Fidus Investment Corporation

Good day and welcome to the FIDUS Investment Corporation's fourth quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star and 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, Dave, and good morning, everyone. And thank you for joining us for FIDUS Investment Corporation's fourth quarter 2025 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's chairman and chief executive officer, and Shelby Sharon, chief financial officer. Finest 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, February 27, 2026, 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 2025 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 2026. Shelby will cover the fourth quarter financial results in our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. During the fourth quarter, deal flow was strong. driven by a healthy M&A environment compared to earlier in the year. This resulted in originations of $213.7 million, the highest amount of capital we have invested in a quarter. From our perspective, this quarter's surge in originations was primarily related to the demand that had been pent up since Liberation Day was announced last April. which essentially froze decision-making across wide swaths of the economy and activity in the M&A market for a period of time. Once rattled markets began to settle down early in the summer, deal flow picked up in the third quarter. Also contributing to the fourth quarter surge for FIDUS were a few deals that spilled over from the third quarter. Over the course of 2025, we invested a total of $498.2 million in new and existing portfolio companies, a higher amount than in 2024. Net originations in 2025 amounted to $210.2 million. As a result, we grew the total portfolio to $1.3 billion on a fair value basis, extending our track record of steady portfolio growth since we went public in 2011. As we further built the portfolio, we continued to apply our strict underwriting standards in selecting investments and niche market leaders in the lower middle market, with proven business models that generate recurring revenue and cash flow, coupled with well-defined value creation strategies. In addition, we continued to structure our debt investments with significant loan-to-value cushions. VITAS's debt portfolio continued to perform well in the fourth quarter. Adjusted NII grew 5.1 percent to $19.4 million, boosted by higher average income-producing assets and a 60 percent increase in fee income compared to the prior year, Q4 2024. On a per share basis, adjusted NII was $0.52 compared to $0.54 for Q4 2024. We continued to over earn our base dividend of $0.43 per share and continued to pay out excess earnings. Total dividends paid in the fourth quarter were $0.50 per share. We ended the year with estimated spillover income of $1.01 per share. For the first quarter of 2026, the Board of Directors declared a total dividend of 52 cents per share, which consists of a base dividend of 43 cents per share and a supplemental dividend of 9 cents per share, equal to 100% of the surplus and adjusted NII over the base dividend from the prior quarter, which will be payable on March 30, 2026, to stockholders of record as of March 20th, 2026. Net asset value grew 13.2% to $741.9 million at quarter end, compared to $655.7 million as of December 31st, 2024. On a per share basis, net asset value was $19.55 as of December 31, 2025, compared to $19.33 as of December 31, 2024. With respect to originations in the fourth quarter, $121.5 million, or a little more than half of the $213.7 million in total originations, was invested in eight new portfolio companies, primarily in connection with M&A transactions. We invested $206.5 million, or 97%, in FIT first lien securities. In addition, we invested $3.2 million in equity securities, giving us opportunities to enhance returns. Proceeds from repayments and realizations totaled $84.7 million for the fourth quarter resulting from a mix of M&A and refinancing activity. Subsequent to the quarter end, we have invested an additional $7 million in one new portfolio company, executed numerous small add-on investments, and realized a $3.4 million gain on the exit of our equity investments in CIH Intermediate LLC. We ended the year with a portfolio totaling $1.3 billion on a fair value basis, equal to 102% of cost. First lien investments comprised 86% of our debt portfolio, reflecting the ongoing migration of our debt portfolio towards first lien securities. And our equity portfolio stood at $142.3 million, or 10.7% of the total portfolio, on a fair value basis at quarter end. Our portfolio remains well diversified by industry consisting of a mix of manufacturing, distribution, and services companies. Given the current environment, we wanted to address our software and tech enabled services portfolio. Worth noting, we have been investing in software companies for over 10 years at FIDUS alongside leading private equity firms. and it's been a strong performing industry vertical for us. As with all investments we make, we underwrite with an acute focus on determining the value proposition of a business and its overall durability, meaning its ability to thrive and generate cash flows over our investment period and beyond. With regard to software-related businesses, this includes evaluating and ultimately getting comfortable not only with the company's growth prospects and market position, but importantly, each company's technology risk, including AI risk over the past three years or so. At Q4 2025, our software and tech-enabled services portfolio So our portfolio exposed to AI opportunities and risks was $464 million, which comprised