Fidus Investment - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 total investment income was $36.5M (+5.3% YoY) and net investment income (NII) was $18.2M ($0.53/share); adjusted NII was $18.5M ($0.54/share). NAV increased to $19.39 per share; the Board declared Q2 dividends totaling $0.54/share (base $0.43 + supplemental $0.11).
• Results were modestly ahead of consensus: EPS estimate $0.538* vs actual $0.54 (in line to slight beat), and revenue estimate $35.7M* vs actual $36.5M (+$0.8M, ~+2.2%). [Values retrieved from S&P Global]
• Portfolio originations were $115.6M (94% first-lien) across seven new companies; repayments/realizations were $57.3M, with $11.5M net realized gains contributing to NAV.
• Liquidity strengthened with March issuance of $100M 6.75% notes due 2030; ending cash was $67.5M and revolver availability $140M. Management plans to redeem $25M of 2026 notes in May and is open to additional debt issuance in 2H25.
• Credit quality remains healthy: nonaccruals were under 1% of fair value (3.9% of cost) and direct tariff exposure is just over 5% of the portfolio; management sees a volatile but potentially attractive investment environment in lower middle market private credit.

What Went Well and What Went Wrong

What Went Well

• Realizations and equity monetization: two equity exits (including Medsurant Holdings) drove $11.5M net realized gains, supporting NAV growth. “We also monetized two equity investments for a net realized gain of $11.5 million, or $0.33 per share, which contributed to the increase in NAV.”
• High-quality originations with first-lien focus: $111.6M debt originations, ~94% first lien; co-invested equity in six of seven new names, consistent with balanced income/capital gains strategy.
• Dividend sustainability and spillover: declared Q2 dividends of $0.54/share; estimated spillover income remained robust at $47.4M ($1.36/share).

What Went Wrong

• Yield pressure and fee income softness: weighted average effective yield on debt edged down to 13.2% (from 13.3% in Q4), and fee income declined QoQ amid lower prepayment/amendment activity.
• Higher interest and financing costs: weighted average debt cost rose to 4.8% with incremental debt; interest expense increased with higher balances and rates.
• Isolated credit challenges: management acknowledged distressed marks at Quest Software (over-levered, LME risk) and Quantum IR on nonaccrual with elevated risk; continued valuation write-downs in select names.

Transcript

Operator (participant)

Good day and welcome to the Fidus First Quarter 2025 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 from LHA. Please go ahead.

Jody Burfening (Alliance Advisor of Investor Relations)

Thank you, Danielle, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation's First Quarter 2025 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, May 9th, 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. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Ed Ross (Chairman and CEO)

Good morning, Jody, and good morning, everyone. Welcome to our First Quarter 2025 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. In the first quarter, deal activity in the lower middle market was at more modest levels, continuing the lackluster M&A trends we have been seeing.

Including a couple of 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, assets under management stood at approximately $1.2 billion on a fair value basis, up 6% compared to December 31st, 2024. Adjusted net investment income for the quarter was $18.5 million, compared to $18.1 million in the prior year, Q1, 2024.

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 12 months. Net asset value was $677.9 million, or $19.39 per share at quarter end, compared to $655.7 million, or $19.33 per share as of December 31st, 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 2025, 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 June 25th, 2025, to stockholders of record as of June 13th, 2025. Originations totaled $115.6 million for the first quarter, $102.1 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 $111.6 million. 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 million. Subsequent to quarter-end, we invested $5.8 million in First Lien debt and equity in another new portfolio company. Proceeds from repayments and realizations totaled $57.3 million for the first quarter, and we monetized equity investments in two portfolio companies, MedSurant Holdings and Healthviews, both of which had been evaluating strategic alternatives for a realized gain of $13.3 million. With $58.3 million in net originations for the first quarter, our total portfolio on a fair value basis increased to approximately $1.2 billion, equal to 100.5% of cost. Our debt portfolio totaled approximately $1 billion on a fair value basis, 79% of which consisted of First Lien investments, and our equity portfolio stood at $137.8 million, 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, the portfolio remains healthy, with companies on non-accrual 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.

While M&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 experienced historically in periods of high volatility. Should economic conditions deteriorate, our debt portfolio is well-positioned to weather a storm, as a vast majority of our portfolio companies possess resilient cashflow-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 on our financial and operating results. Shelby?

Shelby Sherard (CFO)

Thank you, Ed. 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, 2024. Total investment income was $36.5 million for the three months ended March 31st, a $1 million decrease from Q4 driven primarily by a $1.1 million decrease in interest income, primarily due to a decline in the weighted average yield on debt investments, a $0.9 million decrease in fee income given a decrease in prepayment and amendment fees in Q1, offset by a $1.1 million increase in dividend income from equity investments.

