Private equity extracts high dividends from companies as exits are delayed
Both M&A activity and IPOs are in the doldrums in Germany. In the first six months, there were only four takeovers with a volume of more than 2 billion euros in this country, according to data from the London Stock Exchange Group. Private equity investors, in particular, are still finding it difficult to exit their investments in companies, because valuations are not reaching the desired level, given the high interest rates. However, their institutional investors (limited partners) are clamouring for payouts.
As a result, private equity firms are being forced to use two means to comfort themselves during the M&A ice age. They are extending the loan agreements of their highly indebted portfolio companies with the old creditors on new terms („amend & extend“) before they mature– and at the same time they are extracting generous dividends from the companies financed with fresh debt.
Such „dividend recaps“, in which private equity firms take on debt (leveraged loans) on behalf of the company in order to hand over cash to their investors, rose sharply in the first half of the year. According to Pitchbook data, 36 billion dollars of leveraged loans have been raised for dividend recaps in 2024 to date, matching the amount raised in 2021 – the highest in at least a decade.
„We expect even more amend & extend refinancings in the market– these offer attractive opportunities to improve financing terms, extend maturities and finance dividend distributions while owners can wait for the right time to sell,“ comments Michele Iozzolino, Head of Investment Banking at J.P. Morgan in Germany.
Morgan Stanley takes a similar view. „Due to the modest number of new M&A deals, and the good market conditions, we are seeing a lot of amend & extend transactions,“ says Moritz Zschoche, Managing Director at Morgan Stanley in Frankfurt. „In some cases, we are even seeing debt packages that can be transferred to the next acquirer of the company without having to ask the lenders for approval under change of control clauses.“
Dividend recaps in fashion
The latest example of a dividend recap is Best Secret. The online designer fashion shopping club and its parent company, Schustermann & Borenstein, are owned by private equity firm Permira, which has just had to cancel the IPO of Italian luxury sneaker company Golden Goose. Last week, Best Secret raised 550 million euros in a bond issue, to partly finance a dividend payment of 250 million euros to Permira. For comparison – in the planned sale or IPO of Best Secret, which is being handled by Deutsche Bank, J.P. Morgan and Goldman Sachs, Permira is aiming for a valuation of 4 billion euros.
Around the same time, Neu-Isenburg based building services provider Apleona signed a loan for 835 million euros (Term Loan B). The company is handing over 409 million euros of this as a dividend to the French private equity firm PAI Partners.
Wiesbaden-based HR software company P&I also recently obtained a loan of 455 million euros in order to distribute 155 million euros to Hg Capital. And the Arnsberg-based toilet paper manufacturer Wepa, where Friedrich Merz was Chairman of the Supervisory Board until 2021, raised 250 million euros and paid a dividend of 20 million euros.
