Private equity firms are facing concerns over increasing debt burdens on their portfolio companies and the lack of incentives for owners to reinvest in the business after recouping much of their initial equity. Lenders find dividend recap deals attractive due to the need to deploy cash, especially when public markets are restricted. For instance, Clarios improved its earnings and reduced debt over the past three fiscal years.

Trench Group, a power-equipment manufacturer owned by Triton Partners, recently obtained a leveraged loan to refinance existing debt and pay a dividend. Similarly, Clarios International Inc., a car battery maker, raised debt to distribute a significant dividend to its buyout-fund investors. This trend of businesses borrowing money to pay dividends to owners is on the rise in both the US and Europe as a way to reduce financial exposure in case of a downturn.

Amidst a sluggish M&A market, private equity firms are resorting to credit investors to finance dividend payouts. While this strategy helps in returning capital to investors, it also raises concerns about overleveraging companies. Despite the thriving credit markets, there is uncertainty about the sustainability of such capital structures in the face of potential market shocks.