Fidus Investment Corp (FDUS) 2026 Q3 法說會逐字稿

Good day, and welcome to the Fidus third-quarter 2026 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Megan. And good morning, everyone, and thank you for joining us for Fidus Investment Corporation's third-quarter 2026 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, November 6, 2026. 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 third-quarter 2026 earnings conference call. Today's call will start with a review of our third quarter performance and our portfolio at quarter end, then share with you our outlook for the remainder of 2026. Shelby will cover the third quarter financial results and our liquidity position. After we have completed our prepared remarks, we will be happy to take your questions.

As expected, given the pent-up demand in the M&A markets, deal flow picked up in the third quarter relative to the first half of the year. A number of our portfolio companies continue to be active from an M&A perspective as part of their growth strategies. As our strategy calls for investing in high-quality, growth-oriented companies, typically the need for add-on acquisition capital is often part of the equation and an opportunity for Fidus. Overall, our debt portfolio is performing well, generating adjusted NII of $0.54 per share in the third quarter. It was driven by a 24% increase in interest income on larger average loan outstanding balances.

We continue to amply cover our base dividend. Net asset value was $774.4 million at quarter end, or $19.47 per share. For the fourth quarter of 2026, 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 December 29, 2026, to stockholders of record as of December 18, 2026.

Originations in the third quarter totaled $51.8 million and consisted primarily of first lien debt investments in existing portfolio companies in support of acquisitions. Proceeds from repayments and realizations were $52.4 million for the third quarter. With originations nearly equal to repayments, our portfolio at quarter end was stable, totaling $1.4 billion on a fair value basis, or 102.8% of cost, and consisting of $1.3 billion in debt investments and $159 million in equity investments.

At quarter end, first lien instruments accounted for 88% of our debt portfolio, and the weighted average loan-to-value is approximately 41%. In addition, our portfolio remains well-diversified and structured to produce both high levels of recurring interest income and capital gains from monetizing equity investments.

From a credit quality perspective, our portfolio remains healthy overall, reflecting the generally strong fundamentals of our underlying lower middle market portfolio companies. At quarter end, we did not have any debt investments on non-accrual.

Looking ahead to the remainder of 2026, we anticipate a higher level of investment activity from an origination and a repayment perspective due to a more active M&A market. Our pipeline consists of a number of quality opportunities sourced from both longstanding relationships with deal sponsors and our portfolio companies, many of which are active in M&A.

Since inception, we have focused on the lower middle market and employed the same investment strategy and strict underwriting criteria consistently, both of which has served us well. As a result, we continue to have a healthy portfolio, well-positioned to generate adjusted NII that covers our base dividend and the potential for capital gains from monetizing equity investments. By adhering to our investment strategy and underwriting disciplines, we remain committed to our long-term goals of capital preservation and of generating attractive risk-adjusted returns for our shareholders.

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 will review our third 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, Q2 2026.

Total investment income was $45.9 million for the three months ended September 30, a $2.4 million increase from Q2, primarily driven by a $2.2 million increase in interest income driven by increased average debt investments outstanding, a $0.9 million decrease in dividend income from equity investments, offset by a $0.9 million increase in fees, income primarily related to prepayment fees on the repayment in full of our debt investments in True Environmental.

Total expenses, including income tax provision, were $24.8 million for the third quarter, in line with Q2. Q3 expense variations included a $0.7 million increase in interest expense related to higher average debt balances outstanding and a higher average interest rate, a $0.2 million increase in base management fees given an increase in assets under management, a $0.4 million increase in income incentive fees offset by a $0.4 million decrease in the capital gains fee accrual, and a $1 million decrease in G&A expenses, primarily related to proxy solicitation costs for the Annual Shareholder Meeting held in Q2.

Net investment income, or NII, for the three months ended September 30 was $0.54 per share versus $0.49 per share in Q1. 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 Q3 versus $0.50 in Q2.

For the three months ended September 30, we recognized approximately $11 million of net realized losses on debt investments in Virtex Enterprises, which had previously been written down. We ended the quarter with $712.2 million of debt outstanding, comprised of $289.5 million of SBA debentures, $320 million of unsecured notes, $92.3 million outstanding on the line of credit, and $10.5 million of secured borrowings.

Our net debt-to-equity ratio as of September 30 was 0.9 times. Our statutory leverage, excluding exempt SBA debentures, was 0.5 times. The weighted average interest rate on our outstanding debt was 5.8% in line with Q2.

