Edward Ross; Chairman of the Board, Chief Executive Officer; Fidus Investment Corp
Robert Dodd; Analyst; Raymond James & Associates, Inc.
Bryce Rowe; Analyst; B. Riley Securities, Inc.
Good day and welcome to the Fidus third-quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead, ma'am.
Thank you, Chuck, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's third-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. Conference call today will contain forward-looking statements including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation.
Although management believes these statements are reasonable based on estimates assumptions and projections as of today, November 1, 2024, 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 the forward-looking statements.
With that, I would now like to turn the call over to Ed. Good morning, Ed.
Good morning, Jody, and good morning, everyone. Welcome to our third-quarter 2024 earnings conference call. On today's call, I'll start with a review of our third-quarter performance and our portfolio at quarter end, and then share with you our outlook for the remainder of 2024. Shelby will cover the third quarter financial results in our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions.
Despite lighter investment activity levels overall during the third quarter, we continue to build our portfolio through a combination of our strong relationships with deal sponsors; industry knowledge, and investment expertise in the lower middle market. Our debt portfolio, which has grown 20% over the past 12 months, generated record interest income of $33.7 million and continued to amply cover our base dividend.
Through our strategy of selectively investing in high caliber companies that generate high levels of free cash flow have defensive characteristics and positive long-term outlooks. We continue to build a healthy and high-performing portfolio.
At quarter end, net asset value stood at $658.8 million, 11.8% higher than net asset value of $589.5 million as of December 31, 2023. On a per share basis, that asset value was $19.42 per share at quarter end compared to $19.37 per share as of December 31, 2023.
Before I start my review of our performance for the quarter, I am pleased to report that the SBA has approved our new SBIC license effective on the last day of the quarter, September 30, 2024. Adjusted net investment income for the quarter grew 12.3% to $20.4 million compared to $18.2 million last year, primarily reflecting higher interest and fee income for the quarter, along with a onetime dividend income lift.
On a per share basis, adjusted net investment income was $0.61 per share compared to $0.68 per share for the same period last year, which also reflects the higher average share count from ATM issuances. Adjusted NII per share amply covered the base dividend of $0.43 per share for the quarter. In addition, we paid a $0.14 per share supplemental dividend for a total dividend to shareholders of $0.57 per share. For the fourth quarter of 2024, the Board of Directors declared dividends totaling $0.61 per share consisting of a base dividend of $0.43 per share and a supplemental dividend of $0.18 per share, equal to 100% of the surplus and adjusted NII over the base dividend from the prior quarter, which will be payable on December 27, 2024, to stockholders of record as of December 17, 2024.
Originations totaled $65.9 million for the third quarter, including $38.1 million in three new portfolio companies. The remaining $27.8 million in follow-on investment activity reflects a combination of portfolio company acquisitions and refinancings.
Debt investments totaled $62.7 million, the vast majority of which were in first-lien securities. Equity investments totaled $3.2 million, of which $2.3 million -- sorry, $3.2 million, of which $2.3 million was invested in three new portfolio companies. We continue to structure our debt investments with a high degree of equity cushion, which gives us a margin of safety, while our equity investments give us the potential for enhanced returns.
As expected, repayments were a larger portion of deal activity during the third quarter compared to the first half of the year. Proceeds from repayments and realizations totaled $50.8 million for the third quarter, including $8.6 million in proceeds from the monetization of equity investments. We've mentioned on previous calls this year that a number of our portfolio companies were evaluating strategic alternatives and that accounted for three of the exits this quarter.
Subsequent to quarter end, we invested $21.1 million in first-lien debt and common equity in two new portfolio companies and received $18.5 million in proceeds from the exit of debt investments in two portfolio companies.
Our portfolio stood at $1.1 billion on a fair value basis as of September 30, 2024, equal to 101.5% of cost and consisting of a debt portfolio totaling $959.4 million and an equity portfolio of $131.3 million at quarter end. With first-lien investments accounting for nearly all of debt originations for the third quarter, this security accounted for 73% of debt investments on a fair value basis at quarter end. We ended the quarter with 85 active portfolio companies. Overall, our portfolio remains healthy with sound credit quality and a well-positioned equity portfolio.
Furthermore, the portfolio is structured to absorb losses through net realized gains on equity investments over the long term. As an example, in the third quarter, we realized a loss on a debt investment that was nearly offset by a realized gain on an equity investment for a net realized loss of $0.4 million. For the first nine months of this year, we've realized net gains of $10.6 million, well in excess of any realized losses, extending our track record of generating enhanced returns.
