Daijiworld Media Network - New York

New York, Jun 21: Private equity giants Blackstone Inc. and Warburg Pincus have added more debt to their portfolio company IntraFi to fund another payout to themselves, marking the seventh such transaction in three years.

The financing method, known as a dividend recapitalisation, has returned to popularity as investors look for floating-rate debt opportunities amid concerns over inflation and uncertainty surrounding interest rate movements. Private equity firms are using the deals to extract cash from companies they own at a time when exiting investments has become increasingly difficult.

Over the past four weeks alone, 10 borrowers have launched more than $3.5 billion in leveraged loans and high-yield bonds to fund distributions for their owners, according to data compiled by Bloomberg. These deals account for nearly half of the total dividend recapitalisation activity recorded this year.

“The market is looking for supply, and we’re increasingly pitching these deals where they make sense for the credit,” said Brian Tramontozzi, head of North America leveraged finance capital markets at JPMorgan Chase & Co.

He added that investors are more comfortable with such dividend deals because they already understand the companies and have analysed the underlying credit.

Representatives for Warburg Pincus and Blackstone declined to comment, while IntraFi did not respond to requests for comment.

With nearly 80% of US loan issuance this year linked to refinancing or repricing existing debt, the availability of new loans remains limited. Analysts said this shortage has encouraged more companies to pursue dividend recapitalisations.

David Saitowitz, head of US liquid credit at ICG, said tight credit spreads and improving market sentiment have created an opportunity for private equity sponsors to return capital to investors.

Market participants expect more such deals in the third quarter as private equity firms attempt to secure returns before the end of the year.

“Against a manageable new money pipeline, dividend deals are expected to increase in the months ahead for performing assets,” said Cody Gunsch, Morgan Stanley’s head of North American leveraged finance capital markets.

Private equity firms have traditionally used dividend recapitalisations to generate returns after acquiring companies. However, the practice has attracted criticism from ratings agencies and investors because it increases debt levels without necessarily improving earnings, raising concerns over higher leverage and interest costs.

Private equity firms have struggled in recent years to sell portfolio companies at profitable valuations and return money to investors. Higher interest rates and weaker market valuations have ended the era of quick buyouts and rapid exits.

A report by Bain & Co. noted that a growing number of private companies are effectively “trapped in portfolios”, resulting in longer holding periods for investments.

Michael Best, a senior-secured loan portfolio manager at Barings, said private equity firms are choosing dividend deals because they expect to hold assets for longer than the traditional three-to-five-year investment period.

“Private equity firms are reluctant to give up good, performing credits right now,” Best said, adding that higher borrowing costs and stagnant valuations have made quick exits difficult.

IntraFi’s latest dividend recapitalisation in late May came less than a year after it raised more than $2 billion through the leveraged loan market, partly for a dividend payment.

Other companies have also followed the trend. Security solutions provider ADI Global raised $1 billion through bonds and loans this month to fund a dividend linked to its separation from home safety company Resideo. Colonial Enterprises, backed by Brookfield Infrastructure Partners, raised $425 million for a dividend payout a year after acquiring the business operating Colonial Pipeline.

Apart from dividend deals, private equity firms are also exploring alternative ways to unlock cash, including continuation funds and secondary market stake sales.

However, these options are facing increased scrutiny from investors, particularly limited partners, according to the Bain report.

Experts said private equity firms are avoiding competitive bidding environments because selling assets at acceptable valuations has become challenging.

“If the credit markets are open and under supplied, then it’s an easy way to get that done,” Best said, referring to dividend recapitalisations as a way for firms to take money off the table.