Participants

Jody Burfening; Investor Relations; Alliance Advisors

Edward Ross; Chairman of the Board, Chief Executive Officer; Fidus Investment Corp

Shelby Sherard; Chief Financial Officer, Chief Compliance Officer, Corporate Secretary; Fidus Investment Corp

Mickey Schleien; Analyst; Ladenburg Thalmann & Co. Inc.

Sean-Paul Adams; Analyst; Raymond James

Presentation

Operator

Good day and welcome to the Fidus fourth quarter 2024 earnings conference call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Jody Burfening. Please go ahead.

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 Call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer.
Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call.
The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, March 7, 2025, these statements are not guarantees of future performance.
Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements.
With that, I would now like to turn the call over to Ed. Good morning, Ed.

Edward Ross

Good morning, Jody, and 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. Shelby will cover the fourth quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions.
As expected, the fourth quarter was active for both in investments and repayments and realizations perspective. Although deal flow remained at a reasonable but not robust levels during the quarter, as it 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 with durable and defensible business models that generate recurring revenue and cash flow and have strong prospects for growth.
We grew our portfolio by 14% to $1.1 billion on a fair value basis as of December 31, 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 companies, which gives us the potential for enhanced returns. 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.
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, while yields have declined due in large part to a decline in SOFR.
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. Net 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 and a supplemental dividend of $0.18 per share.
For the first quarter of 2025, the Board of Directors declared a total dividend of $0.54 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.11 per share, equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on 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 acquisitions. Debt investments totaled $115.5 million, nearly all of which were in first lien securities. We 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 have been evaluating strategic alternatives. Subsequent to the quarter end, we invested $50.7 million in first lien debt and common equity in three new portfolio companies.
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 Used and an $8.2 million gain on the distribution of our equity investment in Medsurant 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.
Our debt portfolio totaled $944.5 million, 76% of which consisted of first lien investments, and our equity portfolio was $146 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 quality perspective throughout the year, even as we have grown the debt portfolio by 13% on a fair value basis. Nonaccruals on a fair value basis for the fourth quarter stayed under 1% of the portfolio and were 4.1% of the total portfolio on a cost basis. With an active portfolio, we do, of course, always have some companies that are exceeding expectations and others that are underperforming.
This quarter, for instance, we added Quantum IR Technologies to our nonaccruals and 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.
Cushioning the impact of this write-down is some appreciation in the fair value of our equity portfolio. 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. This illustrates the benefits of both our strategy and our long-term approach to managing the business.
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 from $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 to $19.33 per share as of 12/31/2024. Over the five years, we have generated $208 million in net realized capital gains from equity investments or said differently, $155 million in net realized gains across the total portfolio, taking into account any losses on debt extinguishment.
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 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 with an equity portfolio to enhance returns.
We remain committed to this strategy and to our long-term goals of generating attractive risk-adjusted returns for our shareholders and great asset value over time. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Shelby Sherard

Thank you, Ed, and good morning, everyone. I'll review our fourth quarter results in more detail and close 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 ended December 31, 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.
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, 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. Adjusted NII, which excludes any capital gains in the accruals or reversals attributable to realized and unrealized gains and loss investments, was $0.54 per share in Q4 versus $0.61 in Q3.
For the three months ended December 31, 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.
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% at 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 or in 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%. Weighted average effective yield on debt investments was 13.3% as of December 31 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.
Now I'd 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. 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

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 Michael for Q&A. Michael?

Question and Answer Session

Operator

(Operator Instructions) Mickey Schleien, Ladenburg.

Mickey Schleien

Ed, LSEG reported that middle-market loan spreads finally stabilized in the fourth quarter, and I'm assuming the same is true in 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. My expectation are for yields to stay pretty stable. I think they've been stable over the last, call it, three to six months. I don't see them getting a lot more aggressive. Clearly, I think there will be some opportunities of -- 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. And so there may be an opportunity there. But I think our working thoughts are that yields are probably here for a little while just based on -- there's a fair bit of capital out there, and there is an interest in trying to keep portfolio is the same size or grow them. So that's probably the thought process that we have.

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?

Edward Ross

It's a great question, Mickey. I think -- what I would say and just -- is the company is a provider of software-based thermal, infrared, data collection and predictive analytics to industrial process companies and experienced a series of very specific, very negative events that have impacted, 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. We are -- but we're very active here, and I think I'll just leave it at that, Mickey.

Mickey Schleien

Okay. A couple of more housekeeping questions. I'm a little confused about the Health Use and Medsurant distribution. Are those going to be booked as income or as realized gains? And has -- have those distributions already been accrued into the value of those investments?

Edward Ross

It's a great question. Shelby, you want to take that one, please?

Shelby Sherard

Sure. 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 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 will continue to stay on our schedule of investments. But effectively, the company was sold, and we're recognizing a realized gain here in Q1.

Mickey Schleien

Okay. And lastly, Ed, your balance sheet is not very highly levered compared to most BDCs. Can you update us on where your target balance sheet leverage is in the current market environment?

Edward Ross

Sure. Great question. We're -- what we've said for quite a while, Mickey, is we're probably 1:1 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, 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. 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 of we'll do things as we move forward.
But I think it's a balanced approach is 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.

Operator

Sean-Paul Adams, Raymond James.

Sean-Paul Adams

You guys talked a little bit about last quarter about pockets of softness when you -- in regards to like consumer discretionary purchases and how that would relate to manufacturing and industrial companies. And if you fast forward a little bit into the quarter, we're 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 of quarters?

Edward Ross

Great question. Obviously, there's a lot there. I think from pockets of softness, just going back to last quarter and fourth quarter, clearly, 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 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 declined. Overall, we had a 2% growth, and that's LTM quarter over quarter. So it's a healthy level of growth. So the portfolio is performing quite well from a operating and financial perspective.
Obviously, the last month or so has created some uncertainties that a lot of folks weren't expecting. But -- and then you add tariffs and you had any -- if you have exposure to government contracts, what does that mean? And 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? Costs going up, how you're 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. Our expectation is if costs go up, most of our portfolio companies have pricing power, and they will use that either in surcharges or actual price increases.
But overall, we don't expect any huge changes in terms of portfolio performance. And I think our portfolio is very well positioned to weather the storm.

Sean-Paul Adams

Got it. Perfect. And in regards to, I guess, 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 of quarters?

Edward Ross

Not with regard to specific sectors, no. I mean we're typically focused on very high free cash flow businesses, pretty stable demand characteristics. They will be exactly the types of businesses that we're interested in investing in as we move forward as well. So really no change for us. I think we, obviously, leverage.
We care about those levels. Our portfolio's average leverage is about 4.25 for our core lower middle market. 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 of those characteristics. And probably most importantly is our enterprise value cushion. So our loan to values 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 what we intend to employ as we move forward. Hopefully, that's helpful.

Operator

(Operator Instructions) 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

Thank you, Michael. 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.

Operator

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