Prospect Capital (PSEC) is targeting spin-offs in order to raise capital to be redeployed in asset classes yielding higher returns. The company is currently working on three dispositions, forming approximately 10% of its total asset base. Prospect Capital is aiming to unlock the value of its online lending business, structured credit business, real estate business, and CLOs (collateralized loan obligations). The company believes that these individual businesses could yield higher values when the proceeds are deployed in middle-market companies. On a stand-alone basis, each of these businesses could fetch a greater value than Prospect Capital’s current valuation.
Prospect Capital expects to complete a first set of divestitures by the end of the December quarter. The company expects to complete its remaining divestitures in 2016, upon regulatory and exchange listing approval.
Non-business development companies
Prospect Capital has substantially expanded these new businesses at a quick pace over the past few years. In particular, it has rapidly expanded its online lending business. The CLO structured credit business and the real estate business have expanded faster than the traditional lending business.
Prospect Capital has suspended market equity issuances for the indefinite future due to unattractive share price levels. The company is instead seeking to raise capital for future expansion through the divestment of non-business development companies, through partial or complete spin-offs.
These divestitures will occur in conjunction with debt-raising so that the company can increase its leverage and earnings neutrality.
Prospect Capital generated returns of 10.2% on its book equity in 4Q15 on an annualized basis. This is lower than the peer average of 10.7%. Here’s how a few of the firm’s peers in investment management fared in terms of return on equity:
- Ares Capital Corporation (ARCC): 11.2%
- BlackRock (BKCC): 18.4%
- KKR & Co. (KKR): 12.5%
- Blackstone (BX): 28%
Together, these companies form 1.36% of the Financial Select Sector SPDR Fund (XLF).