Private equity: Recaps suffer as leverage multiples rocket
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Private equity: Recaps suffer as leverage multiples rocket

Tougher financing conditions are now making it harder to execute.

Leveraged recapitalizations have grown in popularity throughout the past year as private equity sponsors go to market with the companies they already own – taking advantage of cheap funding in order to take money out of their businesses. But, according to market players, this is getting more difficult as conditions in the LBO market are becoming more selective.

Rates for such deals are rising as credit quality drops and existing leverage increases. The market is there for higher-quality recapitalizations. However, for those private equity firms looking to squeeze money out of already highly leveraged assets it is becoming a tough sell.

Acceptable returns

In the first three quarters of the year, private equity firms doled out $13.5 billion in dividends to shareholders in Europe alone through the use of leveraged recapitalizations, according to research by Standard & Poor’s Leveraged Commentary Data. This is more than twice as much as private equity firms paid themselves through such deals in the whole of 2004 – dividends paid on recapitalizations totalled about $6 billion for the year. However, the number of private equity firms coming to market with leveraged recaps appears to be slowing as financing conditions worsen.

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