From October 20 to 22, along the banks of Shanghai's Huangpu River, the 2026 Sustainable Global Leaders Conference returns once again. Nobel and Turing Award laureates will take the stage to discuss the future and trends of technology, and the internet-famous professors who "rescue" people from anxiety and involution-era pressures — Macfarlane and Xiang Biao — will hold a live dialogue!
Limited seats available, first come first served. Let us embark on this journey toward sustainability together! [Click to register]
Key Takeaways
IPO listings and company sale transactions remain sluggish, and private equity firms are increasingly turning to dividend recapitalizations to return capital to investors.
Moody's indicates that private equity-owned companies in the EMEA region still have approximately 41 billion euros (equivalent to 46 billion US dollars) of additional borrowing capacity.
Increasing debt can return cash to investors, but it weakens a company's financial flexibility and creates obstacles for future exits.
Data shows that private equity funds are pushing their portfolio companies to take on more debt as a way to return cash to fund investors.
In recent years, the traditional monetization channels for private equity investment — company IPOs, selling companies to other private equity firms or industrial buyers — have dried up.
While investors receive cash returns, the practice of private equity firms loading portfolio companies with debt, known as dividend recapitalization, damages a company's ability to reinvest and weakens its capacity to withstand future operational downturns.
Since 2022, the scale of dividend recapitalization transactions has surged significantly. Moody's Ratings says that with company sales and IPOs still lackluster, private equity firms in the EMEA region will continue to heavily use this tool to reward investors.
Moody's estimates that private equity-owned companies in the EMEA region can add another 41 billion euros (46 billion US dollars) of debt before leverage ratios hit rating downgrade thresholds.
Exit Channels Remain Scarce
Moody's latest analysis points out that these transactions are currently concentrated among companies with the best operating performance and the strongest capacity to absorb additional debt; this considerable room for further leverage means dividend recapitalization transactions will continue to increase.
However, this approach cannot solve the backlog of exit challenges facing the private equity industry. Funds are now holding companies for far longer than the conventional 5-6 year holding period.
Moody's analyst Mayank Malik said: "The core problem is that exit channels are few and far between. The European IPO market remains sluggish; after the last interest rate hike cycle, the cost of capital for large companies making industrial acquisitions has risen substantially. Overall, we focus on the impact of the private equity ecosystem on corporate credit quality, and dividend recapitalization is currently one of the most important transmission channels."
Moody's says private equity firms remain "restrained" when selecting dividend recapitalization targets, with services, consumer goods, and manufacturing being the sectors where transactions are most concentrated.
Malik said that most companies carrying out such transactions are actually performing better than their original business plans; after adding new debt, leverage returns to initial acquisition levels without substantially undermining future exit opportunities.
He said via email: "But the fact is, companies preparing for an IPO typically want to show a track record of steadily declining leverage over several consecutive years before listing."
"The risk does exist: if the IPO window unexpectedly opens, companies that have just completed a dividend recapitalization may miss the listing window. By undertaking such debt operations, companies are essentially betting that the IPO market will not recover in the short term."
In recent years, distributions allocated to investors have fallen sharply. Moody's cites PitchBook data: private equity distribution returns as a share of initial net asset value have dropped from over 30% in 2022 to around 12% today.
Malik added: "If the private equity exit backlog persists, firms may choose to monetize companies with weaker credit profiles, which would cause credit quality deterioration across the entire portfolio."
He said this risk has become higher than a decade ago, partly because contractual constraints on companies taking on new debt have become considerably looser.
Credit Market Tightening Temporarily Supports Dividend Recapitalizations
Portfolio companies carrying out dividend recapitalizations mostly source funding from the broad syndicated loan market: multiple investment banks form syndicates to lend to borrowers and spread risk; funding can also be obtained through high-yield corporate bond issuance or private credit financing.
Sunaiana Sinha Haldia, Global Head of Private Capital Advisory at Raymond James, said the market still has ample capital to absorb such restructuring transactions; narrowing spreads and scarce supply of new loans are sustaining lenders' willingness to invest.
"Weakening earnings, widening credit spreads, or investor redemptions would compress capital supply; and once M&A financing recovers, lenders will have more options and will no longer prioritize financing shareholder dividends."
Haldia said dividend recapitalizations can provide liquidity and ease the pressure on firms to sell companies, but they do not fundamentally resolve valuation disagreements.
She said in an email interview: "Investors get some cash, but the asset remains within the fund and ultimately still needs a buyer to take it over."
"If earnings growth genuinely creates borrowing capacity, a dividend recapitalization may not necessarily destroy a future exit; but borrowing solely in hopes of future growth is a different matter. The higher the debt, the lower the company's financial flexibility; assuming total enterprise value remains unchanged, the equity value available to shareholders in a future sale will be further diluted."
Comments