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Prospect Capital’s Big Plans for Its Portfolio and Structured Lending

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Portfolio strengthening

Prospect Capital (PSEC) made portfolio investments of $692 million in fiscal 2Q16 (which ended December 31, 2015), up from $438 million in fiscal 1Q16. These were deployed in five new and several follow-on investments. The company’s exits in the form of sales, repayments, and scheduled amortization payments stood at $731 million in the December quarter, and its net investment exits totaled $38.7 million. As of December 31, 2015, Prospect Capital’s control investments at fair value formed 32.5% of its total portfolio, compared to 31.1% in the previous quarter.

The company believes there’s a better chance for risk-adjusted reward in agented and self-originated opportunities, as opposed to the syndicated loan market. As a result, it directs its resources accordingly.

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Prospect’s investments and YoY revenue growth

In fiscal 2Q16, the company invested a total of $692 million. Here’s how its investments break down:

  • third-party sponsored deals—45%
  • syndicated debt—7%
  • online lending—40%
  • operating buyout—3%
  • real estate—5%

Here’s the YoY (year-over-year) revenue growth of Prospect’s peer companies in investment management:

  • Ares Capital (ARCC)—12%
  • BlackRock Capital Investment (BKCC)—2%
  • Blackstone (BX)—12%
  • KKR & Company (KKR)—8%

Together, these companies form 1.4% of the Financial Select Sector SPDR ETF (XLF).

Retail originations

Prospect Capital deploys multiple strategies for origination, including 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, and online lending. The company continues to look for better opportunities in non-controlled investments and is leveraging its capability to provide multiple financing options through its large-scale balance sheet.

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

In the next part, we’ll discuss Prospect Capital’s portfolio building strategy.

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