Connection Capital clients invest in Invesco distressed and special situations credit fund, seeing now as an opportune point in the cycle
- Strong appetite among HNWIs to participate in this hard-to-access, institutional strategy
- Leading blue-chip asset manager ideally placed to source opportunities arising from the Covid-19 crisis
Clients of Connection Capital, the specialist private client investment platform, have invested £3.2m in a distressed and special situations credit fund managed by Invesco Credit Partners (ICP). Many see this as an opportune time to access the strategy as growing numbers of businesses are hit hard by the Covid-19 crisis and require financial restructuring solutions to get through it.
The Invesco Credit Partners Fund II will invest in stressed, distressed and special situations opportunities in small and mid-cap corporates in the US, UK and Europe that are experiencing trading difficulties in the current challenging environment, but which are fundamentally solid businesses. Its strategy involves purchasing senior secured loans from existing lenders at a discount to par, creating the potential to generate attractive risk-adjusted returns when valuations recover.
According to ICP, the opportunity set for distressed and special situations credit grew four-fold in the first quarter of 2020 and is continuing to expand. Current pricing means that the senior debt of these companies can be purchased at deep discounts and low cashflow multiples.
Historically, post-crisis returns of this investment strategy have eclipsed those of other vintages. Recent research* among institutional investors and fund managers found that distressed debt and special situations are expected to be the best-performing private debt strategies over the next three years.
And in a survey conducted in May 2020 among Connection Capital’s private high net worth investor (HNWI) clients with an estimated total net worth of over £2bn**, more than half (52%) said that special situations and distressed debt strategies were likely to be of significant interest to them in the next 12 months.
However, gaining direct access to such strategies can be a challenge for private capital. Connection Capital’s excellent industry relationships and unique syndication model mean that its clients have been able to participate alongside institutional investors, in multiples of £25,000, even though the minimum investment is normally $5m.
Smaller companies are often disproportionally impacted by operating, industry and consumer-related challenges compared to larger ones. However, small and mid cap-focused strategies tend to be an overlooked segment of the distressed debt market as opportunities can be harder to source, although it is more diverse than large cap-focussed strategies and can present less risk.
The highly experienced ICP team can take full advantage of the Invesco global credit platform (which is one of the largest in the market, with $32bn under management), allowing for extensive deal sourcing, due diligence, execution and trading advantages.
ICP has been investing in and working with businesses experiencing market stress, those requiring restructuring and those needing operational support to undertake a turnaround for more than two decades and have restructured over $200bn of debt in that time.
The fund is expected to be fully invested within three years and fully realised within its six-year term, with cash distributions to investors anticipated from year three.
Lorna Robertson, Head of Funds at Connection Capital, comments, “The Covid-19 crisis has created a unique and dynamic environment for the distressed debt investor.”
“Declining revenues across nearly all sectors this year mean that market growth is exponential and far exceeds that of the usual market cycles. Emergency government schemes are masking the full scale of corporate stress right now, but we’re likely to see more pain when they come to an end.”
“Many companies that have suffered revenue shortfalls, liquidity issues or supply chain disruption may be facing temporary financial pressure and require extra headroom in their borrowing to cope with it, but they do not have deep, intrinsic operational or structural issues that need resolving.”
“ICP is seeing opportunities among even the highest quality blue-chip businesses which are likely to emerge unscathed from this crisis due to their business models or market position. We have every confidence that this highly experienced ICP team will make the most of this exceptional pipeline.”
“This opportunity provides our clients with exposure to a differentiated, globally diversified distressed credit fund strategy, operated by a leading blue-chip manager, at a point in the credit cycle which offers the potential for strong returns. It’s the sort of prospect that there is huge pent-up demand for among the private capital community that is generally unable to access this asset class.”
*Source: Research company IFI Global and fund services provider IQ-EQ
**Survey carried out among Connection Capital clients between 30 April and 10 May 2020. 233 out of around 1,000 clients took part, each with an average estimated net worth of £7.5m-£10m.