Fidus Investment Corporation

Good day and thank you for standing by. Welcome to the FIDUS Third 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. I would now like to hand the conference over to one of your speakers today, Ms. Jody Berfinning. Please go ahead.

Thank you, Vic. And good morning, everyone. And thank you for joining us for FIDUS Investment Corporation's third 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 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 Finest Investment Corporation. Although management believes these statements are reasonable, Based on estimates, assumptions, and projections as of today, November 5th, 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, Jody, and good morning, everyone. Welcome to our third 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 third quarter performance in our portfolio at quarter end, and then offer you an update of our views on deal activity in the lower middle market. Shelby will cover the third quarter financial results in our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. As expected, activity levels in the lower middle market from both an M&A activity and refinancing perspective were healthy and robust during the third quarter, continuing a period of heightened activity that began nearly a year ago. Against this backdrop, our portfolio performed well, and we continue to see a strong flow of opportunities for investment in and high-quality businesses that possess resilient business models that generate strong levels of cash flow to service debt and that have positive long-term outlooks. Repayments remain at high levels and outpaced originations due in part to the timing of deal closings. 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 was $9.8 million, or 40 cents per share, compared to $9.7 million, or 40 cents per share, last year. NAV grew to $447.5 million, or $18.31 per share, reflecting both a solid operating performance and underlying portfolio value appreciations. In addition, we reported net realized gains of $8.4 million, or $0.35 per share, as we harvested several mature equity investments in conjunction with sales and exits of portfolio companies. FIDUS paid a base quarterly dividend of $0.32 per share, a supplemental cash dividend of $0.06 per share, and a special dividend of $0.04 per share for the third quarter. 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. On November 1, 2021, Board of Directors declared a base quarterly dividend of $0.32 for share, a supplemental quarterly cash dividend of $0.04 for share, and a special dividend of $0.05. per share for a total dividends of 41 cents per share for the fourth quarter. The dividends will be payable on December 17, 2021 to stockholders of record as of December 3, 2021. In terms of originations, we invested $78.2 million in debt and equity securities, of which $39.6 million, or roughly half of the total, was invested in first lien debt, and roughly 40% was invested in second lien debt. Investments in new portfolio companies consisted of $14.3 million in first lien debt and common and preferred equity in Cardback Intermediate LLC, a leading provider of chargeback prevention and recovery services for e-commerce and card-not-present businesses. $10.5 million in second lean debt and common equity and power grid services acquisition, LLC, a leading utility services business providing repair and maintenance services for distribution, transmission, and substation infrastructure. As you can see, we continue to focus on companies with stable and diversified demand characteristics, relative insulation from the supply chain constraints, and inflationary pressures currently weigh in on many companies and strong positive long-term outlooks. The remaining $53.4 million is a new $20 million second lien loan commitment and worldwide express in a number of follow-on investments in support of M&A transactions on the part of some of our portfolio companies. Shortly after At the end of the quarter, we invested a total of $27 million in two new portfolio companies. These were $8.5 million in first-link debt, subordinated debt, and common equity of AutoCRM LLC, doing business as dealer holdings, a leading SaaS-based provider of customer communication software to the auto repair market. $18.5 million in first lien debt, common equity, and warrants of Ascendre Midco Inc., a leading provider of cloud-based talent management software solutions. In addition, we committed $16 million in second lien debt to a leading technology platform for digital customer acquisition across all consumer vehicles, including financial services, home services, and insurance, which we expect to fully fund in Q4. In terms of repayments and realizations in the third quarter, we received proceeds totaling $127.5 million, with the majority from second lien and subordinated debt investments, and $23.4 million in proceeds from monetizing equity investments. In terms of exits, we received payment in full of $21 million on our first lien debt and converted debt to equity in Hilco Technologies and realized a net loss of approximately $1 million on 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, LLC, and realized a gain of $3 million on 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 the original common equity investment and funded a $20 million second lien loan commitment. We received payment in full of $11 million on our subordinated debt investment in LNG Indy LLC and realized a gain of $4.5 million on our equity investment. We received payment in full of $21.5 million on our subordinated debt in Allied 100 and realized a gain of $1.8 million on our equity investment. We received payment in full of $11.6 million, including a prepayment penalty, on our subordinated debt in ECM Industries LLC. In addition, we received a cash distribution of $0.8 million on our equity investment. We received payment in full of $17.3 million, including a prepayment penalty on our debt investment in Routwear, Inc. Subsequent to quarter end, we received payment in full of $7.1 million, including a prepayment penalty on our subordinated debt in Transonic Companies. The fair value of the portfolio at quarter end was $719.1 million, equal to 113.9% of cost, and reflecting net repayments for the quarter partially offset by appreciation in the fair value of the portfolio. We ended the third quarter with 70 active portfolio companies and six companies that have sold their underlying operations. Our portfolio remains well-structured, positioned to produce both high levels of recurring income and to provide us with a reasonable margin of safety along with the opportunity to enhance returns. Given current market conditions, we remain focused on rotating mature equity investments into income-producing assets. With first lien debt investments exceeding repayments and second lien and subordinated debt repayments exceeding originations during the third quarter, the mix continued to shift in favor of first lien debt on both an absolute basis and as a percent of the total portfolio. At quarter end, first lien debt accounted for 41.2% of the total portfolio on a fair value basis compared to 25.2% as of December 31st, 2020, while second lien debt decreased to 28% of the portfolio on a fair value basis from 44.7% as of December 31st. Subordinate debt accounted for 9.7%, and equity investments grew to 21.1% of the portfolio on a fair value basis. Moving to portfolio performance, overall, our portfolio continues to perform well, and risk remains at comfortable levels. As of September 30th, we did not have any companies on non-accrual. Some of our portfolio companies continue to work their playbooks in terms of pricing and productivity measures in response to supply chain challenges created by the pandemic, including component shortages, material and freight cost inflation, and labor availability. In light of these unprecedented business conditions, having a well-diversified portfolio continues to serve us well. To help us assess the overall health, 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 1 is outperformed and a rating of 5 is an expected loss. At September 30th, 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 Fridays' debt investments to total EBITDA. For the third quarter, this ratio is five 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 third quarter, this metric was 3.1 times, excluding equity-only and ARR deals. As a result of the elevated velocity of M&A activity that began in the fourth quarter last year, we have seen high levels of originations and repayments in each of the past four quarters. Because repayments outpaced originations for the third quarter, We were underinvested as we started the fourth quarter. Nevertheless, we currently expect to grow the portfolio in the fourth quarter. I mentioned earlier that we closed three deals in early October for a total of $43 million in originations, including the $16 million commitment. And strong deal flow offers us opportunities to add further to originations before the end of the year. While we are encouraged by these near-term opportunities, we will continue to manage the business for the long term and not rush to grow the portfolio in a way that would have us forfeit our underwriting standards. As always, our proven underwriting discipline places greater value on quality than on quantity. In summary, I remain confident that our relationships with deal sponsors, our experience, and our strategy of selectively investing high-quality companies with defensive characteristics and positive long-term outlooks positions us well for the growth over time with a long-term goal of generating attractive risk-adjusted returns from our debt and equity investments and on preserving capital. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?