No Holds Barred

Once More Unto The Breach

Bloomberg – which rarely writes about the public BDC sector despite its ever growing importance in private credit – has published yet another in-depth report into one of the most marginal larger sized players: Prospect Capital (PSEC).

Here are links to just a few of the prior Bloomberg articles: on August 6, 2024 the headline shouted “Private Credit Fund Burned by Risky Bets Is Bleeding Cash” (we bet that got your attention). Then, on November 8, 2024, we heard that “Prospect Capital Plunges on First Dividend Cut Since 2017“. More recently, December 6, 2024, there was a piece about the BDC’s borrowings being downgraded to junk status.

(We couldn’t find any in-depth articles about the recent “slashing” of the dividend at Goldman Sachs BDC (GSBD) or the ever continuing losses at BlackRock TCP (TCPC), which also included the departure of its CEO, or the (39%) declines in the net asset value pershare of venture-lender TriplePoint Venture Growth (TPVG).

This time the headline is “Private Credit Pioneer Dragged Down by Insults and Indecision“, followed by a sub-heading clearly intended to avoid litigation: “Current and ex-employees of Prospect Capital describe a culture so dysfunctional that other firms don’t want to work with it; Prospect executives say they have a proven investing track record and supportive work environment“.

We know a little about PSEC, which we’ve been writing about more or less since 2004, when the BDC launched its IPO, so we were very interested to see what Bloomberg had turned up that required the involvement of three of its journalists –  Ellen Schneider, Davide Scigliuzzo, and Silas Brown – and “interviews with more than 30 people who either work or have worked at Prospect or done business with it”.

Good Stuff

We can tell you that Bloomberg had plenty of “revelations” to offer up, providing the sort of behind-the-scenes “color” we rarely get about BDCs.

Here is a non-exhaustive list, which made for very interesting reading:

• “On conference calls, Barry and his top lieutenant, Grier Eliasek, rip into staffers”.  Apparently, according to the unnamed sources, the principals of the firm can be abusive, throwing around (non-PC) words like “idiotic” and “moronic”.

• PSEC’s “staffers” – in turn – can be “belligerent” and aggressive with Lincoln International, the BDC’s valuation firm.

Mimicking their CEO, they’ve fumed over recommendations they think are too low. And when Lincoln analysts refused to rework the numbers on Prospect’s loans, the protestations would get louder and the conversation more heated, according to four people involved in the discussions.

Lincoln International, though, had no comment to the anonymous claims by 4 sources.

• Bloomberg also claimed that PSEC has become – for want of a better word – a pariah in the clubby world pf leveraged lending:

[PSEC was]deemed too erratic and indecisive to be invited into the most coveted loan deals. Several former employees said that when they rang up other firms to inquire about deals in the works, they were frequently told that Prospect was frozen out.

• There were also sadder revelations, like the claim that PSEC could not even attract existing and prospective clients to their corporate parties, despite the offer of a evening cruise around Manhattan and – one expects – free booze:

On many occasions, though, only a fraction of invited guests showed up, according to people who have attended in recent years. Meier, the lawyer, refuted this, saying 53 “client-side individuals” joined last summer, but the employees remember outings when there were so few guests to entertain that they just mingled among themselves on the deck.

• Unconvincingly, some sources claimed PSEC’s “isolation” has “pushed Prospect into riskier and riskier loans — many of which are in trouble today”.

Begin At The Very Beginning…

That last claim seems like a bit of a stretch: PSEC has been booking risky loans since the very beginning.

Those “riskier loans” were a necessary part of a strategy of both paying shareholders and the external manager (especially CEO John Barry who owns the advisory firm) handsomely.

Bloomberg failed to point out that PSEC continues to charge a 2% Management Fee and a 20% Incentive Fee on income at a time when many of its peers are charging 1.0% on the former and as little as 15% on the latter.

The Boorish Billionaire

We also learn from Bloomberg a great deal about John Barry and how he has parlayed Prospect (both the BDC and other funds) into a $1.3bn fortune.

The picture that emerges is not a particularly attractive one.

Besides the ripping into staffers, the article begins with the now-infamous conference call where the CEO furiously berated analyst Finian O’Shea for what seemed like an eternity to those of us listening.

For six and a half minutes, Barry berated and mocked the analyst, Finian O’Shea, his voice rising higher and higher. “Why don’t you do the world a favor,” he snapped at one point, “and do a little research before you come on an earnings call with absurd questions like this?”

