Q4 2024 Fidus Investment Corp Earnings Call

Operator: Good day and welcome to the FIDUS fourth quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Good day and welcome to the Fittest fourth quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

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

I would now like to turn the conference over to Jody preventing.

Please go ahead.

Jody Burfening: Thank you, Michael, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's fourth quarter 2024 earnings conference. With me this morning are Ed Ross, Fidus Investment Corp. Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer.

Jody Preventing: Thank you Michael and good morning, everyone and thank you for joining us for fight US Investment Corporation fourth quarter 2024 earnings Conference call.

Jody Preventing: To me. This morning are Ed Ross <unk> Investment Corporation Chair.

Jody Preventing: Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer.

Jody Burfening: 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.

Jody Preventing: <unk> investment Corporation issued a press release yesterday afternoon with details of the company's quarterly financial results.

Jody Preventing: Copy of the press release is available on the Investor Relations page of the company's website at F. T U S Dot com.

Jody Burfening: I'd also like to call your attention to the customary Safe Harbor disclosure regarding form booking 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, March 7th, 2025, these statements are not guaranteed for 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.

Jody Preventing: I also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.

Jody Preventing: Conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cash flows the brightest investment Corporation.

Jody Preventing: Although management believes these statements are reasonable based on estimates assumptions and projections as of today March seven 2025.

Jody Preventing: But they are not guarantees of future performance.

and I'm going to be accurate at the time of any telephonic or webcast replay.

Jody Preventing: Actual results may differ materially as a result of risks and certainties and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission. By the center takes no obligation to update or revise any of these forward looking statements.

Jody Burfening: Fidus undertakes no obligation to update or revise any of these forward-looking statements.

Edward Ross: With that, I would now like to turn the call over to Ed. Good morning, Ed. Good morning, Jody. Good morning, everyone. Welcome to our fourth quarter 2024 earnings conference call. On today's call, I'll start with a review of our fourth quarter performance. in our portfolio at quarter end, and then share with you our outlook for 2025.

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

Good morning, Jody. Good morning, everyone.

Jody Preventing: Welcome to our fourth quarter, 2024 earnings conference call. On today's call I'll start with a review of our fourth quarter performance in our portfolio at quarter end and then share with your outlook for 2025.

Shelby Sherard: Shelby will cover the fourth quarter financial results and our liquidity position.

Jody Preventing: Shelby will cover the fourth quarter financial results in our liquidity position after we have completed our prepared remarks we'll be happy to take your questions.

Edward Ross: After we have completed our prepared remarks, we'll be happy to take your questions. As expected, the fourth quarter was active for both an investment and repayments and realizations perspective. Although deal flow remained at a reasonable, but not robust levels during the quarter. did all year, our sponsor relationships, investment experience, and industry knowledge in the fragmented lower-middle market differentiate Fidus. As a result, we continue to find opportunities to selectively invest in high-quality companies. durable and defensible business models that generate recurring revenue and cash flow and have strong prospects for growth. grew our portfolio by 14% to $1.1 billion on a fair value basis.

Thank you. Thank you.

Jody Preventing: As expected, the fourth quarter was active for both an investment and repayments in realization's perspective.

Jody Preventing: Although deal flow remained at a reasonable, but not robust levels during the quarter.

Jody Preventing: As it did all year, our sponsor relationships, investment experience, and industry knowledge in the fragmented lower-middle market, Differentiate Fidus.

Jody Preventing: As a result, we continue to find opportunities to selectively invest in high-quality companies with durable and defensive business models that generate recurring revenue and cash flow and have strong prospects for growth.

Jody Preventing: drew our portfolio by 14% to $1.1 billion on a fair value basis.

Edward Ross: as of December 31st, 2024, versus year-end 2023, adhering to our underwriting discipline and our strategy of co-investing in the equity of a large majority. of our portfolio company. which gives us the potential for enhanced returns. From our perspective, our strategy has clearly worked. Overall, our portfolio is healthy, our debt portfolio continues to perform well with sound credit quality, and our equity portfolio, which is quite strong and promising, continues to deliver net realized gains. The adjusted net investment income for the quarter was $18.4 million compared to $18.8 million last year. As our portfolio has grown over the past year, debt investments under management have increased.

