Dividend recapitalization, when a private company pays its investors a cash dividend with borrowed money, surged to a record high in 2024. According to PitchBook LCD data, private equity firms raised $30.2 billion in leveraged loans for dividend recaps in just the first half 2024, matching 2021 levels—the highest in a decade.
The sudden resurgence can be explained by a perfect storm of market conditions: during the Covid-19 pandemic, low interest rates and heavy fiscal stimulus allowed private equity firms to raise funds from LPs (limited partners)—investors in private equity funds—and borrow at record levels and quickly funnel that money into investments. However, the pandemic was followed by high inflation and a stricter regulatory regime. Higher interest rates made it harder for potential buyers of private equity funds’ portfolio companies—often other private equity firms or major companies—to raise capital to finance acquisitions.
In addition, the FTC—under Lina Khan’s leadership—took a wary approach to mergers and acquisitions, dampening market activity significantly. In 2023, U.S. M&A deals fell 16 percent from the previous year and were down 49 percent from their 2021 peak, according to EY. IPOs also plummeted, totaling just $23.9 billion in 2023 globally compared with $601.2 billion in 2021.
In short, private equity firms had a lot of their LPs’ capital tied up with little way to return gains to them. In 2024, private equity had the highest average holding period of portfolio companies of around 5.8 years, compared to five years in 2020. Dividend recap provided a much-needed alternative for private equity firms to keep investors enticed without cashing out their stakes in portfolio companies.
However, dividend recap comes at a cost. Heightened leverage makes a company more vulnerable in an uncertain economic environment. Moody’s has warned that these deals heap pressure on borrowers who are already rated below investment grade. Companies that take on excessive debt to pay dividends risk financial distress if business conditions deteriorate.
A cautionary tale is Wheel Pros, backed by Clearlake Capital. After Clearlake Capital executed a dividend recap in 2020 by borrowing more money against Wheel Pros., the latter’s financial leverage ballooned to over seven times its earnings in 2021. When sales declined in 2022, earnings plummeted 86 percent, leading to multiple credit downgrades. By 2024, Moody’s considered its leverage “unsustainable.”
Despite its risks, the trend continued. Blackstone’s $1.7 billion refinancing of Park Place Technologies and Centerbridge Partners’ $925 million loan for KIK Custom Products are just two examples of firms leveraging debt markets to fund investor payouts. Private equity sponsors even weakened loan covenants to allow for more dividend-friendly terms, making it easier to execute these deals.
However, cracks may emerge soon. If economic conditions worsen, or if more companies follow Wheel Pros’ trajectory, lenders may become more cautious. Moody’s has already raised concerns about firms relying on leverage rather than fundamental earnings growth. If debt markets tighten, the window for dividend recaps could close quickly. For now, private equity firms are betting that investor appetite for high-yield credit will outlast concerns about financial stability. Whether that gamble pays off will be a defining question for 2025.
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