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Edited Transcript of FDUS earnings conference call or presentation 3-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Fidus Investment Corp Earnings Call

Orrington Avenue Evanston Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Fidus Investment Corp earnings conference call or presentation Friday, March 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jody Burfening

LHA - IR

* Ed Ross

Fidus Investment Corporation - Chairman & CEO

* Shelby Sherard

Fidus Investment Corporation - CFO

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Conference Call Participants

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* Robert Dodd

Raymond James Financial Services, Inc. - Analyst

* Bryce Rowe

Robert W. Baird & Company, Inc. - Analyst

* Chris Kotowski

Oppenheimer & Co. - Analyst

* Ryan Lynch

Keefe, Bruyette & Woods - Analyst

* Arren Cyganovich

D.A. Davidson & Company - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fidus Investment fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jody Burfening. Ma'am, you may begin.

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Jody Burfening, LHA - IR [2]

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Thank you, Kaylee, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation's fourth-quarter and full-year 2016 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 details of the Company's quarterly financial results. A copy the press release is available on the investor relations page of the Company's website at fdus.com.

Before starting the call, I'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the investor relations page of the Company's website following the conclusion of this call.

I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding 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 3, 2017, 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 result of risks, uncertainties and other factors, including but not limited to, the factors set forth in the Company's filings with the SEC. 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 Ross. Good morning, Ed.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [3]

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Good morning and thank you, Jody, and good morning, everyone. Welcome to our fourth-quarter and full-year 2016 earnings call. I will start the call by highlighting our results for the fourth quarter and full year, followed by comments about our fourth-quarter investment activity and the performance of our investment portfolio, and then offer views about 2017. Then Shelby will go into more detail about our fourth-quarter financial results and liquidity position. After that, we will open the call for questions.

In looking back at FY16, our fifth full year as a public Company, we were very pleased to have produced another strong year. Our new investments solidly out-paced realizations. The strength and performance of our investment portfolio produced an 11% increase in total investment income, while our adjusted net investment income covered our annual regular distributions, a goal we have achieved every year since our IPO in 2011. As of December 31, 2016, our net asset value was $353.8 million or $15.76 per share, an increase of 4% from $15.17 per share at the end of the prior year.

We ended the year on a strong note with our fourth-quarter net investment income increasing 9.3% year over year to $7.8 million or $0.39 per share. And our adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee attributable to realized and unrealized gains and losses, surging 20% to $8.8 million or $0.43 per share. We also had several equity distributions in the period which nicely boosted our profitability.

Our performance this quarter, in absolute and relative terms, reflects both the overall quality of our portfolio and the underwriting discipline we ascribe to on a daily basis. On December 16, 2016, Fidus paid a special dividend of $0.04 per share and a regular quarterly dividend of $0.39 per share. For all of 2016, we paid a total of $1.60 per share in dividends, consisting of regular dividends of $1.56 per share and a special dividend of $0.04 per share.

At December 31, estimated spillover income, or taxable income in excess of distributions, was $13.2 million or $0.59 per share. For the first quarter of 2017, the Board of Directors has declared a regular quarterly dividend of $0.39 per share which is payable on March 24, 2017 to stockholders of record on March 10, 2017.

In the fourth quarter 2016, we invested a record $93.4 million in debt and equity securities, representing roughly 40% of total investments made in the year. As has been the case since 2014, the year proved to be back-end loaded with over three-quarters of the total occurring in the second half, as we saw a pickup in M&A activity after a slow first half.

Of the $93.4 million we invested during the fourth quarter, $73.9 million was channeled to seven new portfolio company investments. We continued to stay true to our investment strategy, investing in companies that have positive long-term outlooks and strong yet defensible marketable positions, operate in industries we know well and that generate excess free cash flow for debt service and growth.

Let me briefly recap each of our new portfolio company investments. We invested $15.3 million in subordinated notes and common equity of Accent Food Services LLC, a leading provider of customized fresh food, snacks and refreshments services. $15 million in subordinated notes of Comprehensive Logistics Company Inc, a leading third-party logistics provider and value-add assembly manufacturer serving OEMs and tier 1 suppliers in the automotive and other end markets.