Jody Preventing: as of December 31st, 2024, versus year-end 2023, adhering to our underwriting disciplines and our strategy of co-investing in the equity of a large majority of our portfolio companies.

which gives us the potential for enhanced returns.

Jody Preventing: From our perspective, our strategy is clearly working. Overall, our portfolio is healthy, our debt portfolio continues to perform well with sound credit quality, and our equity portfolio, which is quite strong and promising, continues to deliver net realized gains.

Jody Preventing: Adjusted net investment income for the quarter was $18.4 million, compared to $18.8 million last year.

Jody Preventing: as our portfolios have grown over the past year, that investment under management have increased.

Edward Ross: while yields have declined due in large part to a decline in... including the higher average share count from ATM issuances earlier in the year, adjusted NII on a per-share basis. $0.54 per share compared to $0.65 per share for the same period last year. That asset value was $655.7 million, or $19.33 per share at quarter end. In the fourth quarter, dividends totaled $0.61 per share, consisting of a base dividend of $0.43 per share. Supplemental Dividend of 18 cents.

Jody Preventing: While yields have declined, due in large part to a decline in sofa.

Jody Preventing: including the higher average share count from ATM issuances earlier in the year. Adjusted NII on a per share basis was $0.54 per share compared to $0.65 per share for the same period last year.

Jody Preventing: That asset value was $655.7 million or $19.33 per share at quarter end.

Edward Ross: In the first quarter of 2025, the Board of Directors declared a total dividend of $0.54 per share. The total share value 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 March 27, 2025, to stockholders of record as of March 20, 2025. Originations totaled $120.3 million for the fourth quarter, including $43.9 million in five new portfolio companies. The remaining $76.4 million was invested in existing portfolio companies. primarily facilitating add-on activities.

for the first quarter of 2025, the Board of Directors.

Jody Preventing: 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.

Jody Preventing: from the prior quarter, which will be payable on March 27, 2025 to stockholders of record as of March 20, 2025.

Jody Preventing: Originations totaled $120.3 million for the fourth quarter, including $43.9 million and five New Portfolio Company.

Jody Preventing: Remaining $76.4 million was invested in existing portfolio companies, primarily facilitating add-on acquisitions.

Edward Ross: That investment sold $115.5 million, nearly all of which were in first-line security. co-invested in the equity of the five new portfolio companies for a total of $3.8 million. Proceeds from repayments and realizations totaled $122.8 million for the fourth quarter, including the exit of four portfolio companies, one of which had been evaluating strategic alternatives.

Jody Preventing: That investment stole the $115.5 million, nearly all of which were in first-lane securities. We co-invested in the equity of the five new portfolio companies for a total of $3.8 million.

Jody Preventing: Proceeds from repayments and realizations totaled $122.8 million for the fourth quarter, including the accident of four portfolio companies, one of which had been evaluating strategic alternatives.

Edward Ross: subsequent to the quarter end. We invested $50.7 million in first lien debt and common equity in three new portfolios. In addition, two of our portfolio companies completed strategic reviews and were sold. In connection with the sale transactions, we realized a $3.2 million gain on the distribution of our preferred equity investment in health use, and an $8.2 million gain on the distribution of our equity investment.

Jody Preventing: Subsequent to the quarter end, we invested $50.7 million in first lean debt and common equity in three new portfolio companies.

Jody Preventing: In addition, two of our portfolio companies completed strategic reviews and were sold.

Jody Preventing: and connection with the sale transactions. We realized a $3.2 million gain on the distribution of our preferred equity investment in health use and an $8.2 million gain on the distribution of our equity investment.

Edward Ross: and Matt Sheeran Holdings, LLC. with originations equivalent to repayments this quarter. Our portfolio of debt and equity investments on a fair value basis as of December 31, 2024, was $1.1 billion, unchanged from September 30, 2024, and equal to 101.4% of cost. debt portfolio totaled $944.5 million. 76% of which consisted of first lien investments. Our equity portfolio was $146 million, or 13.4% of the total portfolio at quarter end. We ended the quarter with 87 active portfolio companies. a net addition of two from the third quarter. Our portfolio overall has remained sound from a credit quality perspective throughout the year, even as we have grown the debt portfolio by 13% on a fair value basis.

in that sure-and-holdings LLC.

