US private equity firms are rushing to take advantage of lower borrowing costs by loading debt on to their portfolio companies and then using the cash to pay dividends to themselves and their investors.
Corporate borrowers sold $8.1bn worth of junk-rated US loans to fund payments to shareholders in January, more than six times December’s total and the highest monthly figure in more than two years. The vast majority were issued by companies backed by private equity firms, according to data from PitchBook LCD.
With weak deal volumes and sluggish demand for initial public offerings making it harder to offload existing investments, private equity firms are turning to these so-called dividend recapitalisations as a way of pacifying investors eager for a return on their capital.