$5 million in subordinated notes and common equity of Fiber Materials Inc, a manufacturer of high-temperature advanced composite materials for the defense, aerospace and commercial markets. $6 million in subordinated notes and common equity of LNG Indy LLC, doing business as Kinetrex Energy, a leading supplier of liquefied natural gas in the Midwest. $9.9 million in senior secured notes and common equity of Palmetto Moon LLC, a retailer apparel, giftware and accessories.

$12.8 million in subordinated notes and common equity of Pugh Lubricants LLC, a leading full-line distributor of automotive, commercial and industrial lubricants. And $9.9 million in subordinated notes and common equity of Software Technology LLC, a leading provider of financial, billing, practice management and other software solutions to small and mid-size law firms in the United States.

From a repayments and realization perspective, we also had an active fourth quarter. Proceeds totaled $45.6 million, including we received payment in full on our existing subordinated note in K2 Industrial Services and reinvested $12 million in new subordinated notes. We exited our debt and equity investments in MECLABS LLC and also realized a gain on our equity investment of approximately $0.1 million.

We exited our equity investment in Channel Technologies Group and realized a loss of $0.9 million. We exited our equity investment in Premium Franchise Brands LLC and realized a gain of approximately $1.1 million. And we exited our debt investments in Worldwide Packaging LLC and received a $1.5 million distribution on our existing equity investment.

We've also seen a fair amount of investment activity, both new investments and realizations, thus far in 2017. As reported in the fourth-quarter press release, subsequent to quarter end on January 4, we invested $12.3 million in subordinated notes and common equity of Revenue Management Solutions LLC, a leading provider of services that match, reconcile and facilitate the posting of healthcare payments received against submitted claims from healthcare providers, benefit managers and billing companies.

On February 3, we exited our debt and equity investments in Worldwide Express Operations LLC. We received payment in full on our subordinated note, including the prepayment penalty, and sold a portion of our equity for a realized gain, net of estimated taxes, of approximately $5 million. Concurrently, we rolled over $4 million of our equity investment into a new equity investment in the portfolio company. We also invested $10 million in new subordinated notes.

February 28, we invested $10.5 million in subordinated notes and common equity of TransGo LLC, a specialty manufacturer and designer of aftermarket automotive transmission parts and repair kits. On February 28, 2017, we exited our debt investment in Grime Master Corporation. We received payment in full on our subordinated note, including a prepayment penalty.

The fair market value of our investment portfolio at December 31, 2016, was approximately $525 million, equal to approximately 105% of cost. We ended the year with debt and equity investments in 53 active portfolio companies, plus 4 portfolio companies that have sold their underlying operations. The breakdown on a fair value basis between debt and equity remained fairly stable, with 85% in debt and 15% in equity investments, providing us with high levels of current and recurring income from our debt investments and the continued opportunity to realize capital gains from our equity-related investments.

In terms of portfolio performance, we track several quality measures on a quarterly basis to help us monitor the overall stability, quality and performance of our investment portfolio. In the fourth quarter, these metrics remained strong and in line with prior periods.

First we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperform and a rating of 5 is an expected loss. As of December 31, the weighted average investment rating for the portfolio was 2 on a fair value basis, in line with prior periods.

Another metric we track is the credit performance of the portfolio, which is measured by our portfolio companies' combined ratio of total net debt through Fidus debt investments to total EBITDA. For the fourth quarter, this ratio was 3.3 times compared to 3.1 times for the same quarter last year.

The third measure we track is the combined ratio of our portfolio companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. In the fourth quarter, this metric was 3.5 times compared to 3.7 times for the same quarter last year. The soundness of these metrics reflects our philosophy of maintaining significant cushions to our borrowers' enterprise value in support of our capital preservation and income goals.

As mentioned on our last call, early in the fourth quarter we successfully restructured our debt investment in Pinnergy Limited. As of December 31, none of our investments were on non-accrual status.

Turning to current market conditions, due to aged private equity portfolios, the strong liquidity position of the sponsored community, debt capital availability and combined with a stable economic outlook, we believe that 2017 will be another healthy year for M&A activity. We continue to focus on our strengths, including our relationships, industry knowledge and the ability to offer flexible capital solutions.

