High Expectations for Closed-Ended Funds, but What's Driving Them?
The availability of credit has improved significantly over the past five years. Companies have had various options for equities as well as debt offerings. Closed-ended funds (PEX) have a predetermined mandate or classification of the companies where they want to deploy funds.
Originations in the industry were low during the past couple of quarters due to the global equity rout and difficult markets. Major funds were deployed in the automobile, retail, and real estate spaces, supported by improved employment, lower oil prices (USO), and stagnant consumer prices.
Prospect Capital (PSEC) made portfolio investments of $692 million in fiscal 2Q16 (ended December 31, 2015), up from $438 million in fiscal 1Q16. These were deployed in five new and several follow-on investments. The company closed more than $2 billion in investments in 2015. It believes there’s a better chance for risk-adjusted rewards in agented and self-originated opportunities, as opposed to the syndicated loan market. As a result, it’s directing its resources accordingly.
Prospect Capital deploys multiple strategies for origination, including the following:
- non-controlled agented and syndicated lending in private-equity-sponsored and non-sponsored transactions
- control investments in operating and financial companies
- structured credit investments
- real estate investments
- online lending
Ares Capital’s (ARCC) portfolio totaled $8.7 billion at fair value. Its total assets stood at $9.2 billion. About 95% of its new commitments during the third quarter were made in the first or second lien. The company continues to invest more in senior secured loans, and Ares Capital expects that the underlying corporate borrowers in its portfolio could deleverage from current levels in order to improve their liquidity, considering the positive 11% year-over-year EBITDA (earnings before interest, taxes, depreciation, and amortization) growth of the portfolio companies.
BlackRock and CIT Group
By comparison, BlackRock Capital Investment (BKCC) invested $76.9 million in 3Q15 and is expected to invest higher amounts in the fourth quarter on attractive opportunities. Sales, repayments, and other exits of investments were at a more than four-year low at $10.7 million during the quarter, resulting in $66.1 million of net new invested capital.
On the other hand, CIT Group (CIT) expanded its assets on the back of expanding operations for CIT Bank. The company recently closed the acquisition of OneWest Bank and remains focused on integrating and leveraging its platform.
On the deployment front, Ares and Prospect Capital are investing more in structured lending and second lien lending to improve yields. Let’s explore this further in the next part.
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