Fidus Investment Corporation

Good day and welcome to the FIDUS second quarter 2026 earnings conference call. All participants will be in a 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 your touch-tone phone. 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 Burfening. Please go ahead.

Thank you Danielle and good morning everyone and thank you for joining us for FIDUS Investment Corporation's second quarter 2026 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's Chairman and Chief Executive Officer and Shelby Sherard, 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, August 7, 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 filing for 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 second quarter 2026 earnings conference call. On today's call, I'll start with a review of our second quarter performance in our portfolio at quarter end, and then share with you our outlook for the second half of 2026. Shelby will cover the second quarter financial results in our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. Although ongoing geopolitical uncertainties and market volatility wait, on deal activity levels in the fragmented lower middle market. We continue to build our diversified portfolio of debt and equity investments in the second quarter. Our long-standing relationships with high-quality sponsors, our proven investment strategy, and industry knowledge continue to differentiate FIDUS. These attributes create opportunities for us to add, through discipline selection, niche market leaders with defensible moats and resilient business models that generate cash flows to service debt and support realistic growth strategies. As a result, our portfolio remains healthy and structured to produce both high levels of current and recurring income and the potential for capital gains from monetizing equity investments. Adjusted NII of $0.50 per share extended our track record of covering our base dividend. In addition, we realized net gains of $6.4 million, or $0.17 per share, from the monetization of three equity investments. That asset value is $738.5 million at quarter end, or $19.46 per share. For the third quarter of 2026, the Board of Directors declared a total dividend of $0.50 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.07 per share, equal to 100% of the surplus and adjusted NII over the base dividend from the prior quarter, which will be payable on September 29, 2026 to stockholders of record as of September 15. 2026. Originations in the second quarter amounted to $98 million, the vast majority of which were M&A-driven first lien investments. We invested a total of $48.1 million in four new portfolio companies. In terms of existing portfolio company investments, we continue to support many of them with acquisition capital in the form of debt and equity investments. As we continue to build our portfolio, we remain focused on maintaining a high level of diversity while investing in growing companies that provide essential products and services with an emphasis on manufacturing, distribution, and service enterprises. Proceeds from repayments and realizations totaled $39.2 million for the second quarter. At quarter end, our portfolio on a fair value basis stood at $1.4 billion, or 102% of cost, and consisted of $1.3 billion in debt investments and $147.2 million in equity investments. Our portfolio remains well-structured to produce both high levels of recurring income and capital gains from monetizing equity investments. coupled with attractive loan-to-value characteristics. Our debt portfolio continues to perform well and is sound from a credit quality perspective, given the solid fundamentals of our underlying portfolio companies. At 630, one portfolio company, Vertex, remained on non-accrual, accounting for less than 1% of the total portfolio on both a fair value and cost basis. Subsequent to quarter end, we exited our second lien in subordinated debt investments in Vertex Enterprises LP, which had previously been written down. We received payment of $0.2 million, resulting in an aggregate realized loss of $11 million. As a result, as of today, we do not have any investments on non-accrual status. Looking ahead to the second half of 2026, Given the pent-up demand in the M&A market, we expect deal flow and investment activity to pick up as geopolitical uncertainties abate, though such timing is not entirely clear. Yet deal flow appears to be picking up as we sit here today. In addition, even in this more muted environment, our portfolio continues to be active and a meaningful source of new investment. As we have in the past, through periods of both robust and sluggish deal activity and during the heightened risk associated with the pandemic, we will adhere to our strict underwriting standards to maintain a well-diversified portfolio that produces both high levels of current and recurring income and offers the potential for enhanced returns from monetizing equity investments. Our portfolio is well positioned to continue to generate adjusted NII that covers our base dividend. We remain focused on managing the business for the long term and committed to our goals of capital preservation and generating attractive risk-adjusted returns. Now 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 second 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 Q1 2026. Total investment income was $43.5 million for the three months ended June 30th, a $4 million decrease from Q1 primarily driven by a $2.6 million increase in interest income driven by increased average debt investments outstanding, a .6 million increase in dividend income from equity investments offset by a 6.8 million decrease in fee income primarily related to the fees from the American Always debt refinancing recognized in Q1. Total expenses including income tax provision were 24.8 million for the second quarter, a 1.9 million higher than Q1 driven primarily by a 1.2 million increase in interest expense related to higher average debt balances outstanding and the refinancing of our unsecured notes due November 2026 completed in the second quarter, which included approximately $0.4 million of duplicative interest given the timing of the redemption of the unsecured notes. A $0.3 million increase in base management fees given increase in assets under management offset by a $1.2 million decrease in income incentive fees given lower fee income in Q2. A $0.4 million increase in G&A expenses primarily related to proxy solicitation costs related to the annual shareholder meeting held in Q2 and a $1.2 million increase in capital gains fee accrual. Net investment income or NII for the three months ended June 30th was $0.49 per share versus $0.65 per share in Q1. Adjusted NII which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.50 per share in Q2 versus $0.62 in Q1. For the three months into June 30th, we recognized approximately $6.4 million of net realized gains on our equity investments in MedShare and Holdings, USGAS Holdings, and Worldwide Express Operations. We ended the quarter with $73.8 million of debt outstanding, comprised of $296 million of SBA debentures, $320 million of unsecured notes, 112.7 million outstanding on the line of credit and 11.1 million of secured borrowings. Our net debt to equity ratio as of June 30th was one time. Our statutory leverage excluding exempt SBA debentures was 0.6 times. The weighted average interest rate on our outstanding debt was 5.8% as of quarter end versus 5.2% in Q1. The increase in the cost of debt is driven by the refinancing of the 3.5% unsecured notes that were due in November with new unsecured notes with the higher interest rate of 6.625% that are due in June 2029. As a result of the refinancing, our earliest debt maturity is now in June 2029. Turning now to portfolio statistics, as of June 30th, our total investment portfolio had a fair value of $1.4 billion. Our average portfolio investment on a cost basis was $14 million, which excludes investments in eight portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 82.4% of our portfolio companies, with average fully diluted equity ownership of 2.1%. Weighted average effective yield on debt investments was 12.5% as of June 30th, in line with Q1. 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. As of June 30th, our liquidity and capital resources included cash of $39.3 million, $112.3 million of availability on our line of credit, and 18.5 million of available SBA debentures resulting in total liquidity of approximately 170.1 million. Now I'll turn the call back to Ed for concluding comments.

