Keep pulling the thread on Ron Kantowitz.
At least 70% of all direct lending deals today are sponsored by private equity firms.
A key indicator of risk in a direct lending portfolio is the conversion of cash-pay interest to payment-in-kind (PIK), which signals that a company lacks the free cash flow to service its loans.
Ron Kantowitz believes a significant backlog of M&A opportunities will come to market once financial markets stabilize, as private equity firms are currently holding assets longer than intended.
Ron Kantowitz predicts that Invesco's private credit platform will experience "explosive growth" over the next five years if M&A market volumes rebound.
The shift of middle-market finance from banks to private capital providers was driven by post-GFC regulations like the OCC leveraged lending guidelines and Basel III, which made it more expensive for banks to participate.
Unitranche deals as large as $5 billion are now being executed in the direct lending market, a significant increase from when billion-dollar deals were considered novel.
In typical sponsored direct lending deals, loan-to-value ratios are in the mid-40s, meaning private equity firms provide more than half the value in first-loss equity.
Invesco's direct lending strategy exclusively focuses on senior secured debt, such as first lien and unitranche loans, and does not participate in second lien or mezzanine financing.
Invesco's private credit platform has over $25 billion of capital invested in the portfolio companies of more than 200 private equity firms.
Competitive pressures in the direct lending market have caused spreads to compress by 50 to 75 basis points.
Despite spread compression, the direct lending asset class is consistently generating low to mid double-digit returns.
Invesco's direct lending funds typically hold 40 to 50 investments, with each position representing 1% to 3% of the portfolio to ensure diversification.