Given that our investment decisions are guided by quality and capital preservation themes, we will likely see quarter-to-quarter fluctuations in our deal flow and our overall investment activity levels. However, due to the low levels of deal flows surrounding year-end, we currently expect investment activity will again be somewhat back-end weighted in 2017.

In closing, our Management Team is very proud of our track record of covering our dividends since our IPO, our NAV growth and the overall performance of our investment portfolio. Looking forward, we will continue to execute on the strategy that has served us well over the past five years, continuing to focus on the long term, taking a cautious and deliberate approach, and investing in strong cash flow-generating businesses that are more defensive in nature and that operate in industries we know well.

We remain well-positioned to selectively grow and further diversify our investment portfolio, in conjunction with an acute focus on capital preservation and the generation of attractive risk-adjusted returns. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

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Shelby Sherard, Fidus Investment Corporation - CFO [4]

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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 2016.

Total investment income was $17.3 million for the three months ended December 31, 2016, a $2.8 million increase from Q3 2016. Interest income increased by $2.1 million, primarily related to high assets under management and a $0.5 million write-off in Q3 related to the anticipated restructuring of our investment in Pinnergy.

Fee income was in line with the prior quarter. Higher fees from investment activity were offset by fewer prepayment fees in Q4. Dividend income in Q4 was $1.7 million versus $0.9 million in Q3, an increase of $0.8 million, primarily related to higher than usual distributions received in Q4 from equity investments in nine portfolio companies, including a $1.1 million in distributions of earnings of profits related to dividend recaps for two of our equity investments in the Wolf Organization and Worldwide Packaging.

Total expenses, including income tax provision, were $9.4 million for the fourth quarter, approximately $1.7 million higher than the prior quarter due to an increase in management and incentive fees, including accrued capital gains incentive fees. Interest expense was in line with the prior quarter. G&A expenses increased by $0.2 million. Base management and income incentive fees increased by a total of roughly $0.6 million. And accrued capital gains incentive fees increased by $0.6 million.

In addition, we accrued $0.4 million of excise tax expense in Q4. Interest expense includes the interest paid on Fidus's SBA debentures and line of credit as was any commitment and unused line fees. As of December 31, 2016, the weighted average interest rate on our outstanding debt was 4.1%. As of December 31, we had $224 million of debt outstanding.

Net investment income, or NII, for the three months ended December 31, 2016, was $7.8 million or $0.39 per share versus $0.35 per share in Q3 2016. Adjusted NII was $0.43 per share in Q4 versus $0.37 per share in Q3. Adjusted NII is defined as net investment income, excluding any capital gains incentive fee expense or reversal, attributable to realized and unrealized gains and losses on investments. A reconciliation of NII to adjusted NII can be found in our earnings press release that was issued yesterday afternoon and is also posted on the investor relations page of our website.

For the three months ended December 31, 2016, Fidus had $8.1 million of net realized losses, primarily related to an $8.9 million realized loss from restructuring our debt investments in Pinnergy, a $0.9 million realized loss from the exit of our equity investment in Channel Technologies Group, and a $1.1 million realized gain from the exit of our equity investment in Premium Franchise Brand. Our net asset value as of December 31, 2016, was $15.76 per share, which reflects payment of a $0.39 per share regular dividend and a $0.04 per share special dividend in December, as well as more shares outstanding given our successful equity issuance above NAV in Q4.

Now turning to portfolio statistics, as of December 31, our total investment portfolio had a fair value of $524.5 million. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 73% subordinated debt, 17% senior secured loans and 10% equity securities.

Our average portfolio company investment on a cost basis was $9.4 million at the end of the fourth quarter, which excludes four investments in portfolio companies that have sold their operations and are in the process of winding down. We have equity investments in approximately 86% of our portfolio companies with an average fully diluted equity ownership of 7.3%.

Weighted average effective yield on debt investments was 13.1% as of December 31. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the 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. On November 29, we issued 2.8 million shares above NAV in a follow-on offering, with an additional 420,000 shares from the over-allotment issued on December 13, raising total net proceeds of $51.1 million. In addition to providing financing for a number of our recent new portfolio company investments, a small portion of the operating proceeds were used expand our utilization of the SBIC program. In Q1, we intend to request SBA approval for the remaining $25 million of SBA debentures for Fidus Mezzanine Capital II.

