Fidus Investment Corporation

Ladies and gentlemen, thank you for standing by and welcome to the FIDUS Q4 2022 Earnings Conference Call. I would now like to turn the call over to Jody Berfanin, LHA Investor Relations. Please go ahead.

Thank you, Mandeep, and good morning, everyone. And thank you for joining us for FIDUS Investment Corporation's fourth quarter 2022 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 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 Vitus Investment Corporation. Although management believes these statements are reasonable based on expectations as of today, March 3, 2023, 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 risk, 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 2022 earnings conference call. On today's call, I'll start with a review of our fourth quarter performance and our portfolio at quarter end, and then discuss our views on market conditions in the lower middle market in 2023. Shelby will cover the fourth quarter financial results in our liquidity position. After we have completed our prepared remarks, we'd be happy to take your questions. There's no question that the credit environment was tougher in the fourth quarter than a year ago, as deal activity continued to slow down. Nevertheless, from an originations perspective, we had a healthy quarter, once again demonstrating our industry expertise, strong relationships with deal sponsors, and ability to provide customized and flexible financing solutions that differentiate us in the lower middle market. At the same time, we kept our focus on quality over quantity, finding opportunities to selectively invest in high-quality companies that operate in industries we know well, generate cash flow to service debt, and possess resilient business models and positive long-term outlooks. 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 $12.6 million, or 51 cents per share, compared to $12 million, or 49 cents per share, last year. Interest income grew due to both a larger investment portfolio and higher debt yields, resulting in an increase in adjusted NII year over year. For the fourth quarter, we paid dividends totaling 61 cents per share and ended the year with net asset value of $480.3 million or $19.43 per share. As mentioned on last quarter's call, our dividend policy for 2023 approved by the board included a base dividend restored to 39 cents per share, a supplemental dividend, and a special cash dividend of 10 cents per quarter. The supplemental dividend will continue to be based on our formula of applying 100% of the excess adjusted NII over the prior quarter's base dividend. We're distributing a special cash dividend of 10 cents per share to bring our spillover income in line with our target level over the course of the year. As a result, all else being equal, that asset value will drop by 10 cents per quarter each quarter in 2023. Recently, the Board increased the base dividend for the second consecutive quarter to 41 cents per share in recognition of the improved earnings power of the portfolio. In addition to the higher base dividend for the first quarter of 2023, The Board of Directors has declared a supplemental dividend of 15 cents per share and a special cash dividend of 10 cents per share for a total cash dividend of 66 cents per share. First quarter dividends will be payable on March 29th, 2023 to stockholders of record as of March 22nd, 2023. In terms of originations for the quarter, we invested $65.9 million, adding to our portfolio of debt securities that generate recurring interest income while continuing to invest in equity securities, which provide us with a margin of safety and the opportunity to generate incremental profits. Debt investments in Q4 were fairly evenly spread among first lien, second lien, and subordinated debt. Nearly two-thirds, or $41.8 million, of the total amount of originations was invested in four new portfolio companies. In addition, we continue to support our existing portfolio companies with add-on investments. In terms of repayments and realizations in the fourth quarter, we received proceeds totaling $65.7 million, including $56 million of first lien debt repayment. Repayments were essentially equal to originations for the quarter, and the fair value of the portfolio at quarter end was $860.3 million, equal to 103.8% of cost. We ended the fourth quarter with 76 active portfolio companies and two companies that have sold their underlying operations. Subsequent to year-end, we invested $40.2 million in debt and equity securities and three new portfolio companies. Over the course of 2022, the total portfolio mix on a fair value basis continued to shift in favor of debt investments on an absolute basis and as a percent of the total, reflecting our success in redeploying the proceeds from equity monetizations. Debt investments increased from $549.8 million, or 77% of the total as of December 31st, 2021, to $740.5 million, or 86% of the total as of December 31st, 2022. First lien debt as a percentage of debt investments was approximately 62% at year end. Equity investments as a percentage of the total portfolio on a cost basis was 7.3% within the boundary of our target allocation of 10%. From a credit quality perspective, overall our portfolio is in pretty good shape. The issues our portfolio companies are contending with, higher labor and energy costs, material cost inflation, and supply chain challenges are not new, and the playbooks they have developed are enabling them to perform reasonably well. There are exceptions, of course, as you would expect for a portfolio of our size, but even those situations are manageable from our perspective, especially given the structure of our portfolio. During the quarter, we placed one additional company on non-accrual. As of December 31st, non-accruals as a percentage of the total portfolio on a fair value basis was approximately 1.2%. Looking back on 2022, what stands out is our success in building our debt portfolio after experiencing high levels of repayments and realizations in 2021 and late 2020. During that period of exceptionally robust M&A and investment activity, our portfolio structure, combining debt investments that produce recurring income and equity investments that can generate incremental capital gains, has served us well. We have monetized $195 million of equity investments since the beginning of 2020. In 2022, we enlarged our debt portfolio on a cost basis by $210.3 million, or 38%. We have also increased the size of our variable rate debt portfolio on a fair value basis by 39%. from $376 million as of December 31st, 2021 to $522.9 million as of December 31st, 2022. As a result, we entered 2023 with approximately 71% of the debt portfolio comprised of floating rate debt. At the same time, the yields on our debt investments expanded 190 basis points over the last nine months, to 13.8% as of December 31st, 2022, reflecting higher rates and the benefits of our balance sheet in a widening spread environment. Combination of putting equity proceeds to work, investing in income-producing assets, and higher yields has significantly enhanced the earnings power of our portfolio. As a result, we believe our portfolio remains positioned to generate adjusted NII well in excess of base dividends and to grow net asset value over the long term. Even though deal activity is currently slower than it was a year ago, we continue to find attractive investment opportunities. 2023, regardless of macroeconomic conditions, whether we have a recession or a soft landing, Our experience of investing through past cycles and strict underwriting standards position us to further build the portfolio and drive adjusted NII growth. As we continue to grow our portfolio, we will stay focused on our long-term goals of preserving capital and generating attractive risk-adjusted returns for our shareholders. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?