Fidus Investment (NASDAQ:FDUS) Q4 2020 Earnings Call

0:00 Ladies and gentlemen, thanks for standing by and welcome to the FIDUS fourth quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Ms. Burfening. Thank you. Please go ahead, ma'am.

0:29 Thank you, Felicia, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's fourth quarter 2020 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. The 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.

1:23 Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, February 26, 2021, the statements are not guaranteed the 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. Bytus 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.

2:02 Good morning, Jody, and good morning, everyone. Welcome to our fourth quarter 2020 earnings conference call. I hope all of you, your families, friends, and coworkers are staying healthy and well. I'm going to open today's call with commentary about the state of our portfolio at year end. I'll then review fourth quarter highlights and share our views on deal activity in the lower middle market during the first quarter of 2021. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. When I look back at 2020 and recall the uncertainties we were facing toward the end of the first quarter due to the pandemic, we did not know at that time what the ultimate impact on our portfolio companies' business operations would be.

3:01 We indicated that we believed the vast majority of our portfolio companies had resilient business models that could absorb economic stress. We believe that our strategy of selectively investing in companies with defensive characteristics, including strong free cash flow and positive long-term outlooks, would enable our portfolio to weather the storm, even under unprecedented adverse business conditions. I'm pleased to report that our portfolio overall has, in fact, weathered the storm thus far and performed well in a difficult year, a testament to the success of our strategy. Due to the great uncertainties we were all facing, we also made a deliberate decision to manage the business with great caution, focused on maintaining a strong liquidity position and preserving capital. This decision has served us well.

3:59 After writing down the fair value of the portfolio in the first quarter to reflect negative impacts of the pandemic, Over the remainder of the year, our portfolio continuously improved, a trend that continued in Q4 for a number of our portfolio companies, which resulted in pronounced appreciation in the fair value of our debt and equity investments. NAV at year-end increased $21.2 million, or 5.4%, to $410.8 million, or from $389.6 million at the end of the third quarter. We ended the year with NAV per share of $16.81, just 4 cents shy of the level at the end of 2019. Our assessment of portfolio risk based on company operations has also steadily improved since the first quarter. At that time, we considered a little more than 80% of the portfolio to be in the low to medium risk range.

5:05 For the fourth quarter, our view is that 94% is in the low to medium risk range categories. While many of the companies in our portfolio found ways to capitalize on competitor weaknesses and or heightened in-market demand, They are overall finding ways to persevere in the current business environment and to remain well-positioned for long-term success. We ended the year with one portfolio company on PIC non-accrual status and our non-accrual balance is less than 1% of the portfolio on a fair value basis. As you may recall, the pandemic had particularly severe repercussions on Accent's business in 2020.

5:50 In Q4, we realized a loss of $36.1 million on Accent Food Services. In terms of our portfolio construction and metrics, the fair market value of our investment portfolio as of December 31, 2020, was $742.9 million, equal to 108.1% of cost, and compared to 99.9% of cost for the third quarter and 98.3% for the first quarter. We ended the fourth quarter with 66 active portfolio companies and three companies that have sold their underlying operations. During 2020, we continued to increase the mix of first lien debt investments in the portfolio and at year end, first lien debt accounted for 25.2% of the portfolio on a fair value basis compared to 14.1% as of December 31st, 2019.

6:52 The breakdown of the rest of the portfolio by investment type as of December 31st was as follows. Second lien debt, 44.7%, subordinated debt, 14.5% and equity investments, 15.6%. Our portfolio remains well structured to remain healthy during difficult times. In addition, our equity investments continue to give us the opportunity to enhance returns over the long term. Turning to our results for the fourth quarter, we reported adjusted net investment income, which we defined as net investment income excluding any capital gain, incentive fee attributable to realized and unrealized gains and losses, of $10.7 million, or $0.44 per share, compared to $8.3 million, or $0.34 per share, for the same period last year, completing a year of sequential gains in adjusted NII.

