(Bloomberg) — Booming credit markets are throwing private equity firms a lifeline as they strive to return cash to investors: Instead of relying on the IPO market, they can pile portfolio companies with more debt and give themselves a payout.
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Dividend recapitalizations, where a firm borrows money for a payout to its owners, are an increasingly popular alternative to the usual dual-track options of listing or selling portfolio companies, according to multiple bankers. The strategy has been used in recent deals such as Clarios International Inc.’s debt sale, and red-hot demand for corporate bonds and loans means more are likely to follow, bankers said.
“If they are keen to retain the investment, they can extract money by releveraging the structure and do some exceptional dividends,” said Alexis Foret, a high yield portfolio manager at Edmond de Rothschild Asset Management, referring to PE firms. “Markets allow for that at the moment.”
A strong credit market is facilitating the use of dividend recaps as a third option, as investors seek to put cash to work amid huge inflows into debt funds. Last year saw the most US dividend recaps since 2021, according to data compiled by Bloomberg. A stellar year for issuance of collateralized loan obligations has also helped, because the vehicles are the biggest buyer of leveraged loans in the market.
PE firms have welcomed the advent of ‘triple-track’ processes. They’ve been under pressure after years of high interest rates disrupted their traditional model of buying companies using debt and exiting them at a profit through listings or sales. With this backdrop, more are likely to attempt dividend recaps in order to placate investors who want their cash back.
“Pressure on the sponsor community to return capital is expected to persist in the near-term,” said Cade Thompson, partner and global co-head of KKR & Co.’s debt capital markets unit. “Sponsors will seek other avenues to monetize.”
Some have already used this route: Car battery maker Clarios recently raised debt to fund a $4.5 billion dividend for PE owners including Brookfield Asset Management Ltd. and Caisse de Depot et Placement du Quebec. That recap — one of the largest on record — came after the company shelved plans for an IPO.