Yields in range
Closed-end funds (PEX) have been targeting higher yields by investing in second lien—or marginally risky—offerings or companies.
Prospect Capital’s (PSEC) portfolio, for example, generated a yield of 12.8% across its interest-bearing investments in fiscal 1Q17. This yield represented a 0.2% fall from fiscal 4Q16 and a 0.5% rise over fiscal 4Q15. The company has invested in higher-interest-yielding asset classes such as structured credit and online lending.
Yields are expected to rise marginally following the Federal Reserve’s expected rate hike in 4Q16. The potential rate hike could lead to an increased cost of funds. Closed-end funds are targeting structured investments, retail lending, and housing finance to generate originations and higher yields.
Apollo Investment’s (AINV) yields istood at ~11% for its full portfolio in fiscal 3Q16. The company’s yields have been falling consistently over the past few quarters on its high-risk portfolio. The yields on its overall portfolio stood at 11.5% in fiscal 1Q16.
BlackRock and Ares Capital
Ares Capital’s (ARCC) weighted average yield in fiscal 3Q16 stood at 9.8%, compared to 10.1% on December 31, 2015. The yield fell mainly due to lower yields on subordinated certificates in SSLPs (senior secured loan program) and subdued transaction flows in high-yield markets. Ares Capital deploys money via second lien loans to either known or large companies.
In comparison, BlackRock Capital Investment’s (BKCC) weighted average yield stood at 11.4% in 3Q16, compared to 11.1% in 2Q16 and 11.6% in 3Q15. The sequential rise was mostly due to investments through Senior Loan Partners and Gordon Brothers Finance Company.
In the next article, we’ll study originations and the various strategies deployed by closed-end funds.