Fidus Investment Corp (FDUS) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fidus Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) And please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Ms. Burfening. Thank you. Please go ahead, ma'am.

Thank you, Felicia, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's Fourth Quarter 2020 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. 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, February 26, 2021, 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.

Good morning, Jody, and good morning, everyone. Welcome to our fourth quarter 2020 earnings conference call. I hope all of you, your families, friends and co-workers are staying healthy and well.

I'm going to open today's call with commentary about the state of our portfolio at year-end. I'll then review fourth quarter highlights and share our views on deal activity in the lower middle market during the first quarter of 2021. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

When I look back at 2020 and recall the uncertainties we were facing toward the end of the first quarter due to the pandemic, we did not know at that time what the ultimate impact on our portfolio companies' business operations would be. We indicated that we believe the vast majority of our portfolio companies had resilient business models that could absorb economic stress. We believe that our strategy of selectively investing in companies with defensive characteristics, including strong free cash flow and positive long-term outlooks, would enable our portfolio to weather the storm even under unprecedented adverse business conditions. I'm pleased to report that our portfolio overall has, in fact, weathered the storm thus far and performed well in a difficult year, a testament to the success of our strategy.

Due to the great uncertainties we were all facing, we also made a deliberate decision to manage the business with great caution, focused on maintaining a strong liquidity position and preserving capital. This decision has served us well. After writing down the fair value of the portfolio in the first quarter to reflect negative impacts of the pandemic, over the remainder of the year, our portfolio continuously improved, a trend that continued in Q4 for a number of our portfolio companies, which resulted in pronounced appreciation in the fair value of our debt and equity investments.

NAV at year-end increased $21.2 million or 5.4% to $410.8 million from $389.6 million at the end of the third quarter. We ended the year with NAV per share of $16.81, just $0.04 shy of the level at the end of 2019.

Our assessment of portfolio risk based on company operations has also steadily improved since the first quarter. At that time, we considered a little more than 80% of the portfolio to be in the low-to-medium risk range. For the fourth quarter, our view is that 94% is in the low-to-medium risk range categories.

While many of the companies in our portfolio found ways to capitalize on competitor weaknesses and/or heightened end-market demand, they're overall finding ways to persevere in the current business environment and to remain well positioned for long-term success. We ended the year with one portfolio company on PIK nonaccrual status, and our nonaccrual balance is less than 1% of the portfolio on a fair value basis. As you may recall, the pandemic had particularly severe repercussions on Accent business in 2020. In Q4, we realized a loss of $36.1 million on Accent Food Services.

In terms of our portfolio construction and metrics, the fair market value of our investment portfolio as of December 31, 2020, was $742.9 million, equal to 108.1% of cost and compared to 99.9% of cost for the third quarter and 98.3% for the first quarter.

We ended the fourth quarter with 66 active portfolio companies and 3 companies that have sold their underlying operations. During 2020, we continued to increase the mix of first lien debt investments in the portfolio. And at year-end, first lien debt accounted for 25.2% of the portfolio on a fair value basis compared to 14.1% as of December 31, 2019.

The breakdown of the rest of the portfolio by investment type as of December 31 was as follows: second lien debt, 44.7%; subordinated debt, 14.5%; and equity investments, 15.6%. Our portfolio remains well-structured to remain healthy during difficult times. In addition, our equity investments continue to give us the opportunity to enhance returns over the long term.

Turning to our results for the fourth quarter. We reported adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses, of $10.7 million or $0.44 per share compared to $8.3 million or $0.34 per share for the same period last year, completing a year of sequential gains in adjusted NII.

On December 18, 2020, Fidus paid a regular quarterly dividend of $0.30 per share and a supplemental dividend of $0.04 per share to stockholders of record as of December 4. As you may recall, last April, our Board of Directors reduced the quarterly dividend from $0.39 per share to $0.30 per share. We made this very difficult decision to reflect the unprecedented uncertainties we were all facing at that time and the challenges some of our portfolio companies were continuing with due to the pandemic.

As a result of the steady improvement in the overall health of the portfolio since then, the Board has increased the base quarterly dividend by $0.01 to $0.31 per share and implemented a supplemental quarterly dividend for 2021, equal to 50% of the surplus in adjusted NII over the base dividend for the prior quarter. This formula results in a surplus of $0.14 per share from Q4, generating a first quarter supplemental dividend of $0.07 per share.

