Private Equity Firms Turn to Debt as Exits Stall

Private equity-owned companies in Europe, the Middle East and Africa could take on another 41 billion euros in debt before reaching leverage levels that typically prompt a downgrade, Moody’s Ratings estimates. The agency expects dividend recapitalizations to remain high as company sales and IPOs stay subdued.

In a dividend recap, a private equity sponsor’s portfolio company borrows money and returns cash to investors. Moody’s said the practice has surged since 2022, as traditional ways to exit investments have slowed.

Moody’s, citing PitchBook data, said private equity distributions fell from more than 30% of starting net asset value in 2022 to about 12% at the time of its report. Funds are also holding companies longer than the typical five to six years, CNBC reported.

The activity remains concentrated among stronger-performing companies with room to borrow, according to Moody’s. Services, consumer products and manufacturing have been the most active sectors.

Raymond James’ global head of private capital advisory, Sunaina Sinha Haldea, said tight credit spreads and limited new loan supply are supporting financing for recaps. But weaker earnings, wider spreads or investor withdrawals could reduce that capacity, she said.

The transactions provide investors with some cash but do not resolve the need to eventually sell the asset, Haldea said. Moody’s analyst Mayank Mallik warned that a prolonged backlog of exits could lead sponsors to borrow against weaker companies, increasing credit risks across portfolios.