of 92% first lien debt, 4% junior debt, and 4% equity. This portfolio is well diversified across 28 total names, and all but one are backed by financial sponsors we know well who have significant expertise in the space. resulting in an average exposure per name of $17 million. The weighted average loan-to-value for this portfolio was 37%, well below our total portfolio weighted average loan-to-value of 44%. In addition, substantially all of our first lien investments are highly structured investments with at least two maintenance covenants. In short, we feel extremely good about the health of this portfolio and its long-term outlook. In addition, the characteristics of our overall portfolio remain quite positive from a credit quality and capital preservation perspective. We ended the year with non-accruals accounting for less than 1% of the total portfolio on a fair value basis and 2% on a cost basis. Overall, our portfolio is healthy and well-structured to deliver both high levels of recurring income and capital gains from monetizing equity investments. In summary, in the fourth quarter and over the course of 2025, we demonstrated that our model clearly continues to work well and that our longstanding sponsor relationships, investment strategy, and industry knowledge in the fragmented lower middle market continue to differentiate FIDUS. Looking ahead, we are starting the year with a decent level of deal flow. We expect activity levels will pick up during the year as some private equity owners are likely to need to bring certain portfolio companies to market. As we deploy capital, we intend to stay focused on our long-term goals of generating attractive risk-adjusted returns for our shareholders and growing net asset value over time. I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our fourth quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q3 2025. Total investment income was $42.2 million for the three months ended December 31st. A 4.9 million increase from Q3 primarily driven by a 2 million increase in interest income as a result of increased average debt investments outstanding and which includes a .3 million of accelerated amortization of closing fees related to debt repayments. A 3.5 million increase in fee income given an increase in investment activity in Q4 which was partially offset by a .8 million decrease in dividend income from equity investments. Total expenses, including tax provision, were $22.5 million for the fourth quarter, a $2.6 million higher than Q3, primarily driven by a $1.4 million increase in income tax provision related to the annual excise tax accrual in Q4, a $1.8 million increase in interest expense related to higher average debt balances outstanding, including the $100 million add-on to our 6.75% notes due in March 2030. A $0.8 million increase in base management and income incentives give an increase in assets under management and higher investment activity in Q4. Offset by a $0.6 million decrease in the capital gains fee accrual and a $0.5 million decrease in G&A expenses. G&A expenses in Q3 were higher due to some one-time items related to the exit of our former debt investment in U.S. Green Fiber. Net investment income, or NII, for the three months into December 31st was 53 cents per share versus 49 cents per share in Q3. Adjusted NII, which excludes any capital gains, incentives, accruals, or reversals attributable to realized and unrealized gains and losses on investments, was 52 cents per share in Q4 versus 50 cents in Q3. For the three months into December 31st, we recognized approximately 1.5 million of net realized losses related to a realized loss on the exit of our debt investments in U.S. green fiber which was partially offset by realized gains related to the sale of our equity investments in Aldinger Company and Garlock Printing and Converting. We ended the quarter with $658.3 million of debt outstanding, comprised of $237.5 million of SBA debentures, $325 million of unsecured notes, $83.9 million outstanding on the line of credit, and $12 million of secured borrowings. Our net debt-to-equity ratio as of December 31st was 0.8 times. Our statutory leverage excluding exempt SBA to ventures was 0.6 times. The weighted average interest rate on our outstanding debt was 5.2% as of December 31st. Turning now to portfolio statistics, as of December 31st, our total investment portfolio had fair value of 1.3 billion. Our average portfolio company on a cost basis was 13.4 million, which excludes investments in six portfolio companies that sold their operations or are in the process of winding down. We have equity investments in approximately 85.4% of our portfolio companies with an average fully diluted equity ownership of 1.9%. Weighted average effective yield on debt investments was 12.6% as of December 31st versus 13% at the end of Q3. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any. Now I'd like to briefly discuss our available liquidity. In Q4, we used the net proceeds from the $100 million debt add-on to fully redeem the remaining $100 million of unsecured notes due in January 26. In December, we exercised the accordion feature on our line of credit and increased our borrowing capacity from $175 million to $225 million. In Q4, we issued accretive shares under our ATM program and raised $31.5 million of net proceeds. As of December 31st, our liquidity and capital resources included cash of $79.6 million, $141.2 million of availability on our line of credit, and $84 million of available SBA debentures, resulting in total liquidity of approximately $304.8 million. Now we'll turn the call back to Ed for concluding comments.