On February 9, 2021, the Board of Directors, therefore, declared a base quarterly dividend of $0.31 per share and a supplemental quarterly dividend of $0.07 per share. The base quarterly dividend and the supplemental cash dividend will be payable on March 26, 2021, to stockholders of record as of March 12.

Turning to originations and repayments. I mentioned on the third quarter call that M&A activity in the lower middle market was very high, particularly for companies that were not meaningfully impacted by the pandemic. As a result, and as anticipated, we had an extremely busy quarter in terms of investment activity.

In terms of originations, we invested $103.9 million in debt and equity securities during the quarter. Of the $103.9 million, $58.5 million or 56% was in first lien debt investments, and we invested in 7 new portfolio companies.

These were: $9.1 million in first lien debt, common equity and preferred equity in Applied Data Corporation, a leading provider of fresh item management technology for grocery and convenience stores.

$11 million in first lien debt and common equity in Comply365, LLC, a leading provider of SaaS enterprise content and compliance management solutions for the aviation and rail markets.

$21.5 million in first lien debt and common equity in Dataguise, Inc., a provider of automated data discovery, classification, protection and continuous monitoring software.

$8.2 million in first lien and revolving debt in Elements Brands, LLC, an e-commerce platform dedicated to developing consumer products brands.

$9.3 million in first lien debt and common equity in Hallmark Health Care Solutions, Inc., a software-as-a-service company, offering physician compensation and workforce management solutions for health systems, academic medical centers and physician groups.

$6.8 million in first lien debt and preferred equity in Healthfuse, LLC, a leading provider of revenue cycle vendor management solutions to hospitals and health systems.

And $13.5 million in second lien debt and common equity in Pool & Electrical Products, LLC, a leading regional distributor of pool equipment and supplies.

These investments in new portfolio companies share the defensive characteristics critical to the success of our strategy, resilient business models with recurring and reoccurring revenue streams and strong cash flow generation to service debt and positive outlooks for growth over the long term. They also operate in industries we know well. In these cases, in software or tech-enabled services, business services and health care services.

In addition to investing in new portfolio companies, we refinanced our $20 million second lien debt investment in Wheel Pros during Q4.

In terms of repayments and realizations, we received proceeds of $100.7 million.

In terms of exits, we exited our debt and equity investments in Pugh Lubricants, LLC, receiving payment in full of $26.6 million, including a prepayment penalty on our second lien debt investment and realized a gain of approximately $0.5 million on our equity investment. We exited our equity investment in Hoonuit, LLC, and realized a gain of approximately $0.2 million. We received payment in full of $4.3 million on our first lien debt in Global Plasma Solutions, Inc.

We exited our debt and equity investments in ControlScan, Inc. We received payment in full of $6.8 million on our subordinated debt investment and realized a gain of approximately $0.7 million on our equity investments. We exited our debt and equity investments in BCC Group Holdings, Inc. We received payment in full of $18.5 million, including a prepayment penalty on our subordinated debt investment and realized a nominal gain on our equity investment. And as I mentioned, we refinanced our $20 million second lien debt investment in Wheel Pros, Inc.

Subsequent to year-end, we closed $42 million of investments, including investments in 3 new portfolio companies, primarily in first lien debt and equity and received proceeds of $60.6 million in repayments and realizations.

Before I close with comments about the market, I wanted to highlight the exit of our debt and equity investments in FDS. FDS was acquired and combined with Calculex, Inc. and Argon Corporation under a new holding company, Spectra A&D Holdings. FDS is an avionics company that we controlled for the past several years. And this exit and the effective reinvestment of the proceeds into a now much larger and better positioned company was well-executed by our team.

Importantly, the new company is now very well positioned for the future. As a result of the transaction, we now have a first lien debt investment in a meaningfully -- meaningful minority equity investment alongside a private equity group that focuses on the aerospace and defense space. This is a nice transaction for FDUS and all stakeholders involved.

After the flurry of deal activity in the fourth quarter, M&A in the lower middle market has moderated a bit in the first quarter. Nonetheless, we have had some deal flow held over from 2020, and we believe we'll have a decent level of investments in the first quarter.

