Private equity turns to old playbook

PRIVATE equity (PE) firms, struggling to find buyers for their investments, are turning to an old playbook like never before. 

Financial sponsors are extracting cash from their portfolio companies by raising debt to fund payouts to themselves and their investors at an unprecedented clip.

Such dividend loans have hit US$28.7bil so far this year, putting them on track to surpass 2021’s record US$28.8bil, according to data compiled by Bloomberg.

Their efforts come as the PE machine hits snarls at nearly every turn: Attractive takeover targets are sparse and it’s harder to cash out old investments and deliver the returns once promised to pension managers, foundations and wealthy individuals.

To quell impatient investors, buyout shops are increasingly layering extra borrowing on their companies and funnelling the proceeds of debt sales to their stakeholders instead.

“All the stars are aligned for dividend recaps; rates are coming down, spreads are tight, the market is open – yet the IPO (initial public offering) market and M&A (merger and acquisitions) are still subdued,” Bill Zox, a portfolio manager at Brandywine Global Investment Management, says.

“Investors want distributions, and dividend recaps can buy PE firms more time to wait for a better environment for exits.”

PE firms have routinely used dividend recapitalisation to book profits and take skin out of the game after they acquire companies.

Such deals can be seen as controversial and aggressive, often leading debt investors – fearing the strain of the additional debt – to push back. But with demand for loans likely outpacing supply of new debt this year, borrowers have an upper hand.

This month, PE firm Thoma Bravo priced a US$750mil loan for cybersecurity firm Darktrace to fund a distribution to shareholders, in what Fitch Ratings called “an aggressive financial policy with high leverage.” 

In October, Thoma Bravo raised debt on Ping Identity Holding Corp to help fund a roughly US$1bil payout.

Earlier this year, another one of its portfolio companies, Proofpoint Inc, obtained a US$1.35bil loan to fund a payment to the buyout firm and employees.

Other recent deals include a US$1.35bil leveraged loan by yogurt maker Chobani Inc to partly finance a payout. 

Buyout firms and their clients are relying on alternative methods to unlock cash.

They’re shuffling assets out of older vehicles into what are known as continuation funds, selling stakes on the secondary market and borrowing against holdings through complex loans with high interest rates. 

The industry’s fund distributions have slowed so drastically that, at the current rate, it would take about nine years for customers to collect their money from the more than 12,000 companies held by US buyout funds, according to Pitchbook.

That’s making limited partners (LPs) reluctant to step up fresh capital, with Bain & Co estimating in a mid-year report that there were more than 18,000 private capital funds seeking US$3.3 trillion.

“The reason that sponsors are doing it, and driving most of this, is realistically because they have struggled to monetise their investments,” Matthew Mish, head of public and private credit strategy at UBS Group AG, said.

“The IPO market has started to thaw but is not really providing an exit. The LPs are not getting their money back.”

Scarce supply

Helping fuel the dividend deals is the market’s supply-demand dynamic.

Roughly US$915bil of loans have been sold in 2025, about 16% lower than the same period last year. Of that debt, some 80% has been for loan refinancing and repricing, meaning there has been relatively little new debt to buy.

Another driver is collateralised loan obligations (CLOs), structured credit vehicles that are the largest buyers of leveraged loans. CLOs are financed by issuing bonds.

There have been more than US$151bil of the debt backed by syndicated loans sold in 2025, up about 4.7% from the same time last year, according to the Bloomberg data.

“The problem is the deals aren’t performing. And so when they don’t perform, even if I want to sell mine, I’m not going to sell it to the other PE guy

that knows that he has his own deals that aren’t performing and he doesn’t want mine,” Mish says.

“The easiest thing to do is to do a recapitalisation and sell it to a less credit discriminate investor, which is a CLO.” — Bloomberg