Private equity funds are increasingly asking portfolio companies to take on more debt to return cash to investors, a practice called dividend recap, as IPOs and sales of companies remain subdued. Moody's expects this activity to stay high in the EMEA region, estimating that PE-owned companies there could take on a further 41 billion euros ($46 billion) before reaching leverage levels that typically trigger a downgrade. The analysis shows the practice is mostly limited to companies that have outperformed their business plans, but if an IPO window opens unexpectedly, recent recap issuers may struggle to take advantage. Distributions to investors have fallen from more than 30% of starting net asset value in 2022 to about 12% today, according to PitchBook data. Raymond James warns that more debt means less equity value for shareholders when the business is eventually sold.
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