Repayments, on the other hand, will likely be slightly higher than the fourth quarter. While we are not discounting the uncertainties that are still with us around the strength and pace of the economic recovery, we have demonstrated success in redeploying proceeds into portfolio companies that provide us with a high level of current and recurring investment income and equity upsides. Our steadfast commitment to our underwriting disciplines, improving investment strategy will continue to serve us well as will our conservative approach to managing the business for the long term focused on generating attractive risk-adjusted returns and preserving capital in the interest of our shareholders.

I'll now turn the call over to Shelby for finance.

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 2020.

Total investment income was $23.6 million for the 3 months ended December 31, 2020, a $2.6 million increase from Q3, primarily due to a $1.6 million increase in fee income from new investments, amendments and prepayments; a $1.4 million increase in dividends offset by a $0.4 million net decrease in interest income, primarily related to timing of repayments versus new investments in Q4.

Total expenses, including tax provision, were $17.6 million for the fourth quarter, approximately $3.4 million higher than the prior quarter, primarily due to an increase in the capital gains incentive fee accrual of $1.9 million related to meaningful appreciation and the fair value of the portfolio; a $0.7 million excise tax accrued in Q4 related to the estimated spillover income of approximately $22 million or $0.90 per share; $0.3 million increase in professional fees related to audit and tax expenses; and a $0.2 million increase in the income incentive fee.

As of December 31, the weighted average interest rate on our outstanding debt was 4.7%. As of December 31, we had $454.3 million of debt outstanding comprised of $147 million of SBA debentures and $307.3 million of unsecured notes.

Our debt-to-equity ratio was 1.1x or 0.75x statutory leverage, excluding exempt SBA debentures. In late December, we successfully issued $125 million of unsecured notes at a 4.75% interest rate. The net proceeds were used to pay down the outstanding balance on the line of credit of $23 million at closing and to fully redeem our 5.875% $50 million public notes in January and to partially redeem $50 million of the total $69 million 6% notes in February.

Given the notice requirements, the bond redemptions occurred subsequent to year-end, so we ended the year with artificially higher leverage. In conjunction with the bond redemptions, we will realize a onetime loss on extinguishment of debt in Q1 2021 of approximately $1.9 million related to the unamortized deferred financing cost on the redeemed bonds. Taking into account the bond redemptions on -- our GAAP debt-to-equity ratio is now currently approximately 0.86x.

Net investment income, or NII, for the 3 months ended December 31, 2020, was $0.25 per share versus $0.28 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 $0.44 per share in Q4 versus $0.40 per share in Q3.

For the 3 months ended December 31, 2020, Fidus had approximately $33.9 million of net realized losses related to $36.1 million of realized losses on Accent Food Services, offset by $2.3 million of realized gains on the exits of several of our equity investments, primarily including ControlScan, $0.7 million gain; Pugh Lubricants, $0.5 million gain; and Hoonuit, $0.2 million gain.

Turning now to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $742.9 million. Our average portfolio company investment on a cost basis was $10.4 million at the end of the fourth quarter, which excludes investments in 3 portfolio companies that sold their operations and are in the process of winding down.

We have equity investments in approximately 88.4% of our portfolio companies with a weighted average fully diluted equity ownership of 5.8%. Weighted average effective yield on debt investments was 12.2% as of December 31. The weighted average yield is computed using the effective interest rates for debt investments at cost including accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual, if any.

Now I'd like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash of $124.3 million, $100 million of availability on our line of credit, resulting in total liquidity of approximately $224.3 million. Taking into account subsequent events, including the bond redemptions, we currently have approximately $143.1 million of liquidity and access to $161.5 million of additional SBA debentures under our third SBIC license, subject to SBA regulatory requirements and approval.

Now I'll turn the call back to Ed for concluding comments. Ed?

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 Felicia for Q&A. Felicia?

(Operator Instructions) And your first question comes from the line of Chris Kotowski of Oppenheimer.

Well, first of all, I guess I kind of wanted to -- I think your new dividend policy is kind of ingenious. I guess I've always kind of thought the -- having a -- $0.38 every single quarter or whatever the number is, is kind of artificial and that if the world doesn't hand you the exact same opportunities every single quarter over a long period of time. And so I'm wondering, are you thinking of making that move kind of permanent? And I'm kind of curious how that will then kind of interact with the buildup in spillover? I mean it just -- presumably your spillover income would grow a lot faster under this kind of thing rather than having a fixed dividend that targets what you expect to earn over the -- over time?