7:52 On December 18, 2020, Vitus paid a regular quarterly dividend of $0.30 per share and a supplemental dividend of $0.04 per share to stockholders of record as of December 4th, As you may recall, last April our Board of Directors reduced the quarterly dividend from $0.39 per share to $0.30 per share. We made this very difficult decision to reflect the unprecedented uncertainties we were all facing at that time and the challenges some of our portfolio companies were contending with due to the pandemic. As a result of the steady improvement in the overall health of the portfolios since then, The Board has increased the base quarterly dividend by 1 cent to 31 cents per share and implemented a supplemental quarterly dividend for 2021 equal to 50% of the surplus in adjusted NII over the base dividend for the prior quarter.

8:52 This formula results in a surplus of 14 cents per share from Q4, generating a first quarter supplemental dividend of 7 cents per share. On February 9, 2021, the Board of Directors, therefore, declared a base quarterly dividend of $0.31 per share and a supplemental quarterly dividend of $0.07 per share. The base quarterly dividend and the supplemental cash dividend will be payable on March 26, 2021 to stockholders of record as of March 12. Turning to originations and repayments. I mentioned on the third quarter call that M&A activity in the lower middle market was very high, particularly for companies that were not meaningfully impacted by the pandemic.

9:40 As a result, and as anticipated, we had an extremely busy quarter in terms of investment activity. In terms of originations, we invested $103.9 million in debt and equity securities during the quarter. Of the $103.9 million, 58.5 million, or 56%, was in first lien debt investments, and we invested in seven new portfolio companies. These were $9.1 million in first lien debt, common equity and preferred equity, and Applied Data Corporation, a leading provider of fresh item management technology for grocery and convenience stores. $11 million in first lien debt and common equity in Comply365, LLC, a leading provider of SAS enterprise content and compliance management solutions for the aviation and rail markets.

10:37 $21.5 million in first lien debt and common equity in DataGuides, Inc., a provider of automated data discovery, classification, protection, and continuous monitoring software. $8.2 million in first lien and revolving debt in Elements Brands, LLC, an e-commerce platform dedicated to developing consumer products brands. $9.3 million in first lien debt in Common Equity and Hallmark Healthcare Solutions, Inc., a software as a service company offering physician compensation and workforce management solutions for health systems, academic medical centers, and physician groups.

11:23 $6.8 million in first lien debt and preferred equity in HealthFuse LLC, a leading provider of revenue cycle vendor management solutions to hospitals and health systems. And $13.5 million in second lien debt and common equity in Pool and Electrical Products LLC, a leading regional distributor of pool equipment and supplies. These investments in new portfolio companies share the defensive characteristics critical to the success of our strategy. Resilient business models with recurring and reoccurring revenue streams and strong cash flow generation to service debt and positive outlooks for growth over the long term. They also operate in industries we know well, in these cases in software or tech-enabled services, business services, and healthcare services.

12:16 In addition to investing in new portfolio companies, we refinanced our $20 million second lien debt investment in Wheel Pros during Q4. In terms of repayments and realizations, we received proceeds of $100.7 million. In terms of exits, we exited our debt and equity investments in Pew Lubricants LLC, receiving payment in full of $26.6 million, including a prepayment penalty on our second lien debt investment and realized a gain of approximately $0.5 million on our equity investment. We exited our equity investment in Who Knew It, LLC and realized a gain of approximately $0.2 million. We received payment in full of $4.3 million on our first lien debt in Global Plasma Solutions, Inc. We exited our debt and equity investments in Control Scan, Inc.

13:10 We received payment in full of $6.8 million on our subordinated debt investment and realized a gain of approximately $0.7 million on our equity investments. We exited our debt and equity investments in BCC Group Holdings, Inc. We received payment in full of $18.5 million, including a prepayment penalty on our subordinated debt investment and realized a nominal gain on our equity investment. And as I mentioned, we refinanced our $20 million second lien debt investment in Will Prose, Inc. Subsequent to year end, we closed $42 million of investments, including investments in three new portfolio companies, primarily in first liens, debt, and equity, and received proceeds of $60.6 million in repayments and realizations.

