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Prospect Capital Yields Stabilize in Difficult 3Q15

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Investment performance

With a team of more than 100 professionals, Prospect Capital (PSEC) made approximately $3.2 billion worth of closed investments during calendar year 2014. The company’s non-bank structure gives it the flexibility to invest in multiple levels of corporate capital, with a preference for secured lending and senior loans.

As of March 31, 2015, its overall portfolio consisted of 132 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. The portfolio changes reflect the company’s shift toward marginally larger investments.

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Prospect Capital’s portfolio generated an annualized yield of 12.4% in 3Q15 across its interest-bearing investments. Overall, the market has been experiencing some yield compression over the past two years. The company has preferred not to increase its performance yields by chasing riskier investments. Its yield increased marginally by ten basis points over the previous quarter’s yield.

Protecting against downside risk

Prospect Capital is focusing on quality assets such as first-lien senior and secured debts to protect against downside risk. But it has managed to generate above-market yields through disciplined credit selection and a diverse origination approach. The yield compression is expected to stabilize due to the trading valuation discounts of peer companies.

Prospect Capital’s portfolio’s fair value is made up of the following proportion of assets:

  • 55.6% first lien
  • 19.4% second lien
  • 16.6% collateralized loan obligation structured credit
  • 0.6% small business whole loan
  • 1.4% unsecured debt
  • 6.4% equity investments

Year-over-year revenue growth of peer companies in investment management

  • Ares Capital Corporation (ARCC) – 12%
  • BlackRock Capital Investment (BKCC) – 2%
  • Apollo Investment (AINV) – 15%

Together, these companies form 5.87% of the PowerShares Global Listed Private Equity Portfolio (PSP).

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