Fidus Investment Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 9, 2025

There are 6 speakers on the call.

Operator

Good day, and welcome to the Fidus First Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touch tone phone. To withdraw your question, please press then 2.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Jodi Boeufering from LHA. Please go ahead.

Speaker 1

Thank you, Danielle, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's first quarter twenty twenty five 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. Bidus 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.

Speaker 1

The conference call today will contain forward looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Finis Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, 05/09/2025, 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. Fidus undertakes no obligation to update or revise any of these forward looking statements.

Speaker 1

With that, I would now like to turn the call over to Ed. Good morning, Ed.

Speaker 2

Good morning, Jody, and good morning, everyone. Welcome to our first quarter twenty twenty five earnings conference call. On today's call, I'll start with a review of our first quarter performance and our portfolio at quarter end and then share with you our outlook for the rest of 2025. 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.

Speaker 2

In the first quarter, deal activity in the lower middle market was at more modest levels, continuing the lackluster M and A trends we have been seeing. Including a couple deals held over from the fourth quarter, we continue to build our debt portfolio on the strength of our durable sponsor relationships, proven industry expertise and investment experience. Carefully and deliberately selecting portfolio companies that fit our strategy of investing in high quality companies with resilient business models, strong cash flow generation and achievable prospects for growth. Consistent with our strategy, we co invested in the equity of nearly all of the new portfolio companies. As a result, at quarter end, under management stood at approximately $1,200,000,000 on a fair value basis, up 6% compared to 12/31/2024.

Speaker 2

Adjusted net investment income for the quarter was $18,500,000 compared to $18,100,000 in the prior year Q1 twenty twenty four. On a per share basis, adjusted NII was $0.54 compared to $0.59 for the same period last year, including the impact of incremental shares issued under our equity ATM program over the past twelve months. Net asset value was $677,900,000 or $19.39 per share at quarter end compared to $655,700,000 or $19.33 per share as of 12/31/2024. For the first quarter, dividends paid totaled $0.54 per share consisting of the base dividend of $0.43 per share and a supplemental dividend of $0.11 per share. For the second 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, to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on 06/25/2025 to stockholders of record as of 06/13/2025.

Speaker 2

Originations totaled $115,600,000 for the first quarter, dollars '1 hundred and '2 point '1 million of which was invested in seven new portfolio companies. Reflecting our practice of investing in industries we know well, most of our investments in new portfolio companies focused on business service companies with relatively high enterprise value multiples, and we continued to structure our debt investments with attractive loan to values well less than 50%. Debt investments totaled $111,600,000 First lien securities accounted for approximately 94% of the total. We co invested in the equity of six of the new portfolio companies for a total of approximately $4,000,000 Subsequent to quarter end, we invested $5,800,000 in first lien debt and equity in another new portfolio company. Proceeds from repayments and realizations totaled $57,300,000 for the first quarter, and we monetized equity investments in two portfolio companies, Metsurant Holdings and Healthuse, both of which have been evaluating strategic alternatives for a realized gain of $13,300,000 With $58,300,000 in net originations for the first quarter, our total portfolio on a fair value basis increased to approximately 1,200,000,000 equal to 100.5% of cost.

Speaker 2

Our debt portfolio totaled approximately $1,000,000,000 on a fair value basis, 79% of which consisted of first lien investments and our equity portfolio stood at $137,800,000 or 11.9% of the total portfolio at quarter end. Our portfolio is well diversified and is structured to produce both high levels of recurring income and the potential for capital gains from our equity investments. From a credit quality perspective, portfolio remains healthy with companies on nonaccrual remaining under 1% of the total portfolio on a fair value basis and 3.9% of the total portfolio on a cost basis. With respect to the macroeconomic challenges and uncertainties associated with the administration's current trade policies, we believe our portfolio companies are reasonably insulated from the stresses and challenges that may lie ahead. Not only are they domestic businesses with limited tariff exposure, but the vast majority of them are niche market leaders with pricing power and proprietary services and products, and they have effective risk mitigation levers to pull as necessary.

Speaker 2

While M and A activity overall is currently slowing down because of market turbulence, a fluid macroeconomic environment and a higher level of uncertainty, we have a decent outlook for originations in the second quarter based on our new investment pipeline, which consists of both new investment opportunities and add on investments in existing portfolio companies. As we look forward, we believe we are well positioned from a capitalization and liquidity position as we expect a more interesting investment environment, which we may have which we have experienced historically in periods of high volatility. And should economic conditions deteriorate, our debt portfolio is well positioned to weather a storm as a vast majority of our portfolio companies possess resilient cash flow generating business models that can absorb economic stresses and possess moderate leverage levels and robust equity capitalizations. As in the past, when we faced uncertainties and challenges, our philosophy of managing the business cautiously and deliberately in the long term interest of our shareholders keeps us active and focused on generating attractive risk adjusted returns while preserving capital. Now I'll turn the call over to Shelby to provide some details financial and operating results.

