The COO of Prospect Capital Corporation on Its Subprime Lenders

Prospect Capital Corporation (NASDAQ: PSEC  ) is a frequent buyer of, and investor in, subprime personal lenders, among other investments. 

In the following video, Motley Fool Financial Bureau Chief David Hanson and contributor Jordan Wathen ask Prospect Capital's president and COO, Grier Eliasek, about the state of its investment portfolio. In particular, Eliasek highlights the deal terms under which it acquired one of its largest lenders, First Tower, and how it fits in Prospect Capital's portfolio. 

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A transcript follows the video. 

Hanson: The yield on the return that you're going to get in some of those areas is going to vary -- be higher in some, lower in others. Are some of those small parts of your business, where they may be great yields, but it's not really going to move the overall needle of the entire Prospect business?

Eliasek: Our straight lending businesses tend to be closer to a 10% yield, then our structured credit and financial buyouts and other buyouts tend to be in the higher teens; in some cases closer to 20%-plus. Weighted average is about 12.5%.

Some of those businesses, we have regulatory caps on. For example, as a BDC we're capped at no more than 30% of our assets in financial services types of companies -- structured credit and financial buyouts in the aggregate can't be more than 30% -- so the regulatory structure in which we live drives us toward having some of that diversity as well.

Hanson: You've talked a little bit about the finance companies, and buying those. I know one on your balance sheet is fairly large, at least in terms of your average portfolio company, First Tower. I was wondering, how do you think about that business, and how do you think about how it impacts the Prospect portfolio as a whole?

Eliasek: First Tower is definitely one of our larger investments, but it represents less than 5% of our diversified asset base. We love the tax efficiency of this business. If Tower were to go public on its own -- which it's certainly big enough to do -- Tower would need to be a taxpaying corporation. Under a BDC umbrella, on the other hand, Tower is a nontaxpayer.

This company is not a payday lender. It is an installment lender that focuses on making so-called "A loans" to consumers in several U.S. states. These loans are generally two-year, $2,000 sized loans.

Tower has been in business for about 30 years, with a consistent business model over that time. The CEO of the company, Frank Lee, owns 20% of the business, alongside us, which aligns incentives nicely.

We've been pleased with the stability of Tower's business, and expect it to continue to be a meaningful cash flow generator for our company in the years to come.

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Jordan Wathen

"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

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8/27/2015 4:00 PM
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