our second lien debt. With repayments and exits outpacing originations during the first quarter, assets under management as of March 31st, 2021 was, as expected, lower than December 31st, 2020. As of March 31st, the fair market value of our portfolio was $711.9 million, equal to 108.4% of cost, and we ended the first quarter with 67 active portfolio companies and four companies that have sold their underlying operations. In terms of portfolio construction, we continue to increase the mix of first lien debt investments on an absolute basis and as a percent of the total portfolio, and at quarter end, first lien debt accounted for 27.5 percent of the portfolio on a fair value basis compared to 25.2% as of December 31, 2020. The breakdown of the rest of the portfolio by investment type as of March 31 was as follows. Second lien debt, 41.5%, subordinated debt, 14%, and equity investments, 17%. With this security mix, our portfolio remains well-structured for current economic conditions and positioned to provide us with a high level of current and recurring income from debt investments, along with the opportunity for incremental returns from monetizing equity investments. Moving to portfolio performance, overall our portfolio is performing well, and risk is at comfortable levels. Some of our portfolio companies have encountered supply chain disruption, higher input costs, including freight costs, But overall, they are managing these issues well, and the long-term fundamentals of their businesses remain in good shape. Eblen's remains on PIC non accrual, representing 0.8% of total fair value of the portfolio. We track several quality measures on a quarterly basis to help us assess the overall health, stability, and performance of our investment portfolio. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperformed and a rating of 5 is an expected loss. March 31st, the weighted average investment ratio for the portfolio was 2 on a fair value basis. Another metric we track is the credit performance of our portfolio, which is measured by our portfolio company's combined ratio of total net debt through FIDUS's debt investments to total EBITDA. For the first quarter, this ratio is 4.4 times, excluding equity-only and ARR deals. The third measure we track is the combined ratio of our portfolio companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. For the first quarter, this metric was 3.4 times, excluding equity-only and ARR deals. With high levels of repayments and exits exceeding originations recently, we are pleased to see that M&A activity in the lower middle market remains robust and is expected to remain strong throughout the year, offering us opportunities to invest in high-quality companies that meet our underwriting standards and supporting our positive outlook to build our portfolio of debt and equity investments in a disciplined and measured way as we have in the past. At the same time, we do expect repayments to continue through the year, but at a slower pace than the recent past. Overall, we believe the portfolio is headed in the right direction and remains well-structured in support of our capital preservation and income goals. Our strategy is working, and we remain committed to our goal of growing net asset value over time through careful investment selection and focus on preservation and on generating attractive risk-adjusted returns. I will now turn the call over to Shelby to review our financial results and liquidity position. Shelby?