Private Equity Firms Turn to Dividend Recapitalizations Amid Exit Challenges

Buyout firms have embraced dividend recapitalizations this year as the continued slowdown in traditional exit channels pushes sponsors to find alternative sources of liquidity. With average holding periods stretching to five years in 2023-2024—up from 4.2 years in the prior two-year period—general partners are turning to debt markets to find an answer to the realizations problem.

Portfolio companies are tapping leveraged loans or high-yield bonds to fund payouts to investors: institutional loan volume tied to dividend recaps rose by five-fold from 2023 to 2024, with 103 recapitalizations delivering $80.4 billion in proceeds, the highest level since 2021.

“As more and larger funds approach the end of their life, financial sponsors face increasing pressure to return money to their limited partners,” noted Andrew Nussbaum, Steven Cohen, and Igor Kirman, partners at Wachtell, Lipton, Rosen & Katz. “Traditional exits such as IPOs slowed over the past few years, and sponsors increasingly utilized alternative exits such as sponsor-to-sponsor sales, minority investments and continuation funds, as well as other liquidity events like leveraged dividends.”

Recent deals include Clayton Dubilier & Rice-backed Wolseley Group’s £350 million senior secured bond offering earlier this month, with proceeds used to refinance existing debt and fund a distribution to shareholders.

It’s a similar story in Europe. Last week, power equipment company Aggreko offered $2.265 billion of debt, with $503 million distributed to owners TDR Capital and I Squared Capital.

In January, Clarios International completed one of the largest-ever dividend recaps after paying out $4.5 billion raised through a combination of a dollar-denominated term loan, a euro term loan, and high-yield bond issuance. The deal reportedly allowed investors, including Brookfield Asset Management and Caisse de Depot et Placement du Quebec, to take out the equivalent of 1.5 times their equity investment.

A competitive lending environment has helped the trend, with lenders generally taking a favorable view of such financings and competing to put money to work. But, the high rate environment makes for more challenging math than when dividend recaps were last in vogue in 2021.

Limited partners have expressed mixed opinions.

Realizations are always welcome, especially when they’ve been so hard to come by. Even so, some LPs have pushed back against distributions that they feel are ‘manufactured’ by the sponsor and not necessarily reflective of real value creation (dumping dividend recaps into the same camp as options like NAV loans or secondaries). There’s also been some concern over elevated leverage post-recap and what that means for an investment’s risk profile through the remainder of the hold.