Prospect Floating Rate and Alternative Income Fund Highlights Robust Lending Strategy

The firm outlines a diverse approach focused on senior secured loans, CLO equity, and middle-market lending while navigating regulatory and macroeconomic headwinds.

September 04, 2025

Investment Focus and Market Positioning

Prospect Floating Rate and Alternative Income Fund (PFLOAT) has laid out its full strategy in its latest annual report, highlighting a portfolio focused on senior secured lending, middle-market credit, and exposure to CLO equity. The goal: deliver steady income and capital appreciation in a dynamic rate environment.

At its core, the fund invests in floating rate senior secured loans—mainly first and second lien debt—issued by privately held U.S. companies. These borrowers typically generate $50 million to $2.5 billion in annual revenue. PFLOAT sees this part of the market as both undercapitalized and resilient, especially when sourced through direct origination and club deals where lenders can negotiate terms upfront.

These senior loans sit at the top of a borrower’s capital structure. If something goes wrong, lenders holding this paper are first in line to be repaid, giving the fund a degree of downside protection. Most loans pay floating interest rates, typically tied to SOFR or prime. As rates move, income adjusts—helping insulate the portfolio from interest rate risk.

In addition to directly originated loans, the fund also holds syndicated deals and selectively invests in junior debt, preferred and common equity, and structured products. One area of focus is CLO equity, or what the fund calls subordinated structured notes (SSNs). These positions offer the potential for enhanced income, though they come with greater risk. PFLOAT can allocate up to 30% of its portfolio to these non-core assets, depending on market conditions.

Underwriting and Risk Oversight

Underlying all of this is a disciplined sourcing and diligence process led by Prospect Capital Management, the fund’s external adviser. Investment professionals conduct extensive operational and financial reviews, negotiate terms, and monitor performance post-investment. For loans that come through syndication, the fund leverages long-standing relationships with other lenders and arrangers.

Risk management plays a central role in the fund’s approach. PFLOAT avoids overconcentration, evaluates covenant packages closely, and regularly reviews liquidity across the portfolio. The fund also benefits from an SEC exemptive order that allows it to co-invest alongside affiliate funds when appropriate—subject to board oversight.

Market Outlook and Capital Strategy

The firm continues to lean into the relative value it sees in U.S. middle-market lending. With institutional loan issuance on the rise and private equity sponsors actively deploying capital, PFLOAT views this as an environment with steady deal flow. At the same time, floating rate structures and conservative underwriting give the fund room to navigate volatility.

On the capital markets side, the fund launched a $300 million Multi-Class Offering of Class S, D, and I shares. As of September 3, 2025, it had issued 2,237 shares of Class I stock. No Class S or D shares had been sold yet.

Regulatory Framework and Tax Status

PFLOAT remains structured as a business development company (BDC) and regulated investment company (RIC). That means it distributes the majority of its income to investors, avoiding corporate tax in the process. To maintain this status, the fund must stay within specific income, asset, and distribution thresholds—something it actively monitors.

Ultimately, PFLOAT’s latest filing points to a credit platform designed to be flexible but grounded. The team continues to source loans across sectors and deal types while maintaining clear limits around exposure and risk. With credit markets still adjusting to rate pressure and macro uncertainty, the fund is positioned to respond in real time—and keep capital working.