Private Equity Firms Embrace Dividend Recapitalizations as Credit Markets Surge

Amidst a booming credit market, private equity firms are increasingly turning to dividend recapitalizations as an alternative to IPOs and portfolio company sales to return capital to investors.

Rise of Dividend Recapitalizations

Dividend recapitalizations involve borrowing funds to distribute dividends to owners, offering PE firms a third option beyond traditional listing or sale strategies. This approach has gained popularity due to strong demand for corporate bonds and loans.

Strong Credit Market Facilitates Dividend Recaps

The robust credit market has enabled private equity firms to tap into this option. Investors are eager to invest in debt instruments with strong cash flow metrics, making dividend recaps an attractive proposition.

Pressure to Return Capital

PE firms face pressure to return capital to investors, especially after years of high interest rates that hindered their traditional investment model. Dividend recaps offer a path to distribute funds while maintaining control of portfolio companies.

Recent Notable Deals

Recent examples of dividend recap deals include Clarios International Inc.'s debt sale and Belron International Ltd.'s bond and loan issuances to fund dividend payouts. The Clarios deal highlighted the potential for debt investors to value companies higher than the equity market.

Selective Investment Approach

Debt investors are expected to remain open to dividend recaps in 2025. However, they will prioritize cash flow metrics over debt metrics in assessing investment opportunities.

IPO and Sale Pipeline Influences Dividend Recaps

The success of IPOs and sale processes will impact the number of dividend recaps. If equity capital markets remain volatile, PE firms may prefer dividend recaps to secure returns.

Potential Candidates

European firms Cirsa Enterprises and HBX Group are potential candidates for dividend recaps should their planned IPOs not proceed as expected. Debt investors may favor a dividend over an IPO for HBX, given its strong loan performance.

Suitability for Dividend Recaps

Not all companies are suitable for dividend recaps. Only those with strong businesses and cash flows are likely to attract interest in the loan and bond markets. However, for eligible firms, dividend recaps provide a viable solution for PE firms seeking to distribute funds.