Prospect Capital’s (PSEC) portfolio generated an annualized yield of 12.7% in 4Q15 across its interest-bearing investments, an increase of 0.6% compared to 4Q14 and 0.3% compared to 3Q15. These yields don’t include dividend payouts or capital appreciation from the company’s equity positions. Prospect Capital holds equity positions in its portfolio companies that will also likely contribute towards the company’s profitability.
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Overall, the market has been experiencing some yield compression over the past two years. However, Prospect Capital has elected to invest in higher-interest-yielding asset classes such as structured credit and online lending. The company’s non-bank structure gives it the flexibility to invest in multiple levels of corporate capital, with a preference for secured and structured lending.
As of June 30, 2015, its overall portfolio consisted of 131 long-term investments with a fair value of $6.6 billion. As of December 31, 2014, the firm counted 138 investments with a fair value of $6.01 billion. These portfolio changes reflect the company’s shift toward marginally larger investments yielding higher returns.
Prospect Capital is focusing less on higher-quality assets such as first-lien senior and secured debts. The company has reduced its composition of first-lien and second-lien investments over the past few quarters as it seeks higher returns by investing in collateralized loan obligations and structured credit. Prospect Capital has managed to generate above-market yields through disciplined credit selection and a diverse origination approach. The changes that Prospect Capital has made to their portfolio should improve yield compression.
Prospect Capital’s portfolio’s fair value is made up of the following proportion of assets:
Here are some of the firm’s peers in investment management that have considerable assets under management:
Together, these companies form 1.36% of the Financial Select Sector SPDR Fund (XLF).