Private-equity firms are adding debt to companies they own to fund payouts to themselves at a record pace, as fears mount that the window for these deals will close if interest rates rise.
So far this year, $47.4 billion of new loans and bonds have been sold by companies to pay dividends to the private-equity firms that own them, according to data provider S&P Capital IQ LCD. That is 62% more than the same period last year, which wound up being the biggest year on record, with $64.2 billion sold to fund private-equity payouts.
Buyout firms acquire companies with a combination of cash and debt, which the acquired companies aim to pay back with earnings. In dividend deals, private-equity-owned companies add more debt so they can pay dividends to their owners. Ultimately, the payouts are distributed to the buyout firms’ own investors, which include endowments, pension funds, wealthy families and the firms’ executives.