14:03 Before I close with comments about the market, I wanted to highlight the exit of our debt and equity investments in FDS. FDS was acquired and combined with Calculex Inc. and Argonne Corporation under a new holding company, Spectra A&D Holdings. FDS is an avionics company that we controlled for the past several years and this exit and effective reinvestment of the proceeds into a now much larger and better positioned company was well executed by our team. Importantly, the new company is now very well positioned for the future. As a result of the transaction, we now have a first lien debt investment and a meaningful minority equity investment alongside a private equity group that focuses on the aerospace and defense space. This was a nice transaction for FDUS and all stakeholders involved.

15:04 After the flurry of deal activity in the fourth quarter, M&A in the lower middle market has moderated a bit in the first quarter. Nonetheless, we have had some deal flow held over from 2020, and we believe we'll have a decent level of investments in the first quarter. Repayments, on the other hand, will likely be slightly higher than the fourth quarter. While we are not discounting the uncertainties that are still with us around the strength and pace of the economic recovery, We have demonstrated success in redeploying proceeds into portfolio companies that provide us with a high level of current and recurring investment income and equity upsides. Our steadfast commitment to our underwriting disciplines, improving investment strategy, will continue to serve us well as will our conservative approach to managing the business for the long term.

15:59 Focused on generating attractive risk-adjusted returns, and preserving capital in the interest of our shareholders. I'll now turn the call over to Shelby for fans.

16:13 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 2020. Total investment income was $23.6 million for the three months ended December 31, 2020. A $2.6 million increase from Q3 primarily due to a $1.6 million increase in fee income from new investments, amendments, and prepayments, a $1.4 million increase in dividends offset by a $0.4 million net decrease in interest income primarily related to timing of repayments versus new investments in Q4. Total expenses, including tax provision, were $17.6 million for the fourth quarter, approximately $3.4 million higher than the prior quarter, primarily due to an increase in the capital gains incentive fee accrual of $1.9 million related to meaningful appreciation and the fair value of the portfolio, a $.7 million excise tax accrued in Q4 related to the estimated spillover income of approximately $22 million or $0.90 per share.

17:26 0.3 million increase in professional fees related to audit and tax expenses and a 0.2 million increase in the income incentive fee. As of December 31st, the weighted average interest rate on our outstanding debt was 4.7%. As of December 31st, we had 454.3 million of debt outstanding comprised of 147 million of SBA debentures and 307.3 million of unsecured notes. Our debt to equity ratio was 1.1 times or .75 times statutory leverage, excluding exempt SBA debentures. In late December, we successfully issued $125 million of unsecured notes at a 4.75 interest rate. The net proceeds were used to pay down the outstanding balance on the line of credit of $23 million at closing, and to fully redeem our 5.875 $50 million public notes in January and to partially redeem 50 million of the total 69 million 6% notes in February.

18:31 Given the notice requirements, the bond redemptions occurred subsequent to year end, so we ended the year with artificially higher leverage. In conjunction with the bond redemptions, we will realize a one-time loss on extinguishment of debt in Q1 2021 of approximately 1.9 million related to the unamortized deferred financing cost on the redeemed bonds. Taking into account the bond redemptions on our gap debt to equity ratio is now currently approximately 0.86 times. Net investment income or NII for the three months ended December 31st, 2020 was 25 cents per share versus 28 cents per share in Q3. Adjusted NII, which excludes any capital gains, incentive fee, accruals, or reversals attributable to realized and unrealized gains and losses on investments, was $0.44 per share in Q4 versus $0.40 per share in Q3.

