FIDUS INVESTMENT Corp quarterly report, Q2 FY2013

Fidus Investment Corp. 10-Q Summary (Period Ended June 30, 2013)

Business Context and Reporting Period

Fidus Investment Corporation (Fidus) is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and a Small Business Investment Company (SBIC). The company provides customized debt and equity financing to lower middle-market U.S. companies. This report covers the quarterly period ended June 30, 2013. As of this date, Fidus held investments in 34 portfolio companies with a total fair value of $309.8 million.

Key Financial Metrics

Metric Six Months Ended June 30, 2013 Six Months Ended June 30, 2012
Total Investment Income $20.3 million $15.2 million
Net Investment Income $8.1 million $7.0 million
Net Increase in Net Assets from Operations $18.1 million $7.7 million
Net Asset Value (NAV) per Share $16.06 $15.02
Total Assets $374.0 million $333.8 million (Dec 31, 2012)
Cash and Cash Equivalents $56.3 million $52.0 million (Dec 31, 2012)
SBA Debentures (Debt) $144.5 million $144.5 million (Dec 31, 2012)
Weighted Average Yield on Debt 15.1% 15.3%

Material Changes vs. Prior Period

  • Revenue Growth: Total investment income increased 33.3% year-over-year, driven primarily by a $4.7 million increase in interest and fee income due to higher average levels of outstanding debt investments.
  • Expense Increase: Total expenses rose 47.3% to $12.2 million. This was largely due to a $2.6 million increase in incentive fees (both income and capital gains components) and a $0.7 million increase in the base management fee.
  • Capital Appreciation: Net unrealized appreciation on investments increased significantly to $8.9 million for the six-month period, compared to $0.7 million in the prior year period. This was driven by $11.0 million in unrealized appreciation on equity investments.
  • Portfolio Expansion: The company invested $59.3 million in new and existing portfolio companies during the period, compared to $33.4 million in the prior year. Repayments totaled $36.7 million.
  • Equity Issuance: In February 2013, the company completed a follow-on public offering, issuing 1.725 million shares for net proceeds of $28.9 million.

Outlook, Risks, and Management Commentary

  • Liquidity and Capital: Management believes current cash ($56.3 million), available SBA leverage, and operating cash flows are sufficient for the next 12 months. Fund 1 has capacity to issue an additional $5.5 million in SBA debentures. Fund 2 received SBA approval for a $25.0 million loan commitment in July 2013.
  • Dividends: The company declared a quarterly dividend of $0.38 per share and a special dividend of $0.04 per share on July 31, 2013, payable in September 2013. The company maintains a dividend reinvestment plan (DRIP).
  • Valuation Risks: Substantially all portfolio investments are valued using Level 3 inputs (unobservable inputs), requiring significant judgment by the Board. Valuations rely on discounted cash flow models and market comparables (EBITDA multiples).
  • Subsequent Events: In August 2013, the company exited its investments in Worldwide Express Operations, LLC, recognizing a gain of approximately $22.0 million on equity and warrant investments.
  • Regulatory Constraints: As a BDC, the company is subject to asset coverage requirements. It has received exemptive relief to exclude SBA-guaranteed debt from these requirements for Fund 1, but not yet for Fund 2.

Key Facts for Investor Verification

  • Debt Leverage: Verify the weighted average interest rate on SBA debentures (4.6%) against the portfolio yield (15.1%) to assess net spread.
  • Unrealized Gains: Confirm the sustainability of the $8.9 million unrealized appreciation, which significantly boosted net assets but is non-cash.
  • Incentive Fee Structure: Note that incentive fees increased substantially due to capital gains accruals; verify the impact of future market volatility on these accrued fees.
  • Portfolio Concentration: Review the top 10 portfolio companies, as one investment represented over 10% of the total portfolio fair value.
  • DRIP Impact: Assess the dilution or accretion effects of the dividend reinvestment plan, which issued 37,916 new shares in the first half of 2013.