Thank you.

with Originations Equivalent to Repayments This Quarter.

Jody Preventing: Our portfolio of debt and equity investments on a fair value basis as of December 31st, 2024, was $1.1 billion, unchanged from September 30th, 2024, and equal to 101.4% of cost.

Our debt portfolio totaled $944.5 million.

Jody Preventing: 76% of which consisted of first lean investments and our equity portfolio was $146 million or 13.4% of the total portfolio at quarter end.

We ended the quarter with 87 active portfolio companies.

in that edition of two from the third quarter.

Jody Preventing: Our portfolio overall has remained sound from a credit quality perspective throughout the year, easing even as we have grown the debt portfolio by 13% on a fair value basis.

Edward Ross: non-accruals on a fair value basis for the fourth quarter stayed under 1% of the portfolio. were 4.1% of the total portfolio on a cost. With an active portfolio, we do, of course, always have some companies that are experiencing or exceeding expectations and others that are underperforming. This quarter, for instance, we added quantum IR technologies to our non-accruals. wrote down its fair value to zero. This reflects the risk associated with a series of company-specific and very negative events. particularly given our position in the cap structure as holders of a last out first lien loan.

Jody Preventing: Nonacruals on a fair value basis for the fourth quarter state under 1% of the portfolio, and we're 4.1% of the total portfolio on a cost basis.

Jody Preventing: With an active portfolio, we do, of course, always have some companies that are experiencing or exceeding expectations and others that are underperforming.

Jody Preventing: This quarter, for instance, we added quantum IR technologies to our non-accruals and wrote down its fare value to zero.

Jody Preventing: This reflects the risk associated with the series of company-specific and very negative events, particularly given our position in the cap structure as holders of a last-dial personally loan.

Edward Ross: Questioning the impact of this write down with some appreciation and the fair value of our by maintaining a well-diversified portfolio and structuring it to hold both debt and equity in balance. we are able to sustain its overall health. to the long term. This illustrates the benefits of both our strategy and our long-term approach to managing the business.

Jody Preventing: Questioning the impact of this write down with some appreciation and the fair value of our equity portfolio.

Jody Preventing: by maintaining a well diversified portfolio, and structuring it to hold both debt and equity investments. We are able to sustain its overall health over the long term.

Jody Preventing: This illustrates the benefits of both our strategy and our long-term approach to managing the business.

Edward Ross: In summary, in 2024, we continued a five-year period of extremely high activity at Fidus. from both a new investment and realization perspective. and of building a portfolio with strong resiliency characteristics and with the opportunity for enhanced returns from capital gains. Looking back over the past five years, we are proud to report a 7.5% compound annual growth rate in the investment portfolio. $766.9 million to $1.1 billion. First lien debt investments represent 76% of our debt portfolio on a fair value basis versus 16.8% in 2019. Net asset value per share has grown from $16.85 per share at year end 2019.

Jody Preventing: In summary, in 2024 we continued a five-year period of extremely high activity at Fidus from both a new investment and realization perspective.

Jody Preventing: and a building a portfolio with strong resiliency characteristics and with the opportunity for enhanced returns from capital gains.

Jody Preventing: Looking back over the past five years, we are proud to report a 7.5% compound annual growth rate in the investment portfolio.

from $766.9 million to $1.1 billion.

Jody Preventing: Firstly, in debt investments represent 76% of our debt portfolio on a fair value basis versus 16.8% in 2019.

Jody Preventing: Net asset value per share has grown from $16.85 per share at year-end 2019 to $19.33 per share as of 2012-31-2024.

Edward Ross: to $19.33 per share as of 12-31-2021. Over the past five years, we have generated $208 million in net realized capital gains from equity investments. said differently, $155 million in net realized gains across the total portfolio, taking into account any losses on debt and equity investments. For 2025, we intend to continue to find ways to build our portfolio in a methodical and disciplined way. independent of the strength of the overall M&A market. We know the year will bring us both opportunities and inevitable headwinds, but we also know that our investment strategy is working. Sustaining a healthy portfolio that combines a debt portfolio that generates high levels of current and recurring income.