19:30 For the three months into December 31, 2020, FIDUS had approximately $33.9 million of net realized losses related to $36.1 million of realized losses on Accent Food Services offset by 2.3 million of realized gains on the exits of several of our equity investments, primarily including control scan, 0.7 million gain, P lubricants, 0.5 million gain, and who knew it, 0.2 million gain. Turning now to portfolio statistics, as of December 31st, our total investment portfolio had a fair value of 742.9 million. Our average portfolio company investment on a cost basis was $10.4 million at the end of the fourth quarter, which excludes investments in three portfolio companies that sold their operations during the process of winding down.

20:23 We had equity investments in approximately 88.4% of our portfolio companies, with a weighted average fully diluted equity ownership of 5.8%. Weighted average effective yield on debt investments was 12.2% as of December 31st. The weighted average yield is computed using the effective interest rates for debt investments at cost, including accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any. Now I'd like to briefly discuss our available liquidity. As of December 31st, our liquidity and capital resources included cash of $124.3 million, $100 million of availability on our line of credit, resulting in total liquidity of approximately $224.3 million.

21:11 Taking into account subsequent events including the bond redemptions, we currently have approximately $143.1 million of liquidity and access to $161.5 million of additional SBA debentures under our third SBIC license subject to SBA regulatory requirements and approval. Now I will turn the call back to Ed for concluding comments. Ed?

21:34 Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at FIDAS for their dedication and hard work, and our shareholders for their continued support. I will now turn the call over to Felicia for Q&A. Felicia? And as a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, press the pound or hash key. And please stand by while we compile the Q&A roster. And your first question comes from the line of Chris Kotowski of Oppenheimer.

22:09 Yeah, good morning. Thanks for taking that question. Well, first of all, I guess I kind of wanted to – I think your new dividend policy is kind of ingenious. I guess I've always kind of thought having 38 cents every single quarter or whatever the number is is kind of artificial in that the world doesn't hand you the exact same opportunities – Every single quarter over a long period of time. And so I'm wondering, are you thinking of making that move kind of permanent? And I'm kind of curious how that will then kind of interact with a buildup and spillover. I mean, presumably your spillover income would grow a lot faster under this kind of thing rather than having a fixed dividend that targets what you expect to earn over time.

23:05 Sure. I appreciate your comments and your question, Chris. Let me give you just kind of a perspective on our thinking. And I think, as all of us would agree, there's still a fair bit of uncertainty in the world today. And so from our perspective, being aggressive with dividend policy just doesn't seem like the right thing to do. We're thrilled with our performance and our overall outlook. We're also thrilled to be making a meaningfully supplemental distribution this quarter, which is a direct correlation to our performance. As we mentioned in our prepared remarks, we feel this approach is a good solution for at least 2021.

23:56 It provides significant upside to the base dividend. as we have in the last two quarters while also providing what I'd say is a durable and flexible distribution model in these uncertain times. So overall, we do like this approach, especially this year in an environment like this. And so said another way, we think operating with a reasonable level of caution makes a lot of sense at the moment. And, you know, to your specific question, will this be a permanent move, it could be. I think the base dividend is something we'll always look at, but the approach is a good one, and I wouldn't say we are the first to do this, but I do think it's a good one, especially in this environment, and we will consider it on a permanent basis as well as we move forward.

24:49 But this is a 2021 move at this point in time. Regarding spillover, and it falls in line with we're still operating in an environment that has some uncertainty and an elevated level of uncertainty. And so we like the idea of having a high spillover position like we do for rainy day reasons. And so at the moment, we're going to kind of keep spillover in the range that it is assuming it stays there and I think it will. So that's how it didn't factor into the dividend equation really because we like having this cushion at the moment. Hopefully that answers your question.

25:33 Yeah, that's helpful. Thank you. And then secondly, I was wondering it looks like your first lien debt positions are now roughly 30% of the portfolio and as recently as two years ago I think they were less than 10%. And, again, can you talk a bit about what's driving that change? Does it impact, you know, kind of the mix of business and yields, and how much further does that go?

