Private credit loans fund dividend recaps as PE exits stall

The exit drought is driving everything else

The biggest story in private markets this autumn is a missing exit, not a single deal. Private equity firms cannot easily sell what they own, and the investors in private credit funds cannot easily get their money back. Both problems are being handled the same way. Firms are taking on more borrowing and building new structures that buy time without fixing the underlying issue.

The latest evidence came on October 16. Moody's said sponsors are pushing portfolio companies to borrow so they can pay cash to their own investors, a move known as a dividend recapitalization. The agency expects this to stay high in Europe, the Middle East and Africa because IPOs and company sales remain weak26. Moody's estimates that private equity-owned companies in EMEA could take on roughly €41 billion ($46 billion) more debt before reaching leverage levels that usually lead to downgrades26. Citing PitchBook data, Moody's also said private equity distributions have fallen from more than 30% of starting net asset value in 2022 to about 12% now26.

Moody's analyst Mayank Mallik put it bluntly: exits are scarce, European IPO markets have been quiet, and the money that would normally fund large corporate acquisitions became much more expensive after the last cycle of rate hikes26. US figures point the same way. PitchBook data cited by Valuation Research Corporation (VRC) shows US private equity exit value down about 11% in early 2026 compared with a year earlier. