As surely as the arrival of pumpkin pie mix on supermarket end caps heralds turkey day, the appearance of ranks of dividend recaps on loan and high-yield shelves is a vivid sign of investor over-exuberance.
Call it the First Law of Private Equity Dynamics: “A general partner will act to return as much money to its limited partners as quickly as it can, until the market says it can't.” And so far “the market” is saying, “Yes, you can.”
In the early stages of this recap mania – meaning last Tuesday – investors had three criteria to assess dividend deals: the sponsor leaves skin in the game (i.e. doesn’t take out all their invested cash equity), total pro forma leverage is no higher than the original LBO, and the company is hitting its numbers.
On Wednesday HCA, the jumbo hospital operator, via a junk deal sent a $2 billion dividend back to its owners. It’s third dividend this year. Cash out? $4.25 billion. Original cash in? $5.5 billion. Still some skin left.
Not everyone loves recaps. Here’s one founder of a well-regarded PE fund: "It’s crazy to leverage up your company to do these,” he said. “You should be conserving cash and borrowing capacity now to pick off competitors and grow market share and shareholder value. Then when you exit, you’ll deliver way better returns to your LPs."
Of course, piling on corporate debt for any reason in the face of an uncertain economic outlook may not be the wisest course of action. But in the meantime, as the Second Law of Private Equity Dynamics states: “Anything worth doing is worth overdoing.”