Total expenses, including income tax provision, were $18.3 million for the first quarter, $0.5 million less than Q4, driven primarily by a $1.8 million decrease in income tax provision related to the annual excise tax accrual in Q4, offset by a $0.5 million 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 $0.2 million increase in management and income incentive fees, and a $0.5 million increase in the capital gains incentive fee accrual. Net Investment Income, or NII, for the three months ended March 31st was $0.53 per share versus $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 31st, we recognized approximately $11.5 million of net realized gains, net of income tax, related to the sale of two portfolio companies. We recognized a gross realized gain of $10.1 million, not including the income tax provision, on our equity investments in MedSurant Holdings and a $3.2 million realized gain on our equity investment in Healthview. In March, we issued $100 million of five-year unsecured debt with a 0.75% coupon and received net proceeds of $96.9 million. We ended the quarter with $545.6 million of debt outstanding, comprised of $182 million of SBA Debentures, $350 million of unsecured notes, and $13.6 million of secured borrowings. Our net debt-to-equity ratio as of March 31st 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 31st.

Turning now to portfolio statistics, as of March 31st, our total investment portfolio had a fair value of $1.2 billion. Our average portfolio company investment on a cost basis was $12.5 million, which excludes investments in four portfolio companies that sold their operations and 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 13.2% as of March 3st 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 31st, our liquidity and capital resources included cash of $67.5 million, $140 million of availability on our line of credit, $24 million of available SBA Debentures, resulting in total liquidity of approximately $231.5 million. As reported, later this month, we plan to redeem $25 million of the notes due in January 2026. Now I will turn the call back to Ed for concluding comments.

Ed Ross (Chairman and CEO)

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 Danielle for Q&A. Danielle?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one 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 then two. The first question comes from Robert Dodd from Raymond James. Please go ahead.

Robert Dodd (Director)

Excuse me. Sorry. Ed, thank you for bringing up kind of like the environment, the tariff issue. I mean, all of the, as you said, like the vast majority, or it should be reasonably insulated. I mean, is that, have you done any first versus second-order effects? I mean, obviously, you do not have anybody based overseas, but any kind of you can give on like impacts from your companies that are importing goods versus where they are doing something in the U.S., but maybe their customers, some customers are overseas. I mean, any additional color you can give on what the potential exposure is there?

Ed Ross (Chairman and CEO)

Sure. Absolutely. Good morning, Robert.

Robert Dodd (Director)

Morning.

Ed Ross (Chairman and CEO)

I'm going to just talk about the 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. Just over 5% of our portfolio from a direct material exposure perspective, meaning exposure to China and exposure to otherhigh-tarifff entities, so pretty small percentage for sure. I think what's more important is really based on our assessments, and we've talked and assessed really the plans that our high and medium-risk companies have put in place.

What I would say is we feel like the situations are very manageable. The plans that are being put in place are prudent. 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. Hopefully that's helpful, but I think the percentage is quite low, and then more importantly is really how are our portfolio companies dealing with the issues in tariffs in particular, 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.

Robert Dodd (Director)

Great. Thank you for that additional comment. Kind of tied to the thing that you described, the M&A market as lackluster, which is not a surprising description, but also not surprising that it is given all these question marks. I mean, harder question. What do you think needs to change for the M&A market to rebound? I mean, is it tariffs going away, or is it just, for example, just for the record, or is it tariff certainty? Or is it the uncertainty that's causing the lackluster market, or is it the existence of these potential, because there are these trade barriers at all, that's creating more of the problem there, do you think?

Ed Ross (Chairman and CEO)

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. Until we have a little more stability, and 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. I do think M&A will come back. The long-term fundamentals for M&A are quite strong. The current uncertain environment obviously has put a major dent in that market activity. 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. There is activity. There's add-on activity. There are plenty of companies that really aren't very impacted by tariffs.

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. There is a chance that it becomes a pretty interesting investment environment as well, meaning from a higher spread or higher opportunity perspective. That has not occurred yet, but there is that chance. In previous periods of high volatility, that is what has occurred. We are prepared for that if it does.

Robert Dodd (Director)

Got it. Got it. Thank you for that comment. I mean, if I can add one more on that, congrats on being proactive and dealing with the next—well, not dealing with, that's the question, right? Your next year's maturity, you've effectively sort of pre-funded. I mean, do you think you need to do more adjustments to your financing structure ahead of the maturities next year? Because you obviously have two. Do you think what you've done currently is proactive and enough that everything a year and 18 months from now is dealable, positioned to be dealt with already, or are there more steps you need to take? Obviously, you've acted early. Good timing on that.

