Prospect Capital Corporation is a business development company. It specializes in middle market, mature, mezzanine finance, later stage, emerging growth, buyouts, recapitalizations, turnaround, growth capital, development, subordinated debt tranches of collateralized loan obligations, cash flow term loans, and bridge transactions. It also makes real estate investments particularly in multi-family residential real estate asset class. The fund makes secured debt, senior debt, unitranche debt, first-lien and second lien, private debt, mezzanine debt, and equity investments in private and microcap public businesses. It focuses on both primary origination and secondary loans/portfolios and invests in situations like debt financings for private equity sponsors, acquisitions, dividend recapitalizations, growth financings, bridge loans, cash flow term loans, real estate financings/investments. The fund typically invests across all industry sectors, with a particular expertise in the energy and industrial sectors. It invests in aerospace and defense, chemicals, conglomerate services, consumer services, ecological, electronics, financial services, machinery, manufacturing, media, pharmaceuticals, retail, software, specialty minerals, textiles and leather, transportation, oil and gas production, coal production, materials, industrials, consumer discretionary, information technology, utilities, pipeline, storage, power generation and distribution, renewable and clean energy, oilfield services, healthcare, food and beverage, education, business services, and other select sectors. It prefers to invest in the United States and Canada. The fund seeks to invest between $10 million to $500 million per transaction in companies with EBITDA between $5 million and $250 million, sales value between $25 million and $500 million, and enterprise value between $5 million and $1000 million. It fund also co-invests for larger deals. The fund seeks control acquisitions by providing multiple levels of the capital structure. The fund focuses on sole, agented, club, or syndicated deals.
(Summary) (Company) (Chart)
22 January 2016
1yr Target $7.88
Payout Ratio 127.27%
1yr Cap Gain -8.80%
1yr Tot Return 2.77%
EPS (ttm) $0.44
EPS next yr $0.97
Forward P/E 8.89
EPS next 5yr 5.00%
1yr Price Support $4.85
Market Cap $3.08 Bil
Revenues $771.60 Mil
Earnings $156.90 Mil
Profit Margin 20.33%
Quick Ratio ---
Current Ratio ---
1yr RevGR 0.61%
3yr RevGR 7.59%
5yr RevGR 32.67%
1yr EarnGR -70.41%
3yr EarnGR -35.01%
5yr EarnGR -26.81%
1yr DivGR 0.00%
3yr DivGR -8.76%
5yr DivGR -3.75%
The Business Strategy
Prospect Capital Cor is a leading provider of private debt and private equity to middle-market companies in the United States with a focus on sponsor-backed transactions and direct lending to established owner-operated companies. PSEC is a publicly-traded closed-end investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. PSEC completed its initial public offering in 2004.
PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt, which in some cases include an equity component. PSEC provides capital to middle-market companies and private equity financial sponsors for refinancings, leveraged buyouts, acquisitions, recapitalizations, later-stage growth investments, and capital expenditures. PSEC’s portfolio is diversified across a wide variety of industries, including manufacturing, industrials, energy, business services, financial services, food, healthcare, and media, as well as many other sectors. PSEC also invests in the equity and subordinated debt tranches of collateralized loan obligations (CLOs).
The company's investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. They seek to maximize returns and protect risk for their investors by applying rigorous credit analysis to make and monitor their investments. PSEC is a yield-oriented investor and has paid a continuous, regular dividend to its investors since inception.
PSEC is managed by Prospect Capital Management L.P. (“PCM”). PCM has been registered as an investment advisor with the United States Securities and Exchange Commission since 2004. PCM, its predecessors and affiliates have a 25-year history of investing in companies and managing high-yielding debt and equity investments, using both private partnership and publicly-traded closed-end structures.
The reasons that I've invested in Prospect Capital Corporation.
Large, diverse asset pool. Prospect Capital Corporation is one of the largest business development companies with over $7 billion of available capital. PSEC provides flexible private debt and equity capital to middle market companies in the United States and Canada. As of September 30, 2016, PSEC had investments in 123 long-term portfolio investments. PSEC has invested across a range of industries, with low exposure to energy, where energy sector investments account for 2.6% of total investments.
Focus on secured lending. First-lien and second-lien secured loans comprise 71% of PSEC's portfolio of investments, and majority of those are first-lien.
High dividend yield. PSEC has historically used income from debt and equity investments to pay attractive dividends with yields generally higher than other income-oriented investments such as master limited partnerships, real estate investment trusts, and high yield bonds. PSEC pays a current monthly dividend of $0.08333 per share, implying an annual dividend yield of approximately 12.0%.
Significant discount to net asset value. PSEC reports NAV on a quarterly basis within its public filings. PSEC is trading at approximately a 13% discount to NAV.
Excellent returns. PSEC has generated superior operating returns compared to the publicly-traded BDC median over the 3 year, 5 year, and 10 year periods ended September 30, 2016, based on dividends plus change in NAV compounded on a quarterly basis. PSEC's operating performance among publicly-traded BDCs ranks in the 63rd percentile during the 5 years ended 9/30/16, based on dividends plus change in NAV compounded on a quarterly basis.
Significant investment by Management. Senior management are the largest shareholders of PSEC with more than $175 million of common stock, including over $50 million purchased in 2016. Senior management own 6.8% of PSEC's outstanding shares and have never sold a share.
Well-positioned for potential rising interest rates. PSEC has positioned itself to benefit from a rising rate environment by investing predominately in floating rate assets and borrowing at fixed rates.(2)
My Path Forward
Evaluating Business Development Companies is really all about evaluating Management and their ability to make profitable loans that are eventually paid back successfully. Fortunately Prospect Capital has one of the best managements in the business as demonstrated by their success in creating and distributing wealth over the years.
This fits in very well with my investing strategy while not being normally included in a Dividend Growth Strategy. Within my strategy and without the means to significantly invest in the stock market, I needed help creating funds for dividend investing. And this is where the BDCs and MLPs entered my strategy.
I own several of these companies for the sole purpose of receiving generous subsidies in which to invest in dividend growth stocks. I realized early on that I just couldn't generate funds fast enough to create a portfolio that generated enough money to live off of within the timeframe of my life. So I decided to do some limited investing in companies that would produce a significant stream of income (10-12% per annum) that I could use to invest in other companies that would grow their stock price and dividend. Normally these types of companies are purchased by retired individuals who simply want to live off the income that these investments generate. Unfortunately you have to be rich first!
So far this has been a rather successful strategy for me. I've owned shares in this, and other income producing companies, for several years now. By using dividend reinvestment and covered call writing these investments grew rather fast. Somewhere along the way those investments got large enough that I decided to cap them at a certain level and now all the income from dividends and covered call writing is used to invest in other companies.
These types of investments may not be the right ones for everyone, but they worked for me. I have less need for them today but I still enjoy the monthly income. I suppose I'll always hold on to these shares.