Private equity's plan B for failing exits: more debt

Private equity's plan B for failing exits: more debt
PE firms that can't unload portfolio companies through an IPO or sale are turning to an increasingly popular alternative.
JAN 21, 2025
By  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.

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.

And last year, UK vehicle glass repair company Belron International Ltd. sold bonds and loans to fund a €4.3 billion ($4.5 billion) dividend payout, along with some of the company’s own cash.

The Clarios deal suggested that credit investors valued the battery maker more highly than the equity market. The company is a well-known debt issuer and is seen as a stable, cash-generating business with very little capital expenditure and a predictable source of income. The loan was increased during syndication by $1 billion and the pricing tightened amid high demand.

IPO Pipeline

Olivier Monnoyeur, a high yield portfolio manager at BNP Paribas Asset Management, expects to see more dividend recaps in 2025, and said he would be open to investing. 

“We will look at these situations selectively,” he said. “More than the debt metrics, it’s the cash flow metrics that are key for us. If the cash flow looks attractive, we are open to investing.”

The number of dividend recaps to come will depend upon the success of IPO and sale processes. A number of listings are in the works in the US and Europe, and bankers are more hopeful for both listings and M&A in 2025 after years of muted activity. Buyout firms have been cleaning up the balance sheets of some portfolio companies in preparation for public offerings, and exiting through the IPO or sale route gives them fresh cash for their next investments. 

But equity capital markets are still fragile, especially going into a potentially volatile year of tariff news under US President Donald Trump. If PE firms aren’t able to get the valuations they want in public offerings or sales, or if equity market conditions sour, they may look at dividend recaps.

Cirsa Enterprises, a casino operator owned by Blackstone Inc., and HBX Group, a travel technology firm backed by Cinven and the Canada Pension Plan Investment Board, are among European firms preparing listings for this year, Bloomberg has previously reported.

The two Spanish companies are potential candidates for exploring dividend recaps in the event that the IPOs don’t work out, according to bankers, who declined to be identified because the information is private. In fact, debt investors in HBX — a popular company with loans that are performing well — may favor a dividend over a listing, in a bid to increase the company’s tradeable debt, some of the bankers said. A listing would see the debt refinanced at lower rates.

Still, no such plans for either company are currently in place, they added.

Cirsa did not respond to a request for comment. Blackstone, HBX, Cinven and CPPIB declined to comment.

To be sure, dividend recaps aren’t something that’s open to all companies. Only those with strong businesses and cashflows are likely to find interest in the broadly syndicated market for loans and bonds used for the purpose of a dividend.

Still, for the right candidates, they provide a solution for PE firms who need to find a way to release funds.

“You have to give me a story and you have to tell me where the cash flows are coming from,” said Catherine Braganza, a senior credit analyst at Insight Investments. “But if you’re the right company, we will absolutely be happy to fund a dividend recap.”

Latest News

'Bogged down' advisors just want to have fun (again)
'Bogged down' advisors just want to have fun (again)

Jim Cahn, of Wealth Enhancement Group, lifts the lid on his firm's partnership model, his views on RIA M&A, and the widely slept-on reason why advisors are merging into larger organizations.

Vestwell unveils new emergency savings account offering
Vestwell unveils new emergency savings account offering

The fintech firm is cementing its status in the workplace savings space with its latest ESA offering, which employers can integrate into their existing benefits package.

'Money Mimosas' and other ways to show your Valentine financial love
'Money Mimosas' and other ways to show your Valentine financial love

Wealth managers offer unique ideas for couples to grow closer emotionally and financially.

Limra research finds financial confidence on the rise among Black American workers
Limra research finds financial confidence on the rise among Black American workers

Survey findings suggest increased sense of financial security and more optimistic 2025 outlook, while highlighting employers' role in ensuring retirement readiness.

DOGE efforts sideswipe muni bonds backed by federal lease payments
DOGE efforts sideswipe muni bonds backed by federal lease payments

Falling prices for some securities within the $4 trillion state and local government debt market spotlight how the push to shrink spending is sending shockwaves across the US.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.