Nonaccruals on a fair value basis were unchanged from the first and second quarters of the year and remained under 1% for the third quarter. For the remainder of the year, we expect a modest yearend uptick in M&A activity levels, in other words, another quarter of reasonable investment activity. Having said that, as some portfolio companies are still evaluating strategic alternatives, we do still expect to see a higher level of repayments in the last quarter of the year.
New originations may outpace repayments as they did in the third quarter. As we evaluate investment opportunities, we continue to apply our strict underwriting standards to investment selection, focusing on strong cash flow-generating businesses with resilient business models and positive long-term outlooks.
Our goal is to maintain a healthy portfolio that produces both high levels of current and recurring income and the potential for incremental returns from monetizing equity investments. Adhering to both our investment strategy and underwriting disciplines will enable us to stay focused on our long-term goals of generating attractive risk adjusted returns for our shareholders and growing net 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 third-quarter results in more detail and close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q2 2024.
Total investment income was $38.4 million for the three months ended September 30, a $2.7 million increase from Q2 primarily driven by a $1.2 million increase in fee income, of which approximately $0.8 million was an increase in prepayment fees. In addition, we had a $1 million increase in dividend income related to the distribution from one of our equity investments.
Total expenses including income tax provision were $17 million for the third quarter, $1.7 million lower than Q2 driven primarily by a $2.4 million decrease in the capital gains fee accrual, offset by $1.1 million increase in base management fees and $1.5 million increase in income incentive fees.
Net investment income or NII for the three months ended September 30, was $0.64 per share, versus $0.53 per share in Q2. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals, attributable to realized and unrealized gains and losses on investments, was $0.61 per share in Q3 versus $0.57 in Q2, which includes the increase in weighted average shares outstanding in Q3. For three months ended September 30, we recognized approximately $0.4 million of net realized losses primarily related to a $5.4 million realized loss on the exit of our debt investments in [Trelix], offset by a $5 million realized gain on the sale of our equity investment in Gurobi Optimization.
We ended the quarter with $479 million of debt outstanding comprised of $175 million of SBA debentures, $250 million of unsecured notes, $40 million outstanding on the line of credit, and $14 million of secured borrowings. Our debt to equity ratio as of September 30, was 0.7 times or 0.5 times statutory leverage, excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 4.6% as of September 30.
Now turning to portfolio statistics as of September 30. Our total investment portfolio had a fair value of $1.1 billion. Our average portfolio company investment on a cost basis was $12.6 million, which excludes investments in five portfolio companies that sold their operations are in the process of winding down. We have equity investments in approximately 83.3% of our portfolio companies with average fully diluted equity ownership of 3.6%.
Weighted average effective yield on debt investments was 13.8% as of September versus 14% at the end of Q2. 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. In Q3, we issued approximately 1.7 million shares at an average price of $20.01 per share, generating $14.1 million in net proceeds. As of September 30, our liquidity and capital resources included cash of $54.4 million and $100 million of availability on our line of credit, resulting in total liquidity of approximately $154.4 million.
Further, as Ed mentioned, the SBA has approved our request for a new SBIC license, giving us access to $175 million in additional SBA debentures subject to regulatory requirements and conditions.
Now I 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 Chuck for Q&A. Chuck?
Operator
(Operator Instructions) Robert Dodd, Raymond James.
Robert Dodd
Hi. I'm looking at the outlook, that's about Q4, right? I mean, you said -- you still gave some pretty good color on that, but are you seeing any increase in -- early stage? I mean, if you see a new deal approach today, it's not closing this year, obviously. So, well, probably not.
How's the early-stage indicators looking for '25? Because I mean, we've heard from several BDCs now. They're pushing their expectations from a strong end of the year to a strong 2025. Is that consistent with what you're seeing in early-stage opportunities or is that just too early to tell?
Edward Ross
Great question, Robert. I wish I knew the answer to that one in a definitive manner. What I would say, what we're seeing in the market today, be candid, quality continues to be hit or miss, Q3 deal flow has been decent, M&A activity from our perspective is still relatively lackluster in nature, but we are seeing your typical Q4 uptick this quarter. And then, obviously, competition is relatively robust as you well know.
So for us, we are seeing -- we expect Q4 to be a pretty active investment quarter relative to Q3, for instance. And we do have an uptick going on right now. We are very hopeful that 2025 will be much more robust from an M&A perspective. And that's our expectation but we're not really seeing that yet. I think it's too early to tell from our perspective.
Robert Dodd
Got it. Thank you. Yeah, that is helpful.
On the competitive side, I mean spreads, I mean, it's been a theme, obviously, compressing spreads. But the biggest -- for the one of the new platform ones that you put on, I looked it up, I mean, the spreads on the first lien on that are right in line with your overall average spread the first-lien portfolio for everything on board before. So, I mean, has spread compression -- is it still there? Has it stabilized? Can you give us any color on that? Is there any increasing momentum on spread compression in areas of the market that maybe you stayed away from or any color on that?