Jody Preventing: Over the past five years, we have generated $208 million in net realized capital gains from equity investments.

Jody Preventing: or set differently, 155 million in net realized gains across the total portfolio taken into account any losses on debt and equity investment.

Robert Dodd, Mickey Schleien, Paul Johnson, Erik Zwick, Fidus Investment Corp, Fidus Investment Corp, Fidus Investment Corp.

Jody Preventing: For 2025, we intend to continue to find ways to build our portfolio in a methodical and disciplined way, independent of the strength of the overall M&A market.

Jody Preventing: We know the year will bring us both opportunities and inevitable headwinds. We also know that our investment strategy is working, sustaining a healthy portfolio that combines a death portfolio that generates high levels of current and recurring income.

Edward Ross: with an equity portfolio that can answer a germ. We remain committed to this strategy and to our long-term goals of generating attractive risk-adjusted returns for our shareholders and growing our net asset value over time.

with an equity portfolio that can answer adjourns.

Jody Preventing: to remain committed to this strategy and to our long-term goals of generating attractive risk adjusted returns for our shareholders and growing our net asset value over time.

Shelby Sherard: Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Thank you, Ed, and good morning, everyone. I'll review our fourth quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q3 2024. Total investment income was $37.5 million for the three months into December 31st. A $0.9 million decrease from Q3, primarily driven by a $1.3 million decrease in dividend income from equity investments, offset by a $0.3 million increase in fee income given an increase in investment activity in Q4.

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

Shelby: Thank you, Ed, and good morning, everyone. I'll review our fourth-quarter results in more detail and close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q3 2024.

Shelby: Total investment income was 37.5 million for the three months ended December 31st.

Shelby: A .9 million decrease from Q3, primarily driven by a 1.3 million decrease in dividend income from equity investments, offset by a .3 million increase in fee income, given an increase in investment activity in Q4.

Shelby Sherard: Total expenses, including income tax provision, were $18.8 million for the fourth quarter, a $1.8 million higher than Q3, driven primarily by a $1.2 million increase in income tax provision related to the annual excise tax approval in Q4. a $0.8 million negative variance in capital gains fee accrual, a $0.3 million increase in interest expense due to higher average debt balances outstanding on the line of credit, and a $0.2 million increase in G&A expenses offset by a $0.6 million decrease in the income incentive fee. Net investment income, or NII, for the three months ended December 31 was $0.55 per share versus $0.64 per share in Q3.

Shelby: Total expenses including income tax provision were 18.8 million for the fourth quarter, a 1.8 million higher than Q3 driven primarily by a 1.2 million increase in income tax provision related to the annual excise tax accrual in Q4.

Shelby: A 0.8 million negative variance in capital gains fee accrual, a 0.3 million increase in interest expense due to higher average debt balances outstanding on the line of credit, and a 0.2 million increase in GNA expenses offset by a 0.6 million decrease in the income and sympathy.

Shelby: None Investment Incomer NIO for the three months ended December 31st with 55 cents per share versus 64 cents per share in Q3.

Shelby Sherard: Adjusted NII, which excludes any capital gains in Senate vehicle rules or reversals attributable to realized and unrealized gains and losses on investments, was $0.54 per share in Q4 versus $0.61 in Q3. For the three months ended December 31st, we recognized approximately 0.5 million of net realized losses related to a realized loss on the exit of our residual equity investments in BurgerFi International. We ended the quarter with $483.7 million of debt outstanding, comprised of $175 million of SBA debentures, $250 million of unsecured notes, $45 million outstanding on the line of credit, and $13.7 million of secured borrowings.

Shelby: Adjusted NII, which excludes any capital gains and senate vehicles are reversals, attributable to realized and unrealized gains and losses on investments, with 54 cents per share in Q4, versus 61 cents in Q3.

Shelby: For the three months ended December 31st, we recognized approximately 0.5 million of net realized losses related to a realized loss on the exit of our residual equity investments in Burger Fire International.

Robert Dodd, Mickey Schleien, David Schleien, David Schleien, David Schleien, David Schleien,

Shelby: We ended the quarter with 483.7 million of debt outstanding comprised of 175 million of SBA debentures, 250 million of unsecured notes, 45 million outstanding on the line of credit, and 13.7 million of secured borrowings. Our net debt to equity ratio as of December 31st was 8.7 times.

