Fidus Investment Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: Our portfolio’s credit quality remains strong with nonaccrual loans under 1% of fair value, reflecting resilient business models and sound capital structures.
  • Positive Sentiment: Adjusted NII rose to $20.0 M vs. $18.4 M in Q2 2024 (both $0.57 per share), covering the base dividend with ample cushion.
  • Negative Sentiment: We realized a net loss of $7.6 M in Q2 driven by a $14.4 M loss on our Quantum IR exit, offset by $6.8 M in net realized gains.
  • Positive Sentiment: Net asset value per share increased to $19.57 at quarter-end from $19.39 as of 03/31/2025.
  • Neutral Sentiment: We ended Q2 with approximately $252.7 M in total liquidity (cash, credit facility and SBA debentures) to fund future investments.
AI Generated. May Contain Errors.
Earnings Conference Call
Fidus Investment Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good morning, everyone, and welcome to the Fidus Second Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's remarks, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jodi Burfening.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Cole, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's second quarter twenty twenty five earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer and Shelby Sharon, 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.

Speaker 1

The conference call today will contain forward looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, 08/08/2025, these statements are not guarantees of future performance. Time sensitive information may no longer be accurate at 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. Finus undertakes no obligation to update or revise any of these forward looking statements.

Speaker 1

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

Speaker 2

Good morning, Jody, and good morning, everyone. Welcome to our second quarter twenty twenty five 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 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.

Speaker 2

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 and A activity during the quarter, we converted lending opportunities from our pipeline of both new investment opportunities and add on investments. Relying on our longstanding relationships with deal sponsors, industry expertise, and investment experience in the lower middle market, we continue to carefully and purposefully select high quality company 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 $20,000,000 compared to $18,400,000 for Q2 twenty twenty four with fee income accounting for about half of the $1,600,000 increase.

Speaker 2

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 twelve months. Adjusted NII continues to cover the base dividend with plenty of cushion. For the second quarter, dividends paid totaled $0.54 per share consisting of the base dividend of 43¢ per share and a supplemental dividend of 11¢ per share. For the 2025, the board of directors declared a total dividend of 57¢ per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.14 per share, to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on 09/25/2025 to stockholders of record as of 09/18/2025. Net asset value grew slightly to $692,300,000 at quarter end compared to $677,900,000 as of 03/31/2025.

Speaker 2

On a per share basis, net asset value was $19.57 as of 06/30/2025 compared to $19.39 as of 03/31/2025. During the quarter, we realized a net loss of $7,600,000 which consisted of a $14,400,000 loss on the exit of our investment in Quantum IR Technologies that overshadowed $6,800,000 in net realized gains, including a $6,100,000 gain from the exit of Micronix Filtration. Originations, which totaled $94,500,000 for the second quarter,

Operator

were

Speaker 2

comprised of investments in four new portfolio companies as well as add on investments. All debt investments in the new portfolio companies were first lien debt securities and we continue to structure our debt investments with a high degree of equity cushion. Subsequent to quarter end, we invested $12,800,000 in first lien debt in preferred equity in one new portfolio company, Sono Toscano. In addition, we received $10,600,000 of proceeds related to the repayment of our first lien investment in Choice Technology Solutions. We also recognized a net realized gain of approximately $400,000 related to two equity distribution.

Speaker 2

Proceeds from repayments and realizations totaled $109,300,000 for the second quarter, primarily resulting from refinancing coupled with an M and A related exit. As expected, a portion of the proceeds this quarter came from prepayment, which resulted in $1,300,000 of prepayment fees. Our debt portfolio totaled $1,000,000,000 on a fair value basis as of 06/30/2025, 81% of which consisted of first lien investments and our equity portfolio stood at $138,800,000 or 12% of the total portfolio at quarter end for the total portfolio on a fair value basis of approximately $1,100,000,000 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 investment. The portfolio also remains healthy from a credit quality perspective with companies on nonaccrual remaining under 1% of the total portfolio on a fair value basis and 2.9% of the total portfolio on a cost basis.

Speaker 2

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 midyear 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 gains. Looking ahead to the 2025, with M and 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.

Speaker 2

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

Speaker 1

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 twenty twenty five. Total investment income was $40,000,000 for the three months ended June 30, a $3,500,000 increase from Q1 driven by a $2,100,000 increase in interest income, primarily due to an increase in assets under management driven by the net investment activity in Q1 and approximately $600,000 of accelerated unamortized fee amortization on debt repayments, a $1,800,000 increase in fee income given by a $1,300,000 increase in prepayment fees in Q2 related to our debt investments in four portfolio companies, offset by a $600,000 decrease in dividend income from equity investments. Total expenses including income tax provision were $21,300,000 for the second quarter, a 3,100,000 increase over Q1 driven primarily by a $1,000,000 increase in the capital gains incentive fee accrual, a $1,000,000 increase in interest expense related to higher average debt balances outstanding, including the $100,000,000 note issuance in March 2025, a $400,000 increase in base management and income incentive fees and a $400,000 increase in professional fees primarily related to proxy solicitation expenses for the twenty twenty five Annual Shareholder Meeting held in Q2.