Sure, sure. Well, I appreciate your comments and your question, Chris. Let me give you just kind of a perspective on our thinking. And I think is -- all of us would agree, there's still a fair bit of uncertainty in the world today. And so from our perspective, being aggressive with dividend policy just doesn't seem like the right thing to do. We're thrilled with our performance and our overall outlook. We're also thrilled to be making a meaningfully supplemental distribution this quarter, which is a direct correlation to our performance. As we mentioned in our prepared remarks, we feel this approach is a good solution for at least 2021. It provides significant upside to the base dividend as we had in the last 2 quarters, while also providing what I'd say is a durable and flexible distribution model in these uncertain times.

So overall, we do like this approach, especially this year in an environment like this. And so said another way, we think operating with a reasonable level of caution makes a lot of sense at the moment. And to your specific question, will this be a permanent move? It could be. I think the base dividend is something we'll always look at. But the approach is a good one. And I wouldn't say we are the first to do this. But I do think it's a good one, especially in this environment, and we will consider kind of it on a permanent basis as well as we move forward. But this is a 2021 move at this point in time.

Regarding spillover, and it falls in line with the -- we're still operating in an environment that is highly -- has some uncertainty -- an elevated level of uncertainty. And so we are -- we like the idea of having a high spillover position like we do for rainy day reasons. And so at the moment, we're going to kind of keep spillover in the range that it is assuming it stays there, and I think it will. So that's -- we didn't factor into the dividend equation really because we like having this cushion at the moment. Hopefully, that answers your question.

Okay. Yes. That's helpful. And then secondly, I was wondering the -- it looks like your first lien debt positions are now roughly 30% of the portfolio. And as recently as 2 years ago, I think they were less than 10%. And again, can you talk a bit about what's driving that change? Is it -- does it impact kind of the mix of business and yields? And how much further does that go?

Sure, sure. It's a great question. We've talked about it a little bit on previous calls. But I'd say several years ago, we started -- a good 24 months ago, maybe 24 to 30 months ago, we started to focus more on first lien investments, in particular, on what I would call more lower middle market, smaller EBITDA businesses. We felt like that was the right approach where we could control the balance sheet a little bit more if things move around. And obviously, we're also doing a fair bit of tech-enabled and software lending today, and that's an approach that we're using with regard to that end market as well, at least, on the smaller EBITDA businesses, if you will.

So it's a conscious approach pre-COVID. I will tell you, post-COVID, when COVID showed up, we also made a very deliberate decision to say that junior capital investments here in the, at least, near term are going to be very few and far between and only kind of meet just superlative opportunities. And the -- so it just seemed like the right thing to do cosmetically as well as just structurally so we can really control those assets a little bit more.

So it's a conscious decision that we've made pre-COVID. It's continuing in this COVID environment. And quite frankly, we're finding a lot of success with our clients in providing first lien solutions. Now some of these solutions are first out, last out, where we'll bring in a bank to lower the rates, and obviously, give us a little bit higher yield. But these are transactions where we're originating the debt investment and we're deciding whether we want to do that, which is provide a first out, last out solution or we're just providing a first lien solution, and we're the only lender. So but it's -- we've been doing it for a while, and I would expect that trend to continue to some degree, for sure.

And are you still getting warrants to roughly the same degree that you did historically?

No. I mean I think warrants, we were getting quite a few warrants. I'd say 7 years ago, 9 years ago, 10 years ago, I think, in the -- where we're focused with private equity groups, and that's a large majority of what we're doing today. Getting warrants is going to be a pretty hairy situation, which we haven't been doing much of. So it's more direct equity investments alongside the private equity groups and then providing the debt solution as well. And that's been the approach for over the recent years, if you will.

Your next question comes from the line of Matt Tjaden of Raymond James.

Ed, maybe first one for you. Any commentary you can give on -- from the pipeline you're seeing, kind of where spreads and terms are sitting right now versus pre-COVID levels?

Sure. It's a great question, Matt. What I would say is the vantage, if you will, currently, but -- for Q4 and Q1 is very similar in nature. We're continuing to see yields be at reasonable levels, I'd say at least at COVID -- or pre-COVID, but probably a little bit better. Given what I just talked about, I think the structures, most of it's first lien debt for us, by definition, is probably a little bit better from our perspective, and then also the underlying assets that we're investing in.

