Fidus Investment Corporation

Good day and thank you for standing by. Welcome to the FIDUS fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After speaker's 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. 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 your speaker today, Jody Berfening, please go ahead.

Thank you, Gigi, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's fourth quarter 2021 earnings conference call. With me this morning are 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 FIDUS Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections, as of today, March 4, 2022, 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 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 2021 earnings conference call. I'm going to open today's call with a review of our fourth quarter performance and our portfolio at quarter end, discuss the positive outlook behind the board's dividend decisions, and then offer you an update of our views on deal activity in the lower middle market in the year ahead. 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. Although the last quarter of the year is typically a busy time for us, the fourth quarter of 2021 was exceptionally busy, extending the trend of elevated velocity of M&A and refinancing activity to five consecutive quarters. As you may recall from last quarter's call, we were underinvested at the start of the fourth quarter, and we expected to grow the portfolio by the end of the year. Although at the same time, Some portfolio companies were evaluating strategic alternatives. What we didn't expect was that a couple of deals would come together quickly toward the end of the quarter. As a result, repayments were once again at very high levels, including a sizable level of equity realizations and ultimately exceeded originations. Amidst this flurry of activity, we continued to execute our proven investment strategy of carefully selecting investments in high-quality, lower-middle-market businesses, that possess resilient business models that generate excess levels of cash flow to service debt and that have positive long-term outlooks, leveraging the breadth and depth of our relationships with deal sponsors, our industry knowledge, and our differentiated perspective on financing solutions. Our portfolio performed extremely well during the fourth 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, was $12 million, or 49 cents per share, compared to $10.7 million, or 44 cents per share, last year. Net asset value grew to $487.8 million, or $19.96 per share, driven by a combination of strong operating performance and underlying portfolio value appreciation, and was boosted by net realized gains of $42.1 million, or $1.72 per share, including $20.4 million from the sale of Mesa Line Services, LLC. FIDUS paid a base quarterly dividend of 32 cents per share, a supplemental cash dividend of 4 cents per share, and a special dividend of 5 cents per share, for a total dividend of 41 cents per share for the fourth quarter. For the first quarter, the Board of Directors, recognizing our extremely strong performances throughout the year and the exceptionally high level of net realized gains, increased the base dividend from 32 cents per share to 36 cents per share, a 12.5 percent increase, and revised the formula to calculate the supplemental dividend each quarter distributing a greater share of surplus income generated by our portfolio to our stockholders. Previously, the supplemental dividend was equal to 50 percent of the surplus in adjusted NII over the base dividend from the prior quarter. Under the revised formula, the supplemental dividend is now equal to 100 percent of the surplus. For the first quarter dividend, the surplus is 17 cents per share, or 49 cents per share of adjusted NII, less the fourth quarter base dividend of 32 cents per share for a total dividend of 53 cents per share this quarter. Base dividend of 36 cents per share and a supplemental dividend of 17 cents per share will be payable on March 25, 2022, to stockholders of record as of March 11, 2022. In terms of originations, we invested $101.2 million in debt and equity securities, of which $72.1 million, or nearly three-quarters of the total, was invested in first lien debt, and $25.8 million was invested in second lien debt. In terms of new portfolio companies, we invested $79 million in six of them. consisting of $18.5 million in first-link debt, revolving loans, common equity, and warrants, and Ascendre Midco Inc., a market-leading provider of cloud-based talent management software solutions. $8.5 million in first-link debt, subordinated debt, and common equity in auto, CRM, LLC, doing business as dealer holdings, a leading SaaS-based provider of customer communication software, to the auto repair market. $13 million in first lien debt in Green Cubes Technology, LLC, doing business as Green Cubes, a leading provider of lithium power systems for motive, mobile, and stationary power in the industrial automation, material handling, and telecom markets. $5.7 million in first lien debt in Mobile Wallet, Inc., a leading provider of consumer intelligence solutions, $16.5 million in first lien debt in NetBase Solutions, Inc., doing business as NetBase Quid, a global leader in artificial intelligence-powered consumer and market intelligence. $16.8 million in second lien debt in Common Equity and Suited Connector, LLC, a leading marketing technology platform for digital customer acquisition across most consumer verticals, including financial services, home services, and insurance. These new investments reflect our continued focus on companies that are relatively insulated from the adverse effects of the pandemic, including supply chain disruptions and margin compression due to rising material, freight, and labor costs. In terms of repayments and realizations in the fourth quarter, we received proceeds totaling $153.7 million with nearly two-thirds of the total from second lien and subordinated debt investments. We also successfully monetized equity investments in seven portfolio companies, realizing $42.1 million of gains in Q4, having spent the time and effort on optimizing outcomes. From my perspective, this reflects well on the team's portfolio management skills and further differentiates VITAS in the market. We're patient. We're focused on the long term, and we deliver strong results for our shareholders. In terms of sales and exits, we received payment in full of $7.1 million, including a prepayment penalty on our subordinated debt and the transonic companies. We received payment in full of $12.1 million, including a prepayment penalty on our second lien debt in pool and electrical products. In addition, we received proceeds of $10 million and a realized gain of $9.1 million on our equity investment in pool and electrical products related to the sale of the business. We received payment in full of $11.2 million on our second lien debt and B&B roadway and security solutions. In addition, we received a distribution of $.7 million and a realized gain of $.2 million on our equity investment related to the sale of the business. We received payment in full of $30 million on our existing subordinated debt investments and rolled $10 million into a new subordinated debt investment in BCM1 Group. In addition, we received proceeds of $3.3 million and realized a gain of $2.5 million on the exit of our