Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation’s Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference is being recorded. I would like now to turn the call over to Jody Burfening. You may begin.

Thank you, Gracia, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation’s third quarter 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 of the press release is available on the Investor Relations page of the Company’s website at fdus.com. 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 at fdus.com following the conclusion of this conference call. Finally, 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 the goals, strategies, beliefs, future potential operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, November 4, 2016, these statements are not guarantees of future performance. Time sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including but not limited to the factors set forth in the Company’s filings with the 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. Good morning, Ed.

Good morning, Jody, and thank you, and good morning, everyone. Welcome to our third quarter 2016 earnings call. On today’s call, I’ll be commenting on our third quarter results, the performance of our investment portfolio and current market conditions. And Shelby, will go into more detail about our financial results and liquidity position. After that, we will open the call for questions. Our third quarter results were solid and in line with expectations. Total investment income rose 6.4% year-over-year to $14.4 million. 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 increased 5.5% to $7.1 million or $0.37 per share. As of September 30, 2016, our net asset value was $299.3 million or $15.58 per share. Overall, we were pleased with the third quarter in which major highlights included a strong level of investment activity in both new and existing portfolio companies and the realization of several capital gains. In addition, we ended the quarter with significant liquidity, including $42.2 million in cash, positioning us well to continue to grow and diversify our investment portfolio in a deliberate manner with the focus on quality over quantity. On September 23, 2016, Fidus paid a regular quarterly dividend of $0.39 per share. As of September 30, 2016, estimated spillover income or taxable income in excess of distributions was $14.4 million or $0.75 per share. For the fourth quarter of 2016, the Board of Directors has declared a regular quarterly dividend of $0.39 per share, just payable on December 16, 2016 to stockholders of record on December 2, 2016. We are pleased to report our Board of Directors also declared a special dividend of $0.04 per share, which is payable on December 16, 2016 to stockholders of…

Thank you, Ed and good morning everyone. I’ll review our third quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q2 2016. Total investment income was $14.4 million for the three months ended September 30, a $0.6 million increase from Q2 2016. Interest income decreased by $0.6 million primarily related to the restructuring of our debt investments and synergies. Fee income increased by $1 million due to more investment activity and prepayment fees in Q3. In addition, dividend income increased by $0.2 million primarily related to distributions from equity investments received in Q3. Total expenses, including income tax provision were $7.7 million for the third quarter. Approximately $1.2 million lower than the prior quarter due to a decrease in accrued capital gains incentive fee. Interest expense was in line with the prior quarter, G&A expenses decreased by $0.2 million and base management and incentive fees increased by a total of roughly $0.2 million. Interest expense includes the interest paid on Fidus’ SBA debentures and line of credit, as well as any commitment and unused line fees. As of September 30, the weighted average interest rate on our outstanding debt was 4.2%. As of September 30, we had $214 million of debt outstanding. Net investment income or NII for the three months ended September 30, 2016 was $6.7 million or $0.35 per share versus $0.29 per share in Q2, 2016. Adjusted NII was $0.37 per share in Q3 versus $0.38 per share in Q2. Adjusted NII is defined as net investment income excluding any capital gains incentive fee expense, a 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…

Thanks, Shelby. As always, I’d like to thank our team and the Board of Directors of Fidus for their dedication and hard work and our shareholders for their continued support. I’ll now turn the call back to Gracia for Q&A.

Thank you. [Operator Instructions] And our first question comes from [indiscernible] from D. A. Davidson. Your line is now open.

I guess in terms of the investing environment you mentioned the competition is relatively high, something we’ve heard echoed, I guess not so much in the lower end, I guess you’re one of the first lower end of the middle market sort of talked but, maybe you could just talk about whether it’s intensified or it’s relatively steady since the past few quarters out. How are you viewing the competitive environment?

Sure. Good morning, Aaron, and it’s a great question. In the lower-middle market, I do think it’s less competitive. There is a fair bit of capital being raised, I think it’s from a private debt perspective, I think most of that is earmarked for larger companies and a lot of it’s more for senior secured loans, if you will. Some of those senior secured or unitranche loans are coming down into the high end of our market, so call it $10 million to $20 million of EBITDA businesses. But generally speaking, I don’t think we’ve seen a big increase in competition. In fact, the next thing you would ask is, how is pricing, and what I would say about pricing and pricing is pretty stable right now. It’s not as high levels, but it’s stable levels, we haven’t seen anything crazy really going on. So I would say, in our market it’s remained competitive, it has been competitive, but it’s not crazy if you will from a pricing or competition perspective. Hopefully, that’s helpful.

That is. Thank you. And in terms of one of your new investments in a retailer, I was just curious as you – how you think about the investing in more cyclical business or something about that business, that’s less cyclical and maybe just where you could play in the capital structure and how that works for something of that nature?

Sure. Well, from a capital structure perspective, it’s a senior secured loans, so it’s firstly. And secondly, we think it is a very highly differentiated retailer in the metrics and the cash flow characteristics of the business kind of back that up if you will. And so, and then lastly, I think the average – we look at how pricy the goods are that they’re selling and what’s the average ticket and all those types of things. And it’s more low from my perspective, when you think about apparel. So we’re pretty comfortable with the business. I understand your comments quite frankly, but it’s one that we have fair bit of experience in the retail world. And what we do is really look for differentiated businesses that we think are superior relative to others and this one fits in that category.

Thanks. That’s helpful. In terms of – just one last kick more accounting question. The reversal of uncollectible interest income, I’m sorry if I missed, Shelby discussing that. What was that related to and how much was that an impact in the quarter.