Shelby Sherard: Our net debt-to-equity ratio as of December 31 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 4.6% as of December 31. Turning now to portfolio statistics, as of December 31, our total investment portfolio had a fair value of $1.1 billion. Our average portfolio company investment on a cost basis was $12.4 million, which excludes investments in four portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 85.7% of our portfolio companies, with an average fully diluted equity ownership of 3.5%.

Our statutory leverage excluding exempt SBA debentures was 0.5 times.

Shelby: The weighted average interest rate on our outstanding debt was 4.6% as of December 31st.

Shelby: Turning now to Portfolio Statistics, as of December 31st, our total investment portfolio had a fair value of 1.1 billion. Our average portfolio company investment on a cost basis was 12.4 million, which excludes investments in four portfolio companies that sold their operations during the process of winding down.

Shelby: We have equity investments in approximately 85.7% of our portfolio companies with an average fully deluded equity ownership of 3.5%.

Shelby Sherard: Weighted average effective yield on debt investments was 13.3% as of December 31st, versus 13.8% at the end of Q3. 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 nonaccrual, if any.

Shelby: Weighted average effective yield on debt investments was 13.3% as of December 31st, versus 13.8% at the end of Q3. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issued discount and loan origination fees.

but excluding investments on not a cruel if any.

Shelby Sherard: Now I would like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash of $57.2 million, $95 million of availability on our line of credit, and $23.5 million of available SBA debentures, resulting in total liquidity of approximately $175.7 million.

Shelby: Now I'd like to briefly discuss our available liquidity. As of December 31st, our liquidity and capital resources included cash, a 57.2 million, 95 million of availability on our line of credit, and 23.5 million of available SBA debentures, resulting in total liquidity of approximately 175.7 million.

Shelby Sherard: Taking into account our subsequent events, we have approximately $129.1 million of liquidity.

Shelby: Taking into account our subsequent events, we have approximately 129.1 million of liquidity. Now I'll turn the call back to Ed for concluding comments.

Edward Ross: 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.

Ed: Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work.

Edward Ross: and our shareholders for their continued. I will now turn the call...

and our shareholders for their continued support.

Ed: I will now turn the call over to Michael for Q&A. Michael?

Operator: So over to Michael for Q&A. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Ed: We will now begin the question and answer session to ask a question you may press star than one on your telephone keypad.

Ed: If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to let's draw your question, please press star then two. At this time we will pause momentarily to assemble our roster.

Operator: At this time, we will pause momentarily to assemble our roster.

Mickey Schleien: The first question comes from Mickey Schleien with Ledenburg. Please go ahead. Yes, good morning, Ed and Shelby. Ed, LSEG reported that middle market loan spreads finally stabilized in the fourth quarter, and I'm assuming the same is true of the lower middle market. How do you see spreads evolving this year? And do you think there's any scope for them to actually widen as perceived risks increase?

Speaker Change: The first question comes from Mickey Schleien with Leidenberg. Please go ahead.

Mickey Schleien: is good morning and Shelby at LSEG reported that middle market loan spreads finally stabilize in the fourth quarter and I'm assuming the same is true of the lower middle market. How do you see spreads evolving this year and do you think there's any scope for them to actually widen as perceived risks increase?

Edward Ross: Great question, Mickey. You know, my expectation are for yields to stay pretty stable. I think they've been stable over the last three to six months. I don't see them getting a lot more aggressive. You know, clearly, I think there will be some opportunities of You know, to invest at maybe higher rates where there's perceived risk, and maybe those risks are more perceived than actual, those types of things, so there may be an opportunity there, but I think our kind of work I think our thoughts are that yields are probably here for a little while, just based on a fair bit of capital out there and there is an interest in trying to keep portfolios the same size or grow them.

Great question, Mickey.

Mickey Schleien: You know, my expectations are for yields to stay pretty stable. I think they've been stable over a lot, you know, probably three to six months. I don't see him getting a lot more aggressive.

Um, um,

Speaker Change: You know, clearly, I think there will be some opportunities of...

