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Prospect Capital’s Net Exits Continue, Investments Expected to Rise

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Higher exits than deployments

In fiscal 4Q16, Prospect Capital (PSEC) made portfolio investments of $294 million, which is a substantial rise from the $23 million in fiscal 3Q16. These funds were deployed in multiple follow-on investments.

High market volatility and increasing competition for high-quality assets have led to lower originations in the first half of 2016. Prospect’s deployment is expected to rise at a slower pace in the wake of competition and with the expected rate hike by the Fed in 4Q16.

In fiscal 4Q16, Prospect invested a total of $294 million. Here’s how its investments break down:

  • third-party-sponsored deals: 50%
  • syndicated debt: 24%
  • online lending: 25%
  • real estate: 1%

Prospect Capital’s exits in the form of sales, repayments, and scheduled amortization payments stood at $383.5 million in fiscal 4Q16. The company’s net investment exits totaled $89.5 million.

As of June 30, 2016, Prospect Capital’s control investments at fair value made up 29.7% of its total portfolio as compared to 33.3% in the previous quarter. The decline was due to a sale of Harbortouch Payments for $328 million.

The year-over-year revenue growth of Prospect’s peer companies are as follows:

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

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

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Origination methods

Prospect Capital is continuously working on its origination strategies in order to boost its loan book. The company’s major strategies include non-controlled agented and syndicated lending in private-equity-sponsored and non-sponsored transactions, control investments, structured credit investments, real estate investments, and online lending.

Prospect continues to look for better opportunities across various sectors, especially in non-controlled space. The company is leveraging its capability to provide multiple financing options through its large-scale balance sheet.

Prospect’s call center initiative is helping it expand its retail book, which reduces risk and boosts returns. This initiative supports the company’s long-term strategy of offering capital from retail to midsize companies. 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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