Where are Closed-Ended Funds Investing for Higher Growth?
Closed-Ended Funds Alter Strategies with Rate Hike in Mind
Investing for higher growth
Traditionally, asset managers (PSP) have focused on middle market companies with strong credit ratings. But with declining yields, they’re investing for higher growth with lower grade investments and retail investments.
Ares Capital (ARCC) has consistently increased its exposure to second lien senior secured debt. Second lien debt made up 21% of its new commitments in 3Q15. It also represents 30% of the company’s total portfolio, while the first lien senior secured loans represent 31%.
Ares Capital has substantially reduced its exposure to first lien loans over the past few quarters, from 46% in 3Q14 to 31% in 3Q15. The company is targeting a minimum yield that’s 400 basis points higher on its second lien debt offerings than what it generates on first lien senior loans. This strategic change should help Ares Capital boost its average yield on its overall portfolio. The overall risk profile has deteriorated marginally, but it remains strong.
Online lending
On the other hand, Prospect Capital (PSEC) is deploying investments for the online lending industry. It’s focusing on near-prime, prime, and subprime consumers as well as small business borrowers. The company generated 28% of its origination in the September quarter through online lending. The business currently delivers an expected leveraged yield of ~18%.
During fiscal 2014, the company entered the online lending industry jointly with National Retail Properties, an REIT. Its total business currently stands at ~$261 million across multiple third-party and captive origination and underwriting platforms. It’s also focusing on diversifying origination sources for its online business in order to generate more leads.
American Capital (ACAS) and United Rentals (URI) are also focusing on retail clientele in order to increase their originations. Some of the middle market players are also deploying funds in international markets in order to select quality portfolios.
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