The Evolution of Direct Lending with Invesco’s Ronald Kantowitz

Stewart: Today, we’re talking about private debt and specifically direct lending. It’s an area where a lot of funds are flowing and we’re joined by Invesco’s Ron Kantowitz, who’s a managing director and head of private debt. Ron, thanks for being on.

Ron: Sure. Thank you very much for having me.

Stewart: We are thrilled that you’re here. You have a lot of responsibility with regard to portfolios and meeting their objectives, and I want to get into the details of that. But first, I’d like to talk about, what do you think the macro environment is right now? I know that your specialty is direct lending, but I’m hoping you can talk about private debt more generally of what is top of mind for credit investors right now?

Ron: Sure. That’s a great question. Look, these are really interesting times, right? We’re living in environments of geopolitical dynamics, rising interest rates, and record volatility. And all of those components ultimately suggest greater risk, and you see that risk in the private debt world manifesting itself in the context of: challenges on the labor side, rising raw material costs, supply chain disruptions. I think all of these things ultimately drive us to focusing on a singular thing. This is about disciplined asset selection. And it’s always a key component of direct lending, but I think given everything we’re seeing in the macro environment today, we have to have a greater heightened focus and be thinking very carefully about where we put our money.

Stewart: It’s really interesting, there is so much money flowing to private assets and rates have come up substantially. And that’ll be interesting to see if that changes that flow, but it certainly doesn’t look like it. There’s a broad spectrum of private debt and a lot of choices. What factors are driving investors into private assets and in particular, which sectors?

Ron: Sure. Look, direct lending by its very nature is a defensive asset class. It’s typically senior secured. It typically aligns with world-class private equity investors. It offers current income. It’s floating rate in nature. So, when you think about the opportunity set and you think about the risks, we talked about just a few moments ago, when you look at this asset class, it’s growing, it offers investors a lot of the mitigants that they’re looking for as they think about their overall portfolio and they think about the risks they’re dealing with today.
As an example, when you compare direct lending to the broader debt and equity markets, what you’ll see is the asset class tends to demonstrate significantly lower volatility. And as a consequence of that, it has lower correlation with all these other asset classes. And notwithstanding, all the different underlying risks in many of the liquid asset classes in the market today, we tend to see many of them move in tandem. And so, one of the really compelling dynamics that direct lending offers is this ability to diversify your overall investment pool and protect against some of the fundamental trends and dynamics we’re seeing across the market.

Stewart: Well, it’s interesting because I was actually talking with a senior person at Liberty Mutual this week, and they pointed out that the Lehman AG is down. Something on the order of 12% and the duration has extended out to six and a half. That’s a big hit. It’s bigger than the financial crisis in terms of total return. It’s not in terms of… The basis is what went up. It’s not a spread move, it’s a basis change.

Ron: Yeah.

Stewart: But it’s, to your point, floating-rate asset. The extension that the AG has seen, it’s challenging right now, right?

Ron: Yeah.

Stewart: So private credit direct lending, obviously not done through a public offering. Where is your team seeing deal flow? How are you sourcing investments today?

Ron: Sure. Let’s take a step back. What is direct lending? The definition of direct lending is we are making loans to companies and businesses without the use of an intermediary. And so we’re directly interacting with borrowers and with private equity firms. And specifically when you talk about direct lending, you’re talking about middle-market companies. When you look at the opportunity set in the United States today, there is something like 200,000 middle-market companies in the US. It represents a third of private side GDP. It employs over 50 million individuals within the country. This is an enormous opportunity set. And then the second piece of this then is you have to think about, well, where’s the demand side? What drives investment opportunity? And what we know from experience is private equity represents more than 75% of the demand within direct lending. And private equity continues to amass record sums of capital, and for them to execute their strategy, they need our direct lending assets.

And so if you work with the right private equity firms and you focus within the right sub-segments, and I’ll talk about that in a second, the demand side is pretty significant. And when we think about, to your question, what segments do we want to focus on? There are two words we love to use when we talk about, what’s the right direct lending company to invest in? And those two words are stable and boring. And I make that point because we remind ourselves we’re not equity investors. I’m not looking for businesses that are going to grow at 20% a year and show 500 basis point margin improvements. If I’m finding those businesses, there’s probably some other potential risks that I may not want to incur in terms of my investment thesis.

