Wednesday, August 21, 2019

"PE firms keep deploying dividend recaps despite the risks"

'Despite'? It's a feature, not a bug.
And if creditors aren't paying attention they are going to lose A LOT of money.

From PitchBook:
Dividend recapitalizations have never been a popular moneymaking technique for those outside of the private equity industry. For one, they usually only benefit a select group of investors or shareholders. And they typically damage a company's credit rating, which can irk creditors and common retail investors. Plus, once dividend recaps are complete, the company itself has to pay back the debt or it will eventually file for bankruptcy.

But the tactic, which involves a firm adding debt to a portfolio company so it can give itself or its shareholders a quick cash payout, seems as common as ever, with no signs of slowing. Sure, Democratic presidential candidate Elizabeth Warren introduced legislation that would forbid dividend payments for the first two years a PE firm owns a company, but getting a bill passed in a US Senate controlled by the PE-friendly GOP simply isn't possible at the moment.

After another cut in interest rates by Federal Reserve chair Jerome Powell in late July, private equity firms aren't hesitating to cash in. Earlier this week, Bloomberg reported that a consortium led by Silver Lake and Singapore sovereign wealth fund GIC is planning a dividend recap that would pull out roughly $910 million from Utah-based genealogy company Ancestry to pay shareholders. The investor group is also reportedly seeking a one-time dividend payment of $150 million by the end of 2019. That would mark a huge win for Silver Lake and GIC, which backed the business in 2016 at an enterprise valuation of $2.6 billion, with Permira and Spectrum Equity also retaining stakes.

So far, the news hasn't drawn much backlash, perhaps because Ancestry has been a successful business and a cash cow to PE land, having paid out a reported $1.1 billion in dividends. But that wasn't the case for Sun Capital Partners, which has been the focus of intense scrutiny for its treatment of Shopko. The firm purchased the Wisconsin-based retail department store in 2005 for some $1.1 billion, then carried out a series of dividend recaps, including a reported $50 million bump in 2015. The business eventually filed for Chapter 11 bankruptcy in January and has since liquidated, drawing the attention of lawmakers, who expressed concerns regarding severance for the company's employees.

Another high-profile dividend recap came earlier this year....