Our Take At The Time

By the way, we wrote our own article in the wake of that intemperate attack. Here’s a little extract:

We will say, though, that Mr O’Shea remained cool, calm and professional throughout the Q&A. From our point of view, he has a right to ask any question he deems important without being the target of the sort of bad temper and injurious language Mr Barry directed his way. Also worth noting again is that Mr Eliasek – PSEC’s President – to paraphrase Kipling, kept his head when all about him were losing theirs.

Contrition?

Even billionaires have to apologize at times and Mr Barry – as Bloomberg reports – did eventually.

Months later, Barry apologized. He realized almost immediately, he said, that he had made a mistake, and so he started the next quarterly earnings call by telling O’Shea that he regretted what he said.

We Are Sure The Board Has Been Consulted

We also learn that Mr Barry “treats it as an extension of his home, walking around in sandals, even in the dead of winter, and hiring family — his wife, children, even a nephew — to jobs big and small”.

Not Pretty

He is reported to be misogynistic by some sources:

Barry has often complained about female workers, some of the people said. They’re overly emotional and not focused enough on work, he has said on conference calls and at corporate dinners. These dinners have at times had a certain old-boys-club quality to them. Three former employees who attended the gatherings in recent years said they’d seen Barry press the men around him to comment on the physical appearance of the women — female colleagues of theirs or the wives of male colleagues — in attendance.

We could go on because Bloomberg does so for several pages, but you get the drift from what we’ve shared here.

Objection

We enjoy a salacious story as much as the next person and won’t deny we used to read the National Enquirer while waiting in line at the supermarket with as much enthusiasm as the next person.

However, from the perspective of a BDC investor, the Bloomberg article has its own flaws.

The authors go to great lengths to tie the apparent deficiencies in Mr Barry’s character and in Prospect’s corporate culture to its recent financial setbacks that have included a (25%) dividend reduction; a stock price trading way below book; a ratings downgrade and earnings heavily reliant on pay-in-kind income.

However, much of that is “old news” that has already been covered in prior articles and seems to have been recycled for this latest lambasting.

Hiding In Plain Sight

What is missing is something very important to anyone holding PSEC’s securities.

Several months ago, management renounced virtually all their prior investment strategies, and promised to radically re-position its investment portfolio in the quarters ahead.

Gone is the heavy PSEC exposure to CLO equity stakes – a critical factor for many years in generating those high yields the BDC needed but which usually result in ever lower losses to book value.

Gone – as soon as practical – is PSEC’s huge investment in commercial real estate which the BDC touted for years but is now selling off.

Likely gone – if they can find buyers – are the relatively small number of “control” companies where PSEC serves as both lender and owner, and the source of most of its paper income.

Instead, PSEC wants to become a lender and investor in middle market companies, either “sponsored” by private equity groups or non-sponsored.

This is a straight down the fairway leveraged lending strategy similar to that of dozens of other BDCs, both public and private.

Reason

Why this change of heart?

We suppose it’s partly because the economics of those strategies are no longer favorable.

For example, the average GAAP yield on the CLO portfolio is only 3.9% and the real estate portfolio is generating a yield of just 6.9%, well below the 10%-12% yields available elsewhere in leveraged lending.

It may also be because Mr Barry will have a much better chance at eventually selling off Prospect at some time in the future if its business is more conventional.

He is, after all, 73, and may be considering his estate planning as billionaires are wont to do.

Are We There Yet?

PSEC’s facelift has only just begun. It was first announced back in November 2024 on PSEC’s IIIQ 2024 conference call – just after Mr Barry apologized to Mr O’Shea.

We wrote an article on February 12, 2025 – following the IVQ 2024 results – discussing the progress made to that date.

In a nutshell, progress towards PSEC’s stated goals has been slow so far and there is still plenty of doubt as to whether the ultimate economics of the new approach can arrest the BDC’s net book value decline and/or “cover” the recently reduced dividend level.

Over at our sister publication – BDC Best Ideas – we have suspended coverage of PSEC for the moment because handicapping the BDC’s future performance is impossible given its many moving parts.

This. Not That.

Bloomberg discussed none of the above but the future of the BDC is much more linked to the implementation of this strategy rather than whether Mr Barry is someone you’d like to have as a boss or chat with at a cocktail party.

Even Bloomberg’s focus on PSEC’s heavy PIK income might be less important than it used to be.

According to PSEC’s latest conference call:

Payment in kind income for the quarter ended December 2024 was $20 million, down 39% from the prior quarter and down nearly 50% from the June 2024 quarter. 

What Matters Most

Hopefully next time Bloomberg marshals its resources to investigate PSEC – or any public BDC, because they’re all interesting in their own way – there’ll be more emphasis on financial analysis and less tattle tailing.

Anyway, till that day, you’ve still got the BDC Reporter to count on.