Good day and thank you for standing by. Welcome to the Fidus Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to, Jody Burfening. Please go ahead.

Thank you, Christie, and good morning everyone and thank you for joining us this morning for Fidus Investment Corporation's second quarter 2021 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 would 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, cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, August 06, 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 second quarter 2021 earnings conference call. I hope all of you, your families, friends and coworkers are staying healthy and well. I am going to open today’s call with a review of our second quarter performance and portfolio at quarter end, and then share with you our views on deal activity in the lower middle market with the second half of the year. Shelby will cover the second quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Overall, we are very pleased with our results and portfolio performance for the second quarter. Adjusted net investment income grew year-over-year and net asset value per share reached the record level. Originations and repayments were at high levels in line with our expectations for a busy quarter, from a deal flow perspective. We continue to focus on carefully selecting high quality companies in the lower middle market that are reasonably insulated from economic stresses associated with the pandemic. Companies that possess really resilient business models that generate strong levels of cash flow to service debt and positive long-term outlook. Our portfolio remains well-structured, positioned to produce those high levels of recurring income and the potential for equity upside in support of our capital preservation and income goals. Adjusted net investment income, which we define as net investment income, excluding any capital gain, incentive fee attributable to realize or unrealized gains and losses grew 15% versus last year to $10.4 million or $0.42 per share. At quarter end, net asset value had reached a record $429.4 million or $17. 57 per share, reflecting both solid operating performance and underlying portfolio value -- fair value appreciation. Fidus paid a quarterly dividend of $0.31…

Thank you, Ed. And good morning, everyone. I'll review our second quarter results in more detail and closes comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q1 2021. Total investment income was $21.8 million for the three months ended June 30, a $1.5 million decrease from Q1 primarily due to a $1.2 million decrease in interest income and a $1 million decrease in fee income offset by a $0.7 million increase in dividend income. Due to the Hilco restructuring and exchange of debt for equity, approximately $0.6 million of interest income was converted into dividend income. Yields were relatively stable in Q2 at 12.2% versus 12.3% in Q1. However as Ed mentioned yielding assets are lower than historical levels given the unusually high level of repayments over the last several quarters. We had one counting nuance in Q2 that I wanted to highlight regarding secured borrowings. As Ed mentioned, subsequent to the initial closing, we syndicated $13.5 million of our unitranche loan and incentive solutions to a [first out lender]. Given our continuing involvement in the loan, the $13.5 million that was assigned does not meet the gap accounting criteria for sales accounting treatment rather the $13.5 million is a secured borrowing, which simply means that it remains a security on our balance sheet included in total assets with an offsetting liability, a secured borrowing on the balance sheet. Similarly, the interest on the $13.5 million portion of the loan is included in both interest, income and interest expense. Given the total assets include secured borrowings the advisor granted a waiver to exclude the $13.5 million of secured borrowings from the base management fee, waiving approximately 29,000 fees in Q2. So as not to penalize shareholders for the accounting treatment. Total…

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 Christie for Q&A. Christie?

[Operator Instructions] Your first question comes from the line of Ryan Lynch with KBW.

Hey, good morning. Thanks for taking my questions, really nice quarter guys. The first question I had though was regarding, you guys had about $18 million that looks like unrealized gains in your equity portfolio. Can you just talk about, what were the drivers behind those? What were the investments concentrated in the field it wasn't spread across many and what went on in those companies?

Sure. Great question, Ryan. I think to be honest, it was a pretty broad-based appreciation if you will. About two thirds of our companies in our portfolio had EBITDA growth on an LTM basis this quarter. In fact, it was I think for the whole portfolio 7%. So that's just one LTM growth from Q1 to Q2. So it was driven largely, we do have to calibrate some, but it was really driven largely by the performance of the portfolio. Clearly there some names in there that had larger moves than others, but I would say it was a wholesale improvement in performance for the portfolio, is how I would think about it. We don’t tell.

