Fidus Investment Corp (FDUS) 2025 Q2 法說會逐字稿

Good morning, everyone and welcome to the Fidus second-quarter 2025 earnings conference call.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the conference over to Jody Burfening. Please go ahead, ma'am.

Thank you, Cole, and good morning, everyone and thank you for joining us for Fidus Investment Corporation's second 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. The copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections, as of today, August 8, 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.

Good morning, Jody and good morning, everyone.

Welcome to our second quarter 2025 earnings conference call.

On today's call, I'll start with a review of our second quarter performance and our portfolio at quarter end and then share with you our outlook for the second half of 2025. Shelby will cover the second quarter financial results and our liquidity position.

After we have completed our prepared remarks, we'll be happy to take your questions. At a high level, Fidus' second quarter results demonstrate the health of our portfolio from a credit quality perspective, the durability of our investment strategy of generating attractive risk adjusted return and preserving capital over the long term and the strength of our competitive positioning in the fragmented lower middle market.

Although economic and tariff policy uncertainty dampened M&A activity during the quarter, we converted lending opportunities from our pipeline of both new investment opportunities and add-on investments. Relying on our long standing relationships with deal sponsors, industry expertise and investment experience in the lower middle market, we continue to carefully and purposefully select high quality companies that possess on the whole sustainable competitive advantages and resilient business models that generate cash flow to service debt and support growth.

Our debt portfolio continues to perform well, generating higher adjusted net investment income in a competitive environment. For the quarter, adjusted NII was $20 million compared to $18.4 million for Q2 2024, with fee income accounting for about half of the $1.6 million increase.

On a per share basis, adjusted NII was $0.57 for both periods, which takes into account the increase in average shares outstanding, resulting from the shares issued under our equity ATM program over the past 12 months.

Adjusted NII continues to cover the base dividend with plenty of cushions. For the second 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 third quarter of 2025, the Board of Directors declared a total dividend of $0.57 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.14 per share, equal to 100% of the surplus and adjusted NII over the base dividend from the prior quarter, which will be payable on September 25, 2025, to stockholders of record as of September 18, 2025.

Net asset value grew slightly to $692.3 million at quarter end compared to $677.9 million as of March 31, 2025. On a per share basis, net asset value is $19.57 as of June 30, 2025 compared to $19.39 as of March 31, 2025.

During the quarter, we realized a net loss of $7.6 million which consisted of a $14.4 million loss on the exit of our investment in Quantum IR Technologies that overshadowed $6.8 million in net realized gain, including a $6.1 million gain from the exit of Micronics Filtration.

Originations, which totaled $94.5 million for the second quarter, were comprised of investments in four new portfolio companies, as well as add-on investments. All debt investments in the new portfolio companies were first lean debt security, and we continue to structure our debt investments with a high degree of equity cushion.

Subsequent to the quarter end, we invested $12.8 million in first lien debt and preferred equity in one new portfolio company, Sogno Toscano. In addition, we received $10.6 million of proceeds related to the repayment of our first lien investment in Choice Technology Solutions.

We also recognized a net realized gain of approximately $0.4 million related to two equity distributions. Proceeds from repayments and realizations totaled $109.3 million for the second quarter, primarily resulting from refinancing coupled with an M&A-related exit.

As expected, a portion of the proceeds this quarter came from pre-payment, which resulted in $1.3 million of prepayment fees. Our debt portfolio totaled $1 billion on a fair value basis as of June 30, 2025, 81% of which consisted of first lien investments and our equity portfolio stood at $138.8 million or 12% of the total portfolio at quarter end for the total portfolio on a fair value basis of approximately $1.1 billion equal to 101.8% of cost.

Our portfolio remains well diversified and structured to produce both high levels of recurring income and the potential for capital gains from our equity investments. The portfolio also remains healthy from a credit quality perspective, with companies on non-accrual remaining under 1% of the total portfolio on a fair value basis and 2.9% of the total portfolio on a cost basis.

Within our portfolio are some high performers and some companies facing challenges that are idiosyncratic in nature, but overall, our portfolio companies are well diversified by industry, and they remain well positioned to service debt given their resilient business models and sound capital structures.

In summary, our investment strategy has and continues to work for us. At the mid-year point, our portfolio overall remains healthy from a credit quality perspective and is constructed to generate attractive risk adjusted returns over the long term.

