(updated with correction)
Private equity firms are taking advantage of low interest rates to refinance their portfolio companies, packing on debt but also providing a long-awaited payday for firms and their investors.
These deals are like a partial exit for private equity firms and their limited partners from portfolio companies, which are loaded with investments that might have been sold by now had it not been for slow economic conditions.
It's good news for limited partners because these debt transactions, called dividend recapitalizations or leveraged dividends, are providing them with much-needed cash through distributions of profits, which had been at historically low levels in recent years.
“For limited partners, there is certainly a positive impact because they are receiving cash back, and that both reduces their basis in the investment and results in a return,” said Mario L. Giannini, CEO of Hamilton Lane, a Bala Cynwyd, Pa.-based alternative investment consulting and money management firm.
In the U.S. alone, there were 77 bond and loan dividend recapitalizations by private equity firms last year valued at a combined $33.4 billion, up from 55 recapitalizations totaling $17.7 billion in 2011, according to Dealogic.
Along with the availability of cheap debt, recapitalizations are also the result of higher valuations of private equity portfolio companies, industry insiders say. Indeed, there were twice as many dividend recapitalizations in 2012 than in 2007, the year before the worldwide financial crisis.
Jessica Reed Saouaf, managing director, in San Francisco-based consulting firm, Hall Capital Partners LLC, said debt levels are rising — not as high as the peak just prior to the 2008 financial crisis, but as much as seven times earnings before interest, taxes, depreciation and amortization, up from five times in 2012.