PE Firms Flood Junk Debt Market to Pay Themselves
Private equity firms struggling to find buyers for their investments are turning to an outdated playbook like never before.
Fiscal sponsors are extracting cash from portfolio companies by increasing debt to fund themselves and their investors at an unprecedented pace. Such dividend credits have reached $28.7 billion so far this year, putting them on track to exceed a record $28.8 billion in 2021, according to data compiled by Bloomberg.
Their efforts come as the private equity machine growls at almost every turn: Attractive takeover targets are few and far between, and it’s harder to cash in on old investments and deliver the returns once promised to pension managers, foundations and wealthy individuals. To quell impatient investors, buyout shops are increasingly issuing extra debt to their companies and instead passing on the proceeds from debt sales to their stakeholders.
“All the stars are aligned for dividend recaps; rates are falling, spreads are tight, the market is open — but the IPO market and mergers and acquisitions are still weak,” said Bill Zox, portfolio manager at Brandywine Global Investment Management. “Investors want distributions, and dividend recaps could buy PE firms more time to wait for a better environment for exits.”
Private equity firms have routinely used dividend recapitalizations after acquiring companies to book profits and exit the game. Such deals can be seen as controversial and aggressive, often causing debt investors to back out for fear of the strain of additional debt. But borrowers have the upper hand this year, with demand for loans likely outpacing the supply of new debt.
This month, private equity firm Thoma Bravo priced a $750 million loan to cybersecurity company Darktrace to finance a distribution to shareholders in what Fitch Ratings called “an aggressive financial policy with high leverage.”
In October, Thoma Bravo raised debt to Ping Identity Holding Corp. to help finance a nearly $1 billion settlement. Earlier this year, another of its portfolio companies, Proofpoint Inc., took out a $1.35 billion loan to finance payouts to the acquiring firm and employees. Other recent deals include a $1.35 billion leveraged loan from yogurt maker Chobani Inc. to partially finance a settlement.
Buying firms and their customers rely on alternative methods to unlock cash. They move assets from legacy vehicles into funds known as continuation funds, sell shares in the secondary market, and borrow against holdings through complex loans at high interest rates.
The industry’s fund deployments have slowed so severely that, at the current pace, it would take about nine years for clients to collect their money from the more than 12,000 companies holding U.S. buyout funds, according to Pitchbook. Bain & Co. That makes limited partners reluctant to raise new capital, while its mid-year report estimated there were more than 18,000 private equity funds seeking $3.3 trillion.
“The reason sponsors are doing this and driving a lot of this is because, realistically, they’re having a hard time making money on their investments,” said Matthew Mish, head of public and private credit strategy at UBS Group AG. “The IPO market is starting to melt, but it’s not providing a real exit. LPs aren’t getting their money back.”
Helping support dividend deals is the market’s supply-demand dynamic. Roughly $915 billion in loans have been sold in 2025; This is approximately 16% lower than the same period last year. About 80% of this debt was for loan refinancing and repricing, meaning there was relatively little new debt to purchase.
Another factor is collateralized loan obligations, which are structured credit instruments that are the largest buyers of leveraged loans. CLOs are financed by issuing bonds. Debt backed by syndicated loans sold in 2025 totaled more than $151 billion, up about 4.7% from the same period last year, according to Bloomberg data.
“The problem is, the deals aren’t performing well. So even if I want to sell mine, I’m not going to sell it to the other PE professional who knows his deals aren’t performing well and doesn’t want mine,” Mish said. “The easiest thing to do is to recapitalize and sell it to a less credit-discriminatory investor, the CLO.”
Click here for Vanguard’s podcast on its reservations in junk bonds
With help from Dan Wilchins.
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