Private equity funds are increasingly pushing their portfolio companies to take on more debt to return cash to investors, as IPOs and stake sales have dried up. Moody’s Ratings expects dividend recapitalizations to remain high in Europe, the Middle East and Africa, with PE-owned companies in the EMEA region able to absorb an additional 41 billion euros in debt before reaching downgrade leverage levels. Distributions to investors have dropped from over 30% of starting net asset value in 2022 to about 12% today, prompting sponsors to turn to debt-financed payouts despite increased credit quality risks. Moody’s notes that sponsors have remained disciplined in selecting dividend recap candidates, with services, consumer products and manufacturing the most active sectors. If the IPO backlog prolongs, sponsors may start monetizing weaker credits, which could lead to credit deterioration across their portfolios.
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