As of December 31, our liquidity and capital resources included cash and cash equivalents of $57.1 million, unfunded SBA commitments of $51 million, and $50 million of availability on our line of credit, resulting in total liquidity of $158.1 million. Our SBA debentures in Fidus Mezzanine Capital, or FMC, begin maturing in March of 2018. FMC is our first SBIC fund that was launched in 2007.

At the end of February, we repayed approximately $24.8 million of debentures, which had an interest rate of 6.2%, higher than our weighted average cost of debt of 4.1%. Subsequent to quarter end, we invested in two new portfolio companies, participated in the refinancing of Worldwide Express Operations, and received a repayment, including repayment fee, from the exit of our debt investment in Grindmaster Corporation.

Taking into account investment activity and SBA debt prepayment subsequent quarter end, our liquidity is currently around $133.4 million. Now I will turn the call back to Ed for concluding comments. Ed?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [5]

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Thanks, Shelby. As always, I would like to thank our team and the Board of Directors at Fidus Investment Corporation for their dedication and hard work, and our shareholders for their continued support. I will now turn the call back over to Kaylee for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Robert Dodd, Raymond James.

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Robert Dodd, Raymond James Financial Services, Inc. - Analyst [2]

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Hi, excellent quarter. Can I ask you -- you covered most of what I was interested on the call so a really hard question. You mentioned strong equity portfolio, liquidity, et cetera, and you could see a strong year back-end weighted. The thing that obviously stands out in the fourth quarter was dividend recaps accounting for a little over $1 million.

What is your view on what do you think we could see this year in dividend recap activity in the portfolio on an annual basis? Quarter to quarter is a shot in the dark. But do you think you could see a similar level for the year? Or was that really an outlier in the fourth quarter for even an annual sustainable level?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [3]

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That is a great question, one we just talked about actually at the Board meeting. It's also really tough question, Robert. Clearly we were fortunate to have a couple companies that were, quite frankly, at free cash flow were in an under-levered position. And the investors, or equity groups, wanted to take some of that money off the table. That is not something that happens every quarter, as you well know, and it's really hard to predict.

I think last year was probably a very healthy year in terms of that kind of dividend income. So I would not forecast that the same levels would happen this year. I do think, my gut is we will be fortunate and have some good things happen there. We have a number portfolio companies that are prime for that kind of situation, but I wouldn't forecast the same level from my perspective. I think it's too hard to tell.

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Robert Dodd, Raymond James Financial Services, Inc. - Analyst [4]

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Fair enough. The market overall, are you seeing any changing terms, in terms of from borrowers, that you are willing to give on industry-specific basis? Or is it -- obviously it's a very competitive market out there, but is there any divergence between various industries at this point, other than normal ones?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [5]

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Sure, that's a great question. I would say the answer to that is no. I will highlight, I think in the lower middle market the types of terms that we're getting, number one, is the yields are little bit better than the broader market. But the covenants are also drastically different, meaning they are -- you have a say on how much capital expenditures are going to be spent and whether acquisitions are going to take place and what have you. So we have little bit more of a say on things going forward.

Interestingly, we participated in the Worldwide transaction, the refinancing there. That is now a very large EBITDA business. So that got market terms and it was an eye-opener for me, quite frankly, the terms that are provided in the, quote-unquote, second lien markets for businesses that are very large, if you will.

So, we're not seeing a change in terms or in covenants or any of that kind of stuff. I think pricing is relatively stable in our market at the moment. It's competitive, but pricing is relatively stable. In our market it's pretty -- it's stable, is what I would say.

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Robert Dodd, Raymond James Financial Services, Inc. - Analyst [6]

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Okay, I appreciate it. Thanks a lot.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [7]

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Yes, thank you. Good talking to you, Robert.

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Operator [8]

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Bryce Rowe, Robert W. Baird.

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [9]

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Thanks, good morning guys.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [10]

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Good morning, Bryce.

