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You may have missed it in this morning’s Wall Street Journal, but in the Overheard section, the paper let us know how a lot of the private equity industry is preparing for tax hikes, and it’s going to make some people upset.The industry has ramped up its use of dividend recaps to exit investments. From WSJ:
“Recaps” involve private-equity funds taking an early payout from a company, financed with extra debt. With potentially big tax-rate increases on dividends coming as part of the “fiscal cliff,” investors have an incentive to cash out now.
Steve Miller at S&P Leveraged Commentary & Data calculates that $73.9 billion of dividend-related loans and high-yield bonds have been issued so far this year. That easily beats last year’s $56.9 billion total, itself a record.
This is also happening, in part, because not as many companies are going public, which is private equity’s more traditional way of exiting an investment.
Fortune’s Dan Primak had a great column about how dividend recaps hurt the image of the PE industry back in March. He called the practice, “noxious” and said it was PE’s worst enemy.
While dividend recaps are quick and easy money for the industry, they’re bad for business in the long term. Investors in private equity funds — including public pension systems — have begun talking a lot about “sustainable” investments, rather than just buy, sell, and move on.
Luckily for the industry, the Wall Street Journal points out that in the world of low interest rates, investors are clamoring for high-yield debt, and dividend recaps can provide that.
At least someone’s happy.