26:08 Sure, sure. It's a great question. We've talked about it a little bit on previous calls, but I'd say several years ago we started, or a good 24 months ago, maybe 24 to 30 months ago, we started to focus more on first lien investments, in particular on what I would call more lower middle market, smaller EVTA businesses. We felt like that was the right approach where we could control the balance sheet a little bit more if things move around. and obviously we're also doing a fair bit of tech enabled and software lending today and that's an approach that we're using with regard to that in market as well at least on the smaller EBITDA businesses if you will.

26:56 So it's a conscious approach pre-COVID. I will tell you post-COVID when COVID showed up we also made a very deliberate decision to say that junior capital investments here in the least Thank you very much. It just seemed like the right thing to do cosmetically as well as just structurally so we can really control those assets a little bit more. It's a conscious decision that we've made pre-COVID. It's continuing in this COVID environment. Quite frankly, we're finding a lot of success. with our clients in providing first-link solutions.

27:44 Now, some of these solutions are first-out, last-out, where we'll bring in a bank to lower the rates and obviously give us a little bit higher yield, but these are transactions where we're originating the debt investment and we're deciding whether we want to do that, which is provide a first-out, last-out solution or we're just providing a first-link solution and we're the only lender. So, But we've been doing it for a while, and I would expect that trend to continue to some degree for sure.

28:15 And are you still getting warrants to roughly the same degree that you did historically?

28:20 No, I mean, I think warrants, you know, we were getting quite a few warrants, you know, I'd say seven years ago, nine years ago, ten years ago. I think where we're focused with private equity groups is and that's a large majority of what we're doing today. Getting warrants, they're going to be a pretty hairy situation, which we haven't been doing much of. So it's more direct equity investments alongside the private equity groups and then providing the debt solution as well. And that's been the approach for over the recent years, if you will.

29:00 Okay. All righty. Thank you. That's it for me.

29:02 Thank you. Good talking to you, Chris. Your next question comes from the line of Matt Jaden, Raymond James.

29:10 Hey, everyone. Morning, and thanks for taking my questions. Ed, maybe first one for you. Any commentary you can give from the pipeline you're seeing, kind of where spreads and terms are sitting right now versus pre-COVID levels?

29:25 Sure. It's a great question, Matt. What I would say is, you know, the vintage, if you will – Currently, Q4 and Q1 is very similar in nature. You know, we're continuing to see yields be at reasonable levels. I'd say at least at pre-COVID, but probably a little bit better. You know, given what I just talked about, I think the structure is most of its first lean debt for us. You know, by definition, it's probably a little bit better from our perspective. and then also the underlying assets that we're investing in. So in this market, what we're seeing is a lot of interest in recurring revenue models, reoccurring revenue models, businesses that haven't been impacted greatly by COVID and obviously those underlying types of assets are things we have a high degree of interest in and we like very much.

30:26 So when I think about the vintage, if you will, that we're investing in today and we were in Q4, We think it's very attractive is how I would talk about it. I'd say deal flow is moderated here in Q1. I think some of that seasonality, I think there was a huge push and surge in Q4, but we are continuing to see pretty good opportunity in the lower middle market, but probably not at the same robust level we did in Q4.

31:00 Great. Maybe as a follow-up to that, just on the commentary, Pipeline sounds like it's a lot of COVID-resistant names, names that performed well in 2020. Are sponsors right now willing to invest in those more COVID-affected names, or is the play kind of to wait it out and see what happens?

31:19 I think they'll do both. I think a large, large majority of what we're seeing and what people are gravitating towards is Non, you know, businesses that have not been impacted materially by COVID. You know, having said that, there are others that are willing to look at business and say, look, you know, we're getting closer to, you know, out of the woods here with regard to COVID. And, you know, yes, this company was impacted, but I can, you know, look at that adjustment and say that's real. There's not nearly as much of that going on, but there is some of that for sure.