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [11]

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Ed and Shelby, I wanted to ask about the SBA and understand that you guys have repaid the debentures that are due in March of next year. Curious if you're able to redraw within that first license, given the age of it. And if not, now that you are asking for the final capacity on SBA or SBIC II, will you start the process, initiate the process requesting a third license?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [12]

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Sure, great question. What I would say is, we intend to try to over time maximize the use of the SBA program. And what that means is we want to fully invest SBIC II. And we do intend on applying for a third SBIC license here in 2017. Hopefully we'll get that application in, in 2017. That will take a little time but that's clearly a strategic focus of ours.

With regard to FMC I, we do have currently the ability to make additional investments out of that fund. But at the same time, we are going to manage that fund with conservatism, or a margin of safety. And what that means is we are going to make sure we prepay, if you will, the maturities. In this case, we're doing it a year in advance. And that is how we are thinking about things as we move forward.

But at the moment, we do have the ability to make additional investments in there. But we are going to also wind it down, as we should.

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [13]

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Okay. And then one other question. You've drawn $10 million that have been pooled as of March 1, 2017. Shelby, curious if you can share with us the rate on that pool over the fixed rate that would've pulled on March 1.

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Shelby Sherard, Fidus Investment Corporation - CFO [14]

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Yes, that was about 4%, including the annual fixed charges.

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [15]

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Okay, great. And then one final one for me. Ed, if you could -- a lot of activity fourth quarter and then subsequent to fourth quarter. Curious what kind of purchase multiple, EBITDA multiple, you are seeing on some of the new activity here in fourth quarter. Thanks.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [16]

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Sure, sure. That's a great question. I think, as you know, it really varies company to company and industry to industry. We have seen -- I do think for, quote-unquote, great companies, high free cash flow, the ability to grow and have pretty good stability, we're seeing very high purchase price multiples. Very high, as high as I think we've ever seen.

But that's been a continuing theme for the past several years, quite frankly, and low interest rates have something to do that. But for all high-quality situations, I'd say they're healthy multiples. We've seen some definitely over 10 times and we've seen some in the 7 or 8. But the 7 or 8s may have been more like 6 times multiples five years ago. So there is -- they remain high is, I guess, what I would say.

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [17]

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Okay.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [18]

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Did that answer your question?

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Bryce Rowe, Robert W. Baird & Company, Inc. - Analyst [19]

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Yep, that's very helpful, thanks. Good quarter guys.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [20]

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Thank you. Good talking to you, Bryce.

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Operator [21]

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Chris Kotowski, Oppenheimer.

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Chris Kotowski, Oppenheimer & Co. - Analyst [22]

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Yes, if I could go back to the SBA facility. Currently have $224 million outstanding and $51 million available, so for a total of $275 million. The $24.8 million that got repaid, that would take the capacity, under the current lines, down to like to $250 million, right? Am I thinking about that the right way?

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Shelby Sherard, Fidus Investment Corporation - CFO [23]

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That's correct. And then the only other piece I would add is that we are submitting a commitment application for an additional $225 million of borrowing capacity under FMC II.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [24]

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$25 million.

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Shelby Sherard, Fidus Investment Corporation - CFO [25]

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$25 million, yes.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [26]

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Yes, $25 million.

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Chris Kotowski, Oppenheimer & Co. - Analyst [27]

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Okay. And the next question was, do you have any other outstanding high-coupon SBA debentures? And then, is there an incentive to pay those down and then try to draw again in the lower rate environment that we have here? Or is this $24.8 million the extent of that?

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Shelby Sherard, Fidus Investment Corporation - CFO [28]

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The short answer is yes. The next tranche that matures in September of 2018 is at an average rate of 6.4%, and then after that we still have some 5.3%. So the maturities that we have in the nearest term are the higher rates, so we could take advantage of that.

The timing and everything, as I've mentioned, we certainly are planning staying out in front of the maturity, but the timing is largely going to be driven by repayments and FMC I and a little bit of cash management. And figuring out if there is an opportunistic way to prepay SBA debt and lever up under the new fund when that's approved.

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Chris Kotowski, Oppenheimer & Co. - Analyst [29]

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Okay, got it. But there's some flexibility around it.

And then, one of these more global existential questions, and knowing the administration's tax plan is not out. It somehow seems that losing the deductibility of interest would cut against debt financing in general, but in particular, it conceptually seems like it would cut against mezzanine finance.