Thanks, Shelby. As always, I'd like to thank our team and our 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 Danielle for Q&A. Danielle?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are 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 2. The first question comes from Robert Dowd from Raymond James. Please go ahead.

Good morning, Shelby, and congratulations on the quarter. If I can ask, on the market outlook, Ed, I mean, as you say, you know, there's uncertainty. There's a lot going on globally. Your color kind of indicated that you do think deal activity is going to pick up, is picking up right now. But overall timing, like, I mean, is it going to be strong in the second half? Is it going to be stronger in 27? I mean, can you give us any more feel for kind of like, And again, you already hedged a little bit on the timing, so I'm not trying to totally pin you down, but what does it kind of feel like for the second half of this year versus is it just going to be more 27?

It's a great question, Robert, and I wish I had a crystal ball. What I would say, and I did allude to it and you caught it, is that we are seeing, you know, a higher level of deal flow today than we were 60 days ago, for sure. And I think that bodes well for Q4 in particular, maybe Q3 for some, but I think it bodes well for Q4. But there clearly are uncertainties in the world today that could get in the way of some of that. But that's how we're thinking about it as we sit here today. Deal flow is picking up. I mean, if I go back to Q1 and Q2, deal flow was not robust. There was some deal flow. I would say quality was also lackluster. So our hope is quality does and continues to improve. and with that you know hopefully activity levels you know across the board will pick up a little bit but I think there's also you know good news from our perspective which is our portfolio continues to be quite active it was in Q1 it was in Q2 you know I think there's there has been activity here in Q3 a couple you know we've had one funding of a commitment we made in Q2, and we've also made two sizable add-on investments in July that were acquisition related. So I do think things continue to move along from a portfolio investment perspective, and that's healthy, and we like that. The whole idea of incumbency is a good thing. But we also expect new deal activity, probably more in Q4, to pick up some.

Got it. I appreciate that. On credit quality, obviously, I mean, Vertex after the end of the quarter was exited. So you're back down to zero on a course right now. I mean, are you seeing anything on the horizon or anything in any particular portfolio? I mean, anything that gives you any concern over the next, you know, Thank you for joining us.

I think we aren't seeing anything systemic, if you will. We're all aware of the higher oil prices. We're all aware of the lower-end consumer struggling a little bit more than maybe others. But generally speaking, we are seeing healthy growth in our portfolio. EBITDA growth levels this quarter are about 6%. and so we feel good about the outlook and really the strength of the portfolio as we sit here today.

Got it, thank you. If I can, one more and you've talked about it. I mean, it's still topical software and you do have a good chunk of software though. It tends to be specialized software. Have you seen any impacts on any of your software book from the The AI discussions or pressures or anything like that or is it just business as usual?

I think it's more business as usual. I think our software and tech enabled services portfolio continues to perform well. Our debt portfolio with regard to our software and tech enabled services is marked at 99% of cost as we sit here today. We think we've invested in a very resilient group of companies. But as is typical of any 100 company portfolio or with regard to software, a meaningful portfolio, from time to time we have a few businesses dealing with company specific issues. But really as it pertains to AI risk, we are not seeing any widespread performance issues showing up in the portfolio. What I would say is that most borrowers are investing in and adopting AI capabilities to reduce costs and also just improve their products. We also believe many of them are well positioned to capitalize on their advancing AI capabilities and software capabilities. We are pleased with where the portfolio is and expected to continue to perform well as we sit here today.

Got it. Thank you.

Thank you. Good talking to you, Robert.

As a reminder, if you have a question, please press star 1. The next question comes from Christopher Nolan from Lattenburg, Tholom. Please go ahead.