So for me, boring, stable businesses rule the day. I want to find businesses where after I go through an extensive underwriting process, and I think about all the projections and modeling these things out, the inherent assumptions I’m using in terms of extrapolating these businesses out over the next three years from a financial performance perspective, aren’t materially different from what we’ve seen these businesses do over the past three to four years. How does that translate into sectors? Well, again, it’s these core sectors, it’s healthcare, it’s business services, it’s industrials, it’s consumer products. It’s businesses where you can understand where these businesses have come from, what their market share is, who their customers are, and you can have great visibility in terms of how they’re going to perform going forward.

Stewart: This is nothing new, but there’s a record amount of issuance. Private equity has a lot of dry powder. You’ve been at this a while. How have you seen the direct lending market evolve over the last few years?

Ron: Yeah. That’s a great question. It’s interesting, when we talk about the evolution of direct lending and I think about it, there’s really two components to the evolution. First, you have to go back 15 years. 15 years ago, providing capital to middle-market companies was the purview of the banks. They dominated the space. And the Great Recession happened, regulations changed, leveraged lending guidelines changed, and suddenly became difficult for banks to be able to support this asset class. And so markets do what they do. They find their ways to solve problems. And you saw the evolution of what we originally called shadow banking, then we called non-banking, and today we call direct lending. And so phase one of the evolution is the opportunity set moving from banks to non-bank platforms. The opportunity set has always been there, nothing’s changed. It’s not new. It’s just, who are the providers and the participants within that asset class.

The second element of this I think is really what’s happened over the last handful of years, where this asset has become much more broadly accepted. I would argue mainstream. In early days, you had quirky one-off direct lenders solving problems. Today this is a trillion dollar asset class. And you have some incredibly big successful names in the market today, regularly providing these solutions to these companies. And so for me, when I think about the evolution of where this is going, the market continues to expand, right? We’re seeing more capital coming in and what we’re actually seeing happen in this next phase of evolution is: whereas historically direct lending is solely focused in the core middle-market, today, it’s not uncommon to see billion dollar direct lending deals getting done. So more capital coming in, it’s driving greater deployment. And what’s ultimately happening is these direct lending asset classes continuing, in my view, to intrude upon the traditional banking markets.

Stewart: Can you help me understand when you say the middle-market? I’ve heard that term. A lot of people define it in different ways.

Ron: Yeah.

Stewart: How do you define middle-market?

Ron: Yeah, I know. That’s a great question. We have a very specific definition. We call it the core middle-market and we define it in multiple ways. Let’s start with enterprise value. These are businesses generally with enterprise values less than $750 million in size. Now, you take that to the next step. So what does that imply in terms of typical debt facilities? You’re generally looking at debt tranches ranging in the neighborhood of let’s call it 100 to 400 million. The other way we talk about this middle-market is in terms of using EBITDA, which is obviously a proxy for cash flow. And when we think about the sweet spot for core middle-market direct lending, we’re generally looking at companies with EBITDA ranging from $20 to $50 million in size. That’s the classic traditional core middle-market. And that’s where we’ve chosen to invest.

We’ve chosen to invest there because if you look back over the past 20 years and you look at the performance within that sector, what you will see is within this core middle-market, it’s demonstrated some of the most stable and consistent performance. And I think equally important today, when you start to contrast that with other opportunities more broadly across direct lending and private debt, we believe today it still offers the most attractive yields. And at the same time, some of the strongest creditor protections. For us, this core middle-market, the 750 million enterprise value or less, that’s really what we think is a sweet spot.

Stewart: We’re trying to do that every day here, Ron, with, we’re trying to get to the middle-market face. Let me just ask one thing and I don’t know if you’re the right guy for this, but why do you think the banks came out of that? Because I 100% agree with you, the banks have exited this space and it has created a great opportunity. Was there a catalyst for that change? Was it the GFC? Is that what took them out? Can you give us a sense for that?