Our debt portfolio continues to perform well, generating high levels of current and recurring income, and our equity portfolio continues to offer opportunities for us to realize capital gain.

Looking ahead to the second half of 2025 with M&A activity picking up, we have ample liquidity to build the portfolio through careful selection of high caliber companies with both defensive characteristics and positive outlooks for growth, while staying focused on our goal of growing net asset value over time.

Now I'll turn the call over to Shelby to provide some details on our financial and operating results.

Shelby?

Thank you, Ed, and good morning, everyone.

I'll review our second quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q1 2025. Total investment income was $40 million for the three months ended June 30, a $3.5 million increase from Q1 driven by a $2.1 million increase in interest income primarily due to an increase in assets under management, driven by the net investment activity in Q1 and approximately $0.6 million of accelerated unamortized fee amortization on debt repayments, a $1.8 million increase in fee income given by a $1.3 million increase in prepayment fees in Q2 related to our debt investments in four portfolio companies offset by a $0.6 million decrease in dividend income from equity investments.

Total expenses, including income tax provision were $21.3 million for the second quarter, a $3.1 million increase over Q1 driven primarily by a $1 million increase in the capital gains incentive fee accrual, a $1 million increase in interest expense related to higher average debt balances outstanding including the $100 million note issuance in March 2025, a $0.4 million increase in base management and income incentive fees, and a $0.4 million increase in professional fees primarily related to proxy solicitation expenses for the 2025 annual shareholder meeting held in Q2.

Net investment income or NII for the three months into June 30 was $0.53 per share, in line with Q1. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributed to unrealized gains and losses on investments, was $0.57 per share in Q2 versus $0.54 per share in Q1.

For the three months ended June 30, we recognized a net realized loss of $7.6 million related to a $14.4 million realized loss in our debt and equity investments in Quantum IR offset by a realized gains of $6.1 million related to the sale of Micronics Filtration Holdings.

We ended Q2 with $540.3 million of debt outstanding comprised of $202 million of SBA debentures, $325 million of unsecured notes, and $13.3 million of secured borrowings. Our net debt to equity ratio as of June 30 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 June 30.

Turning now to portfolio statistics as of June 30. Our total investment portfolio had fair value of $1.1 billion. Our average portfolio company investment on a cost basis was $12.3 million which excludes investments in five portfolio companies that sold their operations during the process of winding down.

We have equity investments in approximately 87.6% of our portfolio companies with average fully diluted equity ownership of 1.9%. Weighted average effective yield on debt investments was 13.1% as of June 30 versus 13.2% at the end of Q1.

The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any.

Now I'd like to briefly discuss our available liquidity. As of June 30, our liquidity and capital resources included cash of $91.2 million, $140 million of availability on our line of credit, and $21.5 million of available SBA debentures, resulting in total liquidity of approximately $252.7 million.

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

Thanks, Shelby.

As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support.

I now turn the call over to Cole for Q&A.

(Operator Instructions)

Robert Dodd, Raymond James.

On the -- I mean, congrats on the quarter. Talking about the second half, Ed, I mean, you mentioned M&A activity is picking up. I mean, just to what degree do you think that activity is picking up and going to kind of get close in the fourth quarter about just portfolio growth, but also do you think -- I mean, do you think that's going to result in elevated repayment?

Do you think that could result in elevated equity realizations? I mean, any thoughts on how all that kind of shakes out?

Great question, Robert. It's been an interesting year, right? Q1, there was decent deal flow. Quality was hit or miss. Q2 activity levels dropped in April. The uncertainty as a result of Liberation Day impacted overall activity in I'd say a meaningful manner.

And really deal flow, but deal flow continued to or started to improve in late Q2, and now it continues into Q3, which is a nice thing to see in the summer months. And so what we're seeing is an increase in deal flow. It's not robust, but it's definitely an increase in deal flow and kind of the expectation for a continuation of that theme.

So again, we're not at robust levels, but we do think that market activity is poised to be relatively decent here in the latter half of Q3 and then into Q4. Too early to really have a view of Q4. I don't have one, but again, market activity has improved, which is obviously a very nice thing to see.