Yeah. That's definitely helpful. Kind of on that point, you guys have had a ton of success in your equity portfolio and that equity co-investment strategy has been hugely successful. One of the, I guess the good problems to have though is that portfolio has grown to 20%, of your overall portfolio, which is the highest I believe it's ever done in your debt history. What is your outlook for potentially actually in some of these equity investments, obviously M&A taken up in the market and there's a lot of activities, it's all the things. The outlook would be good. I don't know how much of the equity investments you actually control the outcome of when they exit. And so any outlook or any comments there, and what is the potential from a high level of equity in those equity investments and also on that, would you guys ever consider, I think in the past, I think in February of 2020, you’ve all completed the sale of a portion of about 50% of about 40% equity investment. Would you guys consider doing that if, somebody’s equity investments don't kind of exit kind of in normal fashion?

Sure. Great question. Lot of discussion around this, obviously, as you might imagine, it’s amongst the management team as well as the board quite frankly. Yeah I think it's just as, I think you mentioned it's a nice problem to have, we like our equity portfolio overall, got a lot of obviously high-performing companies, but I'll just also just quality company that we have investments. And so, as I look at the market today, I think it's a, it's a very healthy one from an M&A perspective, and you'll probably only get even more active here in the fourth quarter. So we do have an expectation for additional realizations and quite frankly, on both the debt and the equity side of things, primarily driven by M&A and so. I think the outlook for realizing some of the portfolio is very positive from that perspective and we would expect that to continue and we are a lot of companies that are pretty right if you will for M&A or some type of transaction. So I view the outlook from a natural perspective to be very good. When I look at the companies we control, we control a couple of companies today and so and then we have impact on some other investments where, maybe the sponsors not in total control of the situation or if it would be a negotiation, if you will, amongst ourselves and other shareholders. And the good news is in those situations, the companies are in a good position to have a transaction, to the extent we want it to. Having said that I think we also like those investments, so the balance you got to strike. And I wouldn't say we're looking to go, sell those investments right now because there's a good outlook. But at the same time, so as I think about things, it’s for a little long inequity today, just on a percentage basis, but I would also tell you is there, we think the portfolio overall is a very healthy and good portfolio. So there's a balance you got to strike there because I don't want to sell too early or to create transactions that are aren't advisable. And then the last question you asked was where we consider selling a portfolio of equity investments like we did year and a half ago. I will tell you look at anything's on the table for sure. I would never take that, option off the table. But it's not something that we're working on right now. But it is a, it's clearly an option on the table down the road if we think that's the right answer at that point. So hopefully that's helpful a little long-winded, but those nice problem to have from our perspective, but yeah, it's where we are.

Yeah, that's helpful. And obviously, the position we're in today is obviously due to the incredible success in that portfolios had. So it's been a great win for shareholders. Just one last one if I can. We talked about a lot of BDCs over the last several days, lot of them are focused on more kind of the upper or core middle market. And so I wanted to get you all's opinion on where is the competition? Where is it? And from the competitive standpoint, in the lower middle market, as far as competition, as far as yield terms and structures, as you sit here today as kind of the market and to do their robots.

Sure, sure. Well, starting with the deal terms and structures, I mean, they continue to be the same for us. We go to market as a solution provider. Obviously, first lien debt is, it has been for really three to four years, a big priority of ours. And it's where we've been having some great success in the market. So structures are primarily there having said that we still are making second lien and sub-debt investments for the right situations for the superlative opportunities that we see. So I think, that's how we're approaching it. From a competition standpoint it's competitive out there? I would say it's more competitive than three years ago or five years ago, not crazy, more competitive, but more competitive. I think the good news is, leverage really hasn't gotten any more aggressive though than those time periods. And so leverage is, very much at free COVID levels if you will. An interest is about that, but we have seen pockets of kind of extra aggressiveness, if you will from certain participants that in the market that are, are more AUM players, if you will. And doing things that are unnatural. I don't think that's the norm, but we've seen it for sure. So it is aggressive out there, but in the lower middle market the terms are very, does the same. We still have covenants, so these aren't a good covenant light deals. The overall structures have not changed though. Obviously we're getting pushed from a variety of angles in a competitive environment like this. So hopefully that's helpful, but it's a robust market from all angles or active or healthy market, if you will.