Sure. So that was related to our investment in Pinnergy, and so as Ed mentioned replace Pinnergy on non-accrual at the beginning of Q2. However, we had an outstanding cash component of Q1 interest that was an outstanding receivable, given the pending restructuring. As of the end of the quarter, we had pretty good insight into how that restructuring was going to play out and so we went to head and took a bad debt reserve against that outstanding cash interest from Q1. That was approximately $530,000 or to put it in perspective, approximately $0.02 per share for the quarter.

Okay, that’s helpful. Thank you.

And our next question comes from Bryce Rowe from Baird. Your line is now open.

Thanks, good morning.

Good morning, Bryce.

Hi, Ed and Shelby, maybe discuss if you can, the potential for using SBA debenture capacity, the fund near-term investment activity. The debentures have been flat for the last three or four quarters. And so just curious, do you prefer to use cash on the balance sheet or cap into this SBA capacity for funding of new investments?

Bryce, great question. It is from our perspective, utilizing the cash first, is kind of the goal right now. So that’s how we are trying to manage the business, it doesn’t mean we may not have, it may have some outstandings on the line of credit, at some point that would be – maybe for funding non-SBA deals, if you will. But generally speaking, I think we would prefer to use cash first and then use our line of credit for liquidity as well as obviously commitments from the SBA.

Okay. That’s helpful. And then maybe just a little more commentary around the pipeline both new investments and repayments, I know it’s hard to predict – is this fourth quarter maybe increasingly uncertain in terms of timing of when investments may close or repay due to election cycle.

Great question. From our perspective, the market right now is what I would call at a healthy level. However, I would not say it’s at a robust level, but we’ve had pretty good deal flow right over the last 5 months, 6 months, it really started in June and so we are currently working on several transactions that hopefully will close in the quarter. And so our expectation is it’s going to be continued to be a busy quarter from an investment perspective, as well as the repayment and realization perspective. So it’s – I’d say new deal flow probably a slowdown here a little bit recently, I don’t think that’s a surprise. I mean if you are starting to see a lot of deals right now, they’re probably not for Q4. And just given the election and what not I think people are kind of waiting, if you will. So hopefully that gives you some context, but I think it will continue to be a busy quarter from an investment perspective on both the new investment, as well as the reinvest – I mean the repayment side of things.

That’s helpful. And then maybe just one last one on Pinnergy, I understand the restructuring. Can you guys – what does the investment look like, now it sounds like it’s a $6 million equity investment give or take and there is still some subordinated debt out there too?

Well we put $3 million of new equity and then we took $3 million of our debt and converted that to a preferred equity position. So that’s – so we did put $3 million more along with others to kind of stabilize the situation from all constituents perspective, meaning the banks and also just making sure the company had pretty good running room. So what we’re seeing with Pinnergy right now is, thankfully a little bit of an uptick in activity in the oilfields. And so obviously, prices and just overall activity levels need to get to higher levels over the long-term, but we’re pleased with the overall restructuring, if you will.

Right.

Did I answer that adequately, Bryce?

I think, yes.

Thank you. Good talking to you.

[Operator Instructions] And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Hi, everybody. Just one quick follow-up on the reversal and then a more detailed question. Is that reversal – is that reversed out of non-controlling interest income in this quarter, or somewhere else?

Yes, it would have come out of the interest income for the quarter.

Got it. And then on the kind of the broader pipeline question, et cetera Ed, I mean, we’ve had – you’ve given us color in previous quarters this year, but kind of quality of deal flow. So activity obviously picked up, obviously better in Q4, as well as, as it was in Q3. Is it expansion of just the overall number of deals, are you seeing some opportunity – deal opportunity? Are you seeing expansion of some, but much higher quality and is it an issue that you’re winning more than your fair share or is the pool just that much wider and your – basically did you – have you been getting lucky in the last couple quarters [indiscernible] market really picked up broad?

Yeah, It’s for five days [ph] interestingly, I don’t think deal flow; just the absolute flow of opportunities has changed that much. We actually had decent flow if you will in the first six months of the year. I haven’t said that the quality of that flow was really not good.

Right. Right, exactly.

That changed somewhat dramatically, really starting in June, but really in the third quarter. And so, we’ve seen a big uptick in terms of quality and most of this is M&A driven activity. And so today, what we’re trying to do is very selective manner try to participate in some of that activity. I wouldn’t say it’s at robust levels of activity, but there are folks that want to get liquidity on their investments and have very high quality companies. The second half of the year, I mean people will view the second half of the year as the time to do that, relative to the first year. And so I think that’s what we’re seeing right now. And so we’re trying to participate in some of that activity.

Got it, got it. And just kind of follow-up on Bryce’s question around the election. I mean – is this, the kind of year and I might felt it isn’t but are people in a hurry to get things done before the end of the year or this activity that was, that you’ve seen continue in Q4. Could we easily get a spillover into Q1 because there is no real hard deadlines to get things done this year.

Great question, I’m not sure. I’ve got a great answer for you. I’d say we’re working on right now, it’s mostly Q4 driven transactions that, I’ve – unless something changes, I think they happen in Q4. And so I don’t think there is a huge push, got to get things done here this year. I do think there is a little bit of a push at one point in time, just trying to get things done before the election. But with regard to the transactions that won’t close before the election, I don’t think that – any outcome there won’t impact, whether those deals go forward or not from my perspective. Hopefully, that’s helpful.

Okay. Yeah. Very helpful, thank you.

Good talking to you, Robert.

[Operator Instructions] I’m showing no further questions. I’d like now to turn the call back to Ed Ross for any closing remarks.

Thank you, Gracia and thank you everyone for joining us this morning. We look forward to speaking with you on our fourth quarter call in March 2017. Have a great day and a great weekend.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.