32:00 That's it for me. I appreciate the time this morning.

32:03 Thank you. Good talking to you, Matt. Your next question comes from the line of Ryan Lynch of PEW.

32:10 Hey, good morning. Thanks for taking my questions. First one, just kind of following up from the investment philosophy standpoint, obviously in the past several years you've talked about late cycle investing as we were 10 years removed from the last downturn. and now it seems that we are coming out of a severe economic downturn, obviously there's some ways to go, but if the economic recovery continues as it's planned in 2021, do you see yourself changing your investment philosophy of the way you guys approach the market at all, whether that's specific industries you guys are focusing on or were you focusing where you guys are in the capital structure at all?

32:58 Sure. Great question. Generally speaking, I'd say no. Again, we've been approaching the market now for several years or two plus years. We always have been a solution provider. We always did senior debt. I would tell you there's an increased emphasis on that and also receptivity from clients. So that has gone very well from my perspective and So from a philosophy, we are a solution provider. We still are looking at very high quality second lien investments and subordinated debt investments, but they're typically bigger companies and companies that we believe have great staying power and resilience and cash flows for that matter. So That's the approach. It's been that way for a while.

33:57 I think we really stayed away from investing in cyclicals over the last several years. We knew we were late cycle. We also started gravitating towards more first lien investments, for that matter. I think the thought process will continue as it has recently. Again, a solution provider, but it will be a majority of senior debt type solutions with opportunistic, very high-quality junior debt investments. So I don't see a change from where we are today, quite frankly.

34:31 No, I understand. That's fair. It's served you guys very well. You guys had some really nice gains this quarter and a few equity investments. I was wondering if you could give us a couple of lines just on what drove the meaningful gains in energy, fan steel, and global plasma solutions.

34:54 Sure. So, you know, the energy, you know, I'd say generally speaking, our portfolio, the growth was driven by performance. Having said that, you know, we do need, we have, we calibrate. That's what you do from a valuation perspective. And so in certain instances, You know, calibration is part of it, i.e. changing multiples if there's been big market movements, if outlooks change. So a good example of that would be Pennergy, which is in the energy services business. A, they're performing very well, beating budget. Number two, they also, the outlook has improved greatly, and if you look at the multiples in that business, they are much, much higher. So there's a combination there, but it's mostly performance.

35:47 You know, when I think about fan steel, that's performance driven. Global plasma, that's performance. So, you know, we do this on every investment, right? We look at, you know, do we need to calibrate or not? But those three, and I don't know if you mentioned any others, but, you know, we're, as I just mentioned.

36:13 Okay. That's helpful. and then one last one for Shelby. I saw fee income was high this quarter. That was obviously due to the strong activity that you guys had from the repayment side. But dividend income was also very high. I'm just wondering was that most, I know you guys get a little bit but a little bit of that is recurring from a quarterly standpoint but The $1.8 million this quarter, was that all mostly one time, or do you expect, you know, what is kind of your outlet for dividend income, you know, in Q1?

36:57 So I would characterize those as one time. We had two very large dividends from two separate companies, one of which, you know, may be annually, but certainly not in Q1. and then another just one-time big dividend that happened in Q4 that if something were to happen again, I characterize that as more sporadic. So I would definitely say Q4 was outsized in terms of run rate dividends. That will not be continuing.

37:25 The other thing I would add to that, I agree with Shelby's comments completely, but these companies are performing very well and are positioned to do incremental dividends if they choose to. It's not in our You know, it's been a shared decision, not our decision, but, you know, so there is the opportunity for more dividend distributions, but her comments vary, you know, exactly on. They're more sporadic in nature and, you know, one time as opposed to reoccurring.

37:57 Okay. Okay, and then just one quick last one. The $1.9 million realized loss will be extinguished from your debt. Just to be clear, that is going to run through the realized loss line item in Q1, not the interest and financing line item, correct?