Ron: Yeah. I’ve been in the business for almost 30 years and anybody that’s been in the business that long started on the banking side. I’m classically credit trained. I worked at two of the largest banks in the country and I lived it. I worked in private equity coverage models, leveraged finance models. I think what typically happens when skies are blue, there’s an incentive to just continue to drive business. And you will sometimes see discipline fall by the wayside. And when you think about the legacy bank models, these were fee-oriented models, will underwrite, will syndicate, will turn capital, will make lots of fees. And over time as the markets continue to grow and flourish, the level of aggressive investment just continued to expand. The Great Recession hits and all these assets suddenly get marked down dramatically.

And as we know, banks are highly, highly levered vehicles, right? And I think if you go back to the 90s and into the early 2000s, before some of the changes to the regulations, there were flaws in the way banks risk-weighted their capital. And so what happened in the Great Recession when performing loans were suddenly getting marked down to 70 and 60 and 50, suddenly banks didn’t have the capital to be able to support those assets. And it went through a very, very painstaking process to transition, to move, to solve that. But coming out of that, regulations changed. And regulations basically were put in place to say, you know what banks? Do your job. Your job is not to be taking undue risk with our FDIC-insured capital, your job is to be supporting companies, giving them all the things that banks are required to do.

And as a consequence of that when you look at the changes that happen on the regulatory side, it became more difficult and more expensive, by design, for banks to be able to support these companies. The amount of risk-weighted capital that they had to put behind these assets, by design, were made such that it no longer was advantageous for banks to be pursuing these opportunities. And so that’s predominantly what drove banks out of the market. Again, on the demand side, the opportunity set didn’t go away.

Stewart: Exactly.

Ron: If anything, it’s grown.

Stewart: Yeah.

Ron: And so what you started to see happen, you saw a lot of exodus of the talent pool out of banks. We all had the skill set. We were all these classically credit-trained leveraged folks. We knew how to underwrite businesses. We knew how to structure it. And suddenly, the opportunity set for this type of stable income floating rate asset became available to a whole different opportunity set for investors. And that’s really what drove the asset class out of the banking market into the private debt markets.

Stewart: When you were talking about working with private equity firms, I’m assuming that you have ongoing relationships with a group of private equity firms, and these are not one-off deals. You know these people, you’ve done the due diligence, you know the story with them. And that’s got to help you in both directions on deal flow, right? Is that an accurate assessment?

Ron: Yeah. I think having a differentiated approach to sourcing is one of the most critical components of being successful in direct lending. And so when I think about how we go to market on the sourcing side, it starts with the fact that we like to work with private equity firms that we know, where we’ve worked with before. We understand the type of operational expertise they can bring to the table. We understand the type of governance they can contribute. Importantly, we understand how they’re going to respond if things don’t necessarily go according to plan. We want to make sure these are well-capitalized private equity firms that can contribute more capital into these businesses. And I think, again, what’s important here, when I think about our platform and my team, we’ve been doing this for so long, that when you look across our portfolio at the investments we’ve done in, with whom we’ve done them on the private equity side, what I would tell you is in the vast majority of cases, you can measure the length of the relationships we have with those private equity firms in multiples of decades, as opposed to multiple years.

In many cases, these are the name partners that these private equity firms were associates where we were sitting queue by queue back 20 years ago, 25 years ago, running models at midnight. And so if you have that level of relationship and experience and repeat business, there’s just a level of comfort on both sides, right? I mean, we want to work with private equity firms that we believe are great investors. But it’s a partnership. They want to find direct lenders that are going to not just support them on the initial deal, but be there for them as they look to do incrementals and transform these businesses over time, such that they can execute on their strategies. And I think just one more point I want to make on this, because it’s such an important component, sourcing.

One of the reasons I joined Invesco was because of the strength of the institutional platform. Today in Invesco, we have over $30 billion of capital invested in the portfolio, companies of more than 200 private equity firms. And the reason that’s important is because private equity firms are not just doing broadly syndicated deals anymore. You’ll see private equity firms doing everything from small, middle-market on up to multibillion-dollar corporates. And our PE firms are looking for direct lenders that can support them across the size spectrum. They want to consolidate down to fewer lenders that can do more for them. And so we believe by being able to support them across from small middle-market, all the way on up to multibillion-dollar corporates, it elevates the strength of the relationship and that ultimately drives what we believe is a really compelling sourcing advantage. So it’s a lot of factors into sourcing on the PE side, but when you get it right and you have the right set of customers, you can just do some really exciting things within this space.