Speaker Change: You know, to invest it may be higher rates where there's perceived risk and maybe those risks are more perceived than actual those types of things, so there may be an opportunity there, but I think are kind of working.

Speaker Change: Thoughts are that yields are probably here for a little while, just based on a fair bit of capital out there, and there is an interest in trying to keep portfolio is the same size you're growing, so that's probably the thought process that we have.

Mickey Schleien: So that's probably the thought process that we have. Thanks for that, Ed.

[inaudible]

Thanks for that Ed.

Mickey Schleien: And I wanted to ask about Quantum. I realize you probably cannot say a whole lot, but I see that they're being sued by a bank. Is that bank, does that bank hold the first out piece? And do you have a call on the first out piece that you might exercise to take control of the situation and maybe recoup some value?

I wanted to ask about quantum, I realized.

Speaker Change: You probably cannot say a whole lot, but I see that they're being sued by a bank.

Speaker Change: Does that bank hold the first out piece? Do you have a call on the first out piece that you might exercise to take control of the situation and maybe recoup some value?

Edward Ross: It's a great question, Mickey. I think, you know, what I would say, you know, is, you know, the company is a provider of software-based thermal infrared data collection and predictive analytics to industrial processes. experienced a series of very specific, very negative events that have impacted, you know, obviously our valuation. I think we do have a call. We generally do. I can't guarantee that. We are very active in this situation. What I would say is we have all hands on deck in an effort to improve. The Outlook of Our Investment, and lastly, what I'd say is the current risk profile of our investments are reflected in the value of our debt and equity investments, but we're very active here.

Speaker Change: It's a great question, Mickey. I think, you know, you know, what I would say, you know, and just

Experience the series.

Speaker Change: very specific, very negative events that have impacted, you know, obviously our valuation.

Speaker Change: I think we do have a call. We generally do. I can't guarantee that where we are very active in this situation. What I would say is we have all hands on deck in an effort to improve.

Speaker Change: you know the outlook of our investment and you know and lastly what I'd say is the current risk profile of our investments are reflected in the value of our debt and equity investment. We are a very active here and

Edward Ross: I've got to just leave it at that.

and I think I've just leave it at that.

Speaker Change: Mickey. Okay, a couple of more sort of housekeeping questions.

Mickey Schleien: Okay, a couple of more sort of housekeeping questions.

Shelby Sherard: I'm a little confused about the health views and med insurance distributions. Are those going to be booked as income or as realized gains? And have those distributions already been accrued into the value of those investments? That's a great question.

Speaker Change: I'm a little confused about the health views and measurement distributions.

Speaker Change: Are those going to be booked as income or has realized gains? And have those distributions already been accrued into the value of those investments?

Shelby Sherard: Shelby, you want to take that one? Sure, but those are going to be booked as return of capital and realized gains. And the Q4 value anticipated those repayments here in Q1, so it should have been reflected in the fair value. The only distinction there, and why we're calling it a distribution, is we didn't actually sell our equity investment, it was the underlying operations of the business that was sold. And so while we still legally own the security and the company winds down, it'll continue to stay on our schedule of investments. But effectively the company was sold and we're recognizing a realized gain here in Q1.

Speaker Change: Sure, it's a great question, Shelby. You want to take that one, please?

Shelby: Sure, those are going to be both as a return of capital and realize gains and the Q4 value anticipated those repayments here in Q1, so it should have been reflected in the fair value. The only distinction there while we're calling it a distribution is we didn't actually sell our equity investment, it was the underlying operations of the business that was sold.

Shelby: and so while we still legally own the security and the company winds down it will continue to stay on our schedule of investments but effectively the company was sold and we are recognizing a realized gain here in Q1.

Mickey Schleien: Okay, thanks for that, Shelby.

Mickey Schleien: And lastly, Ed, your balance sheet is not very highly levered compared to most BDCs.

Edward Ross: Can you update us on where your target balance sheet leverage is in the current market environment? Sure. Great question. What we've said for quite a while, Mickey, is we're probably one-to-one leverage is the target leverage. We obviously are comfortable where we are as well and feel like we can perform at these levels. But as we move forward, you know, I think... I think debt will probably be a majority of our growth capital, but at the same time, we do have an ATM program that is in place, and I think we'll probably use that from time to time when we see that we're growing.

