Is rising use of dividend recaps a worry?

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The Weekend Pitch

October 13, 2024

Presented by AlixPartners

(Megan Woodard/PitchBook News)

Over the summer I wrote about private equity's intensifying debt dependence, from subscription lines to ManCo loans. However, one type of borrowing I didn't delve into is quickly becoming the most controversial: dividend recapitalization.

A dividend recap—which is when a company issues debt so that all or some of the proceeds can be used to pay shareholders a dividend—has long been used by both public and private companies. However, in the case of the latter, usage has been ramping up.

Year-to-date dividend recap volume in the US for PE-backed companies, as of Sept. 24, stood at $69.3 billion, and this year’s annual total is expected to surpass 2021’s record high of $76 billion, according to PitchBook-LCD data.

I'm Leah Hodgson, and this is The Weekend Pitch. You can reach me at leah.hodgson@pitchbook.com or on X @LeahFHodgson.

In September, UK-based windscreen repair company Belron, which is backed by CD&R and Hellman & Friedman, launched the largest dividend recap ever, with plans to raise over €8 billion with €4.4 billion going to fund a shareholder dividend.

Now more than ever, such arrangements are raising eyebrows, with critics claiming that they benefit investors at the expense of the long-term health of portfolio companies. But does this criticism give an accurate picture of dividend recaps and their impact, or is the reality more nuanced?

Trivia

Polish convenience store chain Zabka is set to go through with Warsaw’s largest IPO in four years and raise $1.6 billion at about a $5.5 billion valuation. What does the company’s name translate to?

A) Little frog
B) Big alligator
C) Tiny lizard
D) Happy turtle

Find your answer at the bottom of The Weekend Pitch!

PE posts breakout quarter amid rate cuts, election

(Jayk7/Getty Images)

Private equity had a breakout quarter in Q3, pushing buy-side deal value up 24% year to date. This comes amid two major developments in the dealmaking landscape: a change in interest rate policy and the US presidential election.

Our Q3 2024 US PE Breakdown examines how these events have historically affected PE and whether the recent strength in dealmaking is likely to be impeded or further accelerated as a result.

What insights did our look back in time uncover? The results point to a post-election December "bump" and a deal market already primed by "stealth" rate cuts administered by lending markets.

get the report

VC LPs are stuck in the mud

(Gannet77/Getty Images)

Cerebras' IPO plans and the Fed's interest rate cut were welcome news to a jittery VC exit market. But headwinds are still holding back distributions, according to the Q3 2024 PitchBook-NVCA Venture Monitor. The rate of cash flow returning to LPs in US VC funds is slower than at any other point since the global financial crisis.

More emerging GPs are delaying fundraising as they wait for distributions. The exception is the legacy brands: Cautious LPs are still re-upping commitments to established funds. Buoyed by AI optimism, VC's powerful players are helping to tick fundraising activity up from the doldrums of the last year.

get the report

Quote/Unquote

(Zeiss4Me/Getty Images)

“[Mega-cap stocks] are not what these big endowments typically invest in—or what any endowments or foundations invest in—when they’re putting a lot of money into private equity or venture capital, for example."

—Michael Strauss, senior institutional portfolio strategist at Bank of America Private Bank, speaking about Ivy League university endowments. You can read more about endowments, specifically that of Columbia University, which boasts the highest returns for a second year in a row among Ivy League schools, here.

Stay tuned

Keep an eye out for these insights and research reports coming out this week:

Q3 2024 European PE Breakdown
Q3 2024 European Venture Report
Q3 2024 Healthcare Services Public Comp Sheet and Valuation Guide
Q3 2024 AI/ML Public Comp Sheet and Valuation Guide
Q3 2024 Fintech & Payments Public Comp Sheet and Valuation Guide
Q3 2024 Enterprise SaaS Public Comp Sheet and Valuation Guide

Trivia

Answer: A.

Zabka—which translates to “little frog”—is backed by CVC Capital Partners. You can read more about the evolution and pricing of Zabka’s IPO here.

This edition of The Weekend Pitch was written by Leah Hodgson and Nadine Manske. It was edited by Andrew Woodman and Ron Prichard.

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Is rising use of dividend recaps a worry?

Trivia

PE posts breakout quarter amid rate cuts, election

VC LPs are stuck in the mud

Quote/Unquote

Stay tuned

Trivia

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