Private Equity's Version of "The Sting"

It's called a "dividend recap," and it's some sweet action

THE SCHEME: Beating the “marks” with their own money

THE COMPANY: Main Street USA

THE NEWS: Private equity firms and Wall Street banks loaded American businesses up with debt from leveraged buyouts over the last decade and now they are loading them with more debt to cash out their winnings with an outlandish strategy, the “dividend recap.”

Illustration by Daniel Medina

In the classic 1973 movie The Sting, con men extraordinaire played by Paul Newman and Robert Redford hatch a plan to take down a fearsome mob boss played by Robert Shaw in a high-stakes poker game. The cons first pickpocket Shaw, stealing his billfold and then, using Shaw’s own money, outcheat him at cards to take him to the cleaners.

The stakes are a lot higher with Private Equity (PE). While Redford and Newman ripped off a mob boss, PE firms take over companies that provide important services — healthcare facilities and nursing homes, for example — and manufacturers that employ thousands.

PE firms typically hold companies between four and seven years before exiting. Small to mid-size companies are often sold to another PE firm, while large companies are usually taken public with an initial public offering (IPO).

But high interest rates and uncertainty over President Trump’s tariffs policy have made IPOs an unattractive option. For one, high interest rates are bad for a debt-laden company, and there’s concern that tariffs will disrupt global supply chains.

Not to worry if you’re a PE investor. There’s still what’s called the “dividend recap.” Take the case of Clarios International — America’s largest producer of electric vehicle batteries with 16,000 employees. It’s an example that would surely earn the respect of Newman and Redford’s characters.

A PE firm — Brookfield Asset Management — and Canadian pension fund manager Caisse de dépôt et Placement du Quebec bought Clarios in 2019 for $13 billion. About $4 billion of that was funded by PE investors. The new owners had success reducing debt — it dropped by $2.1 billion between 2020 and 2024, according to Fitch Ratings.

But Clarios added debt when it came time to sell in 2025. The company took on about $4.5 billion in loans from a syndicate of lenders led by J.P. Morgan to pay a special dividend to its PE investors.

Bloomberg News broke the story:

Car battery maker Clarios International Inc. raised debt to pay a $4.5 billion dividend to its buyout-fund backers, one of the largest such payouts on record. That paid for a distribution to investors, including Brookfield Asset Management Ltd. and Caisse de Depot et Placement du Quebec, letting them take the equivalent of 1.5 times their equity out of the deal, according to people familiar with the matter who asked not to be identified because the deal is private.

Brookfield and its investors ensured a profit by loading the company with more debt. The investors get the money, while the company still has to pay the debt. For Brookfield and Caisse, there is nothing but upside. Investors, to borrow from the Logan Roy character, have already made their nut. Plus, there’s more money to be made if interest rates go down and the demand for their EV batteries remains strong, which could make conditions ideal for an IPO.

Bloomberg compiled data that shows 20 businesses in the U.S. and Europe in 2025 have borrowed to make big payments to their owners.

Now you may be asking yourself, why would JP Morgan and the other loan syndicate members make what seems to be a very risky loan?

They have options. The syndicate can sell into either a structure like a Collateralized Loan Obligation (CLO) or one of the many mutual funds that invest in these loans. As insane as it sounds, these loans are in incredible demand. It’s a lot like the subprime story in the 2000s—the tail is wagging the dog. CLO investors and mutual fund managers hunger for loans so Wall Street can make them without fear.

In fact the lenders make a fee putting the loans together and if they are a CLO underwriter, which they usually are, they get more underwriting fees.

Meanwhile, bankruptcy filings by PE and venture capital-back firms jumped 15% last year, according to an S&P Global study.

“With inflation remaining somewhat stubborn, the Federal Reserve is not expected to lower interest rates aggressively this year, keeping the cost of borrowing high. That could spell trouble for more companies this year,” the study says.

Clarios may still come out whole if the EV battery market remains strong and interest rates eventually go down. However, if neither of those things occurs, Clarios and its employees could pay a steep price while PE investors still walk away flush.

Such a scenario reminds me of the poker game scene from The Sting where Newman’s character says to one of the poor suckers who’s lost all his money, “Don’t worry pal, they wouldn’t let you in this game if you weren’t a chump!”