Fidus Investment Q4 2024 Earnings Report

Fidus Investment EPS Results

• Actual EPS: N/A
• Consensus EPS: $0.51
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Fidus Investment Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $36.66 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Fidus Investment Announcement Details

• Quarter: Q4 2024
• Date: 3/6/2025
• Time: After Market Closes
• Conference Call Date: Friday, March 7, 2025
• Conference Call Time: 9:00AM ET

Fidus Investment (NASDAQ:FDUS) is a business development company. It specializing in leveraged buyouts, refinancings, change of ownership transactions, recapitalizations, strategic acquisitions, mezzanine, growth capital, business expansion, lower middle market investments, debt investments, subordinated and second lien loans, senior secured and unitranche debt, preferred equity, warrants, subordinated debt, senior subordinated notes, junior secured loans, and unitranche loans. It does not invest in turnarounds or distressed situations. The fund prefers to invest in aerospace and defense, business services, consumer products and services including retail, food, and beverage, healthcare products and services, industrial products and services, information technology services, niche manufacturing, transportation and logistics, and value-added distribution sectors. It seeks to invest in companies based in United States. The fund typically invests between $5 million and $15 million per transaction in companies with annual revenues between $10 million and $150 million and an annual EBITDA between $3 million and $20 million, but it can occasionally invest in larger or smaller companies. It seeks to acquire minority equity stakes and board observation rights in conjunction with its investments.

Fidus Investment Q4 2024 Earnings Call Transcript

Key Takeaways

• As of December 31, 2024, Fidus’ investment portfolio grew 14% to a fair value of $1.1 billion, with 76% of its debt investments in first-lien securities and a 13.4% equity allocation to enhance returns.
• Adjusted net investment income for Q4 was $18.4 million (or $0.54 per share), down from last year due to lower interest rates and a higher share count, while NAV stood at $19.33 per share.
• The board declared Q4 dividends of $0.61 per share (including a $0.18 supplemental dividend) and announced a Q1 2025 dividend of $0.54 per share, reflecting 100% of surplus adjusted NII.
• Fourth-quarter originations totaled $120.3 million (mostly in first-lien debt), repayments and realizations were $122.8 million, and the overall portfolio fair value remained unchanged quarter-over-quarter.
• Portfolio credit quality remains strong with non-accruals under 1% of fair value; one investment (Quantum IR Technologies) was written down to zero, underscoring the value of Fidus’ diversified debt and equity co-investment strategy.

Presentation

[Operator]

Good day, and welcome to the Phidus Fourth Quarter twenty twenty four Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I I would now like to turn the conference over to Jody Berfening. Please go ahead.

[Jody Burfening, Investor Relations at Fidus Investment]

Thank you, Michael, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's fourth quarter twenty twenty four earnings conference call. With me this morning are Ed Ross, Binance Investment Corporation's Chairman and Chief Executive Officer and Shelby Sherrod, Chief Financial Officer. Binance 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.

[Jody Burfening, Investor Relations at Fidus Investment]

The conference call today will contain forward looking statements, including statements regarding the goals, strategies, beliefs, future potential operating results and cash flows of Baidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, 03/07/2025, 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. Binance 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.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Good morning, Jody. Good morning, everyone. Welcome to our fourth quarter twenty twenty four earnings conference call. On today's call, I'll start with a review of our fourth quarter performance in our portfolio at quarter end and then share with you our outlook for 2025. Shelby will cover the fourth quarter financial results and our liquidity position.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

After we have completed our prepared remarks, we'll be happy to take your questions. As expected, the fourth quarter was active from both an investments and repayments and realizations perspective. Although deal flow remained at a reasonable, but not robust levels during the quarter as it did all year, our sponsor relationships, investment experience and industry knowledge in the fragmented lower middle market differentiate Fidus. As a result, we continue to find opportunities to selectively invest in high quality companies with durable and defensible business models that generate recurring revenue and cash flow and have strong prospects for growth. Grew our portfolio by 14% to $1,100,000,000 on a fair value basis as of 12/31/2024 versus year end 2023, adhering to our underwriting discipline and our strategy of co investing in the equity of a large majority of our portfolio companies, which gives us the potential for enhanced returns.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

