By Mumbi Gitau | Updated on Oct 12, 2026 at 01:44 PM
Private equity firms have room to keep piling debt onto portfolio companies to fund payouts as market volatility makes exits harder.
Companies owned by buyout firms in Europe, the Middle East and Africa could take on about €41 billion ($46 billion) of additional debt before leverage reaches levels that risk ratings downgrades, according to Moody’s Ratings. That headroom should keep so-called dividend recapitalizations elevated until dealmaking recovers, the ratings firm said.
Higher interest rates, geopolitical tensions and a gap between what buyers are willing to pay and what sellers will accept have slowed exits and brought distributions to investors well below historical levels. Buyout firms have responded by finding other ways to generate cash, including taking out loans against portfolio companies and moving assets into continuation vehicles.
In one deal that priced earlier this month, Spanish fuel retailer Plenergy raised a €400 million leveraged loan to fund, in part, a dividend recap. Investor demand for the deal was enough to let the borrower tighten the margin on the loan — from 400 basis points above the benchmark interest rate to 375. Health supplement maker Sunday Natural also priced a €515 million deal to fund a payout to shareholders at the end of September.
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Dividend recaps offer a way for private equity firms to monetize their assets when a sale or IPO looks challenging. But in doing so they layer yet more debt onto their portfolio companies, many of which are already highly levered.
The latest wave of dividend recap deals hasn’t resulted in widespread ratings downgrades as they have been issued mostly by strongly performing companies with cash flow that can sustain the extra debt, according to Moody’s.
Issuers of dividend recaps often “built a significant buffer” the year before a transaction, relative to peers, according to the report.
In total, buyout firms are sitting on $3.8 trillion of unsold assets, while the average holding period for investments has grown to seven years, Bain & Co. said earlier this year. Holding times for investments have lengthened steadily in recent years, from an average of five years in 2010.
While not all of the €41 billion will go toward dividend recaps, the strategy is likely to remain attractive for cash healthy companies with limited reinvestment opportunities and been held beyond the typical four-to-five-year period.