Prospect Capital’s (PSEC) portfolio generated an annualized yield of 13.0% in fiscal 1Q16 (September end 2015) across its interest-bearing investments, a rise of 1.1% compared to fiscal 1Q15 and 0.3% compared to fiscal 4Q15.
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 toward its profitability.
The market has seen some revival in yields on the expectation of an interest rate hike from the Fed in the fourth quarter of 2015. Prospect Capital is deploying capital 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 September 30, 2015, its overall portfolio consisted of 131 long-term investments with a fair value of $6.4 billion.
As of December 31, 2014, the company counted 138 investments with a fair value of $6.0 billion. These portfolio changes reflect the company’s shift toward marginally larger investments yielding higher returns.
Yields versus risk
Prospect Capital has continued to increase its exposure to collateralized loan obligations and structured credit. The company is focusing less on higher-quality assets such as first-lien senior and secured debts.
Prospect 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.
The company has managed to generate above-market yields through disciplined credit selection and a diverse origination approach. The changes that it has made to its portfolio should improve yield compression.
Prospect’s portfolio’s fair value is made up of the following proportions of assets:
- 54.2% first lien
- 17.4% second lien
- 18.7% collateralized loan obligation structured credit
- 0.3% small business whole loan
- 1.1% unsecured debt
- 8.3% equity investments
Assets managed by other players
Here are some of the company’s peers in investment management that have considerable assets under management:
- Carlyle Group (CG): $193 billion
- KKR & Company (KKR): $98 billion
- BlackRock (BLK): $4.5 trillion
- Apollo Global Management (APO): $163 billion
Together, these companies form 1.4% of the Financial Select Sector SPDR ETF (XLF).