Fidus Investment Corporation

Good day and thank you for standing by. Welcome to the FIDUS second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, please press star 1 on your telephone keypad. 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 hand the conference over to Jody Berfening. Please go ahead.

Thank you, Christy, and good morning, everyone, and thank you for joining us this morning for FIDUS Investment Corporation's second 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. FIDUS Investment Corporation issued a press release today 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 fgus.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 five investment corporations. Although management believes these statements are reasonable based on estimates, assumptions, and projections, as of today, August 6, 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. Citus 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 second quarter 2021 earnings conference call. I hope all of you, your family, friends, and coworkers are staying healthy and well. I'm going to open today's call with a review of our second quarter performance and portfolio at quarter end, and then share with you our views on deal activity in the lower middle market for the second half of the year. Shelby will cover the second quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Overall, we are very pleased with our results and portfolio performance for the second quarter. Adjusted net investment income grew year over year, and net asset value per share reached a record level. Originations and repayments were at high levels, in line with our expectations for a busy quarter from a deal flow perspective. We continue to focus on carefully selecting high-quality companies in the lower middle market that are reasonably insulated from economic stresses associated with the pandemic. companies that possess resilient business models that generate strong levels of cash flow to service debt and positive long-term outlooks. Our portfolio remains well-structured, positioned to produce both high levels of recurring income and the potential for equity upside in support of our capital preservation and income goals. Adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized or unrealized gains and losses grew 15% versus last year to $10.4 million or 42 cents per share. At quarter end, net asset value had reached a record $429.4 million or $17.57 per share reflecting both solid operating performance and underlying portfolio value, fair value appreciation. Vitus paid a quarterly dividend of $0.31 per share and a supplemental cash dividend of $0.08 per share on June 28, 2021 to stockholders of record as of June 14th. 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 third quarter, I am pleased to report that we are increasing the base dividend to $0.32 per share and the surplus is $0.06 per share. In addition, we will pay a special dividend in Q3 of $0.04 per share. Therefore, on August 2, 2021, the Board of Directors declared a base quarterly dividend of $0.32 per share, a supplemental quarterly cash dividend of $0.06 per share, and a special dividend of $0.04 per share. The dividends will be payable on September 28, 2021 to stockholders of record as of September 14. 2021. Following a busy first quarter, deal flow activity remained at high levels during the second quarter, driven by both M&A transaction and refinancing opportunities. In contrast to the first quarter, however, originations outpaced repayments. In terms of originations, we invested $104.2 million in debt and equity securities, of which $96 million, or nearly all of the total, was invested in first lien debt. Investments in new portfolio companies consisted of $18 million in first lien debt and common equity in 2K Direct, Inc., a leading omnichannel digital advertising platform for small and mid-sized businesses. $7 million in first lien debt and common equity in Airnex Inc., a supplier of data transfer, signal analysis, communications products, and related engineering services, primarily to the defense industry. $25.5 million in first lien debt and common equity in ISI PSG Holdings LLC, doing business as Incentive Solutions. a provider of online rewards, travel incentives, and gift card reward programs. We subsequently sold a $13.5 million participating interest in the first lien debt. $6.5 million in first lien debt and common equity in Level Education Group, LLC, a leading provider of online continuing education for mental health and nursing professionals. $12 million in first lien debt in UPG Company, LLC, an original design and contract manufacturer of complex assemblies with roots as a manufacturer of precision injection molded plastics. And finally, $11 million in first lien debt in Winona Foods, Inc., a leading provider of natural and processed cheese products, sauces, and plant-based alternatives. These investments are indicative of our present focus on companies that have not been meaningfully impacted by the pandemic and possess revenue streams that are recurring in nature. In terms of repayments and realizations, we received proceeds totaling $93 million, with the vast majority from second lien debt investments. In terms of exits, we received payment in full of $15 million, including a prepayment penalty on our second lien debt in the Kijun Company. We received payment in full of $8 million in our second lien debt in Netsurance