From our perspective, our strategy is clearly working. Overall, our portfolio is healthy, our debt portfolio continues to perform well with sound credit quality and our equity portfolio, which is quite strong and promising continues to deliver net realized gains. Adjusted net investment income for the quarter was $18,400,000 compared to $18,800,000 last year. As our portfolio has grown over the past year, debt investments under management have increased, while yields have declined due in large part to a decline in SOFR. Including higher average share count from ATM issuances earlier in the year, adjusted NII on a per share basis was $0.54 per share compared to $0.65 per share for the same period last year.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Net asset value was $655,700,000 or $19.33 per share at quarter end. In the fourth quarter, dividends totaled $0.61 per share consisting of a base dividend of $0.43 per share and a supplemental dividend of $0.18 per share. For the first quarter of twenty twenty five, the Board of Directors declared a total dividend of $0.54 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.11 per share equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on 03/27/2025 to stockholders of record as of 03/20/2025. Originations totaled $120,300,000 for the fourth quarter, including $43,900,000 in five new portfolio companies. Remaining $76,400,000 was invested in existing portfolio companies, primarily facilitating add on acquisitions.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Net investments totaled $115,500,000 nearly all of which were in first lien securities. We co invested in the equity of the five new portfolio companies for a total of $3,800,000 Proceeds from repayments and realizations totaled $122,800,000 for the fourth quarter, including the exit of four portfolio companies, one of which have been evaluating strategic alternatives. Subsequent to the quarter end, we invested $50,700,000 in first lien debt and common which on the distribution of our preferred equity investment in HealthVuest and an $8,200,000 gain on the distribution of our equity investment in MedShurant Holdings LLC. With originations equivalent to repayments this quarter, our portfolio of debt and equity investments on a fair value basis as of 12/31/2024 was $1,100,000,000 unchanged from 09/30/2024 and equal to 101.4% of cost. Our debt portfolio totaled $944,500,000 70 6 percent of which consisted of first lien investments and our equity portfolio was $146,000,000 or 13.4 percent of the total portfolio at quarter end.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

We ended the quarter with 87 active portfolio companies, a net addition of two from the third quarter. Our portfolio overall has remained sound from a credit quality perspective throughout the year, even as we have grown the debt portfolio by 13% on a fair value basis. Non accruals on a fair value basis for the fourth quarter stayed under 1% of the portfolio and were 4.1% of the total portfolio on a cost basis. With an active portfolio, we do of course always have some companies that are experiencing or exceeding expectations and others that are underperforming. This quarter for instance, we added Quantum IR Technologies to our non accruals and wrote down its fair value to zero.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

This reflects the risk associated with a series of company specific and very negative events, particularly given our position in the cap structure as holders of a last out first lien loan. Positioning the impact of this write down was some appreciation and the fair value of our equity portfolio. By maintaining a well diversified portfolio and structuring it to hold both debt and equity investments, we are able to sustain its overall health over the long term. This illustrates the benefits of both our strategy and our long term approach to managing the business. In summary, in 2024, we continued a five year period of extremely high activity at Vitus from both a new investment and realization perspective and of building a portfolio with strong resiliency characteristics and with the opportunity for enhanced returns from capital gains.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Looking back over the past five years, we are proud to report a 7.5% compound annual growth rate in the investment portfolio from 766,900,000 to $1,100,000,000 First lien debt investments represent 76% of our debt portfolio on a fair value basis versus 16.8% in 2019. Net asset value per share has grown from 16.85 per share at year end 2019 to $19.33 per share as of twelvethirty onetwenty twenty four. Over the past five years, we have generated $2.00 $8,000,000 in net realized capital gains from equity investments or set differently 155,000,000 in net realized gains across the total portfolio taken into account any losses on debt and equity investments. For 2025, we intend to continue to find ways to build our portfolio in a methodical and disciplined way, independent of the strength of the overall M and A market. We know the year will bring us both opportunities and inevitable headwinds, but we also know that our investment strategy is working, sustaining a healthy portfolio that combines a debt portfolio that generates high levels of current and recurring income with an equity portfolio that can enhance returns.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

We remain committed to this strategy and to our long term goals of generating attractive risk adjusted returns for our shareholders and growing our net asset value over time. Now, I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

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 twenty twenty four. Total investment income was $37,500,000 for the three months ended December 31, a $900,000 decrease from Q3, primarily driven by a $1,300,000 decrease in dividend income from equity investments, offset by a $300,000 increase in fee income given an increase in investment activity in Q4. Total expenses including income tax provision were $18,800,000 for the fourth quarter, a $1,800,000 higher than Q3 driven primarily by a $1,200,000 increase in income tax provision related to the annual excise tax accrual in Q4, a $800,000 negative variance in capital gains fee accrual, a $300,000 increase in interest expense due to higher average debt balances outstanding on the line of credit and a $200,000 increase in G and A expenses offset by a $600,000 decrease in the income incentive fee.