Speaker Change: Sure, great question. What we've said for quite a while, Mickey, is we're probably one to one leverage as the target leverage. We obviously are comfortable where we are as well until like we can perform at these levels, but as we move forward, I think

Speaker Change: I think, you know, that will probably be a majority of our growth capital, but at the same time.

Speaker Change: You know, we do have an ATM program that is in place and I think we'll probably use that from time to time when we see that we're growing. Last quarter we didn't see a lot of growth and we did not use the ATM program so.

Edward Ross: Last quarter, we didn't see a lot of growth, and we did not use the ATM program, so hopefully that gives you a sense. I will do things as we move forward, but I think, you know, it's a balanced approach is the way we like to talk about it and think about it, but, you know, clearly we have some room to add to the balance sheet for growth purposes. and that will be part of the equation for sure. I understand.

Speaker Change: Hopefully that gives you a sense of how we'll do things as we move forward. But I think it's a balanced approach. It's the way we like to talk about it and think about it. But clearly, we have some room to add debt to the balance sheet for growth purposes.

and that will be part of the equation for sure.

Speaker Change: I understand. That's it for me this morning. Thanks for taking my questions.

Mickey Schleien: That's it for me this morning. Thanks for taking my question. Absolutely. Good talking to you, Mickey. Likewise.

Absolutely. Good talk, and you're making. Likewise.

Sean Paul Adams: The next question comes from Sean Paul Adams with Raymond James, please go ahead. Hey, guys. Good morning. You guys. Good morning.

Speaker Change: The next question comes from Sean Paul Adams with Raymond James. Please go ahead.

Hey guys, good morning.

Good morning. Good morning.

Sean Paul Adams: You guys talked a little bit about last quarter about, you know, pockets of softness when you-in regards to like consumer discretionary purchases and, you know, how that would relate to manufacturing and industrial companies. And if you fast forward a little bit into the quarter, you know, we're, you know, now at a point where we're looking at, you know, potential impacts for tariffs and import goods.

Speaker Change: If you fast forward a little bit into the quarter, you know, we're

Speaker Change: Now at a point where we're looking at potential impacts for tariffs and import goods, what are your general thoughts when you're looking over the specific exposures within your portfolio over the next couple quarters?

Edward Ross: What are your general thoughts when you're looking over, you know, the specific exposures within your portfolio over the next couple quarters? Great question. Obviously, there's a lot there. I think, you know, from a pockets of softness, it's going back to last quarter and fourth quarter. Clearly, you know, broadly speaking, there are areas in the consumer market that are softer, right? The manufacturing industrial market has been softer. we talked about last quarter. But overall, it was a... solid economic quarter, it was a solid quarter for our portfolio companies. I think we had 38 of our, with regard to our debt investments, 38 of our portfolio companies grew EBITDA, 24 had declines, overall we had kind of a 2% growth.

Speaker Change: Great question. Obviously, there's a lot there. I think, you know, from a pockets of softness is going back to last quarter and fourth quarter. Clearly, you know, broadly speaking, there are areas in the consumer market that are softer, right? The manufacturing industrial market has been softer as I think we talked about last quarter. But overall, it was a...

Speaker Change: Solid Economic Quarter. It was a solid quarter for our portfolio companies. I think we had 38 of our, with regard to our debt investments, 38 of our portfolio companies, Gruey Bittier.

Speaker Change: 24 had declines, overall we had kind of a 2% growth and that's, you know, LTM quarter of a quarter, so that's healthy.

Edward Ross: healthy level of growth. So the portfolio is performing quite well from, you know, operating and Obviously, the last month or so has created some uncertainties that... A lot of folks weren't expecting, but, you know, and then you add tariffs and you, you know, add any, if you have exposure to government contracts, you know, what does that mean? You know, we have taken a look at our portfolio, you know, do we have some exposure, you know, where companies could be impacted at the margin level, if you will. You know, costs going up, how are you going to deal with them?

Speaker Change: Healthy level of growth. Portfolio is performing quite well from an operating and financial perspective.