Speaker 2

Shelby?

Speaker 3

Thank you, Ed, and good morning, everyone. I'll review our first 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 Q4 twenty twenty four. Total investment income was $36,500,000 for the three months ended March 31, a $1,000,000 decrease from Q4 driven primarily by a $1,100,000 decrease in interest income, primarily due to a decline in the weighted average yield on debt investments, a 900,000.0 decrease in fee income given a decrease in prepayment and amendment fees in q one, offset by a 1,100,000.0 increase in dividend income from equity investments. Total expenses, including income tax provision, were $18,300,000 for the first quarter, dollars zero point '5 million less than Q4, driven primarily by a $1,800,000 decrease in income tax provision related to the annual excise tax accrual in Q4, offset by a $500,000 increase in interest expense related to higher average debt balances outstanding and an increase in the weighted average interest rate with the issuance of incremental debt in March 2025 and a 200,000.0 increase in management and income incentive fees and a 500,000.0 increase in the capital gains incentive fee accrual.

Speaker 3

Net investment income or NII for the three months ended March 31 was $0.53 per share versus a $0.55 per share in Q4. 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 both Q1 and Q4. For the three months ended March 31, we recognized approximately $11,500,000 of net realized gains, net of income tax, related to the sale of two portfolio companies. We recognized a gross realized gain of $10,100,000 not including the income tax provision, on our equity investments in Maturant Holdings and a $3,200,000 realized gain on our equity investment in Health Use. In March, we issued $100,000,000 of five year unsecured debt with 6.75% coupon and received net proceeds of $96,900,000 We ended the quarter with $545,600,000 of debt outstanding comprised of $182,000,000 of SBA debentures, $350,000,000 of unsecured notes, and $13,600,000 of secured borrowings.

Speaker 3

Our net debt to equity ratio as of March 31 was 0.7 times. Our statutory leverage excluding exempt SBA debentures was 0.5 times. The weighted average interest rate on our outstanding debt was 4.8% as of March 31. Turning now to portfolio statistics. As of March 31, our total investment portfolio had a fair value of $1,200,000,000 Our average portfolio company investment on a cost basis was $12,500,000 which excludes investments in four portfolio companies that sold their operations and are in the process of winding down.

Speaker 3

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 13.2% as of March 31 versus 13.3% at the end of Q4. 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 briefly like to discuss our available liquidity. As of March 31, our liquidity and capital resources included cash of $67,500,000 1 hundred and 40 million dollars of availability on our line of credit, dollars 24,000,000 of available SBA debentures, resulting in total liquidity of approximately $231,500,000 As reported, later this month, we plan to redeem $25,000,000 of the notes due in January 2026.

Speaker 3

Now I will turn the call back to Ed for concluding comments.

Speaker 2

Thanks, Shelby. As always, I would 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 Danielle for Q and A. Danielle?

Operator

We will now begin the question and answer session. The first question comes from Robert Dodd from Raymond James. Please go ahead.

Speaker 4

Excuse me. Sorry. Good morning. Thank you for bringing up the kind of, like, the environment, the tariff issue. I mean, all of the, like, the vast majority or it should be reasonably insulated there.

Speaker 4

I mean, is that have you done any first versus second order effects? I mean, obviously, you know, we don't have anybody based overseas, but any color you can give on, like, you know, impacts from from your companies that are importing goods versus where they're, you know, doing something in The US, but maybe their customer some some customers are overseas. I mean, any additional color you can give on what the potential exposure is there?

Speaker 2

Sure. Absolutely. And good morning, Robert.

Speaker 4

Good morning.

Speaker 2

I'm going to just talk about portfolio for a quick sec here. But what I would say is, overall, we continue to be very pleased with the performance and its overall quality. As always, we have some companies that are exceeding expectations and some that aren't and are underperforming. As we all know, we are experiencing a heightened level of uncertainty and tariffs have certainly entered the equation in a real way from that perspective. What I would say is Fidus' direct exposure to tariffs is quite limited.

Speaker 2

Just over 5% of our portfolio from a direct material exposure perspective, meaning exposure to China and exposure to other high tariff entities. So pretty small percentage for sure. And I think what's more important is really based on our assessments, and we've talked and assessed really the plans that are high and medium risk companies have put in place. And what I would say is, we feel like the situations are very manageable. The plans that are being put in place are prudent.