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at FIDUS for their dedication and hard work. and our shareholders for their continued support. I will now turn the call over to Dave for Q&A. Dave?

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Robert Dodd with Raymond James. Please go ahead.

Hi, everybody, and congratulations on another good quarter. I do want to touch on software, and I think everybody appreciates the extra disclosure you gave on that this quarter. But before I get to that, on the activity levels, I mean, a really strong, you know, Is there any, it seems unlikely to be the case, given what you disclosed about Q1, but is there any spillover of deals, given how busy you were in Q4, into Q1? Or should we expect, after that ramp and the release of the pent-up demand in the back half of last year, should we expect a Q1, maybe Q2, like the first half of Q1? of 26 to be much more modest in terms of new portfolio company activity, maybe? I mean, there may always be some add-ons, but can you give us any color?

Sure.

How much of that was in the backup?

Go ahead. Sure, sure. It's a great question. Look, Q4 was a quarter where most things kind of, you know, came to fruition, if you will. Very different than Q3 for us. And there was a pretty healthy amount of deal flow towards the end of Q3 and then Q4. And again, I think it was pent-up demand. I think, you know, now in Q1 26, deal flow is a little more modest in nature. We believe it's, you know, somewhat, you know, due to seasonal patterns, if you will. And our current expectations are for an increase in both deal flow and activity you know, throughout the year. We are, as we sit here today, working hard on, you know, new investment opportunities as well as add-on investment opportunities. And so, you know, is Q1 going to be anything like Q4? I don't think so. But I do think investment activity, you know, we'll have some, you know, real investment activity here in the last month. I think from a repayments perspective, there'll be some repayments, but less than, as I sit here today, you know, no crystal ball, but repayments will be less than origination. So, you know, our expectation would be some growth this quarter, but nothing like the growth in, you know, in Q4. So hopefully that's helpful. It is picking up a little bit, and it'll, you know, we expect it to pick up, you know, a fair bit more here as the year goes on.

Perfect. Thank you. That is very helpful. On the software, and you gave the incremental information that AI has been part of a key risk assessment for three years. Can you use any type of businesses? Because obviously there's a big potential difference in risk between something that's, you know, a piece of application for software that just sits on top of an OS somewhere versus something that might be running the operations at a specialty manufacturing plant or something like that. Obviously, those face very different risks. On a pretty extreme example, spend it. Can you give us some kind of like the type of businesses that you have? I mean, yes, you expect them to thrive, you expect them to be resistant, but why?

Sure. It's an important topic. Let me give you some more thoughts. First and foremost, let me say that we believe the recent headlines, although meaningful and serious, the market dislocation in software has been blown out of proportion from our perspective. You know, when we think about software companies and AI risk, it's important to remember that not all businesses are the same, right? There are varying degrees of quality out there, and that has to do with really every, you know, type of lower middle market company or larger market company for that matter. For us, we look for characteristics that provide long-term barriers to entry, you know, elements that help protect the viability and durability of a company's value proposition. And ultimately, it's revenues and cash flows. You know, so what are we looking for? We're looking for a company to have things like data moats. So think about enterprise solutions that serve as a system of record for critical operating data, which is hard to replicate. Think about vertical markets, specialized industry software that is complex and requires deep industry and process expertise. Regulated sectors, software that tracks, audits, and secures data. Deep relationships, so contractual revenue streams, trusted customer relationships, which typically creates high switching costs. then obviously management management's critical you want a management team that is leveraging their market positions and their competency position to embrace change and create value for their customers so those are the types of things we look for uh you know from a qualitative perspective and then just to touch a little bit more on the portfolio some of this will be duplicative but you know All deals are backed by high-quality sponsors with proven track records in the space. That's a critical component for us. Nearly all of our portfolio companies are currently adding AI features to products and using AI tools to reduce operating costs. Nearly all of our portfolio debt investments are structured as first liens. Our current weighted average loan-to-value for this portfolio is 37%. The current average contractual duration, so maturity date, is approximately 2.5 years for our software and tech-enabled services portfolio. And lastly, the portfolio is performing very well and currently marked all the debt investments as a whole at 100% of cost. So we feel good about it. Hopefully that gives you some more color and some context on the types of things we look for.

