Controlled, online lending

Prospect Capital’s (PSEC) controlled investments in fiscal 2Q17 rose to 31.5% of its total portfolio, compared with 30.6% in the previous quarter. The company targets selective exits to raise capital when it has found attractive pricing. In fiscal 2Q17, it saw net exits of $175.5 million, compared with net investments of $232.8 million in the previous quarter.

Prospect Deploying towards Real Estate, Structured Investments

In fiscal 2Q17, Prospect made significant investments in the real estate and online lending industry. The company, along with National Property REIT, has total direct exposure of $846.6 million, as well as exposure through securitization interests across multiple origination and underwriting platforms. Its online business currently delivers a yield of above 14%, in line with the previous quarter’s yield. The EPS (earnings per share) growth of its investment management peers is as follows:

  • United Rentals (URI): 33.8%
  • CIT Group (CIT): 78%
  • American Capital (ACAS): 157%

Together, these companies make up 13.0% of the ProShares Global Listed Private Equity ETF (PEX).

Structured credit expansion

As of December 31, 2016, Prospect had invested in 41 structured credit investments, with a fair value of $1.1 billion in individual standalone, non-recourse funding with a downside capped at the net investment amount. Its underlying structured credit portfolio was made up of over 2,800 loans, with a total asset base of over $20 billion. The portfolio has had a default rate of 1.2% during the past four quarters, which is 42 basis points lower than the broadly syndicated market rate of 1.6%.

In fiscal 2Q17, Prospect’s structured credit equity portfolio generated an annualized cash yield of 21.5% and an annualized GAAP (generally accepted accounting principles) yield of 14.8%. The portfolio has generated cumulative cash distributions of $812.9 million, making up approximately 61.9% of the original investment. In the next part, we’ll look at Prospect’s leverage and balance sheet strength.

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