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Why Prospect Made Net Exits on Volatile Markets

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Updated

More exits than deployments

Prospect Capital (PSEC) made portfolio investments of $23 million in fiscal 3Q16, a substantial fall from $692 million in fiscal 2Q16. These funds were deployed in multiple follow-on investments. The company slowed originations in the quarter due to market volatility, but it expects to increase its investment pace in the coming quarters, depending on market conditions.

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’s directing its resources accordingly.

In fiscal 3Q16, the company invested a total of $23.2 million. Here’s how its investments break down:

  • third-party–sponsored deals: 10%
  • syndicated debt: 49%
  • online lending: 20%
  • operating buyout: 9%
  • real estate: 12%
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Prospect Capital’s exits in the form of sales, repayments, and scheduled amortization payments stood at $163.6 million in fiscal 3Q16. The company’s net investment exits totaled $140.4 million. As of March 31, 2016, Prospect Capital’s control investments at fair value formed 33.3% of its total portfolio compared to 32.5% in the previous quarter.

Let’s take a look at the year-over-year revenue growth of Prospect’s peer companies:

  • Ares Capital (ARCC): 12%
  • BlackRock Capital Investment (BKCC): 2%
  • Blackstone (BX): 12%
  • American Capital (ACAS): 28%

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

Online strategy dominates

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.

Prospect Capital continues to look for better opportunities in non-controlled investments. The company 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. The initiative has helped the company to expand its portfolio and clientele. The company expects the center to continue contributing to the expansion of its credit portfolio. The majority of its portfolio investments consist of agented middle-market loans.

In the next part of this series, we’ll discuss Prospect Capital’s focus on real estate and online lending.

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