Fidus Investment Corporation

Good morning and welcome to the FIDUS fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jody Berfening. Please go ahead.

Thank you, Drew, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's fourth quarter 2023 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 Finest Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, March 1st, 2024, 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. Finest 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 2023 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 share with you our outlook for 2024. Shelby will cover the fourth quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. Our strong fourth quarter performance reflects the benefits to FIDUS of our strategy of both serving the lower middle market, which has remained reasonably active in a less robust environment, and selectively investing in companies that possess resilient and strong cash flow generating business models and positive long-term outlooks. Our patience during the year has paid off with the typical year-end push and deal activity Originations totaled $132.7 million, and proceeds from repayments and realizations totaled $112.5 million for a net origination of $20.2 million, and we grew the total portfolio to $957.9 million on a fair value basis. Adjusted net investment income increased 49% to $18.8 million in Q4 compared to $12.6 million last year. As was the case for each quarter in 2023, interest income growth drove this year-over-year increase, reflecting both higher average debt balances and higher weighted average yields. Taking into account the higher average share count resulting from the equity raises we completed during the year, adjusted net investment income on a per share basis increased 27.5% to $0.65 from $0.51. We paid dividends totaling $0.80 per share, including a base dividend of $0.43 per share. For the year, we distributed a total of $2.88 per share to shareholders consisting of regular dividends of $1.66 per share, supplemental dividends of $0.82 per share, and special dividends of $0.40 per share. Adjusted NII of $2.56 per share comfortably covered base dividends. As a reminder, we distributed a special cash dividend of 10 cents per share each quarter of 2023 to satisfy RIC requirements and to bring our spillover income in line with our target level, which is roughly the equivalent of the base dividend for three quarters. For the first quarter of 2024, the Board of Directors declared dividends totaling $0.65 per share consisting of a base dividend of $0.43 per share and a supplemental dividend of $0.22 per share equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter. which will be payable on March 27, 2024 to stockholders of record as of March 20, 2024. Net asset value quarter end was $589.5 million, or $19.37 per share, a meaningful increase as compared to $548.6 million, or $19.28 per share, as of September 30, 2023. During the quarter, we grew our portfolio, investing as always in high-quality companies that generate excess levels of cash flow to service debt and structuring our investments with a high level of equity cushion to give us an added margin of safety. Originations totaled $132.7 million, consisting of $123.5 million in debt and $9.2 million in equity. First lien investments accounted for $110.5 million, or approximately 90% of the additions to the debt portfolio. We invested $94.6 million, or about three-quarters of total originations, in six new portfolio companies, which were added to the portfolio through financing of M&A transactions. The remaining $38.1 million was invested in add-ons in support of existing portfolio companies, almost all of which was M&A driven. Proceeds from repayments and realizations totaled $112.5 million for the fourth quarter, reflecting exits and some strategic pruning of the portfolio on our part. We received $87.2 million in debt repayments primarily due to M&A activity, and received proceeds of $25.3 million from the sale of equity investments, resulting in net realized gains of $19.8 million. Our portfolio of debt investments on a fair value basis was $832.8 million, or 87% of the total portfolio at quarter end. First lien investments continued to account for the largest portion of the debt portfolio, now at 69%. Including the fair value of our equity portfolio of $125.1 million, the fair value of the total portfolio at quarter end stood at $957.9 million, equal to 102.3% of cost. We ended the fourth quarter with 81 active portfolio companies. Subsequent to quarter end, we invested $17 million in first lien debt and equity in two new portfolio companies, and we had a debt repayment and equity realization in one company, generating net proceeds of approximately $24.3 million and a realized gain of $1.5 million. Overall, our portfolio, from a credit quality perspective, remains solid. As of December 31st, we had two operating companies on non-accrual unchanged from the third quarter. Non-accruals represented approximately 1% of the total portfolio on a fair value basis. The vast majority of our portfolio companies continue to capture growth opportunities and sustain profitability supported by resilient business models. We do, of course, have a few companies that are experiencing difficulties for a variety of reasons, but there is no one market condition that is weighing on their operations. Looking ahead, we are well positioned to build on our successes in 2023. During 2023, we expanded our portfolio of debt and equity investments on a fair value basis by nearly $100 million to $957.9 million despite subdued levels of M&A activity in the lower middle market. This performance speaks to our experience, our relationships with financial sponsors, and industry knowledge that together enable us to remain highly selective investing in high-quality companies that meet our investment criteria. By building our portfolio of income-producing assets and with an assist from widened spreads, we enhanced the earnings power of our healthy and high-performing portfolio, generating a 46.4% increase year-over-year and adjusted NII to $67.5 million. Our strategy of co-investing in equity investments continued to work well for us producing approximately $22.4 million in net realizable gains for the year. Finally, we continue to deliver value to our shareholders, distributing 100% of our earnings and demonstrating our ability to generate gains in excess of losses while maintaining an overall healthy portfolio, thanks to our rigorous underwriting standards. While we are positioned to build on our successes of 2023, we remain committed to managing the business for the long term, to our underwriting disciplines and selecting investments, and to our long-term goals of growing net asset value over time, 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?