First, the question is, is that your perception as well? And then secondly, is the uncertainty around all of this, is it changing the behavior of the sponsor community that you work with? It would seem like that uncertainty always creates the reason to hit the pause button. And I'm wondering if that's happening in your market?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [30]

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Sure, that's a great question and obviously a full one. I'm going to take the last part of that first. From a, quote-unquote, uncertainty perspective and as that changing need behavior of sponsors or people that we are working with, I would say at this point, no.

Deal flow has gotten to be pretty good. It was slow in December. It was slow in January which I think was somewhat expected, but it has picked up. I think people are looking to invest, if you will, on the equity side of things as well as on the debt side of things.

I don't think that's changing people's approach at this point in time in a material way. I'm sure people are thinking about it and we're thinking about it, but I don't think it's changing the approach greatly.

I would say we'll -- the prospects of some tax changes hurt mezzanine finance. I'm not convinced that's the case, so I don't know that I would share that perspective. I think what I would say is that we have a very flexible capital base and can create structures and solutions in a wide variety of ways. We feel like we can fully participate in this lower middle market if these changes take place, and are not expecting a big change.

I think it's very early, these are premature conversations. I think the devil will be in the details and we can react to those details at that point. But at this point, we are not concerned about our ability to continue to invest in high-quality situations as we move forward.

And then lastly, with regard to the existing portfolio, because I think it's worth touching on that as well, as I said, there's total lack of clarity here so these are all very premature ideas. And it doesn't make too much sense to pontificate but I will make a couple statements.

First, it appears that if there is a change, I think the change would occur primarily with regard to C corporations and not pass-through entities. So when you look at our market, a large majority of that market is pass-through entities. Would there be some change or would it impact C corporations little bit? I think the answer to that is yes. But it wouldn't be a huge impact to our portfolio.

I would also add that if you are exchanging tax reductions for interest not being tax-deductible, it's probably a wash. Not for sure, again that's premature, but it's probably a wash.

And lastly, I think with regard to our equity portfolio, there is a reduction in rates with regard to pass-through entities that would be a positive. So we're not seeing anything overly negative at this point. But those are -- what I would say is those are premature thoughts and subject to change.

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Chris Kotowski, Oppenheimer & Co. - Analyst [31]

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Yes, I think we're all wondering what's going to come down the pike in the end. Thanks for your thoughts and that's it for me.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [32]

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All right, great. Good talking to you, Chris.

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Operator [33]

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Ryan Lynch, KBW.

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Ryan Lynch, Keefe, Bruyette & Woods - Analyst [34]

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Good morning, thank you for taking my questions.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [35]

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Good morning, Ryan.

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Ryan Lynch, Keefe, Bruyette & Woods - Analyst [36]

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Good morning. We've heard other BBCs that play maybe more in the middle market, upper middle market, talk about a very competitive environment. You said it was competitive but you were able to still find quite a bit of deals that you thought were attractive and put a good amount of capital to work in the quarter.

My question is, you also mentioned Worldwide Express as you participated, and as that company got larger, and you participated in the refinancing, the pricing got a lot significantly worse, or much lower yields. So my question is, as you continue to grow the portfolio -- you grew it at significantly this quarter.

You have a lot of capital to grow as you cross over to -- closer to $600 million plus, what is your ability to still stay in your core niche of doing lower middle market companies that maybe aren't as competitive and keep the high pricing and good structures that you currently have in your portfolio?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [37]

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Sure. Great question, Ryan, and another tough one. But I would say, back to my comments, there are huge differences when you start talking about companies that are over five times the average EBITDA of our existing portfolio. So there's a big difference in company size in that case versus what we are doing today. So there's a lot of room in between, is what I would say.

Secondly, I think we have plenty of room to continue to grow the portfolio, on a deliberate and cautious basis, in the market we're playing at. We'll still look at things as low as $3 million in EBITDA. If we do something there, it's probably going to be on a uni-tranche basis where we do a senior secured loan. And then we also will go up to $20 million in EBITDA, and even higher, quite frankly. But that's the target.

And so when you get into the plus $10 million in EBITDA size, there's a lot of room to continue to grow the portfolio from our perspective. I don't have concerns about having to rely on the, quote-unquote, second-lien market, the larger market that I just referenced. At least right now, I mean if we get up to $1 billion in size, we may need to think about how we want to grow from there. But I think right now we feel like we've got plenty of room to run.

