Facing a severe shortage of exit opportunities, private equity firms in India and globally are aggressively turning to a controversial financial strategy to keep their investors happy. They are loading their portfolio companies with additional debt not for growth, but to fund massive payouts to themselves and their limited partners.
Record-Breaking Dividend Deals
This year, the use of so-called dividend recapitalizations, or 'dividend recaps', has surged to unprecedented levels. According to data compiled by Bloomberg, such dividend loans have already hit $28.7 billion in 2025. This puts them on track to surpass the previous annual record of $28.8 billion set in 2021.
The driving force behind this trend is a perfect storm of challenges. The private equity machine is struggling at nearly every turn. Attractive companies to acquire are sparse, and the traditional paths to cashing out investments—like Initial Public Offerings (IPOs) and mergers & acquisitions (M&A)—have become incredibly difficult. This has left firms unable to deliver the returns they once promised to pension managers, foundations, and wealthy individuals.
Buying Time in a Stalled Market
To quell impatient investors, buyout shops are increasingly layering extra borrowing onto the companies they own. The proceeds from these debt sales are then funneled directly to their stakeholders instead of being reinvested into the business.
"All the stars are aligned for dividend recaps; rates are coming down, spreads are tight, the market is open — yet the IPO market and M&A are still subdued," said Bill Zox, a portfolio manager at Brandywine Global Investment Management. "Investors want distributions, and dividend recaps can buy PE firms more time to wait for a better environment for exits."
While private equity firms have routinely used this tactic, its current scale is remarkable. These deals are often viewed as aggressive. Debt investors, fearing the strain that extra leverage places on a company, typically push back. However, in today's market, borrowers hold the upper hand due to a supply-demand imbalance in the loan market.
High-Profile Deals and Market Dynamics
Several recent high-profile deals highlight this aggressive trend:
- Private equity firm Thoma Bravo priced a $750 million loan for cybersecurity firm Darktrace to fund a shareholder distribution, a move Fitch Ratings labeled as an "aggressive financial policy with high leverage."
- In October, Thoma Bravo raised debt on Ping Identity Holding Corp. to help fund a payout of roughly $1 billion.
- Another Thoma Bravo portfolio company, Proofpoint Inc., obtained a $1.35 billion loan to fund a payment to the buyout firm and its employees.
- Yogurt maker Chobani Inc. also executed a $1.35 billion leveraged loan to partly finance a payout.
Matthew Mish, head of public and private credit strategy at UBS Group AG, explained the core issue: "The reason that sponsors are doing it, and driving most of this, is realistically because they have struggled to monetize their investments. The IPO market has started to thaw but is not really providing an exit. The LPs are not getting their money back."
The slowdown in fund distributions has been so drastic that, at the current rate, it would take about nine years for investors to collect their money from the more than 12,000 companies held by US buyout funds, according to Pitchbook. This is making limited partners reluctant to commit fresh capital, creating a cycle that fuels the need for alternative cash extraction methods like dividend recaps.
