For over 20 years, private equity sponsors have utilized dividend recaps, also known as leveraged dividends, to enhance investment returns without resorting to a sale or IPO. During the 2010s, these transactions averaged around 200 per year. However, rising interest rates and a booming M&A market recently reduced the popularity of dividend recaps to fewer than 100 transactions in 2023. The stabilization in interest rates, coupled with a competitive lending environment and longer hold periods for PE sponsors, led to a resurgence in dividend recaps in 2024, continuing into 2025.
Dividend recaps allow private equity firms to extract cash from portfolio companies without giving up equity. These one-time cash distributions provide immediate returns to fund investors, enhancing the firm’s investment track record.
The cost of borrowing is a critical factor in considering a dividend recap. These transactions are more popular when interest rates are low. When the Federal Reserve raised rates in 2022 and 2023 to combat inflation, the volume of leveraged dividends shrank significantly. However, 2024 saw the volume in dividend recaps more than double as compared to 2023.
We attribute this uptick to interest rate stabilization, a more competitive lending environment and continued investor pressure to return capital. With lackluster market conditions to exit, including a dampened IPO market, dividend recaps provided a viable alternative for cash returns, where other avenues are stalled.
Each dividend recap typically involves a solvency opinion, at the insistence of legal counsel. This third-party letter from a financial expert assures that the transaction will not impair the company’s ability to meet its obligations as they become due and that its asset value exceeds its liabilities post-dividend. These opinions provide unbiased conclusions on the viability of the proposed recap and are a valuable step in the process.
It is clear that dividend recaps have re-emerged as a vital tool for private equity sponsors to generate returns in a market where exits and IPO activity remain stagnant. Their resurgence highlights yet another way in which PE fund managers have evolved and adapted to changing market conditions and investor pressures. Given the recent stock market volatility and the corresponding speculation of pressure on the Federal Reserve to cut rates in the near future, we suspect that these transactions will continue to ramp up in volume throughout the remainder of the year.
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