Key Takeaways
- • Moody's Ratings expects dividend recapitalizations by private equity-owned companies in Europe, the Middle East and Africa to remain high as sponsors seek to return cash while IPOs and sales stay subdued.
- • Moody's estimates PE-owned companies in the EMEA region could take on a further 41 billion euros ($46 billion) of debt before reaching leverage levels that typically trigger a downgrade.
- • According to Moody's citing PitchBook data, private equity distributions fell from more than 30% of starting net asset value in 2022 to about 12% today.
- • Moody's warns that a prolonged exit backlog could push sponsors toward weaker credits, potentially causing credit deterioration across portfolios, and says documentation has become "quite permissive" for additional borrowing.
- • Raymond James says recaps remain fundable through the syndicated loan, high-yield bond and private credit markets, but a dividend recap does not resolve the underlying valuation gap.
Summary
Private equity sponsors are increasingly pushing portfolio companies to take on additional debt to return cash to investors, according to data cited by CNBC. The shift reflects the drying up of traditional exit routes, namely IPOs and sales of company stakes to other PE funds or strategic buyers, which have been constrained in recent years. Dividend recapitalizations have surged since 2022, and Moody's Ratings expects activity to remain elevated in EMEA.
Moody's estimates that PE-owned companies in the region could absorb a further 41 billion euros ($46 billion) of debt before reaching leverage levels that typically prompt a downgrade. Its analysis indicates the practice is largely confined to the strongest performers with the greatest capacity to borrow, and that most recaps have involved companies that outperformed their original business plans. Services, consumer products and manufacturing have been the most active sectors. Moody's analyst Mayank Mallik said sponsors have remained "disciplined" in selecting candidates and that the new debt generally returns leverage to its initial level without "materially" affecting exit options. He cautioned, however, that companies preparing for IPOs typically show several years of deleveraging, and that issuers that have recently recapitalized may be unable to act quickly if an IPO window opens.
Distributions to investors have fallen sharply, from more than 30% of starting net asset value in 2022 to about 12% currently, per Moody's citing PitchBook data. Mallik warned that a prolonged exit backlog could lead sponsors to monetize relatively weaker credits, risking credit deterioration across portfolios, and said these risks are greater than a decade ago because loan documentation has become "quite permissive." Funds are holding companies well beyond the typical five-to-six-year period.
Recaps are generally financed through the broadly syndicated loan market, high-yield bonds or private credit. Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said there is still "meaningful capacity" for recaps given tight spreads and scarce new loan supply, though weaker earnings, wider spreads or investor withdrawals could tighten availability. She noted that while recaps provide liquidity, the underlying asset remains in the fund and still requires an eventual buyer, and that higher leverage reduces the equity value left for shareholders at sale.
Moody's estimates that PE-owned companies in the region could absorb a further 41 billion euros ($46 billion) of debt before reaching leverage levels that typically prompt a downgrade. Its analysis indicates the practice is largely confined to the strongest performers with the greatest capacity to borrow, and that most recaps have involved companies that outperformed their original business plans. Services, consumer products and manufacturing have been the most active sectors. Moody's analyst Mayank Mallik said sponsors have remained "disciplined" in selecting candidates and that the new debt generally returns leverage to its initial level without "materially" affecting exit options. He cautioned, however, that companies preparing for IPOs typically show several years of deleveraging, and that issuers that have recently recapitalized may be unable to act quickly if an IPO window opens.
Distributions to investors have fallen sharply, from more than 30% of starting net asset value in 2022 to about 12% currently, per Moody's citing PitchBook data. Mallik warned that a prolonged exit backlog could lead sponsors to monetize relatively weaker credits, risking credit deterioration across portfolios, and said these risks are greater than a decade ago because loan documentation has become "quite permissive." Funds are holding companies well beyond the typical five-to-six-year period.
Recaps are generally financed through the broadly syndicated loan market, high-yield bonds or private credit. Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said there is still "meaningful capacity" for recaps given tight spreads and scarce new loan supply, though weaker earnings, wider spreads or investor withdrawals could tighten availability. She noted that while recaps provide liquidity, the underlying asset remains in the fund and still requires an eventual buyer, and that higher leverage reduces the equity value left for shareholders at sale.
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