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Prospect Capital: The Effect of Slow Real Estate and Lower Wage Growth

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Mar. 15 2016, Updated 9:09 p.m. ET

Consumer credit, real estate

Prospect Capital (PSEC) has a positive outlook for consumer credit throughout 2016 on the back of falling unemployment rates and commodity prices. However, as wage rates have either declined or remained steady in 2016, any decline in wage rates or slowing job market will likely impact originations in the consumer segment.

Notably, the company deployed $93.2 million during the December quarter into NPRC in support of the online consumer lending initiative. Its financial services holdings are returning an annualized yield of 18%–30%, reflecting strong demand for consumer credit.

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Prospect has also made multiple investments in the real estate arena with its private REITs (real estate investment trusts). These investments are focused on multi-family stabilized yield acquisitions with attractive tenure financing. The company’s portfolio has been benefiting from an improved housing market, increased rents, and higher occupancies as well.

Its earnings per share growth in the investment management space compares with the following:

  • CIT Group (CIT)—78%
  • American Capital (ACAS)—157%
  • United Rentals (URI)—33.8%

Together, these companies form 2.0% of the PowerShares Global Listed Private Equity ETF (PSP).

Increase in controlled investments

Prospect Capital’s controlled investments in fiscal 2Q16 (which ended December 31, 2015) stood at 32.5% of its total portfolio, compared to 31.1% in the previous quarter. The company has selectively monetized its controlled positions where it finds attractive pricing. Subsequently, it has deployed the proceeds into new, attractive opportunities yielding higher returns at lower risks.

Prospect Capital is deploying investments for the online lending industry, with a focus on near-prime, prime, and subprime consumers as well as small business borrowers. The company generated 40% of its origination in the December quarter through online lending, and the business currently delivers an expected leveraged yield of ~17%. In 2015, the company closed four bank credit facilities and one securitization in order to enhance its returns, and it is now focusing on diversifying origination sources for its online business as well, in order to generate more leads.

Continue to the next part for a look at Prospect Capital’s higher leverage and its advantages.

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