But equity capital markets are still fragile, especially going into a potentially volatile year of tariff news under US President Donald Trump.
(Jan 21): 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. 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.
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.
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.”
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