38:13 That is correct.

38:17 Okay, great. Well, we'll add Shelby. Thanks, Ryan. Appreciate it, and good talking to you. And your next question comes from the line of Ricky Slean of Leidenberg.

38:47 Yes, good morning, Ed and Shelby. I want to join Ryan in congratulating you on very good results in a very, very difficult time for everyone. Ed, FIDUS experienced a high portfolio turnover during the quarter, and you managed to offset high repayments with new originations, which is definitely not the case at all, the BDCs that I cover. So I thought it would be a good time for you to update us on your team's origination strategy, and what proportion of your deal flow is currently sponsored, and also what share are you the lead non-bank lender?

39:28 Sure. Great question, Mickey. I think we've spent a lot of time over the last, I'd say, five years, we've always been a direct origination shop, but I think we've spent a lot of time trying to get better at it and spending more time as a firm. We've also built, you know, what I would say a very deep team. I mean, we have, you know, over 30 people here at FIDUS. So for, you know, a fund our size, we've got a deep team and a lot of resources that can go out and directly originate and look at businesses and work with private equity groups and others. We focus on four channels, but a large majority of what we do are sponsor-driven transactions, and that represents, if you think about our portfolio today, it's, I think, you know, fund the sponsor or sponsor, it's about 94% of the portfolio.

40:27 So that has been the focus, and we obviously also gravitate towards you know sponsors and quite frankly opportunities that you know that reside in industry and markets where we have expertise and experience and so that's how we go about it but I think that answers your question if there's you know and I guess the only other part for Q4 is We started working very hard on originations and trying to generate deal flow in Q3 when we started to see the market open up, started to have repayments, and we were like, okay, it's time to get back to work. We had really shut things down. We didn't know where it was going to go.

41:16 We spent the second half of the year working hard on originations, and what you're seeing is there was pent-up demand across the market, and obviously that hit us on both sides. We had a fair number of repayments and realizations and then we also generated the opportunity to invest in seven new portfolio companies.

41:36 Hopefully that's helpful. That is helpful and I appreciate that explanation. Ed, I don't want to put salt in the wound, but I'm just curious, could you review the outcome for Accent Foods in terms of the very low recovery and Do you think that's more an idiosyncratic event related to COVID, or was there something in that process of underwriting that shed some light that you'd like to include in your future underwriting strategy?

42:11 Sure. It's a great question, Mickey, and there obviously is some salt in that wound, to say the least. What I would say, look, Accent was on non-accrual prior to COVID-19. Having said that, it had a positive outlook and it had a real market presence. Revenues were growing. It just needed to clean up its act, which it's actually now done. COVID created the opportunity for the company to do that and get their cost structure in line and whatnot. The What happened was the shelter-in-place orders, and in particular the work from home orders, greatly impacted the business.

42:58 The most of any company in our portfolio, no question. Our one non-accrual got hit the hardest. Secondly, I'll say the senior debt providers and, quite frankly, equity group were not helpful, to put it mildly. The senior group played loan-to-own ball, and as opposed to work together, which most people do. And so given the status of the company at the second half of the year, which were very different, quite frankly, than the projections we were getting throughout the COVID period, we chose not to double down and basically take a controlling stake in the company. We had that opportunity. and it would have required a very large equity investment and so it's very unfortunate all around but that's how it played out and the company has a solid medium term outlook and a good management team and so we supported the company with actually a small equity investment in the new restructured company so That's the situation. It's very unfortunate.

44:05 But we didn't have, other than owning the company and writing a very big equity check, we didn't have the cards given COVID.

44:13 And that's what happened. Okay, I understand. And is there anything in that process that is similar at Evelyn's or is that suffering from different issues?

44:26 Thank you so much for joining us. It's a junior debt investment and we obviously put it on non-accrual in Q1. We took it off because of performance and now it's back on pick non-accrual and what I'd say is evaluation reflects the risk profile of a business and I understand.