From a repayments perspective, I think that can be episodic. The last quarter for us was a pretty high level of repayments. One large realization and then some other just refinancings of high quality companies that we had -- that were quite frankly were probably under levered at that point.

As we look at this quarter, we don't expect the same level of activity as from a repayments perspective. So we feel like we're pretty well poised to grow this quarter. By how much, clearly unknown. There's a lot of investment activity yet to happen, but we are working hard on both new investments and add-on activity with some of our portfolio companies.

So it's a much better environment than it was in Q2, but it's unclear how great -- how good it'll be in Q4, but it feels like there'll be an improvement, especially relative to Q2.

And then all competitive environment, if there's anything changing them. I mean, it's obviously it's always competitive, right, but I mean, is anything changing on like banks being willing to do some things or anybody moving down market or any real significant changes particularly if you think they're going to have any impact, right?

Just any thoughts there?

Another great question, and it's somewhat dynamic, right? We're in a market with again, at the end of the day, it's not robust. There has been a lot of capital raised, but most of that's really for the large middle market and the upper market if you will.

The large asset managers are obviously raising a fair bit of capital, but that we don't really see them very often. And so but it's competitive. Don't -- it's clearly competitive, and I think there's been an increase in competitiveness, if you will, over the past two years and clearly over the past five years, but that's okay from our perspective and -- but beyond that, no real changes.

And then if I can kind of one, ask you if you want the, I think there was one, if I got it all written down right, there was $1.3 million in pre-payment fees, not beyond even accelerated organization or anything like that in Q2. Sounds like if there's not a lot of repayments in Q3, we should expect essentially all of that to go away in the Q3 numbers, is that right?

That's probably a pretty good assumption. Shelby, I'd be interested in your thoughts obviously on this one, but that's probably a pretty good assumption.

No. I would agree with that. With the $1.3 million in pre-payment fees and about [600] in amortization. Q2 did have the benefit of about $1.9 million in incremental income. That's really more episodic that I would not necessarily expect to repeat in Q3 at those levels.

Paul Johnson, KBW.

Congrats on another good quarter. I just want to ask, one or two products in the portfolio Quest Software looks like it was written up just for, obviously a positive sign there. Any color you guys could provide on that company?

Sure. Great question. Quest is a full suite provider of cybersecurity solutions, really for large, and smaller companies and also government entities. It's a pretty large for us. It's some very large side of things from a company size perspective, sponsor backed.

We believe the long term outlook is very solid. Having said that, the company has been in an over leveraged position for a while and has been dealing with the impact of higher interest rates. And then last quarter, the company executed an LME transaction that has enhanced the risk profile of our second lien security.

The company's liquidity is more than ample now, and there was no principal reduction to our second lien security. So that's not a normal outcome for such an LME. So we're aligned with the sponsor as they're a very large holder in the second lien securities as well, so the risk profile of our investment is reflected in the valuation, but hopefully, that gives you helpful color.

And then just the higher dividends started picking up this for quarter, I was wondering kind of generally in the perspective of sponsor. What I guess sort of the priority is kind of capital structure optimization so you kind of refinancing existing debt over kind of return of capital, if there's enough pressure there to kind of take some capital out of the company, take some dividend on kind of offer distribution versus loans that, the company's grown and leveraged as you said.

Sure, no, it's -- there are clearly financial sponsors that are looking for ways to return capital, right, to LP, or even if it's not a sponsored backed, if they're -- companies are in position to do so, they're wanting to do it. In Q1, we had some pretty healthy dividend, a healthy dividend level and that was, I would argue episodic in nature.

And then in Q2, I think, it was also what I would consider an episodic driven dividend level but we had a company that got refinanced from a debt perspective. We're an equity owner. There was a pretty sizable distribution, and we've now returned all of our equity capital there and there was dividend income over and above that.

So it is -- clearly, I think it's part of the market today, but I don't know that I would say it's not something that maybe it's reoccurring in nature from time to time, but not recurring in nature, if you will, but it's nice to see at the same time.

(Operator Instructions)

And this will conclude our question-and-answer session.

I'd like to turn the conference back over to Ed Ross for any closing remarks.

Thank you, Cole, and thank you, everyone for joining us this morning. We look forward to speaking with you on our third quarter call in early November 2025.

Have a great day and a great weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.