Prospect Capital Targeting Higher ROE on New Investment Pipeline

Return on capital

Prospect Capital (PSEC) is valued at a lower valuation than its competitors and the broader market (SPY). The company is looking to raise funds through the select sale of equity stakes and spin-offs of profitable divisions in a bid to expand the business. If the stock rises, the company can take another look at its equity dilution strategy.

Prospect has had an average ROE (return on equity) of 9.5% over the past five years compared to the industry average of 7.3%. Here’s how a few of the company’s competitors in the investment management sector fared in terms of ROE:

  • KKR & Co. (KKR): 12.5%
  • Ares Capital (ARCC): 11.2%
  • BlackRock Capital Investment (BKCC): 18.4%

Prospect Capital Targeting Higher ROE on New Investment Pipeline

Prospect Capital is targeting spin-offs for its three divisions, including online business, structured credit, and real estate. The company will dispose of one or more of these divisions if it has higher valuations. These investments make up approximately 10.0% of its total asset base. Its spin-offs are subject to approval based on target valuations as well as regulatory approvals.

Balance sheet strength

Prospect Capital is continuing with a marginally higher leverage than the industry average. Any further rise could lead to a higher risk perception from investors. The company is targeting an improved capital position and thus its balance sheet strength. It’s seeking to raise funds through the partial or full disposition of its subdivisions.

Prospect managed higher net originations in the September quarter on the back of good investment opportunities. The company has deployed more than $350.0 million in new strategies, forming part of its advanced investment pipeline. It’s targeting new areas of investment to improve yield and diversify investments.

In the next part of this series, we’ll examine Prospect’s dividends, repurchases, and valuations.