Private equity firms are increasingly returning to the European high-yield debt markets to extract dividends from portfolio companies, as elevated volatility and a subdued exit environment continue to delay traditional monetisation routes such as M&A and IPOs, according to a report by Bloomberg.
Sponsor-backed borrowers including Brookfield Asset Management-linked REIT Befimmo, Lutech, and Cooper Consumer Health—the latter backed by a consortium including CVC Capital Partners—have recently executed or are preparing so-called dividend recapitalisations in Europe’s junk debt market, according to market sources.
Dividend recaps, which involve raising additional debt to fund shareholder payouts, have historically been associated with late-cycle credit conditions. While they allow sponsors to realise partial returns in the absence of exits, they also increase leverage at portfolio companies and are typically viewed cautiously by credit investors and rating agencies.
In one recent example, ratings agency S&P Global revised Befimmo’s outlook to negative following a €475m bond issuance, part of which was earmarked for a shareholder dividend, citing an expected increase in leverage metrics.
Market participants say the trend reflects a growing imbalance between limited exit opportunities and abundant liquidity in private credit and leveraged loan markets. With IPO and M&A activity remaining muted, sponsors are increasingly turning to financial engineering to return capital to investors.
Legal and credit advisers note that lenders—particularly private credit funds and CLO managers—have continued to support these transactions, aided by strong levels of deployable capital and competition for higher-yielding assets, even as underlying leverage profiles deteriorate.
The resurgence in dividend recap activity follows a period of volatility triggered by geopolitical tensions and concerns around the impact of artificial intelligence on certain corporate credit profiles, both of which have weighed on dealmaking sentiment.
Despite expectations earlier in the year for a rebound in M&A, activity has remained below forecasts, prompting sponsors to seek alternative liquidity channels.
While similar structures have appeared sporadically in the US, current momentum is largely concentrated in Europe, where lower base rates relative to US Treasuries have made leveraged refinancing structures more attractive from a funding cost perspective.
