Private Credit Prepares for Deal Surge as Market Bottleneck Eases

In Brief:

The direct lending market is positioned for explosive growth as a massive backlog of private equity deals awaits release once current market uncertainty subsides, creating unprecedented opportunities for patient capital providers. Ron Kantowitz, head of private debt for Invesco's Global Senior Loan Platform managing $50 billion in middle-market senior secured direct lending, brings three decades of lending experience spanning the fundamental transformation from bank-dominated markets to today's private credit landscape. In a comprehensive discussion on Capital Allocators, Kantowitz traces his evolution from technology consulting through Chase Manhattan's merchant banking operations to building leverage finance businesses at Royal Bank of Scotland during the global financial crisis, ultimately establishing Invesco's conservative direct lending strategy focused on "stable and boring" businesses with strong private equity sponsors. His insights reveal how post-GFC regulatory changes permanently shifted middle-market lending from regulated banks to asset managers, creating a clubby but competitive environment where patient capital sits ready to capitalize on the expected wave of transactions.

Big Picture Drivers:

• Regulatory Transformation: Post-GFC banking regulations including Basel III and OCC leverage lending guidelines permanently shifted middle-market lending from banks to unregulated private capital providers

• Capital Abundance: Massive pools of capital have accumulated in direct lending, creating competitive pressures but positioning the market for explosive growth when deal flow normalizes

• Market Bifurcation: Direct lending has evolved from purely middle-market focus to a two-tier system with collaborative middle-market lenders and aggressive large-cap players competing with banks

• Deal Flow Bottleneck: Private equity firms are sitting on record capital while unable to exit portfolio companies due to valuation gaps, creating a significant backlog of future opportunities

Key Topics Covered:

• Evolution of Lending Markets: The fundamental shift from bank-dominated middle-market finance to private credit platforms managing tens of billions in assets over the past 15 years

• Conservative Investment Philosophy: Kantowitz's deliberate focus on senior secured first-lien positions with private equity sponsors to prioritize capital preservation over higher yields

• Competition Dynamics: The collaborative "clubby" nature of middle-market lending versus the intense competition in large-cap direct lending markets

• Risk Management Framework: Comprehensive due diligence processes, monthly portfolio monitoring, and early warning systems for identifying potential credit problems

Key Insights:

• Structural Positioning Strategy: Kantowitz's platform exclusively targets senior secured first-lien positions with full collateral, avoiding mezzanine and second-lien investments to maintain the safest position in the capital structure during potential downturns.

• Sponsor Partnership Model: Working exclusively with private equity sponsors provides governance, sector expertise, and significant equity cushion, with sponsors typically investing more than half the business value ahead of debt to protect lenders.

• Quality Over Scale Philosophy: The platform deliberately remains focused on middle-market deals despite growth pressures, recognizing that scaling too large would force entry into different competitive dynamics where their collaborative approach doesn't work.

• Documentation Control: Every investment requires primary due diligence and hands-on documentation control, with the team refusing secondary market purchases or deals where they cannot drive terms directly to prevent covenant issues.

• Recession Preparation Strategy: Current conservative positioning and deal selectivity reflects intentional preparation for expected market dislocation, maintaining "powder dry" for better opportunities when uncertainty resolves.

• Portfolio Construction Discipline: Typical investments represent only 1-3% positions across 40-50 names with strict diversification requirements by sector, sponsor, and single-name exposure to prevent any one credit from damaging overall performance.

Memorable Quotes:

• "There are these two words we use over and over again to define the perfect business for us to lend to. Those two words are stable and boring." - Ron Kantowitz, explaining his investment philosophy for senior debt lending that prioritizes predictable cash flows over growth stories

• "The best you could ever hope for is to get your money back. You're not supposed to lose principle when you're lending senior debt." - Ron Kantowitz, describing the fundamental goal of conservative senior lending strategy focused on capital preservation

• "If you're restructuring your deals where you're converting some of your current cash into pick, there's only one reason you're doing it. You're doing it because the company doesn't have the free cash flow to service your loans." - Ron Kantowitz, identifying payment-in-kind provisions as a major red flag indicating credit stress

• "When we get to that point where markets start to stabilize, there's going to be a huge backlog of opportunities that are going to come to market." - Ron Kantowitz, predicting significant deal flow once current market uncertainty and valuation gaps resolve

• "We live with an eye towards the glasses half empty. On every deal we do, we run recession scenarios, and we're very selective about the types of businesses that we're going to invest in." - Ron Kantowitz, describing his risk management approach in the current uncertain economic environment

The Wrap:

Kantowitz's perspective reveals a private credit market in strategic transition, with massive capital accumulation creating both competitive pressures and unprecedented opportunity for disciplined lenders. His conservative approach—emphasizing senior secured lending to predictable businesses with strong private equity oversight—positions his platform for the expected surge of opportunities when current market volatility subsides and the deal backlog releases. The fundamental shift from bank to asset manager lending appears permanent, driven by regulatory constraints that continue favoring private capital providers. While competition has intensified and spreads have compressed, the asset class continues attracting capital due to its consistent low-to-mid double-digit returns and relative stability compared to volatile equity markets, setting the stage for explosive growth when M&A volumes normalize.