So in this market, what we're seeing is a lot of interest in recurring revenue models, reoccurring revenue models, businesses that haven't been impacted greatly by COVID. And obviously, those underlying types of assets are things we have a high degree of interest in, and we like very much. So when I think about the vantage, if you will, that we're investing in today and we were in Q4, we think it's very attractive, is how I would talk about it.

I think deal flow -- and deal flow has moderated here in Q1. I think some of that's seasonality. I think there was a huge push and surge in Q4. But we are continuing to see pretty good opportunity in the lower middle market, but probably not at the same robust level we did in Q4.

Great. Maybe as a follow-up to that, just on the commentary -- pipeline sounds like it's a lot of COVID kind of resistant names, names that performed well in 2020. Are sponsors right now willing to invest in those more COVID affected names? Or is the play kind of to wait it out and see what happens?

I think there is -- I think they'll do both. I think that a large, large majority of what we're seeing and what people are gravitating towards is non -- businesses that have not been impacted materially by COVID. Having said that, there are others that are willing to look at businesses and say, look, we're getting closer to out of the woods here with regard to COVID, and yes, this company was impacted, but I can look at that adjustment and say that's real. No, it's not nearly as much of that going on, but there is some of that, for sure.

Your next question comes from the line of Ryan Lynch of KBW.

First one, just kind of following up from the investment philosophy standpoint. Obviously, in the past several years, you talked about late cycle investing as we were 10 years removed from the last downturn. And now it seems that we are coming out of a severe economic downturn, and obviously, there's still ways to go. But if the economic recovery continues as it's planned and -- in 2021, do you see yourself changing your investment philosophy of the way you guys approach the market at all, whether that's specific industries you guys are focusing on? Or where are you focusing -- where you guys are in the capital structure at all?

Sure. Great question. Generally speaking, I'd say no. Again, we've been approaching the market now for several years or 2-plus years. We always have been a solution provider. We always did senior debt. I would tell you there's an increased emphasis on that and also receptivity from clients. So that has gone very well from my perspective.

And so from a philosophy, we are a solution provider. We still are looking at very high-quality second lien investments and subordinated debt investments, but they're typically bigger companies and companies that we believe have great staying power and resilience and cash flows for that matter.

So those are -- that's the approach. It's been that way for a while. Towards the -- I think we really stayed away from investing in cyclicals over the last several years. We knew we were late cycle. We also started gravitating towards more first lien investments for that matter. And so I think the thought process, I think, will continue as it has recently. I think we're, again, a solution provider, but it will be a majority of senior debt type solutions with opportunistic, very high-quality junior debt investments. So I don't see a change from where we are today, quite frankly.

No, I understand. That's fair. It served you guys very well. You guys had some really nice gains this quarter and a few equity investments. I was wondering if you could give us a couple of lines just on what drove the meaningful gains in Pinnergy, Pfanstiehl and our Global Plasma Solutions?

Sure. So the Pinnergy -- I'd say, generally speaking, our portfolio, the growth was driven by performance. Having said that, we do need -- we have -- we calibrate, that's what you do from a valuation perspective. And so in certain instances, calibration is part of it, i.e., changing multiples if there's been big market movements, if outlooks change.

So a good example of that would be Pinnergy, which is in the energy services business; a, they're performing very well, beating budget; number two, they also -- the outlook has improved greatly. And if you look at the multiples in that business, they are much, much higher. So there's a combination there, but it's mostly performance.

When I think about Pfanstiehl, that's performance driven. Global Plasma, that's performance. So we do this on every investment, right? We look at -- and we -- do we need to calibrate or not, but those 3 -- and I don't know if you mentioned any others, but we're, as I just mentioned.

Okay. That's helpful. And then one last one maybe for Shelby. I saw fee income was high this quarter, that was obviously due to the strong activity that you guys had from the repayment side. But dividend income was also very high. I'm just wondering, was that most -- I know you guys get a little bit -- somewhat of that -- a little bit of that was recurring from a quarterly standpoint. But the $1.8 million this quarter, was that all mostly onetime? Or do you expect -- what is kind of your outlook for dividend income in Q1?

So I would characterize those as onetime. We had 2 very large dividends from 2 separate companies, one of which may be annually but, certainly, not in Q1; and then another just onetime big dividend that happened in Q4. So if something were to happen again, I'd characterize that as more sporadic. So I would definitely say Q4 was outsized in terms of run rate dividends, that will not be continuing.