Yeah. That's helpful. I really appreciate your time today. Those are all my questions and really nice quarter.

Thanks, Ryan. Nice talking with you.

You too.

Thank you. Your next question is from Matt Tjaden of Raymond James.

Hey, Ed and Shelby. Good morning, and appreciate you taking my questions. First one, for me, it looks like your November 2024 notes can be redeemed. In November of this year, for modeling purposes any color you can give about plans for the capital structure in the remainder of 2021.

Sure. Shelby, you want to take that?

Sure. I would say as I mentioned in my remarks we do have some repayments that have occurred in our second SBIC fund. And so in terms of kind of redeeming debt, we're probably going to redeem some SBA debt here in the third quarter. We'll opportunistically consider opportunities for redeeming our baby bonds. It's not something that's it's something that we have to do, given that we have a fair amount of time left before maturity, but we'll certainly consider opportunities as they present themselves. And we're also focused on getting a little more reinvested in the second half of this year and using up our liquidity and having some portion of callable bonds and our capital stack is kind of key to the long-term strategy.

Got it. Appreciate that. Second one for me on fee income note, can be rather volatile quarter to quarter, but maybe in 2022 is activity moderates, would you expect 2022 fee income to be below 2021 levels?

Matt I don't know that I would project that. I would say, we are -- as we are here today in the market and have been for a while where originator or first lien loans. To the extent that we stay in that category if you will, which we believe we will, there's no change in strategy from our perspective that we would expect originations to continue to be healthy in 2022. And thus there would be something income with that. We also think there'll be some repayments, but as you heard today, think one of the six investments we had repayment penalties. So not all of them have. I mean they all have them, but they expire usually after a couple of three years. So, but I would expect at least whether we match the same level of fees in 2022 versus 2021, I don't know, but I don't expect it to be dramatically lower at this point at all. I wouldn't, I don't foresee that.

Got it. That's it for me. I appreciate the time this morning.

Nice talking with you, Matt. Thank you.

Thank you. Your next question is from Bryce Rowe of Hovde Group.

Thanks. Hi Ed and Shelby, how are you?

Good. Hope you are.

I am, appreciate it. Let's see here. So Ed you talked about, you highlighted the second lien repayments and you've consistently highlighted the focus on one first lien over the last few years. I'm curious that the second lien repayments is that, is that kind of just a function of just natural course of company activity and or is that something that you all have kind of focused on trying to kind of push companies to repay those second lien investments so that you can rotate into a more first lien, heavy debt portfolio?

Sure. Great question. Interestingly it is really normal course to be honest in certain of those situations, those weren't investments that we want it to lose quite frankly. They were very good investments, but they had reached. I'd say four of the six repayments materialized due to just being able to access much lower cost to capital i.e. bank debt just due to their leverage profile. So they had performed very well and delevered and took advantage of the market opportunities ahead of them. And the other two quite frankly were acquisitions where the whole capital structures were kind of rejiggered if you will, or reconstructed. And we just weren't part of that solution. So it was a more normal course. We aren't looking to force in our way out of investments, but right now we don't, well I mean, we obviously had to get active with regard to Hilco. But those are more one off situations, not a normal course, trying to push second lien investments out because we're still making second lien investments today. It's just we're doing a very, I'd say opportunistic basis at the moment.

Okay. And then next question, maybe for Shelby. I appreciate the heads up on the $40 million of SBA pay downs, you guys have been able to draw newer SBA debentures here recently. Should we expect that trend to continue in terms of SBA debentures funding some of the new originations here in the near future?

