One implication of the rising leveraged loan transactions is a backlog of accompanying dividend recapitalizations. The scope may well be unprecedented: investors pulled $26.8 billion out of private equity-backed companies year to date, the highest figure through September in the two decades since S&P Global Market Intelligence’s Leveraged Commentary & Data began collecting data.
The upside for investors is clear: GPs awash in capital can appease investors with interim payouts while spending most of their time executing new acquisitions. The practice also bodes well for the publicly traded PE firms, which get a similar periodic boost to smooth earnings results.
But the insight may provide a bit of clarity into dealmakers’ M&A pipelines as well. Why recapitalize when lucrative portfolio exit opportunities loom? After a flurry of Covid-delayed exits in the fourth quarter of 2020, sponsors appear to be pivoting to longer-term holding strategies, as cheap debt and rising valuations make time an ally of the patient. The phenomenon could also signal investors’ confidence in further economic recovery, since added indebtedness typically weighs on company credit ratings and future borrowing capacity.
The most interesting impact of the current rise, though, might be a few years out. Given the historical average of 3 years between buyout and dividend recap, S&P reasons the ongoing M&A frenzy could well spawn more recapitalizations in the foreseeable future. And for those companies whose performance doesn’t warrant additional debt, private credit funds are also eagerly reading the tea leaves.