Edward Ross
Sure. It's a great question. And as you know, it has moved over the last 12 to 18 months in a meaningful way depending on the quality of the credit, right, anywhere from 50 to, let's say, 150 basis points. We are -- it's not accelerating from our perspective. No, but it's a pretty tight spread.
If I look at the third quarter, obviously, our overall yields were at 13.8%, which is down 20 basis points. And I think that comes from net originations generally being a little bit lower. So our new originations were at 13.2%. And those are variable rate loans. So they will come down a little bit from there, but also our repayments were 13.4% on average. So that gives you a little sense of what is going on in the market today. But definitely, there's plenty of competition. I don't know that I see it going down in a material manner from where we are. I would hope not and expect not, quite frankly. But it is competitive, and that's just kind of the state of the market.
Robert Dodd
Got it. Thank you. And then the last one, if I can. I mean, it would not take in amendment fees, the score about $400,000, not huge. But I mean, is there anything we should read into that? I mean, are those normal course amendments or anything -- because obviously, your credit qualities very good. [Medicals] have moved. You haven't had a new medical since the beginning of last year. But is this a sign that with amendments, there's any indicators on the horizon?
Edward Ross
Well, it's interesting. It was a pretty healthy fee quarter, some from prepayments, right? That was a big number, I think, $800,000, if I'm not mistaken. Shelby can correct me, if so.
Shelby Sherard
That's correct.
Edward Ross
And then, amendments also, which I think just speaks to the level of activity. You know, we've got 85 portfolio companies in terms of debt investments in their high 60s. And it's a very active portfolio. So with regards to amendments or acquisitions, what have you, there are different occurrences that are driving that.
What I would say is we have an active portfolio. So there's just a lot going on. In terms of credit quality, I think we feel good about it but as there's always some companies that are exceeding expectations and some that are underperforming. And we have been in a high-interest rate environment. We are in a -- from a geopolitical perspective and other issues, there is a higher-risk level out there. And so it's -- we're weathering those storms as well.
Overall, the economy feels pretty good, overall. But there are pockets of softness, if you think about the consumer discretionary purchases are down, you think about manufacturing industrial companies. And those are, I'd say, areas -- there are areas within those markets that are softer in nature, not recessionary and that's not what we're seeing but definitely softer. So there are things to work through as a result. And so that's part of it. Overall, we feel good about it, but there are things to work through.
Operator
Paul Johnson, KBW.
Paul Johnson
Yeah. Good morning. Thanks for taking my questions. So on the -- congrats on the SBIC approval. For timing on issuing on that license, how are you thinking about that? Would you be able to start ramping on that license and showing some debentures, maybe possibly buying a little time next year to act on tapping the unsecured market?
Edward Ross
Sure, great question. Shelby, do you want to take that one?
Shelby Sherard
Sure. I think the punch line is you're right. It does give us access to additional debt capital. So it buys us time. We don't have a need to tap the secured debt markets. I mean, opportunistically, it's something we could consider with some heftier repayments coming down the pike. But back to the SBA program, for Q4, we're obviously looking for eligible investments. We'll need to fund the first several with equity capital contributed from the parents. So I wouldn't expect to see a lot of borrowing on the SBA debentures here in Q4, but it does set us up in the first half of next year to start expanding our debt capital stack with additional SBA debentures.
Paul Johnson
Thanks for that. That's very helpful. And then maybe just higher level, I mean, how would you describe -- I mean, credit is stable obviously this quarter. It's positive. But how would you describe quarter over quarter or maybe just generally this year the migration of credit or company performance in the portfolio?
Edward Ross
Sure, it's a great, question. But I'd say company performance, it's been generally healthy this year. This quarter, if I look at just let's say growth in EBITDA, it's up, but it's really flattish in nature. I think 45% of our portfolio companies in the core lower middle market grew EBITDA this quarter, so a little bit less robust than others. And that's, I think, reflective of a little bit slower economic environment, if you will.
And then when I think about credit, I think there are those companies that maybe have been in the portfolio for a little while and dealing with underperformance type situations. Interest rates are still relatively high. And in those cases, there are things to work through. And so we feel really good about our portfolio and the positioning of the portfolio, but we're not immune to issues and things we got to work through. And so we are -- and so I would say in those cases, there's been some migration towards maybe issues to navigate and deal with relative to nine months ago.
But overall, I still think it's a very sound and solid credit portfolio and a very, very healthy equity portfolio. So we feel good about things. But clearly, there's stuff to work through as always, quite frankly.