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

Net investment income or NII for the three months ended December 31 was $0.55 per share versus $0.64 per share in Q3. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.54 per share in Q4 versus $0.61 in Q3. For the three months ended December 31, we recognized approximately $500,000 of net realized losses related to a realized loss on the exit of our residual equity investments in BurgerFi International. We ended the quarter with $483,700,000 of debt outstanding, comprised of $175,000,000 of SBA debentures, two fifty million dollars of unsecured notes, $45,000,000 outstanding on the line of credit and $13,700,000 of secured borrowings. Our net debt to equity ratio as of December 31 was 0.7 times.

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

Our statutory leverage excluding exempt SBA debentures was 0.5 times. The weighted average interest rate on our outstanding debt was 4.6% as of December 31. Turning now to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $1,100,000,000 Our average portfolio company investment on a cost basis was $12,400,000 which excludes investments in four portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 85.7% of our portfolio companies with an average fully diluted equity ownership of 3.5%.

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

Weighted average effective yield on debt investments was 13.3% as of December 31 versus 13.8% 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 issued 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 December 31, our liquidity and capital resources included cash of $57,200,000 90 5 million dollars of availability on our line of credit and $23,500,000 of available SBA debentures, resulting in total liquidity of approximately $175,700,000 Taking into account our subsequent events, have approximately $129,100,000 of liquidity. Now I'll turn the call back to Ed for concluding comments.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

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

[Operator]

We will now begin the question and answer session. The first question comes from Mickey Schleien with Ladenburg. Please go ahead.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Yes. Good morning, Ed and Shelby. Ed, LSEG reported that middle market loan spreads finally stabilized in the fourth quarter and I'm assuming the same is true of the lower middle market. How do you see spreads evolving this year? And do you think there's any scope for them to actually widen as perceived risks increase?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Great question, Mickey. My expectation for yields to stay pretty stable. I think they've been stable over the last, call it, three to six months. I don't see them getting a lot more aggressive. Clearly, I think there will be some opportunities of to invest at maybe higher rates where there's perceived risk and maybe those risks are more perceived than actual, those types of things.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

So there may be an opportunity there. But I think our kind of working thoughts are that yields are probably here for a little while just based on a fair bit of capital out there and there is an interest in trying to keep portfolios the same size or grow them. So that's probably the thought process that we have.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Thanks for that, Ed. And I wanted to ask about Quantum. I realize you probably cannot say a whole lot, but I see that they're being sued by a bank. Is that bank does that bank hold the first out piece? And do you have a call on the first out piece that you might exercise to take control of the situation and maybe recoup some value?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

It's a great question, Mickey. I think what I would say and just is the company is a provider of software based thermal infrared data collection and predictive analytics to industrial process companies and experienced a series of very specific, very negative events that have impacted obviously our valuation. I think we do have a call, we generally do. I can't guarantee that. We are very active in this situation.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

What I would say is we have all hands on deck in an effort to improve the outlook of our investment. And lastly, what I'd say is the current risk profile of our investments are reflected in the value of our debt and equity investments. We are but we're very active here and I think I'll just leave it at that, Mickey.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Okay. A couple of more sort of housekeeping questions. I'm a little confused about the HealthFuse and MedShuren distributions. Are those going to be booked as income or has realized gains? And have those distributions already been accrued into the value of those investments?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Sure. It's a great question. Shelby, you want to take that one, please?

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

Sure. Those are going to be booked as return of capital and realized gains and the Q4 value anticipated those repayments here in Q1. So it should have been reflected in the fair value. The only distinction there and why we're calling it a distribution is we didn't actually sell our equity investment. It was the underlying operations of the business that was sold.

