DEALTALK-Credit crunch puts stop to dividend recaps

(For more Reuters columns on deals, click on [DEALTALK])

By Michael Flaherty

NEW YORK, Sept 27 (Reuters) - The private equity industry is under greater pressure to make money the old-fashioned way after losing another popular investment tool, courtesy of the credit crunch.

Dividend recapitalizations, or leveraged "recaps," were popular during the two-year buyout boom. Now they're becoming a thing of the past.

Cheap and easy debt allowed private equity firms to borrow even more cash after buyouts to pay themselves a dividend, often making back their money in a year or two.

Dividend recaps by private equity firms increased 51 percent last year to $38.22 billion across the globe, according to research firm Dealogic. More than $23 billion of recaps were announced in the first half of this year.

But at least for now, tough conditions in the credit markets have put an end to most recaps, as banks are stuck with leveraged buyout debt and can't lend as easily. LBO firms have announced only $1.53 billion in dividends in the third quarter, Dealogic says.

"That game has come to an end," Charles Kaye, co-president of Warburg Pincus, said on a panel at the Dow Jones DJ.N Private Equity Analyst conference last week. Generating strong returns without the debt dividends will be "a meaningful challenge" for some buyout firms, he added.

The cutoff in lending has also reined in secondary sales, a popular buyout strategy in which private equity firms sell companies to each other, rather than to a corporate buyer or in the IPO market. (To read more about this, click on [ID:nN11440455].