Now turning to portfolio statistics as of September 30. Our total investment portfolio had a fair value of $1.4 billion. Our average portfolio company investment on a cost basis was $14.1 million, which excludes investments in eight portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 85% of our portfolio companies, with an average fully diluted equity ownership of 2.1%.

Weighted average effective yield on debt investments was 12.6% as of September 30 versus 12.5% in Q2. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discounts and loan origination fees, but excluding investments on non-accrual, if any.

Now I would like to briefly discuss our available liquidity. In Q3, we issued accretive shares under our ATM program and raised $35.5 million of net proceeds. In September, we received SBA approval for the new increased SBA debenture fund limit of $250 million, giving our SBIC fund, FMC IV, incremental debt capacity of $75 million.

As of September 30, our liquidity and capital resources included cash of $32.7 million, $132.8 million of availability on our line of credit, and $83 million of available SBA debentures, resulting in total liquidity of approximately $248.5 million.

Now I will 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 will now turn the call over to Megan for Q&A. Megan?

(Operator Instructions) Robert Dodd, Raymond James.

A couple of questions. One housekeeping one before I go into the more detailed ones. The combined dividend and fee income, obviously, basically they offset this quarter, right? Dividend was obviously unusual, as recognized, and the fee was higher because of True Environmental. Is it fair to say that if you just treat this quarter as quasi-normal, or even arguably low, on a combined basis? Is that the right way to think about it?

It's not like I should take out fee income next quarter and obviously leave the dividend being unusual. I'm just trying to think about what the right combined number for that is kind of on a go-forward basis. The interest expense obviously is conceptually easier to model than dividends and fees.

I think what I would say is fee income was actually at a decent level because of True Environmental prepayment fee. So that was at the decent level of fees, but usually we have more activity that drives even more fees than that. But I think that's a fair number. And as you know, the dividend income is more episodic in nature. It's just tougher to predict. So I think not expecting that every quarter probably makes some sense.

Got it. Okay. You indicated you expect, obviously, activity to pick up in the fourth quarter, obviously in your end of the market, right? Is there any particular themes in that? Have people been waiting on the election? It seems unlikely because that only just happened. Or is it picking up in more HALO or asset-heavy industries, some of which you've occasionally done? Or is there any particular thing that's more in favor right now that fits, obviously, within your portfolio? Or is it just an overall? Or is it, in fact, a lot of software stuff getting done? Is there any incremental color on kind of what's driving that?

Sure. It's a great question, Robert. I think what happened in the market is things started to pick up mid-year from a deal flow perspective. We didn't have anything closed in Q3, really. We had one holdover from a commitment from Q2. But activity levels really increased. I think it was generally folks getting more comfortable with the war, the geopolitical situation, and the economy as we sit here today. So I think there was a malaise during Q1 and Q2 that started to lift a little bit, and people were more interested in doing things. So that's the primary driver.

I think the second driver is most of the activity is traditional economy-related. So call it, let's say, business services, maybe niche manufacturing, industrial services, those types of things. So that's the second theme, is what I would say, as opposed to software investing.

Got it. I appreciate that. Then one more. I will ask you to get your crystal ball out. Is this sort of a build to a year-end rush, which sometimes happens, or is this, do you think, a kind of a lifting swell and we are going to see more activity overall? Now, to your point, if people have gotten comfortable with geopolitics, which might change, and the economy, that 2027 will just be a more active year. Not crazy, but more active in general. Is that fair to say?

I think that is our hope, right? We are in a more uncertain environment today than we have been in quite a while, so it is kind of hard to predict. But our expectation would be if status quo is what happens, that there would be a lift, if you will, in M&A activity. I do not expect it to be overly robust. There are reasons that people do not want to do that, right? High interest rates and other things. But I think there will be plenty of activity, assuming status quo.

Got it. Sorry, I thought that was the last one. That is not. One final one, if I can. On pricing and spreads, et cetera, right? Obviously, you have got a fairly focused portfolio now. If activity does pick up or it stays, do you expect it to have material impact on spreads? Or you just think this is where they are going to stay? Or could they even go down, given the forward curve says base rates are going to go up? What do you think on pricing here?

Yeah, I think stability is probably where I would come out on that question. We are focused on very high-quality opportunities and high-quality businesses. There is competition, it is real. So that is how I would think about it, as opposed to widening spreads. I do not think so. Could there be a slight narrowing if rates do increase? That could happen, adjusting there for the, again, high-quality situations. You start drifting into riskier situations, that is a different game.

