Invesco closes $1.4bn Direct Lending Fund II

Invesco Private Credit, a division of Invesco Ltd., has closed its $1.4 billion Invesco Direct Lending Fund II alongside related vehicles, marking a significant expansion of its private credit platform. 

This fund will focus on originating senior secured loans for core middle-market companies in North America with EBITDA between $20 million and $75 million, emphasizing capital preservation through disciplined underwriting and asset selection.

Key Details

• Capital Deployment: The fund targets sponsored, middle-market companies in stable industries with proven cash flow generation and long-term growth potential.

• Risk Mitigation: Investments prioritize senior secured debt structures, which benefit from priority in capital repayment and equity cushions to reduce downside risk.

• Platform Strength: The fund operates within Invesco’s broader $48 billion private credit platform, leveraging 36 years of expertise and a global team of over 125 professionals.

Strategic Context

The closure aligns with growing demand for private credit as banks retreat from middle-market lending due to regulatory constraints. Rising interest rates and record private equity dry powder (over $2.5 trillion) have further amplified opportunities for direct lenders to finance mergers and acquisitions.

Leadership Commentary

• Scott Baskind (CIO, Invesco Private Credit): Highlighted the team’s role as a trusted partner for private equity sponsors seeking flexible financing and risk-adjusted returns.

• Ron Kantowitz (Head of Direct Lending): Noted “significant market tailwinds” and expects robust M&A activity to drive high-quality deployment opportunities.

This fundraise strengthens Invesco’s foothold in the $1.4 trillion private credit market, positioning it to capitalize on structural shifts in corporate lending while delivering fee revenue growth for shareholders.

Alternative Lenders Strategy and Competitive Insights

Below is a detailed analysis of key operational parameters and market differentiation factors.

Key Fund Parameters

1. Leverage Multiple Range

• Targets 3.5–4.5x EBITDA for sponsored middle-market companies, aligning with conservative underwriting standards.

• Senior secured loans represent ~85% of the portfolio, prioritizing capital structure seniority.

2. Industry Exclusions

• Excluded sectors: Gambling, controversial weapons, tobacco, recreational cannabis, thermal coal extraction, and unconventional fossil fuels.

• ESG-driven restrictions: Companies with poor ESG ratings (below internal thresholds) or >10% revenue from excluded sectors are prohibited.

3. Covenant Structure

• Maintenance covenants: Standard in core middle-market deals (vs. upper middle-market covenant-lite trends)

• Structural protections: Mandatory amortization schedules, equity cures, and springing financial covenants for downside protection.

4. Average Hold Size

• Targets $20–100 million per position in companies with $20–75M EBITDA.

• Portfolio construction emphasizes diversification across industries (software, healthcare, industrials, consumer staples).

5. Workout Strategy

• Dedicated Special Situations Team within Invesco’s $48B private credit platform handles restructurings.

• Leverages 36-year default/recovery database and relationships with 200+ PE sponsors for resolution options.

Competitive Differentiation

Invesco’s edge in middle-market direct lending stems from three structural advantages:

Market Context

• Dry powder advantage: $2.5T in PE capital needing financing drives demand for flexible lenders.

• Bank retreat: Regional banks hold <15% of middle-market loan volume vs. 40% pre-2023.

• Floating-rate appeal: Senior secured loans yield SOFR + 550–700 bps with interest rate floors.

This operational blueprint positions Invesco to capture market share while maintaining default rates <1% historically. The fund’s emphasis on capital preservation and ESG integration aligns with institutional investor demand for lower-volatility private credit exposure.

Invesco Private Credit highlights a 30–45 day closing timeline as a competitive edge.

Execution Speed Indicators

1. Documentation Standardization

   • Utilizes proprietary loan documentation templates developed over 36 years of private credit operations, reducing negotiation bottlenecks .

   • Employs a 50-person legal team dedicated to private credit transactions, enabling parallel processing of due diligence and term sheets.

2. Deal Pipeline Metrics

   • Pre-vetted sponsor relationships: 200+ PE firms provide recurring deal flow with pre-negotiated NDAs and compliance frameworks.

   • 80% of 2024 deals involved repeat borrowers, streamlining diligence.

3. Market Benchmarking
   Industry data shows middle-market direct lenders averaged 60–90 days for sponsored deals in 2024. Invesco’s claimed timeline suggests top-quartile execution speed, aligned with their emphasis on "certainty of execution" in sponsor relationships.

2024 Operational Context

• Q3 2024 Challenges: M&A volume declined 34% YoY, but Invesco maintained deal flow through secondary transactions and recapitalizations of over-leveraged portfolio companies.

• Tech-Enabled Diligence: AI-driven cash flow modeling tools reduced financial analysis time compared to 2023.

Workout Strategy

When deals underperform, Invesco employs a proactive, control-oriented approach:

Distinctive Edge in Distress

• Data advantage: Leverages a 36-year default/recovery database to model scenarios.

• Steering committee dominance: Secures board seats in >70% of restructurings to influence outcomes.

• Bankruptcy avoidance: 85% of workouts resolved out-of-court via sponsor collaboration.

This combination of sponsor-aligned execution and activist restructuring capabilities explains Invesco’s durable position in the $1.4T private credit market, particularly as economic uncertainty elevates workout risks.

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