Speaker 2

It's not going to be perfect. There is chaos out there trying to deal with the issues. But overall, we feel very good about the portfolio, the plans that the management teams are putting in place and the long term outlooks ultimately for those businesses. So hopefully that's helpful. But I think it's the percentage is quite low and then more importantly is really how our portfolio companies dealing with the issues and tariffs in particular.

Speaker 2

And what I would say is very proactively and there are risk mitigation levers out there that can be pulled that we feel good about.

Speaker 4

Got it. Great. Thank you. Thank you for that additional color. And then it's kind of tied to the thing that that you described the m and a market as lackluster, which is not not a surprising description, but also not surprising that it is given all these these question marks.

Speaker 4

I mean, harder question. What do you think needs to change, for the m and a market to rebound? I mean, is it is it tariffs going away, or is it just for example, just for the or is it tariff certainty? Or is it is it the uncertainty that's causing the the land cluster, market, or is it the existence of these potential because of these trade barriers at all that's creating more of the problem there, do think?

Speaker 2

It's a great question, Robert. My view is that it's the uncertainty. I think it is a more uncertain world today. And people are aware of that with uncertainty spreads rise, right? Prices go down as we saw in the public markets.

Speaker 2

And until we have a little more stability and it's ultimately, I think we will. I don't think tariffs have to go away. It's just stability and then a new level playing field. And then I do think M and A will come back. The long term fundamentals for M and A are quite strong.

Speaker 2

The current uncertain environment, obviously, has put a major dent in that market activity. But having said that, I'll also say in the lower middle market, we expect continued activity just at lower levels than even the lackluster levels. But there is activity. There's add on activity. There's plenty of companies that really aren't very impacted by tariffs.

Speaker 2

And so we expect to continue to be active, maybe not at robust levels, but we do expect to continue to be active as we move forward. And there is a chance that it becomes a pretty interesting investment environment as well, meaning from a higher spread or higher opportunity perspective. But that hasn't occurred yet, but there is that chance. In previous periods of high volatility, that is what has occurred. And so we are prepared for that if it does.

Speaker 4

Got it. Got it. Thank you for that that color. I mean, if I got one more on the yeah. Congrats on being being, you know, proactive and and, you know, dealing with the the next not dealing with.

Speaker 4

That's the question. Right? Your next year's maturity, you've effectively sort of prefunded. I mean, do you think, you know, are you do you think you need to do more adjustments to your finance and structure ahead of of of, of the maturities next year? Because you obviously have two.

Speaker 4

Or or do you think what you've done currently is is is, you know, proactive and enough that that everything, you know, a year and eighteen months from now is dealable deal position to be dealt with already? Or is there more steps you need to take? But obviously, you backed it early. And good timing on that.

Speaker 2

Sure. Sure. Great question. What I would say is I think we've created some flexibility with the capital raises. That was the $100,000,000 offering Shelby spoke about.

Speaker 2

Obviously, ATM program as well raised about $20,000,000 And it created some real flexibility for the near and medium term. Longer term, do we need to refinance unsecured notes? I think the answer to that is yes. There's multiple ways to do that. And so and obviously, we feel like the offering that we did in March was well received out there.

Speaker 2

We feel great about that. So we're well positioned to deal with the markets and refinancings. But what we have done is created flexibility for the near and medium term, which was part of the intent. I don't know if, Shelby, you want to

Speaker 3

I would just echo that. I would say, ideally, I'd like to see us raise additional debt capital in the second half of this year. But if for some reason rates are particularly unattractive or markets are closed, we have other ways of dealing with the remaining $100,000,000 coming due in January of twenty twenty six.

Speaker 4

Got it. Thanks a lot.

Speaker 2

Absolutely. Good talking to you, Robert.

Operator

The next question comes from Mickey Schleien from Ladenburg. Please go ahead.

Speaker 5

Yes. Good morning, Ed and Shelby. Good morning, Mickey. Ed, you mentioned that M and A in the lower middle market, I guess, is sort of muddling along. But there's also just tremendous amount of capital being created to serve private credit.

Speaker 5

Meanwhile, we saw increased risk perception recently leading to stability and spreads. So do you think that spread stability can hold or will the effects of all that capital reappear and drive spreads even lower?

Speaker 2

It's a great question, Mickey. I think, yes, it is competitive. I think it's less competitive in the lower middle market. And what I see today, which is for A plus credits and businesses, spreads are probably pretty stable in an environment like this because there is pent up demand to deploy capital in high quality situations or very high quality situations and a real flight to quality. I also think if there are some scratches or scars on a portfolio company's armor or a potential portfolio company's armor, there may be opportunities for spread widening in a market like this.

Speaker 2

I don't think it'll be in a huge way by any stretch of imagination, but in more complex situations, if you will. So I think it'll remain competitive absent further negative changes. But at the same time, the M and A market is not dead. It's just down. And there are some companies that need to wait and there are some companies that don't.

