How Closed-End Funds Are Increasing Yields on a Given Risk



Improved yields

Closed-end funds (PEX) have been boosting yields by deploying capital in marginally risky asset classes or companies. Prospect Capital’s (PSEC) portfolio, for example, generated an annualized yield of 13.4% across its interest-bearing investments in fiscal 3Q16. This yield represented a 0.1% rise over fiscal 2Q16 and a 1% rise over fiscal 3Q15.

But we should note that 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 can also contribute to its profitability. Its yields are expected to be above 13% in its June quarter as it continues to deploy investments into structured instruments.

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The market saw some revival in yields on the expectation of an interest rate hike from the Federal Reserve in 4Q15. Prospect Capital is thus 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.

Companies with exposure to real estate and automobiles such as United Rentals (URI) have experienced lower yields. Those with higher exposure to the energy sector saw some compression. CIT Group (CIT) saw its yields improve to above 6%, with average earning assets of $3.9 million.

BlackRock and Ares

Ares Capital’s (ARCC) weighted average yield stood at 9.2%, as compared to 9.1% as of December 31, 2015, and 9.6% as of March 31, 2015. Its yields fell mainly due to the decline in the yield on subordinated certificates in the SSLP (senior secured loan program) and lower transaction flow in high-yield markets. The company intends to sell these investments to the SDLP on the establishment of a diversified portfolio for the program.

By comparison, BlackRock Capital Investment’s (BKCC) weighted average yield declined to 10.8% in 1Q16, as compared to 11.0% as of December 31, 2015. The weighted average yield on the company’s newly funded investments during the quarter was 10.9%, while the weighted average yield on the fully exited portfolio company during the quarter stood at 10.1%.

Continue to the next part for a closer and up-to-date look at originations.


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