The only -- one thing I would add to that, I agree with Shelby's comments completely, but there are -- these companies are performing very well and are positioned to do incremental dividends if they choose to. It's not in our -- it's their share decision, not our decision. But -- so there is the opportunity for more dividend distributions, but our comments are very -- exactly on. It's they're more sporadic in nature and onetime as opposed to reoccurring.

Okay. And then just one quick last one. The $1.9 million realized loss on extinguishment of debt. Just to be clear, that is going to run through the realized loss line item in Q1, not the interest in financing line item, correct?

That is correct.

Okay. Great. Well, Ed, Shelby, really nice quarter and the fourth quarter, and probably, more importantly, really nice 2020 to keep math basically stable throughout the year, given the economic environment and pandemic, is really a great accomplishment, so well done on that. And I appreciate the time today.

Thanks, Ryan. Appreciate it, and good talking to you.

And your next question comes from the line of Mickey Schleien of Ladenburg.

Ed and Shelby, I want to join Ryan in congratulating you on very good results in a very, very difficult time for everyone. Ed, Fidus experienced high portfolio turnover during the quarter. And you managed to offset high repayments with new originations, which is definitely not the case at all the BDCs that I cover. So I thought it'd be a good time for you to update us on your team's origination strategy. And what proportion of your deal flow is currently sponsored? And also, what share are you the lead non-bank lender?

Sure. Great question, Mickey. I think we've spent a lot of time over the last, I'd say, 5 years. We've always been a direct origination shop, but I think we spent a lot of time trying to get better at it and spending more time as a firm. We've also built, what I would say, a very deep team. I mean we have over 30 people here at Fidus. So for a fund our size, we've got a deep team and a lot of resources that can go out and directly originate and look at businesses and work with private equity groups and others.

We focus on 4 channels, but a large majority of what we do are sponsor-driven transactions and that represents, if you think about our portfolio today, it's, I think, from a sponsor or a sponsored, it's about 94% of the portfolio. So that has been the focus. And we obviously also gravitate towards sponsors and, quite frankly, opportunities that reside in industry end markets where we have expertise and experience. And so that's how we go about it. But I think that answers your question.

If there's -- and I guess the only other part, for Q4, we started working very hard on originations and trying to generate deal flow in Q3 when we started to see the market open up, started to have repayments, and we're like, okay, it's time to get back to work. We had really shut things down. We didn't know where it was going to go.

And so we were -- we spent the second half of the year working hard on originations. And what you're seeing is there was pent-up demand across the market, and obviously, that hit us on both sides. We had a fair number of repayments and realizations, and then we also generated the opportunity to invest in 7 new portfolio companies. So hopefully, that's helpful.

That is helpful, and I appreciate that explanation. Ed, I don't want to put salt in the wound, but I'm just curious, could you review the outcome for Accent Foods and in terms of the very low recovery? And do you think that's more an idiosyncratic event related to COVID? Or was there something in that process of underwriting that shed some light that you'd like to include in your future underwriting strategy?

Sure. It's a great question, Mickey. And there obviously is some salt in that wound to say the least. The -- what I would say, look, Accent was on nonaccrual prior to COVID-19. Having said that, it had a positive outlook and had real market presence. I mean revenues were growing. It just -- it needed to clean up its act, which is actually now done, and COVID created the opportunity for the company to do that and get their cost structure in line and whatnot.

But -- so the -- what happened was the shelter-in-place orders, and in particular, the work-from-home orders greatly impacted the business, right? The most of any company in our portfolio, no question. So our one nonaccrual got hit the hardest.

Secondly, I'll go -- say the senior debt providers and, quite frankly, the equity group were not helpful to put it mildly. And the senior group played loan-to-own ball and -- as opposed to work together, which most people do. And so given the status of the company at the second half of the year, which were very different, quite frankly, than the projections we were getting throughout the COVID period, we chose not to double down, and basically, take a controlling stake in the company. We have that opportunity. And it would have required a very large equity investment. And so it's very unfortunate all around, but that's how it played out.

And the company has a solid medium-term outlook and a good management team. And so we supported the company with actually a small equity investment in the new restructured company. So that's the situation. It's very unfortunate. But we didn't have -- other than owning the company and writing a very big equity check, we didn't have the cards given the -- given COVID. And that's what happened.