Stewart: Yeah. I mean, that makes total sense to me. And so kind of changing gears a little bit, you mentioned healthcare companies. I’m a bond geek, and stable and boring, it’s music to a bond geek’s ears. Right?

Ron: Yeah.

Stewart: You talked about the underlying health of companies in the segment that you focus on. How have those companies weathered the COVID-19 crisis, the supply chain business? What have you seen out of these middle-market companies?

Ron: Yeah. We talk about it in two phases. We talk about what happened during COVID and then we talk about second derivative implications of COVID. Let’s just start with COVID. Every deal we do, we will run all sorts of modeling sensitivities. We’ll assume market cycles, credit dislocations. The idea being, you want to test these companies any way you can under adverse scenarios, such that you can really assess where you think what the appropriate debt service capability these businesses are and what they’re going to look like if things go the wrong way. Now, nobody, nobody was ever modeling COVID. Nobody would’ve ever anticipated that. And I think, again, here, to some extent, the direct lenders that came out the other side of it well were the ones that were disciplined in terms of their asset selection.

And I can tell you, across our portfolio, we had one name that got caught in the crosshairs. And what’s interesting is this is where the second piece of your strategy falls into place. Are you backing the right sponsors? And in our case, we went through an extensive modeling exercise when COVID hit with our sponsors to understand what this company might need over the course of the next 12 months. Those private equity firms contributed additional capital to buy that company the time to get through COVID. I can tell you, today, that company is back at pre-COVID levels and doing incredibly well. So if you find the right businesses, you’re disciplined in terms of selection, you’re going to weather just about any economic dynamic that occurs, be it COVID, recession, etc.

Now, what’s interesting is what we call this the ‘second derivative dynamic’, which is inflation, labor challenges, supply chain constraints. And I would tell you, one of the other interesting dynamics around direct lending is because these are smaller deals and there are only two or three lenders typically in a transaction, we have a lot of great access to our management teams. In many cases, we have board visitation rights, we get monthly reporting. And so I’m having regular dialogue with almost every one of my management teams. And I would tell you, it’s front of mind for everyone and we’re all talking about it. We’re seeing cost rising here, we’re having challenges retaining these folks or bringing on new individuals. But what I would tell you is if you’ve structured these deals correctly and you’ve backed the right management teams, what we’re seeing to date across the portfolio is it’s not systemic.

There are challenges. And if you found companies that have the operating models to be able to flex whether it be cost side or be able to pass through price increases, companies are coming through the other end of it. I think we’re being extra careful and judicious in terms of making investments. But I would tell there’s a lot of noise in the market. There’s a lot of risk in the market. But for the right investment strategy, these core middle-market companies are doing just fine. And again, that I think is part of the appeal of this asset class. I go back 20-plus years. I look at my portfolio how it managed through the Great Recession, how it’s managed through various credit shocks, how it’s managed through COVID-19. And I can tell you time and time again, if you’ve got the right companies, right sponsors, right management teams, you’re going to come through the other end of it just fine and that’s what we’ve been seeing.

Stewart: Looking at this as post-transaction, but there’s a pre-portion too, right? There’s an underwriting portion here.

Ron: Yeah.

Stewart: And so at a high level, can you talk a little bit about your due diligence process? Obviously, that’s helped by knowing the 200 PE firms that you do know, and you have a relationship there and that helps a lot, I’m sure. But can you talk just a little bit about the due diligence process?

Ron: Yeah, sure. Direct lending, it’s a very interesting process. And if I contrast it with a broadly syndicated market for a second, where you get a call from an agent bank, they send you some materials, you’ve got a bank meeting next week, you’ve got a couple of weeks, at best, to be ready to commit. Our business is very different. I’m going to get a call from a private equity firm, that’s either looking at a business or perhaps maybe has something under LOI. And our process, we would argue, is very much akin to private equity. It’s very deep dive diligence. We’re getting on airplanes, we’re flying down to meet with management teams, we’re walking facilities, we’re talking to third party advisors, we’re buying industry analysis, we’re running extensive modeling and sensitivities, again, to really think about what the proper way to structure these businesses are such that we’re comfortable that regardless of what environment we may find ourselves in, these businesses are going to be able to come out the other end of it successfully and to be able to service our debt.