Speaker 2

And so we are continuing to be active and busy, but just not at robust levels overall. Spreads, though, I don't expect big changes, but I think it's really asset dependent at the end of the day.

Speaker 5

Thanks for that explanation, Ed. Looking at your portfolio, the proportion of your portfolio companies rated one has increased now to 12%. Those are obviously your best performers, which is great. But it leads me to ask how much prepayment risk there is amongst those companies and how much call protection do you have in the investments you've made in those companies?

Speaker 2

Sure, sure. So prepayment risk continues to be something that I think everyone deals with and we clearly have to deal with. We had one mezzanine security that was prepaid last quarter. It should have been. It was very low levered and EBITDA had exponentially.

Speaker 2

And then we do have one company that's under contract to be sold. And so we expect that to happen. So that's both a debt and equity investment. And then we do have a couple of companies in our portfolio right now that we expect to be refinanced out of. So it's both M and A and refinancings, which is a typical quarter.

Speaker 2

And I think we've got a very high caliber portfolio, so that will continue. But it's something we've dealt with, as you know, for a long, long time and it's just part of the business, but it's clearly transpiring in today's market for sure.

Speaker 5

Okay. I understand. My last question relates to Quest software, which has been marked at pretty distressed levels for a couple of quarters. I realize this is a second lien, but I'm curious what the challenges are there? And do you expect that credit to remain on accrual?

Speaker 2

That's a great question, Mickey. Quest is a full suite kind of provider of cybersecurity solutions for both large and small companies and government entities. This is a as I think you're acutely aware, this is a much larger and probably the one real large business in our debt portfolio as we sit here today. We believe the long term outlook here is solid. We also think the company is over levered in dealing with the impact of higher interest rates for a longer period of time.

Speaker 2

The market is concerned about a potential LME event, liability management execution, has really hurt the valuations of the loans in the secondary market. But as some people know and I'm sure you know, there's been a recent uptick in LMEs in the BSL market, which is very unfortunate. However, there was a court ruling at the end of last year that really dampened the aggressiveness of such LME transaction. So that's a good and arguably necessary thing. But I would say is the risk profile of our investments is reflected in the valuation.

Speaker 2

So there's risk there, but we actually have a pretty strong belief system in the long term outlook of that business and of that investment. Hopefully, that's helpful.

Speaker 5

Yeah, that is. I appreciate that explanation. Those are all my questions this morning. I hope you have a good weekend.

Speaker 2

You too, Mickey. Good talking to you.

Operator

The next question comes from Sean Paul Adams from B Riley Securities. Please go ahead.

Speaker 4

Hey guys, good morning.

Speaker 3

Good morning.

Speaker 2

Hey, good morning, Sean Thank

Speaker 4

you. Most of my questions were already answered, but on Quantum IR, I know that it's nonaccrual last quarter, and you guys were last out first lien holders. But can you provide any sort of update on this investment? I also see that there was a continued write down in Vertex and Suite Connector.

Speaker 2

Yes. So Quantum IR, there really isn't a material update other than we continue to have all hands on deck on that situation. And as I mentioned, I think last call, there's been a series of pretty company specific and very negative events that impacted our debt and equity investments here. And what I'd say is the risk profile of our investments are reflected in the value of our debt and equity investments on our balance sheet. From the other two names you just mentioned, I don't think there's anything I think both companies are operating, obviously, and are doing decently well.

Speaker 2

But you have ups and downs from quarter to quarter and that really is what reflected in the valuation. Nothing that we see as a big change at the moment, but both companies are stable. And we and the management teams and the other capital providers to those situations are continuing to work in a good manner to try to move things forward. But no update other than just quarter to quarter type performance issues.

Speaker 4

Got it. Appreciate the color. Thank you.

Speaker 2

Absolutely. Good talking to you, Jean Paul.

Operator

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

Speaker 2

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

Operator

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

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Key Takeaways

  • In Q1 the portfolio grew to $1.2 billion on a fair value basis, up 6% from year-end 2024.
  • Adjusted net investment income was $18.5 million (or $0.54/share), while NAV rose to $19.39 per share.
  • The board declared and paid total dividends of $0.54 per share for Q1 and maintained that payout for Q2.
  • Originations totaled $115.6 million in Q1, with 94% in first-lien debt, co-investment in equity on most deals, and nonaccruals under 1% of fair value.
  • Liquidity remains robust at approximately $231.5 million, including $100 million of unsecured notes issued at a 6.75% coupon and a net debt-to-equity ratio of 0.7x.
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Earnings Conference Call
Fidus Investment Q1 2025
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