Prospect Capital Corporation's 30% Yielder

Prospect Capital is the only BDC investing in peer-to-peer lending. What's it see that others do not?

Jul 14, 2014 at 7:00AM

Prospect Capital Corporation (NASDAQ:PSEC) has a "go anywhere" strategy that sends it into far-flung corners of the investment universe.

Recently, the company has made a unique move: investing in peer-to-peer loans from companies like Lending Club and On Deck. What's the play here, and how much can Prospect Capital earn from this strategy?

In the following video, Motley Fool Financials Bureau Chief David Hanson and Fool contributor Jordan Wathen sit down with Grier Eliasek, Prospect Capital's president and COO, to explore the opportunities in peer-to-peer lending.

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A transcript follows the video. 

Wathen: Great. Also, this was I thought an interesting investment for a BDC; in the last year you have started doing some more peer-to-peer lending. You have done it for a few quarters, and I hadn't seen any new, large investments in your filings recently, so I was wondering what's the strategy there? Is peer-to-peer something you are still interested in, or something you're phasing out?

Eliasek: We're very excited about this business segment, which we refer to as "online lending," because "peer-to-peer" is a bit of a misnomer when an institution like ourselves gets involved.

Our strategy has been an organic one, so far. We've been focused on purchasing consumer loans through Prosper and Lending Club, as well as small business loans through On Deck. These third-party origination platforms often retain loans on their own balance sheets, or sell loans to third parties.

As a result, we're currently looking to build our own origination platform or platforms, which we hope will generate greater origination volumes, higher direct yields, and potential equity upside from valuation growth in the originator itself.

We think this industry will continue to grow rapidly in the years to come, and we are keenly interested in continuing to be a market leader. We're looking at levered prime consumer, unlevered near prime consumer, and unlevered small business loan returns, net of losses of 15-30% in the online industry. So, it's safe to say that we're keen on making a greater allocation to this segment.

Wathen: You mentioned equity returns coming out of the peer-to-peer lending?

Eliasek: Well, if you own an originator, you have an additional storehouse of value for the future. Lending Club’s last private round I think was $3.8 billion. Maybe it’ll go public later this year, maybe Prosper and On Deck a year later.

If we’re going to be supplying loan capital to an originator, let’s capture the potential equity upside from the originator itself.

Hanson: So you’re interested in actually trying to build out a platform similar to the Prospers and the Lending Clubs of the world? Or are you saying invest in those platforms?

Eliasek: The former. We’re interested in owning our own platform or platforms, probably emphasizing small business first. Small business tends to need less leverage, and fits more favorably into our regulatory baskets.

We can do consumer as well, but there’s a few more constraints there as a BDC, so probably emphasizing and focusing on small business first.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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