Paul Johnson
I appreciate the answer. They're very helpful. And I'm also just curious on maybe kind of one trend in the market, at least one, in the larger end of the market you're seeing, more examples of secondaries transactions and such. I mean, has that been anything that you've seen, I guess, in the lower middle market with private equity, secondary fund, sort of interest in portfolio companies that any sort of potential option there for perhaps more exit activity in the portfolio?
Edward Ross
I want to make sure I understand your question. You're talking about just refinancing, generally speaking, of our existing portfolio companies or --?
Paul Johnson
Or more on for the equity co-investments. In the past, you've done at least one transaction where you've sold a sleeve of companies to another investor. So I'm just curious if there's anything similar to that or secondary fund interest as well in the market? Anything that you've seen.
Edward Ross
Got you. Got you. The answer to that is, from our perspective, I don't -- we aren't planning on a transaction like that in the near future and not working on one at all. We do, having said that, feel very good about our equity portfolio. And we also -- and think it's, in some cases, mature and right for activity over the next, whether it's 3, 6, or 12 months in som. And it's a portfolio that's been built over time and so some companies are further along than others. But it's a big part of our strategy, kind of a 90% debt, 10% equity. And I think on a cost basis, we have 8% equity today. But it's well positioned for episodic, is what I would say, events and realizations.
So that's probably how I would answer that. I don't think we're looking to sell a bunch of them on a proactive basis. We're more doing it on a -- kind of, as transactions take place. Hopefully, that gets to your question, I think.
Operator
Bryce Rowe, B Riley.
Bryce Rowe
Thanks a lot. Good morning.
Edward Ross
Good morning, Bryce.
Bryce Rowe
Ed, maybe first just I want to hit on the concept of some of the portfolio companies exploring strategic processes. You noted that three of the exits in the third quarter were the result of that. Have you seen more portfolio companies, I guess, step up to the plate to explore those processes. And maybe give us an update in terms of three or there more out there continuing to go through that process? Just trying to get a feel for what kind of churn we might get within the portfolio.
Edward Ross
Sure. Sure. It's a great question. And what I'd say, I mean, I think, going back to last quarter, I think we had seven or eight companies that we were exploring at that time. Obviously, three have transacted. I don't know if we've had a bunch of new additions, but some of these processes were early on and so they're kind of taking place as we speak.
Not sure what will transpire this quarter versus next and which ones will kind of not transpire, which happens as well. But it is -- I think, it gives you a sense that in the lower middle market, there continues to be activity from an M&A perspective. It's just not at robust levels. But we do expect some churn in the portfolio and we also do expect quite frankly some refinancing of some of our debt investments. So when I think about kind of portfolio growth, I think it's going to be an active new investment quarter, it's going to be active within our portfolio as well, which -- and then it'll be active from a realization and repayment perspective. And it's kind of hard to handicap whether we'll grow the portfolio or not, just given the level of activity on both ends of the coin, if that makes sense.
Bryce Rowe
Okay. Yeah, that's helpful. There was some discussion around the yield compression quarter over quarter; not a not a big surprise to see that. I was kind of curious; of the 20 basis point of yield compression, how much was that tied to spread compression and how much of it was tied to the drop in SOFR that we saw in the third quarter?
Edward Ross
Yeah, I mean, I'll give a quick answer. Shelby wants to add on. The quick answer is very little was tied to SOFR. Most of those resets, if you will, take place early in the fourth quarter in October, so very little took place. And so it is really just the fact that we had new originations at lower rates, and in that -- but though, it was comparable to what the repayments were.
Bryce Rowe
Yeah. Okay. Maybe last one for me and we've talked about credit within the portfolio, stable nonaccruals, as Robert mentioned, nothing added for quite some time. I did notice, I guess, that a change in the internal risk ratings with more three rated credits this quarter versus last. Anything to add there, relative to that and especially relative to what you've already said here on the call. I mean, you might have already exhausted it and explained it, but just curious if there's anything else to read into that.
Edward Ross
I don't know that there's anything to read into it other than I do think we've obviously got a mature portfolio and there's -- there are ups and downs that take place all the time in every portfolio company. And so we did have a couple additions to the Grade III portfolio. And for us, that means that there's underperformance relative to expectations, and probably, the risk has gone up.
Overall, the risk in our portfolio, as a portfolio. we feel really good about. I think loan to values are still in the low 40%s. I think they're at 42% or so. So we feel great overall, but you always have idiosyncratic issues within a portfolio. And we're -- and that's what I see. I don't see -- it's not economic driven, really. It's just you have issues within a specific portfolio company that you got to work through. And so risk levels are elevated a little bit as a result.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ed Ross, our CEO. Please go ahead for any closed remarks, sir.
Edward Ross
Thank you, Chuck, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth-quarter call in early March 2025. Have a great day and a great weekend.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