45:14 My last question is just to gauge your appetite on rotating out of fan steel. It's a

45:41 You've got an enormous unrealized gain there and potentially would down the road be interested in rotating into a new investment. Is that something we can expect this year or how are you looking at it in general?

45:59 Sure. It's a great question. As you know, we did rotate half of our investment and rotate out of it in the Q1 of last year.

46:06 Yeah.

46:09 VanSteel is a manufacturer of high purity sugars and active ingredients for injectable drugs and biologic drugs, mostly in the oncology arena. We're focused on the oncology arena. They also do participate in the vaccine arena to a certain degree. I'd say the company is performing very well and the outlook is also strong. So the positives are outweighing any potential negatives of COVID-19 at this point in time. So valuation reflects the performance of the company. And I would say, you know, look, we like the outlook of the business. So it's not an easy question to answer.

46:56 I think at some point, you know, getting incremental liquidity makes some sense for VITAS. So I get the purpose of the question. But at the same time, we're not in control of the company, and that would require discussions with the company or sale of the business, which neither of which are happening at this point. But at some point we should get some liquidity, but I don't think there's any rush. And, again, we like the outlook of the business.

47:26 I understand. That's very helpful. Those are all my questions this morning. Again, congrats on very good results for 2020. I look forward to talking to you again soon. Thank you.

47:38 Thanks, Mickey. Good talking to you as well. And your next question comes from the line of Marcus Sharbeckian of B. Reilly Security.

47:48 Hey, good morning, and thanks for taking my question here. Good morning, Marcus. You mentioned in the prepared remarks you have deal flow that's held over from 2020 and you have a decent level of investment activity here in the first quarter. Do you expect investment origination to outpace repayments here in the first quarter?

48:12 Actually, if I were a betting person sitting here at the end of February, I'd say no. I think repayments... at the moment look like they are going to exceed originations. But it's too early to make that statement affirmatively, but that's what it feels like to me. Great question.

48:32 And given kind of that activity, what you're seeing to date, maybe if you can describe your expectations on the cadence of deploying capital versus repayments as the year goes on, maybe. Do you expect to be able to grow the portfolio?

48:51 Great question, Sarkis. You know, especially in light of the fact that we had, you know, effectively a record repayment level for FIDUS in Q4, and we may exceed that here in Q1, and probably will. You know, having said that, I think originations are still, you know, relatively solid and sound here in Q1, and... And then what my expectations are is the M&A environment will continue to be healthy, which will create opportunity for originations or more opportunity for originations. So I think that's a positive. And I do, as I sit here and look at our portfolio today, we'll have incremental repayments in Q2, 3, and 4.

49:38 But I don't think they'll be at the levels we've had the last two quarters. I think that's going to subside. to answer your question is I do think we will be able to grow the portfolio over the course of the year, timing of which I don't know, but that's what I would expect at this point. I think the repayments have been at kind of surge levels and I don't expect them to stay there.

50:04 Yeah, no, thanks for that. And I guess as you see kind of the prepays come on into the books, essentially From a fee income perspective, do you expect 2021 to probably be a richer year from kind of an incremental fee perspective, fee generation?

50:29 That's a really, really hard question to answer. What I would say, and I want to get Shelby's thoughts on this as well, is that I would expect fees, and assuming we don't have more events here that change the dynamics of the market, I would expect fees to be at least as good as what we had in 2020, is what I would say. Shelby, you got any incremental thoughts to that?

51:00 No, I think that's right. And again, it's just hard to predict because at the end of the day, it will depend largely on the level of investment activity and to the extent we see some repayments that are still early enough in the life cycle of the loan that generate prepayment fees.

51:18 Thanks so much for that. I'll hop back into the queue.

51:22 Okay, thanks, Sargis. Good talking to you. And I'll turn the call back over to Mr. Ed Ross for closing remarks.

51:31 Thank you, Felicia, 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 have a great weekend. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.