Ed Ross (Chairman and CEO)

Sure. Sure. Great question. You know what I would say is I think we've created some flexibility with the capital raises, and that was the $100 million offering Shelby spoke about. Obviously, ATM program as well raised about $20 million. 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 are multiple ways to do that. Obviously, we feel like the offering that we did in March was well-received out there. We feel great about that. We are well-positioned to deal with the markets and refinancings. What we have done is created flexibility for the near and medium term, which was part of the intent. I do not know if Shelby wanted to add anything to that.

Shelby Sherard (CFO)

No, 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. If for some reason rates are particularly unattractive or markets are closed, we have other ways of dealing with the remaining $100 million coming due in January of 2026.

Robert Dodd (Director)

Got it. Thanks a lot.

Ed Ross (Chairman and CEO)

Absolutely. Good talking to you, Robert.

Operator (participant)

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

Mickey Schleien (Managing Director)

Yes. Good morning, Ed and Shelby.

Ed Ross (Chairman and CEO)

Good morning, Mickey.

Mickey Schleien (Managing Director)

Ed, you mentioned that M&A in the lower middle market, I guess it's sort of muddling along, but there's also just a tremendous amount of capital being created to serve private credit. Meanwhile, we saw increased risk perception recently leading to stability in spreads. Do you think that spread stability can hold, or will the effects of all that capital reappear and drive spreads even lower?

Ed Ross (Chairman and CEO)

It's a great question, Mickey. I think, yes, it is competitive. I think it's less competitive in the lower middle market. 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 potential portfolio company's armor, there may be opportunities for spread widening in a market like this. I don't think it'll be in a huge way by any stretch of the imagination, but in more complex situations, if you will. I think it'll remain competitive absent further negative changes. At the same time, the M&A market is not dead.

It's just down, and there are some companies that need to wait, and there are some companies that do not. We are continuing to be active and busy, but just not at robust levels overall. Spreads, though, I do not expect big changes, but I think it is really asset-dependent at the end of the day.

Mickey Schleien (Managing Director)

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. 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?

Ed Ross (Chairman and CEO)

Sure. Sure. 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 grown exponentially. We do have one company that is under contract to be sold, and we expect that to happen. That is both a debt and equity investment. We do have a couple of companies in our portfolio right now that we expect to be refinanced out of. It is both M&A and refinancings, which is a typical quarter. I think we have a very high-caliber portfolio, so that will continue. It is something we have dealt with, as you know, for a long, long time, and it is just part of the business. It is clearly transpiring in today's market for sure.

Mickey Schleien (Managing Director)

Okay. All right. 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 non-accrual?

Ed Ross (Chairman and CEO)

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's over-levered and dealing with the impact of higher interest rates for a longer period of time. The market is concerned about a potential LME event, liability management execution, which has really hurt the valuations of the loans in the secondary market. 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 transactions. That is a good and arguably necessary thing. What I would say is the risk profile of our investments is reflected in the valuation. There is 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 is helpful.

Mickey Schleien (Managing Director)

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

Ed Ross (Chairman and CEO)

You too, Mickey. Good talking to you.

Operator (participant)

As a reminder, if you have a question, please press star one. The next question comes from Sean-Paul Adams from B. Riley Securities. Please go ahead.

Sean-Paul Adams (Research Analyst)

Hey, guys. Good morning.

Shelby Sherard (CFO)

Good morning.

Ed Ross (Chairman and CEO)

Hey. Good morning, Sean-Paul.

Sean-Paul Adams (Research Analyst)

Thank you. Most of my questions were already answered, but on Quantum IR, I know it was at its non-accrual last quarter, and you guys were last out First Lien holders. Can you provide any sort of update on this investment? I also see that there was a continued write-down in Vertex and [Sweded] Connector.

Ed Ross (Chairman and CEO)

Yes. Quantum IR, there really is not a material update other than we continue to have all hands-on deck on that situation. As I mentioned, I think last call, there has been a series of pretty company-specific and very negative events that impacted our debt and equity investments here. What I would say is the risk profile of our investments is reflected in the value of our debt and equity investments on our balance sheet. From the other two names you just mentioned, I do not think there is anything. I think both companies are operating, obviously, and are doing decently well. You have ups and downs from quarter to quarter, and that really is what is reflected in the valuation. Nothing that we see as a big change at the moment, but both companies are stable.

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. There is no update other than just quarter-to-quarter type performance issues.

Sean-Paul Adams (Research Analyst)

Got it. I appreciate the color. Thank you.

Ed Ross (Chairman and CEO)

Absolutely. Good talking to you, Sean Paul.

Operator (participant)

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

Ed Ross (Chairman and CEO)

Thank you, Danielle. Thank you, everyone, for joining us this morning. We look forward to speaking with you on our ssecond-quartercall in early August 2025. Have a great day and a great weekend.

Operator (participant)

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