Speaker Change: Obviously the last month or so has created some uncertainties that I'm

Speaker Change: You know, a lot of folks weren't expecting, but you know, and then you add tariffs and you you know, add any, if you have exposure to government contracts, you know, what does that mean?

Speaker Change: We have taken a look at our portfolio. Do we have some exposure where companies could be impacted at the margin level, if you will?

Speaker Change: You know, cost going up, how you going to deal with them? The answer to that is yes. But what I would say is it's not significant. It's nothing where we have alarm bells going off and we're highly concerned about it.

Edward Ross: The answer to that is yes, but what I would say is it's not significant. It's nothing where we have alarm bells going off. highly concerned about it. Our expectation is if costs go up, you know, most of our portfolio companies have pricing power and they will use that either in surcharges or actual pricing. Overall, you know, we We don't expect any huge changes in terms of portfolio performance. And I think our portfolio is very well-positioned to weather. Got it.

Speaker Change: Our expectation is, of course, to go up most of our portfolio companies have pricing power and they will use that, either in surcharge or actual price increases.

Overall, you know, we

Speaker Change: We don't expect any huge changes in terms of portfolio performance, and think our portfolio is very well positioned to weather the storm.

Speaker Change: Perfect. Thank you. And in regards to, I guess, you know, adding additional portfolios, sorry, additional companies to the portfolio, have you guys changed any methodology in the specific sectors that you're looking to add over the next couple quarters?

Sean Paul Adams: Perfect. Thank you.

Sean Paul Adams: And in regards to, I guess, you know, adding additional portfolios, sorry, additional companies to the portfolio, have you guys changed any methodology in the specific sectors that you're looking to add over the next couple quarters? Not with regard to specific sectors, no. I mean, you know what, we're typically focused on very, you know, high free cash flow businesses, pretty stable demand characteristics. Those would be exactly, you know, the types of... businesses that we're interested in investing in as we move forward as well.

Speaker Change: Um, not with guard due specific sectors now. I mean, you know what, we're typically focused on very, you know, high free cash flow businesses, pretty stable demand characteristics. Those would be exactly, you know, the types of...

Speaker Change: Businesses that were interested in investing in as we move forward as well.

Edward Ross: So, really no change for us. You know, I think we obviously leverage. We care about those levels. You know, our portfolio's average leverage is about four and a quarter for our core lower middle market. And, you know, that's, you know, a very reasonable level. There's a fair bit of cushion with that level. Interest coverage is high for the portfolio. We intend on trying to maintain both of those characteristics and probably most importantly is our enterprise value cushion. So, our loan to values. This quarter, we're at 41%, so almost 60% equity in the capital structures that we're currently invested in.

Speaker Change: So, really no change for us. You know, I think that we, uh...

Obviously, we leverage, we care about those levels, our portfolios.

Speaker Change: Average leverage is about four and a quarter for our core lower mental market.

Speaker Change: and that's a very reasonable level, there's a fair bit of cushion with that level, interest coverage is high for the portfolio, we intend on trying to maintain both those characteristics and probably most importantly is our enterprise value cushion, so our loan to values.

Speaker Change: I think this quarter we're 41%, so almost 60% equity in the capital structures that we're currently invested in. That same thought process is kind of what we intend to employ as we move forward.

Sean Paul Adams: That same thought process is kind of what we intend to employ as we move forward. Hopefully that's helpful. Got it. Very helpful. Thank you. I appreciate it.

Hopefully that's helpful. Got it.

Very helpful. Thank you, I appreciate it.

Operator: Absolutely, good talking to you. Again, if you have a question, please press star, then 1.

Speaker Change: Again, if you have a question, please press star then one.

Operator: Seeing no additional questions, this concludes our question and answer session.

Speaker Change: Seeing no additional questions, this concludes our question and answer session. I would like to turn the conference back over to Ed Ross for any additional closing remarks.

Edward Ross: I would like to turn the conference back over to Ed Ross for any additional closing remarks. Thank you, Michael, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call in early May. Have a great day and a great weekend.

For more information visit www.FEMA.gov

Speaker Change: Thank you, Michael, and thank you everyone for joining us this morning. We look forward to speaking with you on our first quarter call in early May.

Have a great day and a great weekend.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect.

Thank you.