[Shelby Sherard, CFO, Chief Compliance Officer & Secretary at Fidus Investment]

And so, while we still legally own the security and the company winds down, it will continue to stay on our schedule of investments. But, effectively, the company was sold and we're recognizing a realized gain here in Q1.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Okay. Thanks for that Shelby. And lastly, Ed, your balance sheet is not very highly levered compared to most BDCs. Can you update us on where your target balance sheet leverage is in the current market environment?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Sure. Great question. We're we and what we've said for quite a while, Mickey, is we're probably one to one leverage is the target leverage. We obviously are comfortable where we are as well and feel like we can perform at these levels. But as we move forward, I think debt will probably be a and we did not use the ATM program.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

So hopefully that gives you a sense of how we'll do things as we move forward. But I think it's a balanced approach is the way we like to talk about it and think about it. But clearly, we have some room to add debt to the balance sheet for growth purposes and that will be part of the equation for sure.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

I understand. That's it for me this morning. Thanks for taking my questions.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Absolutely. Good talking to you, Mickey.

[Mickey Schleien, MD - Equity Research at Ladenburg Thalmann]

Likewise.

[Operator]

The next question comes from Sean Paul Adams with Raymond James. Please go ahead.

[Sean-Paul Adams, Senior Equity Research Associate at Raymond James]

Hey guys, good morning.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Good morning.

[Sean-Paul Adams, Senior Equity Research Associate at Raymond James]

You guys talked a little bit about last quarter about pockets of softness when you in regards to like consumer discretionary purchases and how that would relate to manufacturing and industrial companies. And if you fast forward a little bit into the quarter, we're now at a point where we're looking at potential impacts for tariffs and import goods. What are your general thoughts when you're looking over the specific exposures within your portfolio over the next couple of quarters?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Great question. Obviously, there's a lot there. I think from pockets of softness just going back to last quarter and fourth quarter, clearly, broadly speaking, there are areas in the consumer market that are softer, right? The manufacturing industrial market has been softer as I think we talked about last quarter. But overall, it was a solid economic quarter.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

It was a solid quarter for our portfolio companies. I think we had 38 of our with regard to our debt investments, 38 of our portfolio companies grew EBITDA, 24 had declines. Overall, we had kind of a 2% growth and that's LTM quarter over quarter. So it's a healthy level of growth. So the portfolio is performing quite well from an operating and financial perspective.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Obviously, the last month or so has created some uncertainties that a lot of folks weren't expecting. But and then you add tariffs and you add any if you have exposure to government contracts, what does that mean? And we have taken a look at our portfolio. Do we have some exposure where companies could be impacted at margin level, if you will. Costs going up, how are you going to deal with them?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

The answer to that is yes. But what I would say is it's not significant. It's nothing where we have alarm bells going off and we're highly concerned about it. Our expectation is if costs go up, most of our portfolio companies have pricing power and they will use that either in surcharges or actual price increases. But overall, we don't expect any huge changes in terms of portfolio performance.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

And I think our portfolio is very well positioned to weather the storm.

[Sean-Paul Adams, Senior Equity Research Associate at Raymond James]

Got it. Perfect. Thank you. And in regards to, I guess, adding additional portfolios sorry, additional companies to the portfolio, have you guys changed any methodology in the specific sectors that you're looking to add over the next couple of quarters?

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Not with regard to specific sectors, no. I mean, we're typically focused on very high free cash flow businesses, pretty stable demand characteristics. Those would be exactly the types of businesses that we're interested in investing in as we move forward as well. So, really no change for us. I think we obviously leverage.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

We care about those levels. Our portfolios average leverage is about 4.25% for our core lower middle market. And that's a very reasonable level. There's a fair bit of cushion with that level. Interest coverage is high for the portfolio.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

We intend on trying to maintain both of those characteristics. And probably most importantly is our enterprise value cushion. So our loan to values I think this quarter were 41%, so almost 60% equity in the capital structures that we're currently invested in. That same thought process is kind of what we intend to employ as we move forward. Hopefully that's helpful.

[Sean-Paul Adams, Senior Equity Research Associate at Raymond James]

Got it. Very helpful. Thank you.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

I appreciate it. Absolutely. Good talking to you.

[Operator]

Seeing no additional questions, this concludes our question and answer session. I would like to turn the conference back over to Ed Ross for any additional closing remarks.

[Edward Ross, Chairman of the Board, Interested Director & CEO at Fidus Investment]

Thank you, Michael, 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.

[Operator]

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

Participants

Executives

• Jody Burfening, Investor Relations
• Edward Ross, Chairman of the Board, Interested Director & CEO
• Shelby Sherard, CFO, Chief Compliance Officer & Secretary

Analysts

• Mickey Schleien, MD - Equity Research at Ladenburg Thalmann
• Sean-Paul Adams, Senior Equity Research Associate at Raymond James