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How the Closed-Ended Industry Is Innovating for Originations

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Multiple strategies

Closed-ended funds (PSP) have seen a decline in their originations over the past couple of quarters. This came as economic activity was cut in half, the stock markets declined globally, and commodity prices fell. Companies increased their focus on retail clients as retail and real estate showed some strength.

Prospect Capital (PSEC) used multiple strategies for origination. These included the following:

  • non-controlled agented and syndicated lending in private-equity-sponsored and non-sponsored transactions
  • control investments in operating and financial companies
  • structured credit investments
  • real estate investments
  • online lending

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The company launched a call center initiative in 2013 to attract new clients. The initiative has helped the company expand its portfolio and clientele. It expects the center to continue contributing to an expansion of its credit portfolio. The majority of its portfolio investments consist of agented middle-market loans.

Originations through joint ventures

Ares Capital (ARCC) recently entered into a joint venture with Varagon Capital Partners and AIG (AIG) in order to build a strong platform for new originations. The company can improve originations in the upcoming quarter with a similar or better yield profile by building up portfolios in these partnerships.

BlackRock Capital’s (BKCC) offerings have been on floating rates and primarily into second liens in order to generate higher returns. American Capital (ACAS) is focusing on retail clientele. United Rentals (URI) is banking on the strength of power and heating, ventilation, and cooling systems. United Rentals is also focusing on the rental of specialty construction products and related services.

Overall, the industry is expected to expand its earnings per share in the range of low to a high single digits. This comes on the back of the replacement of high-cost debt, originations in untapped or profitable areas, and raising of funds through equity or spin-offs.

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