Enhance portfolio diversification with private credit

Our belief is that macro conditions will likely get worse in the short to medium term. However, markets like this excite us, and we believe the current opportunity set may result in one of the best vintages on record.

Markets now have good visibility on the headwinds that are likely to dominate the next 12-18 months and, as such, we believe our screening, diligence, structuring and asset allocation processes are now that much more informed.

Furthermore, from a yield/return perspective, direct lending remains quite attractive. As a floating rate asset class, Secured Overnight Financing Rate (SOFR)3 is now over 400 basis points higher than it was at the start of 2022.

Along with moderately wider credit spreads and original issue discounts, we are finding opportunities that are currently yielding in the 12% context.

• Like BSLs, direct loans are senior secured and floating rate but are smaller and made directly (no intermediary involved) to middle market companies.
• Direct lending loans are less liquid due to their smaller size and are typically held by a small group of lenders (< 5); as a result, direct lending is mostly a “buy and hold” strategy.
• At Invesco, we primarily focus on core middle market companies ($10-75 million EBITDA), which we believe offer consistent return potential while maintaining strong creditor protections.
• Investors are typically compensated with 200-300 basis points of additional yield above BSLs.

• Senior secured and floating rate loans are made to large cap companies and syndicated by intermediary commercial and investment banks. These loans are distributed to multiple institutional investors.
• This is the most liquid part of the Private Credit space as these loans are larger in size (typically >$500 million) and are actively traded across numerous market participants with daily mark-to-market pricing through multiple providers.
• BSLs are also attractive relative to other liquid debt markets like high yield bonds. BSLs offer higher yields with better downside insulation given their senior secured status and materially higher recovery rates (~60-70% for loans vs. ~30-40% for high yield bonds).
• While some BSL issuers may have public debt or equity, Invesco will mostly (but not in all cases) remain on the “private side” and have access to material non-public information as part of the private loan syndicate.

• A securitised version of BSL exposure, CLOs create portfolios of hundreds of loans and structure them into different tranches with different risk/return profiles.
• This range of risk/return profiles allows investors to choose their preferred balance of risk and return, while benefiting from a collateralised structure which has proven resilient over time.
• Typically, CLO notes offer a premium to other securitised vehicles because of the complexity of understanding the underlying private loans and uniqueness of each CLO structure.
• CLO notes are registered securities and trade and settle like bonds.

• Similar to direct lending, distressed credit is typically less liquid in nature, but can offer higher potential returns (with incremental risk).
• Distressed credit typically involves investing in the senior debt of companies at significant discounts to par – due to perceived fundamental weakness.
• Returns are generated by investing in companies where, over the longer-term and through various actions, meaningful upside potential can be unlocked.
• At Invesco, we take a proactive approach to value creation in seeking asymmetric return profiles – targeting equity-like returns with credit-like risk.
• We focus specifically on inefficient markets which tend to offer a more evergreen opportunity set and are less industry/cycle dependent.