Mickey Schleien, Clear Street.

Robert stole my thunder on a lot of questions, but I have a couple more that I'd like to ask. Ed, your software exposure is pretty similar to the average in the BDC sector, so it's something you're familiar with. I don't want to beat a dead horse, but AI is advancing very quickly, and I'm interested in understanding, I think the market's interested in understanding, particularly in the lower middle market where you focus, how are your borrowers using AI to defend their businesses, their software businesses, from AI competition itself? What are they doing to avoid being replaced by AI, if you understand what I'm saying?

I do. I'll just maybe comment on just smaller software companies because we definitely have some of those. I know the concern is one of, is there more risk? I would say it's true that some, whether it's traditional or new economy, smaller companies can carry more risk, not always.

From our perspective, we know the lower middle market well. We've been investing in it for many years. Part of our historical success comes from finding niche market leaders, people that are leading from a market share and a product perspective with strong value propositions and great management teams. That's our focus.

These are some of the criteria that we use, right, to build out our software and tech-enabled services portfolio. We've got what we believe is a very strong and healthy overall software portfolio. The average revenue and EBITDA, kind of $43 million and $7 million. Margins are 15%. And we continue to see year-over-year growth in both metrics. So we feel good about the health of the portfolio.

What we're seeing from the portfolio companies on the software side is, they're working hard and spending money on continuing to improve their business. Obviously, that's encouraging. They're leveraging AI to improve products and create new features at the end of the day. They're also evaluating acquisitions and channel partnerships to generate more customers.

I think, what I would say is people are investing in AI. What your hope is, your portfolio companies are well-positioned today, and they can just improve that positioning. That's what most companies are trying to do.

I understand. Couple of balance sheet questions. You tapped the ATM, the common share ATM Program again during the quarter, despite limited net portfolio growth. How are you thinking about additional equity issuance versus perhaps carrying a little bit more leverage on the balance sheet, which potentially could help increase your ROE?

Sure. Great question. I think what we are trying to do is stick between that 0.9 to 1 and 1.1 to 1, really in the middle. Our goal is not to go too far over 1-to-1. We do care about our investment grade rating, and I think that is part of the equation as well.

I think what we are trying to maintain is a strong balance sheet position, a strong liquidity position, so we can take advantage of opportunities as they arise, as opposed to being fully levered and fully invested and maybe more limited from a capacity perspective. So there is a balance that you try to strike, and so that is the goal. Every quarter will be a little different, but I think we feel good about the approach.

So if I could, if I am understanding you correctly, if the market were really going to pick up, and the current environment, I think that is doubtful, but let us say it does, you are holding back some dry powder essentially and would be willing to run with a little bit more leverage if it makes economic sense?

Yes, to a limited degree. Back to investment grade matters and not getting too levered, as I think is a piece of our equation. But yes, to a limited degree.

Okay. And lastly, if I have the math correctly, the equity portfolio is marked almost 50% above cost. If I recall, you did a trade a few years ago where you sold several equity positions to capture those gains, which was really interesting. How would you characterize your appetite and the near-term pipeline for exiting some of those equity investments and generating some realized gains?

Sure. It's a great question, Mickey. I think, where we are, I think we are happy with the positioning of our equity portfolio. But as you just mentioned, the market is not in a robust state. So that will impact our realizations and the timing of those realizations. Some of those are pushed out from our perspective.

It's worth noting, just to make sure I get it out there, I think the repayments we expect to be relatively healthy this quarter, most likely less than originations, but relatively healthy. But it's really on the debt investment side, not on the equity side.

But we do see some potential realizations on the equity side in 2027. We've obviously had five or six realizations this year, so we would expect a continuation of those kind of activities, if you will, as opposed to robust levels at the moment. It's just the M&A market is not at that level at the moment.

Right. So that would be plain vanilla M&A activity next year, as opposed to you proactively trying to sell a chunk of that equity portfolio. Am I understanding you correctly?

You are. I do not think there was. Just to put a little meat on the bone, the reason we sold the equity was we were probably long in the tooth as a percentage of our portfolio. It was over 20%, equity was. It just made sense to try to get some liquidity and try to drive more recurring earnings at the end of the day. That was what drove that positioning, not the need for the capital gain. It was obviously very good investments overall that we sold, to be honest, but it was to drive a portfolio that had a higher level of recurring earnings.

