All-time High Dividend Recaps for PE Deals Driven by Private Credit Froth

GPs are returning capital to LPs via Dividend Recaps to capitalize on opportunity

Author

Matthew Podlesak
June 17, 2024

Interesting new data on Dividend Recapitalizations (“dividend recaps”) reaching all-time highs for private equity deals from Bloomberg.

TLDR:

1. GPs are returning capital via dividend recaps as solution to the depressed exit activity driven by the bid-ask spread caused by the heightened interest rate environment

2. The dividend recap activity is enabled by a very frothy private credit market, with $500 billion + of dry powder, has opened the financing market and tightened spreads

This phenomenon ties into a lot of the themes we’ve been talking about in recent weeks, such as:

  1. Bid / Ask Spread preventing exits and slowing down distributions to LPs

  2. LPs pressuring GPs to come up with creative solutions to return capital given depressed exits

The massive increase in dividend recaps is being enabled by a frothy private credit market, where dry powder is at an all-time high.

  • Dividend recaps are being executed via:

    • leveraged loans that are funded by collateralized loan managers (“CLOs”)

    • or private credit firms (which have $500mm of dry powder)

  • The demand for these leveraged loans is tightening spreads on the debt, which only increases the appeal of dividend recaps for GPs (despite the Fed delaying interest rate cuts)

“This trend is not that dependent on the base rate backdrop. The fact that the financing market is open and spreads are tighter, that the market is liquid and lenders are looking for paper, this is much more important,” said Daniel Rudnicki Schlumberger, head of leveraged finance for Europe, the Middle East and Africa at JPMorgan Chase & Co.

As private equity portfolios age with exit activity down, dividend recaps pose an interesting solution for GPs to return some capital to LPs.

“It’s a gap between sellers expectations and buyers expectations,” Chris Bonner, head of US leveraged finance capital markets at Goldman Sachs Group Inc., said in an interview. “Dividend recaps are a nice bridge as you’re waiting for a sale.”

The key question that GPs, LPs, and private credit lenders should all be asking:

Despite getting some capital out of the portfolio company and back in LP’s pockets… are we still setting up the business for long-term success under this new capital structure (with higher leverage issued at higher rates than over the last decade)?