The short answer is yes. Certainly the SBA has been a very good partner to fight us over the years and we have ample opportunity to continue to grow our third SBIC fund. But it's really just going to be a function of what do we have in the pipeline and does it need SBA eligibility criteria? So if it does, we would look to invest it out of the SBA and if it doesn't, we've got opportunities to invest from the parent BDC.

Okay. That's it for me. Appreciate your time.

Thank you, Bryce. Nice talking with you.

Thank you. Your next question is from Mickey Schleien of Ladenburg.

Good morning, Ed and Shelby. Just a couple of questions from me. Ed, the weighted average effective yield on the portfolio has been nicely steady at around 12% despite the higher first lien allocation at costs, which as you've noted, I think has more than doubled. What's been the approach you've been using in choosing first lien investments, which has allowed you to maintain that portfolio yield.

Sure. Great question. I think we've obviously touched on our first lien approach, which includes $1.1 one first lien investments, but it also includes first out last out structures where we partner with other financing providers to lower the cost of capital, quite frankly, for the borrower. So in those cases where we are maintaining yields, but investing in senior debt that maybe it's price lower, we are using a first out last out structure which we've talked about before. And that I'd say that is one of the way that we've been able to maintain our yields. Obviously we're still making second lien investments and sub-debt investments that keeping yields up as well. But that's probably the driver that I would highlight for you, but it's nothing different than what we've been doing over the last several years, there's just a larger percentage of the overall financing transactions that we're getting involved with them.

And in those deals, are you selling the first out pieces generally to commercial banking relationships and how many turns of leverage do you usually sell to them?

Sure. We have a network of commercial banking relationships that we work with and so we've created a network there and then in terms of the leverage, it really varies deal by deal. I mean there are times when maybe it's a four, four and a half times leveraged financing and the bank will take two and a half or three turns and there are times when they only take one turn and we'll take the other two or three turns, whatever. So it's a, it really is deal by deal and we put it together in conjunction with the bank, that we’ve ended up working with. So it's fluid from that perspective. It’s not a fixed formula.

Yeah. I understand. And in those transactions Ed, is there language in your documents that effectively give you a call option on whatever you've sold to them in the event, the borrower violates covenants or has other trouble that gives you control over the deal?

Sure. So generally speaking, I'd say the answer to that is yes. I mean, every document so different as well as you know but generally speaking the answer to that is yes.

Okay. And my last question, when you look at the vintage of the portfolio, how much remaining call protection would you say you have on your debt investments?

That's a tough one. I don't know that I can answer that with any accuracy. I would say we, as I sit here today, we've got a fair bit of call protection and that has to do with the fact that we've quite frankly exited a fair number of debt investments over the last 24 months. And obviously have a fair number of new portfolio companies in the portfolio as well. So typically when you, if that's the case we would have pretty good or healthy call protection on those newer deals, if you will. So I can't answer it any more accurately than that. Hopefully that's helpful, but that's what I was…

Ed just maybe as a last follow-up, do you usually structure sort of a three, two, one call protection sliding scale or is that too aggressive in this kind of market?

It's either a two year or three year. Those are the and it just depends in a second lien investment is first lien bigger and first lien, or those kinds of things, but it's two to three years.

That's it for me. Just congratulations on a good quarter and I hope you guys have a good weekend. Thank you.

Thanks, Mickey. Nice talking with you. Hope you have a good weekend as well.

Thank you. Your next question is from Sarkis Sherbetchyan of B. Riley

Good morning, Ed and Shelby. How are you guys?

Good. How are you, Sarkis?

Yeah. Good. Thanks. First question, just kind of circles around the leverage levels, I guess just remind us where you plan to take the business from a regulatory leverage perspective.