equity investments from the sale of our equity. We received proceeds of $7.5 million and realized a gain of $6.4 million related to the exit of our equity investment in revenue management solutions. We received proceeds of $2.3 million and realized a gain of $1.8 million related to the exit of our equity investment in Alzheimer's Research and Treatment Center. We received payment in full of $13 million, including a prepayment penalty on our first lien debt investments in specialized elevator services holdings In addition, we received proceeds of $2.3 million and realized a gain of $1.3 million related to the exit of our equity investment. And we received payment in full of $13.9 million on our subordinated debt investment in UVO. In addition to these sales and exit, we closed deals on two control investments during the quarter, and I wanted to take a moment to share with you some details about them. First, Green Fiber. As you might recall, FIDUS assumed control of Green Fiber in late 2019 after several difficult operating events. Throughout our ownership period, our team worked side by side with an outstanding management team, and ultimately we facilitated a strategic transaction that merged Green Fiber with another company to create Applegate Green Fiber Intermediate, the leader in the cellulose insulation arena. under new private equity sponsorship. As part of this transaction, the assets of U.S. Green Fiber were sold, and we received a new $9.6 million subordinated loan and $12.8 million of equity in Applegate Green Fiber Intermediate in consideration for 81% of our second lien debt investment in U.S. Green Fiber. As the former company winds down, any residual proceeds will go to pay down the remaining $5.2 million of U.S. green fiber debt on our books. The fair value of the residual debt and equity investments in U.S. green fiber is marked at zero, and we have placed this debt investment on non-accrual status. We believe this transaction positions our investments for positive outlooks while lowering our risk. Second, Mesa Line Services, as you might recall, We assumed control of Mesa Line services in the second quarter of 2021 after several self-inflicted company events occurred. Following the ownership transition, we invested meaningful capital to shore up the company's financial position while working hard to improve the overall operations of the business and positioning the company to be sold to a strategic buyer. As a result of our approach and portfolio management skills, the company was sold and we received payment in full of $26.5 million, including a prepayment penalty on our subordinated debt investments. In addition, we received a $21.6 million distribution and realized a net gain of $20.4 million on our equity investments, reflecting the value we created. Very proud of the work our teams put into these control investments and the outcomes of each of them, showcasing our capabilities, which are differentiated in this industry. To put repayments and realizations for the fourth quarter in perspective, over the course of 2021, we received $472.8 million from a diverse set of deals and exited 11 portfolio companies. Subsequent to the end of the quarter, we invested a total of $62.6 million in four new portfolio companies. These were, we invested $10.8 million in first-ling debt and common equity, of a leading provider of alternative out-of-home advertising across the convenience store and gas station, retail, truckside, and transit markets, among others. We invested $22.4 million in first lien debt and common equity of Micronics Filtration Holdings, Inc., doing business as Micronics Engineer Filtration Group, Inc., a global provider of aftermarket and OEM filtration equipment, and consumables for use in mining, chemical wastewater, and various other industrial end markets. We invested $15 million in second lien debt of Quest Software, U.S. Holdings, Inc., a global cybersecurity data intelligence and IT operations management software provider. And we invested $14.4 million in subordinated debt, preferred equity, and common equity of CIH, Intermediate LLC, a technology-based risk management firm that provides education and customized price risk management services to businesses affected by volatility in agriculture markets. We also received $13 million in repayments consisting of the following. We received payment in full of $6.7 million on our second lien debt investments and Mirage trailers. We received a distribution on our equity investment in frontline Food Services LLC, formerly known as Accent Food Services, resulting in a realized gain of approximately $200,000. And we received a distribution on our equity investment in SpendMen LLC, resulting in a realized gain of approximately $6.1 million. The fair value of the portfolio at quarter end was $719.1 million, equal to 115.7 percent of cost. reflecting the underlying performances of the portfolio companies and appreciation in the fair value of the portfolio, offset by repayments and realizations. We ended the fourth quarter with 70 active portfolio companies and eight companies that have sold their underlying operations. While we had high levels of repayments and originations during the quarter, overall the portfolio remains well-structured to produce recurring income and through our equity investments to provide us not only with incremental profits, but also a reasonable margin of safety. Our portfolio continues to perform well and remains well positioned from a risk perspective for the current business environment. Over the course of 2021, our investments in first lien debt nearly doubled on a fair value basis while repayments were concentrated in second lien and subordinated debt investments. As a result, first lien debt grew to approximately 65 percent of our debt portfolio as of December 31st. In terms of the total portfolio mix on a fair value basis, debt investments comprised about 77 percent of the total, and equity investments accounted for the remaining 23 percent. Looking back on 2021, this has been a period of high velocity from a deal activity perspective, and we set records in terms of originations, repayments, and net asset value. Over the past five quarters, with repayments of $573.5 million, succeeding originations of $450.6 million, we have seen a rotation of a large majority of our debt portfolio into new portfolio companies without sacrificing yield. While also being equal, we would have preferred to have ended the year in a net origination position The high level of repayments is a testament to the overall health of our portfolio and to the strength and resiliency of our portfolio companies, especially in light of the pandemic, which made them attractive candidates for M&A transactions and from a credit perspective for refinancings and recapitalizations. Looking ahead to 2022, we expect another busy year with strong deal flow, although in all likelihood not at the velocity levels of 2021. The outlook for M&A and refinancing in the lower middle market remains strong, and some companies are planning to initiate strategic alternatives in the coming months. As a result, in 2022, we're positioned to both grow the portfolio and monetize some of our equity investments while staying focused on our long-term goal of generating attractive risk-adjusted returns and delivering value for our stockholders. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?