(Operator Instructions) Christopher Nolan, Ladenburg Thalmann.

Just to rephrase a question that Mickey asked, for fourth quarter, should we expect some gains from this increased activity?

No. I do not know, and I tried to hit that at the end of that question in the Q&A session with Mickey. I think we are going to have a relatively high level of repayments, especially as compared to Q3, but it is really going to be on the debt investment side. On the equity realization side, I think it will be very limited here in Q4 based on what we know today.

Great. Also, back to the AI for a second. Business services is one of your larger industries. Does that include law firms and consulting firms, industries which basically really could get displaced by AI? What comprises business services, please?

It is a broad definition. It is a very broad definition. Law firms, we do not have. I mean, we obviously did something that is serving, kind of providing a service, a court service, and you saw that in the subsequent events. That is not something, quite frankly, that can be replaced by AI, if you will, that service. So we feel very good about that.

We do not have any investments in law firms. Consulting firms, we really do not have any straight-up consulting firms. So those are not the types of business services companies that we have.

Great. And final question is, for private equity sponsors, they seem to be under stress, and given the increase in interest rates and a highly competitive lower middle-market lending market, are you finding that you might be making sidecar equity investments alongside loans or not?

When you say sidecar, just to make sure I answer the question, you mean just a co-investment alongside a private equity group?

Exactly.

Yeah. That, I mean, what you just hit on is our strategy. So when Shelby said that we have equity investments in 85% of our portfolio companies, I mean, she's highlighting that we are co-investing with typically the ownership group, which is quite often, almost always, a private equity group. That is the strategy.

And what we like about the lower middle market is, yes, it is competitive, but it's very, very fragmented. Where we play is probably where 90% of the M&A activity in terms of number of deals take place. And so, it gives an opportunity to originate very high-quality situations and businesses, which is the goal, as opposed to a fewer number of companies and you got a bunch of people that can provide those solutions. It's a different equation from an origination perspective. So we like that aspect of it.

But yes, from an equity perspective, we co-invest with the sponsors. What we're looking for are companies where we like both the debt investment, we also like the equity investment, and that's our general goal, if you will.

I should have clarified it. Are you expecting to invest more equity than in the past for deals going forward? That's what I was trying to get to.

Okay. Great question. No, I would say the answer to that is no. Our general strategy has been up to 10% of our capital that we deploy over time is in the form of equity investments. On a cost basis, we're at a lower level than that. On a fair value basis, we're at a higher, we're at like 11% now. So I think about it up to 10% on a cost basis is how we think about it.

Paul Johnson, KBW.

In terms of the current vintage, it does not sound like necessarily you see any kind of meaningful improvement in spreads, but is there anything else, I guess, that you think that you are extracting more of today within covenants or any sort of documentation terms that you think is better in the current vintage?

It is a great question, Paul. If you think about it from a recent history perspective, I think we are. Covenants have been there for a while. When we started investing in first lien debt, having two maintenance covenants, and that really started in 2018, was part of the equation. That continues in the lower middle market. So we have what we believe is real maintenance covenants that gets us a seat at the table when there are things like acquisitions going on or things are not going as planned. So we like that aspect of it.

I think pricing, I do not see big changes there. Leverage, I think leverage is very much in check for obvious reasons. If not, maybe a little bit lower, but let us say it is stable as well. Loan-to-values are also very healthy. So we are in the 30% to 50% range on our originations, or expected originations in Q4. So 30% to 50%. And that has always been a focus of ours and something that we really try to stick to, if you will.

Last one is maybe a higher level question, but it's not historically been a part of your business that I'm aware of, but if there is some sort of scenario where M&A is taking longer to recover and exit timelines are being extended along with loan maturities, is there a scenario where these sponsors potentially create some sort of dividends? Not necessarily a full recap but start to draw on dividend income to create some sort of DPI for these businesses within those funds?

I would say to a limited degree, the answer to that is yes. What we have seen primarily, though, is high-quality businesses, sponsors like to hold onto. And so they do try to generate some form of dividend, and maybe they'll do that 2 times or 3 times, quite frankly. So we have seen that over the years, and we would expect that to continue at the end of the day.

There are times in where you have lower leverage situations where you can generate consistent dividends. But that's, I would say, the minority for sure, as opposed to the majority of those situations.

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

Thank you, Megan. Thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in late February 2027. Have a great day and a great weekend.

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