And I think what’s really interesting in the aftermath of COVID, as I mentioned earlier, we complete this extensive multi-month diligence process. One of the key outputs is a series of sensitivities, where, again, we attempt to build various idiosyncratic events that can happen such that we understand how these companies are going to perform. The ultimate downside scenario is COVID. I don’t think anybody’s ever built a model before COVID that would’ve represented the same level of disaster that you might see within a portfolio company. And so, as we think about investing today, part of our thesis is that if we can find a company and management team that we’re able to successfully navigate through COVID, we’re materially de-risking our investment approach as we move forward.

Stewart: And so, no investment conversation today is complete without talking about ESG.

Ron: Yeah.

Stewart: Of course. And we’ve talked about it a lot and it’s easy to talk about and harder to do, right?

Ron: Yeah.

Stewart: Can you talk about Invesco’s private debt platform and how you’ve integrated ESG into it, into what we’ve talked about as the core middle-market segment?

Ron: Sure. Look, let me just start big picture. Invesco has been an innovator in terms of bringing ESG technology into the broadly syndicated market. I think it’s 12 or 13 years ago, we started building a proprietary technology. Today, we’ve underwritten our entire $45 billion private debt book using this proprietary ESG technology. We manage over $9 billion of dedicated ESG funds. So, ESG is fundamental to our DNA. Now, I think the interesting part of this is a very different value proposition when you’re addressing ESG in the context of broadly syndicated deals, which are multi-billion dollar companies and have lots of resources to be able to address this, relative to bringing ESG into the core middle-market where maybe you’re looking at a $200 or $300 million company, where they certainly don’t have the resources to have dedicated ESG individuals focusing on these things.

But what we’ve found, notwithstanding that, is that they’re no less interested in it and they’re no less focused on it. And so our approach to bringing ESG in the core middle-market in direct lending really is twofold. Number one, we’re leveraging that proprietary technology we’ve developed to evaluate these businesses to make sure they meet the criteria that we care about in the context of making good ESG investments. But the second element of this, which has, frankly, been very exciting and very rewarding is we’re leveraging this base of knowledge we have and experience across ESG and we are helping educate our management teams in terms of understanding where they may have future ESG risks, or frankly, where they may have opportunity. And what’s been really exciting about this is we help work with them to think about and develop actionable plans and things that they can do over time to improve their overall ESG profile. And so it is core to the DNA of Invesco across our entire private debt platform.

Stewart: It’s really interesting that you would take your ESG experience, which is significant, back to your borrower and say, hey, here’s some things to think about. Because obviously, as you rightly say, they don’t have the resources to have an ESG team like a large company would. I mean, that’s something I never considered and a really interesting point.

When you look at risk, we’ve talked a little bit about it, but what do you see as the biggest risk in private debt and how are you managing it?

Ron: Yeah. Look, I think almost regardless of what cycle we’re in or where we are, private debt starts with asset selection, it starts and ends there. For every deal I do, I’m turning down 20, 25 transactions. It’s really easy to put money into work if you want to. But at the end of the day, it starts with asset selection. And asset selection, again, I’ve used this term a couple of times, this relates to discipline. For us, it’s, you’ve got to identify quality sponsors, you’ve got to identify quality management teams, you’ve got to identify companies where you can look through and understand their pricing pressure, their market share, their ability to flex cap structures. For us, if you ask me where I think the greatest risk is today, I think as more capital continues to flow into direct lending, it creates deployment pressure.

If you look at some of the largest asset managers in the market running $20, $30 plus billion in AUM in direct lending, the problem they have is you can’t focus in my market. You can’t worry about doing $100 million deal if you’ve got a $20 billion book of business. Because one of the things we know about direct lending is a typical asset has an average life of approximately three years. And so if you’re running a $20 billion book business, every January 1st, you know you’re going to experience runoff in that book quarter plus of your portfolio. So if you’re running $20 billion, I’m just going to stick with that number for a sec, you got to find $5 billion of assets just to maintain, let alone achieve whatever new deployment thresholds targets you’ve got planned for the year. And so where I see risk is in terms of behaviors that become more oriented around AUM deployment rather than absolute investing.