Holdings, LLC. We received payment in full of $12 million on our second lien debt in Virginia Tile Company, LLC. We received payment in full of $7.8 million on our second lien debt in Stewart Holding, LLC. We received payment in full of $4.7 million on our first lien debt Palmetto Moon LLC. We received payment in full of $22.5 million on our second lien debt in ABC Investors LLC, and we had exited our equity investment in Wheel Pros, Inc., a realized gain of approximately $2.1 million. Subsequent to quarter end, Hilco Technologies was sold. We took control of Hilco in the second quarter and exchanged a $10.3 million debt investment for an equity investment in a new holding company. In conjunction with the sale subsequent to quarter end, we received payment in full on our residual debt and converted equity investment and realized a net loss of approximately $1.1 million of our original equity investment in the company. We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings LLC. We received payment in full of $20 million on our second lien debt in Worldwide Express Operations LLC and realized a gain of $3 million on a portion of our equity investment. In conjunction with the sale of Worldwide Express, We invested $1.5 million in common equity, of which $0.8 million was rolled over from our original common equity investment and funded a $20 million second lien term loan commitment. With originations coming in above repayments and exits and the fair value of the portfolio appreciating relative to the first quarter, the fair market value of our portfolio as of June 30th, 2021 was $743.5 million, equal to 110.8% of cost. We ended the second quarter with 72 active portfolio companies and four companies that have sold their underlying operations. In terms of portfolio construction, our continued focus on investing in first lien debt, combined with a heavy weighting of second lien debt exits, has altered the mix since the beginning of the year. First lien debt investments have increased on an absolute basis and as a percent of total portfolio. And at quarter end, first lien debt accounted for 38.3 percent of the portfolio on a fair value basis compared to 25.2 percent as of December 31, 2020. In contrast, second lien debt has decreased on an absolute basis and a percent of its total portfolio and accounted for 28 percent of the portfolio on a fair market basis compared to 44.7 percent as of December 30th. Subordinated debt accounted for 13.4 percent, and equity investments accounted for 20.3 percent of the portfolio on a fair value basis. Our portfolio remains well-structured for current economic conditions, with debt investments generating high levels of current and recurring income, and equity investments providing us with a reasonable margin of safety, along with the opportunity to enhance returns. Moving to portfolio performance, overall, our portfolio continues to perform well, and risk remains at comfortable levels. As of June 30th, we did not have any companies on non-accrual. Last quarter, I mentioned that some of our portfolio companies were dealing with operational challenges, including supply chain constraints and higher input costs. Although the challenges haven't abated since then, management at these companies are rising to the challenge, making adjustments as necessary in pricing and or productivity, and their overall demand remains favorable. To help us assess the overall health and stability and performance of our investment portfolio, we track several quality measures on a quarterly basis. 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. June 30th, the weighted average investment ratio for the portfolio is two 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 second quarter, this ratio was 4.2 times, excluding equity-only and ARR deals. The third measure we track is the combined ratio of our portfolio company's 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 second quarter, this metric was 3.2 times, excluding equity-only and ARR deals. M&A activity picked up at the beginning of the fourth quarter of last year and has remained at healthy levels to date, resulting in high levels of originations and repayments. Although net originations rebounded in the second quarter, we are currently not fully invested in our debt portfolio after several consecutive quarters of unusually high levels of debt repayments. We have been in this situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income without either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term. We therefore intend to adhere to our strategy of carefully investing in high-quality companies with defensive characteristics and positive long-term outlooks, prioritizing companies that have not been materially impacted by the pandemic and that possess resilient business models and strong cash flow profiles. As we move into the second half of the year, still see very healthy to robust conditions for deals in the lower middle market from both M&A activity and refinancing, where we can leverage our relationships and experience. This favorable environment supports our goal of growing our debt portfolio in the coming quarters. It also supports a positive outlook for equity realizations. Combination of our investment strategy and underwriting principles support our goals of capital preservation and generating attractive risk-adjusted returns. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?