PE firms turn to debt as exits vanish

Private equity sponsors are pushing portfolio companies to take on more debt to return cash to investors. IPOs and company sales have dried up in recent years, forcing new tactics.

Dividend recaps surge since 2022

The practice of adding debt to companies, known as dividend recapitalizations, has surged since twenty twenty-two. Moody's Ratings expects it to remain high in Europe, the Middle East and Africa.

Forty-one billion euros of debt capacity

Moody's estimates that private equity-owned companies in the EMEA region could take on a further forty-one billion euros, or forty-six billion dollars, in debt before reaching leverage levels that typically prompt a downgrade.

Exits remain few and far between

The fundamental problem is that exits are few and far between. European IPO markets have been muted and capital for strategic purchases by large corporates has become much more expensive after recent rate hikes.

“The fundamental problem is that exits are few and far between”

Distributions to investors have collapsed

Private equity distributions dropped from more than thirty percent of starting net asset value in twenty twenty-two to about twelve percent today.

IPO preparation becomes harder

Companies preparing for IPOs like to show a track record of solid deleveraging for a couple of years before approaching the market.

“companies preparing for IPOs like to show a track record of solid deleveraging for a couple of years before approaching the market”

More debt means less flexibility

A dividend recap need not derail an exit if earnings growth has created genuine borrowing capacity.But borrowing against hoped-for growth is different.

“More debt means less financial flexibility and, at the same enterprise value, less equity value left for shareholders when the business is eventually sold.”