And again, I may sound like a broken record, but this is why we continue to focus in this core middle-market. Because as we look at the upper end of the middle-market, which is large, and there’s some great opportunities there, but as you grow and as you have this deployment pressure, what starts to happen is you have to pivot out of, perhaps, your core expertise into a segment of the market that maybe provides more opportunity in terms of size and deployment. But then suddenly, there are other things that you start to see happen that from our vantage point maybe undermine some of the risk.

And just, I’ll give you an example is, if you look at some of these large billion-dollar direct lending deals getting done, and you contrast them with what we’re seeing in core middle-market, take a look at the pricing. You start to see a lot of yield compression in the upper end. Take a look at things that are much more difficult to spot, but really important. Get into the credit documentation, look at definitions, dig in there, understand what the covenants really look like. Are they real covenants or are they cov-lite, cov-wide, cov-loose, whatever we’re seeing up there in the market? Again, I think, ultimately, when investors lose discipline and start to get motivated by things other than being great stewards of capital, that’s where you put yourself at risk.

Stewart: Amen. Amen. We’ve talked about this on the demand side. I know from my experience in talking with a zillion people, that insurance companies, which is our sole focus, are buying this asset class. What have you seen on the demand side, particularly from insurance companies given their need for yield, and the fact that this is a floating rate asset, which is, right now, particularly important?

Ron: Yeah, no, I think you hit the nail on the head. If you look historically, public fixed income have really been the dominant part of the insurance company’s portfolios, right? I think it’s ranged from 60% to 80% of the book and across their general accounts. And I think the issue that insurance companies are having with that asset class is the persistent low yields. And so again, like so many others that are looking for yield without taking additional risk, this direct lending asset class, as it’s evolved, as it’s matured, as it’s become more mainstream, has become a very, very interesting opportunity set for insurance companies. And frankly, for all investors.

There are a lot of other elements of this that I think makes sense. We talked about the size of the market. We talked about the demand side. You made a great point, which is that this is a floating rate asset class, and we’re living in an environment of rising interest rates. And what we know historically is floating rate loans tend to outperform in rising rate environments. So you’ve got some natural hedge against rising inflation. And I think the other element of this is, it’s interesting because we typically price our deals. When I underwrite a deal, I’m typically thinking about an 8% underwritten yield. My book today is underwritten at about 840 basis points, unleveraged. That’s just asset level. But I think what’s really interesting, and a component of that has always been this LIBOR floor or SOFR floor as we’re transitioning. But what’s interesting is for the first time, in many years, we’ve actually breached that 1% floor.

And so traditionally, the yields on our assets have all been protected by this LIBOR floor. When LIBOR was 20 bps, it didn’t matter. We had a LIBOR floor of 100. But if you look at the market today, LIBOR is now at 140 basis points and climbing. And so this legacy, 8% target that we’ve looked at in the context of this conservative asset class, frankly, is starting to offer some interesting upside. LIBOR, I think by the end of the year, will be close to 2% according to the forward curve and up from there. And so I think if you’re an insurance company, you’re looking for low risk, but strong yield opportunities where you can hedge against rising rates. Again, this is an asset class and that’s, I think, why we’re seeing so much demand come out of the insurance companies into this asset class.

Stewart: Second, only to ESG in terms of headlines recently is inflation, right? Inflation’s a tough thing to deal with for an insurer-

Ron: Yeah.

Stewart: Given that it drives the price of their bonds down and the value of their liabilities up. And markets have very short memories. So everybody’s concerned about the monetary environment, inflationary pressures. How do you see this environment impacting private debt?

Ron: Yeah. Look, I think when you think about rising interest rates as we touched on, it’s a double edged sword. I talked a few moments ago about the benefits of rising interest rates, your portfolio’s going to start to benefit from that. We’ve breached the LIBOR floors and the SOFR floors, and it’s just more income at the same leverage multiples, it’s the same risk profile. The other side of that coin, of course, is companies have to be able to meet their interest payments and service their debt. And so as we start to see interest rates tick up, the question becomes, are these companies going to be able to meet these higher interest rates, these higher debt service needs? And I think there, again, as an investor, you need to look through to these asset managers in terms of how they’re thinking about risk.