Hi, thanks for taking my questions. Follow up on Robert's question in terms of the pickup and deal flow. Ed, what does this all mean for terms and conditions? I mean, and I guess in terms of the deals that you're seeing. And also, is the pickup and deal flow private equity sponsors just trying to find an exit after such a lull?

No, I mean, yeah, I think there's pent up demand for exits and then that will help drive. But I think that's, you know, clearly in the private equity world, but also independent companies that maybe we're thinking about it's time, you know, for, you know, a transaction to take place. And so we just there's just a fair bit of pent up demand out there. And, you know, I think as uncertainties abate, we do we do expect more More activity. I think from a terms and conditions perspective, you know, one of the things we like about the lower middle market is our, you know, we have maintenance covenants. Our leverage levels are lower. If you look at our weighted average leverage of our cash flow portfolio, it's 4.1 times. So it's materially lower than the broader market. Pricing's better. You can see that reflected in our spreads. And so We like the market that we're in and we expect those general terms to remain stable in terms of covenants and pricing and whatnot and structures. The other one I would mention is just loan to value. Our portfolio today has a loan to value, a weighted average loan to value of 41%. We target almost every deal having 50% loan to value or less. and that is, you know, I think been helpful to us but also gives us a fair bit of cushion when things don't go exactly right to weather storms and so, you know, we expect those opportunities to continue as well.

Gotcha. And I guess for Shelby as a follow-up, on Vertex Enterprises with the exit in the third quarter, it appears that you exited pretty close to the mark. Am I missing something or is that accurate?

That's correct. No, that's correct.

Okay, so she'd be pretty neutral on that. Okay, great. Thank you very much for taking my questions.

Thank you, Chris. Good talking to you.

Likewise. The next question comes from Paul Johnson from KBW. Please go ahead.

Hey, good morning. Thank you for taking my questions and congrats on a stable quarter. I'm just wondering maybe more broadly in terms of how you're looking at credit. I think it seems Fairly obvious things are performing quite well and you have a non-approval coming off here next quarter. But in terms of the internal watch list, if I can call it that, maybe how has that changed here this quarter, if that's gotten any bigger or going the other way if that continues to get smaller?

It's a great question, Paul. It actually did increase this quarter. We had one addition to that list, and that would be in what I call the grade three plus names. But, you know, it's an idiosyncratic type issue for sure. But I think the good news from our perspective is, generally speaking, we're seeing growth. and we're seeing a pretty healthy portfolio we always have some great threes for lack of a better word and and we're working through those we do see you know several names that we think will actually exit you know be sold and we'll get our money back in the next six to nine months hopefully that does happen but that's what is being worked on right now and so With a little luck, actually, that Grade 3 portfolio could improve. But overall, we're seeing generally growth and a healthy portfolio.

I appreciate that. And then it's been a while since we've talked about, I guess, junior capital opportunities, and you guys have made more of the shift into the Unitronch. What is the relative value if those deal opportunities exist today? If there are any in terms of second lien, subordinated type of deals that you could potentially be reviewing right now or if you're still kind of sticking to the knitting in terms of more of the senior entrench deals?

Yeah, it's a great question. What has transpired for us and really the industry over the last five to ten years is really moved towards more of a first lean solution. There are obviously junior capital opportunities that come up and we do look at them, but what we're looking for with regard to junior capital opportunities are really superlative businesses. you know attractive loan to values obviously attractive pricing and but the real piece of the puzzle is where I started which is you know there's just the market is very first lien oriented and and so that's driving a large majority of you know the originations for us but we do see second lien junior capital opportunities We will continue to look at those and obviously the bar is extremely high from our perspective there, always has been, but we expect our first lien portfolio, our debt portfolio is now 88% first lien and we think that's probably where it stays or if not actually increases from there a little bit over time.

Appreciate it. Thank you very much for that. And I guess the last question would be, given you are one of the few BDCs in the space trading above NAV at this point, gross leverage is as high as it's probably been in a little while on a statutory basis. It's obviously much lower, but how are you kind of balancing the idea of potential Equity Capital raises here with a potentially improving pipeline. We should expect you to potentially be a little bit more active with ATM issuance here in the second half.

Sure. It's a great question. As we move forward and we see the opportunity for growth, we also see repayments, which have been relatively light this quarter or this year so far. We expect repayments to pick up a little bit here in the second half of the year as well. But having said that, if we are growing like we anticipate we're going to, then we would utilize the ATM program as appropriate for sure. It makes sense. Our target leverage is more, you know, range is 0.9 to 1.1, but really, you know, the target being in the middle there at 1 to 1. And so it would make sense to raise capital if it looks appropriate.

I appreciate it. That's all for me. Thank you very much.

Thank you, Paul. Good talking to you.

Again, if you have a question, please press star one.

This concludes our question and answer session. I would like to turn the conference back over to Ed Ross for closing remarks.

Thank you, Danielle. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our third quarter call in early November. Have a great day and a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.