Got it. It does. And thank you for that. And that's it for me.

I want to make sure I heard you there, Robert.

That's it?

That's it for me. Yes. Thank you. Sorry. No more questions.

Thank you. Good talking to you.

And the next question comes from Mickey Shlian with Clear Street Capital. Please go ahead.

Yes, good morning, everyone. Ed, thanks for the insight into your software sector. I just want to ask whether VITAS has any focus on ARR loans or are these mostly cash flow loans?

No, ARR loans are, you know, part of our portfolio and have been a focus. And, you know, the context I would give you, about 22% of our software portfolio today, or 7.5% of our total portfolio, you know, are ARR loans. As we sit here today, a few of those, a few that aren't in that percentage were previous ARR loans that are now EBITDA loans. So when we structure an ARR loan, we force growth through covenants. We have covenants that require growth. And we also force a transition to cash flow, meaning EBITDA positive and EBITDA support for the interest expense as we move forward.

Okay, thanks for that clarification. And Ed, 3% of the portfolio's value is in fan steel, and you've held that a long time. It's been a great investment. But it's your largest single investment, and I'd like to understand how comfortable you are holding it at this level just from the perspective of portfolio risk.

It's a great question. It is, I guess in short, in summary, we are extremely comfortable with that position. I think... the long-term outlook for that business. They're a leader in their space. And I think it's a growing business, and their portfolio of products are also growing. And again, they're differentiated in the market, and we see them being able to maintain that differentiation. Feel great about the business and the outlook. And, you know, I hear you on that, but I think we're, you know, very comfortable with the position today. And obviously there'll be a day when we will look to monetize it. But, you know, we feel good about it today.

And the outlook for dividends from Fansteel, I think you had two quarters of dividends in 2025. Can we expect that to continue or? Are they in growth mode and they need to reinvest their capital?

Yeah, it's a great question. As you know, we're not in control of those dividends at all. And so I would view them as more episodic in nature, but also reoccurring annually in some way, shape, or form. That's what the history has been, and that's what our expectation would be going forward. And I think the last point I would make is they're very well positioned to make distributions, meaning very under levered to no leverage and plenty of liquidity to do those types of things.

Okay, that's good to hear. And my last question, can you give us an update on the average floors in your floating rate debt portfolio? In other words, how much exposure do you have to still declining forward SOFA curve?

Sure, sure. Most of our floors that we've been originating here over the last, let's say, three, four years are in the 2% range, Mickey. Okay. So that's kind of somewhat of a market convention from our perspective, but that's a large majority of what we have today.

So if the Fed were to cut a couple more times this year, that would still flow through your portfolio?

Yes, it would. Now, remember, we're about 25% of our debt investments are fixed rate debt investments, so not 100% flow through. But yes, we do have, if SOFR is reduced this year, then the answer to that is yes. We would expect some decline in total yields, if you will.

Okay, I understand. Those are all my questions this morning. Thank you very much for your time.

Thank you. Good talking to you, Mickey.

Likewise.

And the next question comes from Christopher Nolan with Ladenburg Salmon. Please go ahead.

Hi. On your comments earlier in terms of increased deal flow from M&A and so forth, Is this really driven just by private equity firms seeking to get an exit so they can get liquidity back to their LPs, or do changes in the tax or regulatory structure start affecting some of this deal activity?

Great question. I would say a large preponderance of the comment comes from more just pent-up demand from a PE perspective. You know, the average hold, you know, for the PE portfolio has expanded, as you know, and there is a desire for LPs to get capital back. And that is probably the biggest driver by a long shot from our perspective.

And a follow-up to Robert.

Go ahead.

And a follow-up on the software questions from Robert, are you seeing that these software companies are deleveraging or are private equity firms trying to just unload them, just trying to get a sense as to what they're doing financially?