Okay. I understand. And is there anything in that process that is similar at EbLens? Or is that suffering from different issues?

It's the same issue, right? It's COVID. I mean EbLens is a retailer in the Northeast. It's focused on sneakers and apparel in urban areas. And we've known this business for a long, long time. It's a very good business. But it's been impacted by the pandemic and the shelter-in-place orders, and then the various things that come with that. And then they have had, obviously, vendor challenges as well as many people have in shipping and other things.

So it's a junior debt investment, and we obviously put it on nonaccrual in Q1. We took it off because of performance. And now it's back on PIK nonaccrual. And what I'd say is the valuation reflects the risk profile of the business. And having said that, they're continuing to weather the storm in an impressive way. But the situation, it's a tough environment and the situation is that, it's a tough environment. But they're doing the best they can and performing admirably at the moment. But there's risk in that. So that's where we are.

Okay. I understand. My last question is just to gauge your appetite on rotating out of Pfanstiehl. It's -- you've got an enormous unrealized gain there and potentially would, down the road, be interested in rotating into a new investment. Is that something we can expect this year? Or how are you looking at it, in general?

Sure. It's a great question. As you know, we did rotate half of our investment and rotated out of it in Q1 of last year. I -- Pfanstiehl is a manufacturer of high-purity sugars and active ingredients for injectable drugs and biologic drugs, mostly in the oncology arena. They're focused on the oncology arena. They also do participate in the vaccine arena to a certain degree. I'd say the company is performing very well, and the outlook is also strong. So the positives are outweighing any potential negatives of COVID-19 at this point in time. So valuation reflects the performance of the company.

And I would say, look, we're -- we like the outlook of the business. So it's not an easy question to answer. I think at some point, getting incremental liquidity makes some sense for Fidus. So I get the purpose of the question. And so -- but at the same time, we're not in control of the company and that would require discussions with the company or sale of the business, which -- neither of which are happening at this point. So -- but it's -- at some point, we should get some liquidity, but I don't think there's any rush. And again, we like the outlook of the business.

And your next question comes from the line of Sarkis Sherbetchyan of B. Riley Securities.

So you mentioned in the prepared remarks, you have deal flow that's held over from 2020 and you have a decent level of investment activity here in the first quarter. Do you expect investment originations to outpace repayments here in the first quarter?

Actually, if I were a betting person sitting here at the end of February, I'd say no. I think repayments at the moment look like they are going to exceed originations. But it's too early to make that statement affirmatively, but that's what it feels like to me. Good question and comments, yes.

And given kind of that activity, what you're seeing to date, maybe if you can describe your expectations on the cadence of deploying capital versus repayments as the year goes on, do you expect to be able to grow the portfolio?

Great question, Sarkis, especially in light of the fact that we had effectively a record repayment level for Fidus in Q4, and we may exceed that here in Q1, and probably will. Having said that, I think originations are still relatively solid and sound here in Q1. And then what my expectations are -- is the M&A environment will continue to be healthy, which will create opportunity for originations or more opportunity for originations. So I think that's a positive.

And I do, as I sit here and look at our portfolio today, we'll have incremental repayments in Q2, Q3 and Q4, but I don't think they'll be at the levels we've had in the last 2 quarters. I think that's going to subside. So the answer -- the answer to your question is I do think we will be able to grow the portfolio over the course of the year, timing of which, I don't know, but that's what I would expect at this point. I think there's -- the repayments have been at kind of surge levels, and I don't expect them to stay there.

Yes. No. And I guess as you see kind of the prepays come on into the -- to the books, essentially, from a fee income perspective, do you expect 2021 to probably be a richer year from kind of an incremental e-perspective, e-generation?

That's a really, really hard question to answer. What I would say, and I want to get Shelby's thoughts on this as well, is that I would expect fees, and assuming we don't have more events here in -- that change the dynamics of the market, I would expect fees to be at least as good as what we had in 2020, is what I would say. But Shelby, have you got any incremental thoughts for that?

No, I think that's right. And again, it's just hard to predict because at the end of the day, it will depend largely on the level of investment activity, and to the extent, we see some repayments that are still early enough in the life cycle of the loan that generate prepayment fees.

And I'll turn the call back over to Mr. Ed Ross for closing remarks.

Thank you, Felicia, 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 have a great weekend.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.