Back in 2010, private equity firm Carlyle Group acquired NBTY Inc., which sells vitamins under the Nature's Bounty label, in a $3.6 billion leveraged buyout. Carlyle anted up $1.55 billion in cash to finance the deal and borrowed the rest.
In October, with the stroke of a pen, Carlyle recouped about half the money it invested in the LBO. It did so by having NBTY, Ronkonkoma, N.Y., take on another $550 million in debt and dip into its cash reserves so the company could funnel a $672 million dividend to Carlyle.
Carlyle wouldn't comment on the cash extraction, but such moves — which the LBO world calls dividend recapitalizations, or leveraged recaps — are all the rage these days. Companies this year have borrowed a record $62 billion through mid-October in order to pay for dividends to their private equity owners, according to Standard & Poor's, and rare is the LBO shop that hasn't piled more debt onto its holdings and mined them for cash.
Blackstone Group, for instance, had SeaWorld Parks & Entertainment borrow around $500 million earlier this year so it could pocket a dividend — the second such payout it commanded in nine months.
Hospital operator HCA borrowed $2.5 billion in October to help finance a $1.2 billion dividend payout, 40% of which went into the pockets of private equity owners Bain Capital and KKR & Co.
Carlyle-owned management consulting firm Booz Allen Hamilton paid out a nearly $1 billion dividend in July after borrowing more than twice that amount.
"Any time is a good time to take out millions' worth of dividends," said Steve Miller, managing director at S&P Capital IQ's Leveraged Commentary and Data. But several factors are also driving this year's surge in leveraged recaps.
Dealmakers say they're hitting up their companies for cash because it's tough for LBO firms to fetch attractive prices for companies via initial public offerings — the traditional ticket to riches for private equity players. What's more, plenty of fixed-income investors are eager to snap up the debt used to pay for dividends, since it often comes with hefty yields of 8% or more.
In addition, private equity leaders fear that taxes on dividends and capital gains will rise next year as the Bush-era tax cuts expire and Washington looks for new sources of revenue. Currently, dividend and capital gains are taxed at 15%, but President Barack Obama has suggested boosting tax rates on dividends to nearly 40% for the wealthiest investors and raising the capital-gains rate to 20%. Republican presidential nominee Mitt Romney has proposed maintaining existing rates for the wealthiest.
"Everyone is thinking about this," S&P's Mr. Miller said.
But by far the most important driver of the borrowing binge is that the Bains and Blackstones of the world are under mounting pressure from pension funds and other institutional investors that entrusted billions with them in the past decade but haven't seen much in return. To placate these increasingly impatient investors, LBO shops have taken out 91 cents in dividends for every dollar of capital they've invested this year, according to S&P, compared with just 20 cents per dollar invested last year.
"The private equity firms want to show their investors some money, and one way to do that is lever up their companies and take out dividends," said Steve Siesser, chairman of the specialty finance group at law firm Lowenstein Sandler.