Sure, sure. Great question. From our perspective, what we're seeing in our portfolio is growth, which is what you would expect, and it's a critical component of our underwriting. We are seeing deleveraging, whether it's an ARR loan or it's an EBITDA-based loan. At the same time, we're seeing sponsors continue to look at high-quality software names and And we are also looking at them. I mean, I think in the lower middle market and what we're experiencing is, you know, at the lack of a better word, at the operating level and where, you know, we're financing transactions and what have you, it's somewhat status quo. I mean, I think, you know, look, everyone kind of is fully aware of, of the concerns out there. We have been aware of the concerns, and the bar probably only gets higher for everyone, including us. But we feel very good about the portfolio and the outlook of the portfolio, and so no one's doing anything drastic or reacting in a huge way. Clearly, if you get into the liquid markets, that's different, right? A lot of loans have traded down. Some folks are taking advantage of them. Some folks are trying to loosen up their exposures, if you will. But that's not the market that we play in, and we are kind of one investment at a time and really working with each portfolio company. But, again, we're not seeing performance issues right now, and so hopefully that gives you some context and is helpful.

Great. Helpful and nice work. Thank you.

Thank you, Chris. Good talking to you.

Again, if you have a question, please press star and then one. Our next question comes from Paul Johnson with KBW.

Please go ahead.

Yeah, good morning. Thanks for taking my question. I'm just curious within the lower middle market, you know, from your experience, either whether it's observations of other restructurings or within your own book, what has been kind of like the typical average or, if you will, recovery rate on just a regular, you know, first lien kind of direct lending, lower middle market loan historically? And, you know, how do you think about that in terms of software development going forward? Has that traditionally been in line with direct lending recoveries and with everything going on with compressed EV multiples, et cetera, potentially compressing margins? What's your thoughts on potential recoveries if we were to start to see some turbulence in that sector?

Great question. Look, I think uh recoveries in the lower middle market are similar to the broader market i don't have that data in front of me and i don't want to misspeak but i think in you know first lien loans um recoveries have been you know generally uh you know more in the you know 60 to 85 percent range depending on you know a vintage or what have you um and i you know we feel You know, we're not – you know, it's very interesting and fully understand the risks and are paying attention more than most, I would argue. But we're not seeing the concerns that, you know, obviously are in the marketplace, as I stated at the beginning of the discussion with Robert. And we feel good about – we don't see – uh, changes, um, in recoveries or, or, you know, drastic changes in, um, values of businesses. Clearly today, you know, a lot of software companies, my guess is the, the equity value has been hit by what's going on in the market. But again, our, at 1231, our loan to value is 37%. So there's a, a huge cushion there between 37% and our security to, um, to kind of weather a storm. And we don't think these companies, these are very value-added, high-quality businesses that we've invested in. We don't see the value just dissipating overnight by any stretch of the imagination, quite frankly. So if there were problems, I would expect them to kind of react in a similar fashion as you would a normal kind of restructured deal or bad deal, if you will, from a recovery perspective. Hopefully that's helpful. I'm just trying to give you a little color.

Yeah, it is. Thank you very much. That's all for me.

Okay. Thank you, Paul. Good talking to you.

And the next question comes from Dylan Haynes with the Riley Securities. Please go ahead.

Hey, Greg Corder. Thanks for taking the question. I was wondering about software and tech names in terms of deployments and what the private markets are looking like. Given the BDC headlines and markdowns with specific tech names, how has this impacted pricing and yield? Is there anything, any new trends you could take advantage of for deployments?

Sure. Great question. What I would say, there are We are continuing to look at best-in-class software names, niche market leaders that have competitive positions and, quite frankly, product and service positions that are differentiated enough to get us comfortable to invest. And so we are looking for those kinds of names. We do expect... there to be, and I'm looking forward. It's not really happened yet, but we do expect there to be some unique opportunities that come about due to the recent dislocation in the markets. I do think it'll trend down a little bit. And so, you know, we are – though we think our overall portfolio positioning is is kind of where we want it. But if the right opportunities come along at the margin, we are interested in continuing to invest in the sector, and we'll do so at the margin. And so it's a focus of ours. It's something we've had a lot of success with. There are very differentiated companies and opportunities out there, and we want to continue to focus on that group. And so if they come up, yes, we will to try to take advantage of it. You know, the public markets, you know, that's a different, and in the liquid, you know, software names that you see from a debt perspective, that's a different market, different underwrite, different type of situation. And it's really not, you know, kind of the market we play in or what we're seeing right now. But we do expect some dislocation.

Got it. Thank you.

Thank you.

Good speaking with you, Dave.

Again, if you have a question, please press star and then one. This concludes our question and answer session. I would like to turn the conference back over to Ed Ross, CEO, for any closing remarks.

Thank you, Dave. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call in early May.

Have a great day and a great weekend. The conference is now concluded. Thank you for attending today's presentation.