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Ryan Lynch, Keefe, Bruyette & Woods - Analyst [38]

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Okay. And then I had one more question. Can you give us a sense of the prepayment fees you received in Worldwide Express and Grime Master in the first quarter?

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Shelby Sherard, Fidus Investment Corporation - CFO [39]

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Sure. Grime Master was $105,000 and Worldwide Express $90,000.

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Ryan Lynch, Keefe, Bruyette & Woods - Analyst [40]

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Okay. Those were all the questions for me. Great quarter, guys.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [41]

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Thanks. Good talking to you, Ryan, thank you.

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Operator [42]

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Arren Cyganovich, D.A. Davidson.

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Arren Cyganovich, D.A. Davidson & Company - Analyst [43]

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Thanks good morning.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [44]

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Good morning.

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Arren Cyganovich, D.A. Davidson & Company - Analyst [45]

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The commentary that you made about M&A activity likely being healthy in 2017, what's driving your views on that? Is it the underlying Company activities, discussions with sponsors, et cetera? What gives you that faith that you'll have a solid environment this year?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [46]

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I think first and foremost, it's just what we're seeing really starting at the end of January and early February, deal flow picked up in a meaningful way. I would tell you it was pretty low in December and January. But I also, in talking to bankers, the M&A folks are working and they are quite busy. So I think that's one element of it.

And I think generally speaking, there's a view that there's going to be pretty good stability here in the economy, if you will, and thus the underlying portfolio, in our portfolio, is quite stable. So when we think about the fact that there's plenty of equity capital out there and there's stability and modest growth in the economy, we would expect there to be continued M&A activity. And that's what we're seeing in deal flow, that's what we're seeing when we're talking to M&A bankers.

And quite frankly that's what we're seeing within our portfolio. We do have a fair number -- well, not a fair number, several portfolio companies that are considering strategic alternatives right now. As a result, we're not seeing that we're going to have a ton of growth in our portfolio in this first half of the year. Part of that's just because we expect to have some repayments and some realizations.

But, what does that all mean? That means it's pretty active out there. But for us, repayments could -- and realizations could offset our originations. And given the slow start from a deal flow perspective, that's why we're saying we think our portfolio will probably grow more in the second half of the year versus the first half. Is that helpful?

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Arren Cyganovich, D.A. Davidson & Company - Analyst [47]

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Yes, very much, thanks. And then in terms of the repayments and realizations, is this more refi-driven? Or is it better situations where companies have deleveraged and they're looking for a different capital structure?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [48]

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Yes, I think there are cases that I just referenced, they're more just -- they're companies and the boards and investor groups are looking to exit their investments. And so they're more just trying to realize on their equity investments they made previously.

There's a little bit of refi activity, but we see less of that in our market at the moment, at least. It's more M&A, no different than Grime Master was an M&A transaction. And Worldwide Express was a transition from one equity owner to another, or control party. And so that's what we are seeing right now.

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Arren Cyganovich, D.A. Davidson & Company - Analyst [49]

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Great. And then lastly, relatively small investment but the investment in LNG, can you talk about the commodity risk exposure there and how that would differ from a typical oil and gas investment?

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [50]

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Sure, I think it's a great question. And I think it's very different than your typical oil and gas or oil and gas services business that Pinnergy clearly is. It's a supplier of natural gas and liquefied natural gas in the Midwest. It sells to diverse end markets, including truck fleets like UPS, industrial operations, utilities, asphalt plants. And then they utilize long-term contracts with their customers.

So I would say there is not no risk from a price and volume of natural gas, but there is limited. From our perspective it's not overly material risk on the commodity side. So it's a different business model.

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Arren Cyganovich, D.A. Davidson & Company - Analyst [51]

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Helpful. Thank you very much.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [52]

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Yes. Good talking to you, Arren.

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Operator [53]

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Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Ross for closing remarks.

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Ed Ross, Fidus Investment Corporation - Chairman & CEO [54]

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Thank you, Kaylee, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our first-quarter call in May. Have a great day and a great weekend.

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Operator [55]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.