Fidus Investment Corporation

Good day and welcome to the Fridays Investment Corporation first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Shelby Sherwood to begin the conference. Shelby, over to you.

Thank you, Gavin, and good morning, everyone. Thank you for joining us for FIDUS Investment Corporation's first quarter 2023 earnings conference call. FIDUS issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of this 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 estimates, assumptions, and projections, as of today, May 5, 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 undergoes 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, Shelby, and good morning, everyone. Welcome to our first quarter 2023 earnings conference call. On today's call, I'll start with a review of our first quarter performance and our portfolio quarter end. and then give you an update on our views about market conditions in the lower middle market for the rest of 2023. Shelby will cover the first quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. Our first quarter results demonstrate the enhanced earnings power of our portfolio, which derives from our success in building our portfolio of income-producing assets last year and from higher yields. Our first quarter performance also demonstrates the efficacy of our experience, industry knowledge, and relationships with deal sponsors as we continue to build our portfolio without sacrificing quality, even though credit conditions remain tough and deal activity remain relatively slow in the lower middle market. Our strategy of selectively investing in high-quality companies with defensive characteristics and positive long-term outlooks that operate in industries we know well and generate strong recash flow continues to produce a healthy and high-performing portfolio. We generated adjusted net investment income well in excess of the base dividend for the 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, increased 40.2% to $14.9 million, or 60 cents per share. compared to $10.6 million, or 43 cents per share, last year. A 52% increase in interest income drove this performance and reflected the positive combination of higher average debt investments and a debt yield of 14.3%, which is 240 basis points higher than the debt yield for the first quarter last year. For the first quarter, we paid dividends totaling 66 cents per share, consisting of a base dividend of 41 cents per share, a supplemental dividend of 15 cents per share, and a special cash dividend of 10 cents per share. As a reminder, we are distributing a special cash dividend of 10 cents per share each quarter this year to satisfy RIC requirements and to bring our spillover income in line with our target level. For the second quarter, on May 1, 2023, the Board of Directors declared dividends totaling $0.70 per share consisting of a base dividend of $0.41 per share, a supplemental dividend of $0.19 per share equal to 100% of the surplus in adjusted NII over the base dividend from the first quarter and a special cash dividend of $0.10 per share, which will be payable on June 28, 2023 to stockholders of record as of June 21, 2023. Including the special cash dividend of $0.10 per share, we ended the quarter with a NAV of $484.6 million, or $19.39 per share. In terms of originations for the quarter, we invested $51.5 million, further expanding our portfolio of debt securities that generate recurring interest income, while also continuing to execute our strategy of co-investing in equity securities to add a margin of safety and the opportunity to generate incremental profits. This quarter, $40.2 million, or a little more than three-fourths of total originations, was invested in three new portfolio companies. In each case, the investments were made in connection with a M&A transaction. We also continued to support the M&A activity of our existing portfolio companies. In terms of repayments and realizations in the first quarter, we received proceeds totaling $15.9 million, including $15.7 million in first lien debt repayments. With net originations of $35.6 million for the quarter, the fair value of the portfolio quarter end grew to $897.3 million, equal to 103.7% of cost. We ended the first quarter with 78 active portfolio companies and two companies that have sold their underlying operations. Subsequent to quarter end, we invested $2.5 million in debt in a new portfolio company and exited our debt and equity investments in Rhino Assembly Company, recognizing a net realized gain of approximately $2.1 million. In terms of the total portfolio mix on a fair value basis, we ended the first quarter with debt investments of $772.8 million and and equity investments of $124.5 million. Debt investments accounted for 86% of the total portfolio, with first lien debt representing the majority of the debt portfolio. Overall, our portfolio remains healthy from a credit perspective. Cost pressures and supply chain challenges are showing signs of easing, By and large, our portfolio companies are performing reasonably well, doing what they need to do to navigate current economic uncertainties, especially those with pricing power. We are, however, dealing with select company performance issues, which led us to place one additional company on non-accrual during the quarter. As of March 31st, non-accruals represented 2% of the total portfolio on a fair value basis. As a reminder, we have residual debt investments in two legacy portfolio companies that were previously sold as part of the non-accrual list. Importantly, our non-accruals are all isolated company-specific issues versus related to macroeconomic factors applicable to the entire portfolio. As always, we are managing our overall portfolio in a proactive manner, and more specifically, working closely with the financial sponsors and management teams of our portfolio companies. In summary, thus far, 2023 is unfolding as we thought it would, and our proven investment strategy and underwriting standards continue to serve us well. Although the pace of new deal activity in the lower middle market has been slower than it was in 2021 and most of 2022, we are continuing to find attractive opportunities to invest in high-quality, high-cash flow-generating companies and grow our portfolio. With an expanding portfolio of income-producing assets and the benefits of our balance sheet in a widening spread environment, Our portfolio remains very well positioned to generate adjusted NII and excess of base dividends and to grow net asset value over the long term, supporting our long-term goals of preserving capital and generating attractive risk-adjusted returns for our shareholders. I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?