The effects of leveraged recapitalizations in private equity portfolio companies

Abstract: This paper examines the way in which leveraged recapitalizations (re-issuance of debt) affect private equity portfolio companies. It therefore analyses this type of "transaction" from qualitative and quantitative perspectives. The qualitative perspective is studied with the help of interviews conducted with investors and with representatives of banks, private equity firms and portfolio companies. The quantitative studies are done by analysing a dataset of financial information from Nordic portfolio companies of private equity firms that have been subject to a recapitalization. The paper begins with a brief history of private equity and leveraged buyouts, and then explains the mechanics of leveraged recapitalizations. This introduction is followed by a theoretical explanation, empirical evidence and analysis. In the qualitative analysis we establish that the involved parties have different opinions on leveraged recapitalizations but they agree that under the right circumstances it can be an advantageous strategy. In the quantitative analysis we establish that it is difficult to draw ceteris paribus conclusions because factors other than the re-leverage can affect the key ratios that we have selected. We then conclude this paper by stating our findings; leveraged recapitalizations can be an effective tool for extracting additional capital or as an IRR enhancer given the right circumstances, but can have a devastating effect if thorough due diligence is not made. Furthermore, it can be an effective last-resort strategy if market conditions are not favourable and the investors demand returns on their investments.