Private equity funds are increasingly pushing their portfolio companies to take on more debt to return cash to their investors, data suggests.
It comes as the typical ways of monetizing private equity investments — selling company stakes via IPOs, or offloading them to other PE funds or buyers — have dried up in recent years.
While investors get paid, the practice of private equity sponsors adding more debt to companies — known as dividend recapitalizations — risks weakening their ability to invest or weather future downturns in trading.
"Dividend recap" activity has surged since 2022, and Moody's Ratings expects it to remain high in Europe, the Middle East and Africa as private equity firms look for ways to return money to investors while company sales and IPOs remain subdued.
The ratings agency estimates that private equity-owned companies in the EMEA region could take on a further 41 billion euros ($46 billion) in debt before reaching leverage levels that typically prompt a downgrade.