$1.71
$3.81
bear $1.71
base $2.43
bull $3.81
margin of safety $1.40
market price* $1.60
Prospect Capital is a business development company: a publicly traded lending fund run by an outside manager, Prospect Capital Management, which was paid $131 million in base management fees and $27 million in incentive fees in the year to June 30, 2026. At that date the fund held $6.34 billion of investments in 91 companies. About 68% is first-lien loans, 9% is second-lien loans and 23% is equity. More than half the portfolio (57.5%) is in companies Prospect controls. The largest industry exposures are consumer finance (18%, chiefly First Tower Finance, an installment lender with branches in Mississippi, Louisiana, Alabama, Texas, Missouri, Tennessee, Illinois and Florida), real estate investment trusts (17%) and health care providers (12%). Almost the entire portfolio is valued using the fund's own estimates rather than market prices. The fund is financed with $1.88 billion of debt and $1.57 billion of preferred stock, both of which rank ahead of the common shares. Net asset value was $5.71 per common share, down from $6.56 a year earlier. How we measure earnings. A lender's operating cash flow swings with how much it lends out or gets repaid, so it says little about earnings. We instead measure what common owners earn as net investment income, minus preferred dividends and the costs of redeeming preferred stock, minus losses the fund has actually realized on its loans and investments. Changes in the fund's own estimates of what its holdings are worth are left out of earnings and treated as a risk in the cases below. On that basis common owners earned $0.70 per share in fiscal 2021, $0.74 in 2022, $0.78 in 2023, then -$0.27 in 2024, -$0.69 in 2025 and -$0.04 in 2026. The split is telling: in 2021 to 2023 losses mostly sat on the books as markdowns, and in 2024 to 2026 they were realized ($417 million, $519 million and $224 million on investments). Over the six years realized losses totaled about $1.24 billion, partly offset by $0.49 billion of net write-ups. Because the six-year median of $0.33 simply picks the midpoint between the years when losses were deferred and the years when they were realized, we build normal earnings from today's income and a full-cycle loss rate instead. Income has also fallen. Net investment income after preferred costs dropped from about $0.88 per share in fiscal 2023 to $0.42 in 2026, and 2026 included a one-time $17.1 million reimbursement of expenses funded by a litigation settlement. Without it, and on today's larger share count, the fund earns roughly $0.34 per share, or 6% of net asset value. We set normal realized losses at 4.5% of net asset value (about $0.26 per share), between the six-year realized pace and the six-year pace of realized losses and write-downs combined, both scaled to today's smaller portfolio. That leaves normal owner earnings of about $0.09 per share. The fund's $66 million of interest paid in additional debt rather than cash in 2026 is counted as income, and any part that is never collected shows up later as a realized loss. A second cost to common owners is dilution. New shares are issued at market prices below net asset value through the dividend reinvestment plan ($27.5 million in 2026) and when preferred holders convert into common ($126.7 million in 2026). Together these cut net asset value by $0.41 per share in 2026, and the share count rose from 456 million to 513 million. About $1.2 billion of convertible preferred remains. The company may settle conversions in cash starting five years after each preferred share was issued, and in August 2026 it doubled its authorized share count to 4 billion. How we value it. The board has set the common dividend close to net investment income after preferred dividends and cut it as that income fell; it has declared $0.035 a month through October 2026. We assume the dividend keeps tracking that income. Whatever is paid out beyond owner earnings returns capital to shareholders, so net asset value, and the income it produces, shrinks each year. We discount the resulting stream at 6%. The stream fades as the capital base runs off, and no growth is assumed beyond what the fund's own record supports. Base case, $2.43 per share: income of 6.0% of net asset value, realized losses of 4.5%, and dilution of 5% a year for eight years (a little below 2026's pace, since the convertible preferred pool is finite and becomes eligible for cash settlement), then 1% from the dividend plan alone. Net asset value falls about 9% a year, starting from a first-year dividend of about $0.34. Bull case, $3.81: income of 6.5% of net asset value, near 2026's level excluding the one-time reimbursement, and realized losses of 2.5%, closer to 2021 to 2023. The July 2026 sale of the fund's 95% stake in Valley Electric for $280.8 million, with a $131.8 million realized gain and $40.7 million in escrow, shows that some equity holdings can be sold for more than they cost. Conversions are settled mostly in cash, holding dilution to 2% a year for three years and 1% after that. Bear case, $1.71: income slips to 5.6% of net asset value, realized losses run at 6.4%, roughly the six-year realized pace, dilution continues at 2026's pace of about 6% for nine years, and the consumer-finance holdings are marked back to their June 2025 value, a $196 million ($0.38 per share) write-down. Two facts support this case. First, the fund's holdings are carried only $27 million above cost in total, but that figure combines consumer finance and real estate trusts carried about $573 million above cost with the rest of the portfolio, roughly $546 million below cost. Mississippi holdings are valued at nearly twice their cost ($961 million against $491 million), while California holdings are carried at $806 million against a cost of $1.12 billion. Second, the preferred stock and debt are covered 1.78 times by assets against a legal minimum of 1.5. A loss on the scale of 2025's would still leave the fund above that minimum, but a larger one would force cuts to borrowing and payouts. Our estimates are well below net asset value because common owners have earned far less than 6% a year on that capital after fees, realized losses and dilution. The estimates would be too low if realized losses settle back toward the 2021 to 2023 pace or if management stops issuing shares below net asset value. They would be too high if the fund's estimates for the consumer-finance and real estate holdings prove optimistic, or if losses on the holdings carried below cost exceed our assumptions. Our earlier estimate treated changes in the fund's own valuations, up and down, as earnings. We now count only realized losses, carry the valuation risk in the bear case, and exclude the one-time reimbursement from ongoing income. Together these lower all three estimates. The margin-of-safety price is $1.40. From that price, the dividend, even as it shrinks, plus a move toward the base value over about five years implies roughly a 20% annual return in the base case, and the price sits below even the bear case to reflect how much of the value rests on the fund's own estimates.