As an example, in terms of our portfolio, our average leverage across the portfolio is 4.7 times, which I would suggest is a very conservative leverage multiple within this market. We’re seeing deals getting done at six times, six and a half and greater than seven times. And when your leverage is that high and interest starts ticking up, you can find yourselves at risk. At 4.7 times leverage across the portfolio, our interest coverage across that portfolio equates to something in the neighborhood of three to one. And so when I look at my portfolio and I sensitize it for rising rates, what I know is I can see rates click up 200, 300, 400 basis points. And these companies that we’ve invested in will have more than ample cash flow to be able to support that increased interest component.

The other element of this that I think is really important and interesting is, you talked a little earlier about memories are short and you’re right. Because what I think is about to start to come back into the market is something that we used to implement with regularity, which is we used to require these portfolio companies to put hedging in to protect against this dynamic. If you go back three, four, five years ago in almost every credit agreement we did, we would stipulate within the terms of that agreement, that a certain percentage of a company’s outstanding debt needed to be hedged, whether it was a cap or a collar. But we would make sure we understood what the worst case scenario could be in terms of how much interest they could bear. I would suspect and I would suggest you’re going to start seeing that coming back very quickly as we start to see LIBOR start moving off that floor, that 1% floor that we’ve been living with for the last several years.

Stewart: Quick, almost last question, what are you most excited about right now looking forward?

Ron: Look, number one, having been in this market and in this industry for almost 30 years, what excites me is the fact that this has become such a mainstream asset class today. I think the opportunity set is unlimited. I love working with sponsors that I have a history with. They’re intelligent, they’re smart investors, I love being involved with them. I think the opportunity for us to continue to grow this asset class is just incredibly compelling. And I would add to that, to circle back to our very first discussion, when you look at all the risk in the market today, this is an asset class that is almost designed to play in a volatile environment. We don’t have that volatility. This is long-term capital. We can step in where more liquid markets maybe fluctuate or demonstrate challenges or problems. Deploying our asset class can step in and our asset class can solve problems and our asset class will benefit from that. So what am I excited? I’m excited to watch the market over the next five years and continue to see this asset class continue to grow and deliver for our clients.

Stewart: That’s fantastic. I got one more for you. You remember your first day of work? Do you remember the first job you had, your real job? Not your first, like I worked at a pool. I’m talking about your first job in this business. Do you remember the first day?

Ron: I do, I do.

Stewart: Okay. Let’s just say it’s your first day, and before you get in the elevator and I’m sure if you were anything like me, your knees were knocking, you didn’t know what was going to happen, right?

Ron: Yeah.

Stewart: What would you tell yourself today? If you could talk to that kid, what would you say?

Ron: It’s a great question. So look, I often say I’m pretty boring because I’ve been doing the same thing for 30 years. And I’m glad I’ve done that. I love this business. So I think if anything, what I would tell my earlier version of myself is just keep plowing forward, be curious, ask questions. This is a complicated evolving market. There’s a lot of smart people above you that have been doing this a long time and you need to learn through mentorship. You can’t figure all this out on your own. So just dig in, plow forward, work as hard as you can, work as late as you can, learn as much as you can. And if you do that, you found the right market segment to play in long term.

Stewart: I love it. Ron Kantowitz, at Invesco managing director, head of private debt, talking about direct lending. Ron, thanks for being on.

Ron: Stewart, thank you so much. I really enjoyed it and I appreciate the time.

Stewart: Our pleasure. Thanks for listening. If you have ideas for podcast, please email me at My name is Stewart Foley, and this is the Insurance AUM Journal podcast.

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Invesco is a leading independent global investment manager, dedicated to helping insurance investors achieve their financial objectives. We understand insurers have unique investment needs, from optimizing capital efficiency and yield, to managing reserves and reporting. That's why we offer specialized solutions across a broad set of asset classes and vehicles. With $1.6 trillion in total assets under management, and $51.2 billion on behalf of insurance general accounts,* we strive to understand your distinct capital requirements, accounting tax treatment, and risk factors. (*As of December 31, 2021)

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