Sure. I think as we've talked about it in the past Sarkis. I think we have said one-to-one, we're obviously very comfortable with it. As you can lever your SBIC funds which are subsidiary two-to-one. We were an SBIC fund only when we went through the great session -- recession at two-to-one leverage. And we obviously went through that without any problems. So we're very comfortable with higher leverage. What we've said is we're -- one-to-one is a good number, especially given the complexion of our portfolio, which was weighted more towards junior debt. As you know that the portfolio is changing or the complexion of the portfolio is changing, just do more first lien originations and the exit of some of the second lien investments just from, just as an in natural course, should I say? So what I would say is we continue to do think one-to-one is a very good number, but we also would be comfortable in tracing that if we needed to, or if it makes sense, but it's just given the complexion of the portfolio. We like that number but we can go up a little bit or obviously we're much lower than one-to-one at the moment and we're comfortable with that as well. So hopefully that's helpful, but that's how we've kind of thought about it as, very comfortable around the one-to-one, but we have increased flexibility today due to the complexion of the portfolio changing.

Yeah, that's exactly right. I mean, it just seems like with the shift more and more towards first lien, it seems like your portfolios fairly under levered and can support more leverage that's exactly what I was getting to. And I guess in that light, kind of given the current environment, maybe if you can speak to the current pipeline and then potentially put a number on that and then just kind of frame your expectations for balancing originations versus repayments, clearly trying to understand when we get to that comfortable lever -- level of achieving that leverage.

Sure, sure. So I think it's, you got to start with the market, the market has been very active. It's really, since Q4 of last year I would say robust last year, this year healthy levels, but I'd also say it's expected to remain healthy to robust the rest of the year. So I think that's the, the industry backdrop, I would say. So from an originations perspective, and I've mentioned this first lien investments is a primary focus. We're opportunistically making second lien investments in sub debt investments as well. We think Q3 will be busy from an originations perspective, we make one new investment in Worldwide Express, as I mentioned in our prepared remarks. We've also made several add on, I'd say material add on investments to portfolio companies where we were supporting acquisitions. And then in addition, and what I'd say, it's busy today, so we are active and we're working on several opportunities, but obviously it's too early to tell what closes and what doesn't and whatnot. But it's busy right now. So in terms of repayments and as I mentioned in our subsequent events section, we announced the full debt realization of three investments. Hilco, Worldwide Express and CRS Worldwide. We reinvested in those companies or in that company. And at this point, what I'd say is, we’ve visibility into two transactions that we think will also result in the repayment of debt investments as well as the realization of equity investments. They haven't closed yet, so you never know, but so it’s going to continue to be an active quarter from a repayments perspective. So overall what I would say is we expect originations to maintain pace with repayments. But at the same time, I'm going to, I'll tell you, it's too early to tell, just given, we don't know what's going to close and what's not going to close. But that's, that's what we would say today. So hopefully that's helpful, but it's a, it's a busy time and expected what we're hearing is M&A bankers are as busy as they can be today. And so we're expecting a busy fall.

Yeah, yeah, certainly helpful. And just one more for me, if you can maybe speak to the current pricing environment real time, just kind of help us think about how the near origination yields are behaving. Is it to your standard? Is it -- are you losing some, are you gaining some any color there would be helpful?

Sure, sure. I mean, back to the previous conversation, competition is real out there for the right credits while we reduce price. So a little bit just the answer is yes, but having said that we've always been and will continue to be focused on risk adjusted returns. And so that's going to drive our decision-making, but yields are 12% to 12.2% for us on the debt portfolio. If they were to move, I would say it probably moved down a little bit just due to yield environment and competition. I don't expect any major swings there, but that's kind of the, where we are today and from a competitive standpoint. So until still yields start to move forward, I would expect that there may be some very modest drifting down, that makes sense.

Yeah. That's all for me. Thank you.

Okay. Thanks, Sarkis. Nice talking with you.

Thank you. We have no further questions at this time. I will turn the floor back over to Ed Ross for any additional or closing remarks.

Thank you, Christie. And thank you everyone for joining us this morning. We look forward to speaking with you on our third quarter call in early November. Have a great day and have a great weekend.

Thank you. This does conclude today's conference call. You may now disconnect.