Speaker 1

Net investment income or NII for the three months ended June 30 was $0.53 per share in line with Q1. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.57 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 $7,600,000 related to a $14,400,000 realized loss in our debt and equity investments in Quantum IR, offset by a realized gains of 6,100,000 related to the sale of Micronix Filtration Holdings. We ended Q2 with $540,300,000 of debt outstanding comprised of $2.00 $2,000,000 of SBA debentures, dollars $325,000,000 of unsecured notes and $13,300,000 of secured borrowings. Our net debt to equity ratio as of June 30 was 0.7 times.

Speaker 1

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 $1,100,000,000 Our average portfolio company investment on a cost basis was $12,300,000 which excludes investments in five portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 7.6% of our portfolio companies with average fully diluted equity ownership of 1.9%.

Speaker 1

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 $91,200,000 $140,000,000 of availability on our line of credit and $21,500,000 of available SBA debentures, resulting in total liquidity of approximately 252,700,000.0 Now I'll turn the call back to Ed for concluding comments.

Speaker 2

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'll now turn the call over to Cole for Q and A. Cole?

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer session. And our first question today will come from Robert Dodd from Raymond James. Please go ahead.

Speaker 3

Hi, guys. On the I mean, congrats on the quarter. Talking about the second half, I mean, you mentioned M and 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? It's less about just portfolio growth, but also do you think I mean, do you think that's going to result in elevated repayments?

Speaker 3

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

Speaker 2

Great question, Robert. It's been an interesting year, right? Yeah. Q1, there was decent deal flow, quality was hit or miss. Q2 activity levels dropped in April.

Speaker 2

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, you know, 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.

Speaker 2

Too early to really have a view of Q4. I don't have one. But again, activity has improved, which is obviously a very nice thing to see. From a repayment perspective, I think that can be episodic. Last quarter for us was a pretty high level of repayment.

Speaker 2

One large realization and then some other refinancings of high quality companies that we had, quite frankly, were probably under levered at that point. As we look at this quarter, we don't expect the same level of activity from a repayment 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.

Speaker 2

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

Speaker 3

Got it. Got it. Thank you. And then on competitive environment, is there anything changing there? I mean, I've, you know, it's obviously it's always competitive.

Speaker 3

Right? But, I mean, is anything changing on on, like, you know, banks being willing to do some things or or anybody moving down market or any real significant changes, particularly if you think you're to have any impact, right? Just any thoughts there?

Speaker 2

Another great question. And it's dynamic, right? We're in a market with, again,

Speaker 3

M and

Speaker 2

A is 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.

Speaker 2

It's clearly competitive and I think there's been an increase in competitive nest, if you will, over the past two years and clearly over the past five years. But that's okay from our perspective. Beyond that, real changes.

Speaker 3

Got it. Got it. Thank you. And then if I can kind of one ask if you want. The the I think there was one if I if I got it all written down right, was 1,300,000.0 in prepayment fees, not beyond even accelerated amortization or anything like that in Q2.

Speaker 3

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?

Speaker 2

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.

Speaker 1

No, I would agree with that. With the 1.3 in prepayment fees and about 600 in amortization, Q2 did have the benefit of about 1,900,000.0 in incremental income that's really more episodic that I would not necessarily expect to repeat in Q3 at those levels.

Speaker 3

Got it. Thank you.

Speaker 2

Absolutely. Good talking to you, Robert.

Operator

And our next question will come from Paul Johnson with KBW. Please go ahead.

Speaker 4

Yes, good morning guys. Thanks for taking my questions. Congrats on the quarter. I just wanted to ask about one more of the credits in the portfolio. Quest software looks like it was written up this quarter.

Speaker 4

Obviously a positive sign there. Any color you guys could provide on that company?

Speaker 2

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

Speaker 2

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 it's 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. Company's liquidity is more than ample now and there was no principal reduction to our second lien securities. That's not a normal outcome for such an LME.

Speaker 2

So we're aligned with the sponsors. 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 some helpful color.

Speaker 4

Yes, that's great color. I appreciate all that. And then just on the higher dividend sort of picking up this quarter, I was wondering kind of generally in the perspective of kind

Operator

of the

Speaker 4

sponsor, what I guess sort of the priority is kind of capital structure optimization, 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, make some dividend income, kind of offer a distribution versus loans that the company has grown and leveraged as you said.

Speaker 2

Sure, sure. No, there are clearly financial sponsors that are looking for ways to return capital to LP or even if it's not a sponsored back, if companies are in a position to do so, they're wanting to do it. We had, in Q1, we had some pretty 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.

Speaker 2

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.

Speaker 4

Thank you very much. Yep, very helpful. Thank you very much.

Speaker 2

Yep. Nice talking to you, Paul.

Operator

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.

Speaker 2

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 twenty twenty five. Have a great day and a great weekend.

Operator

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

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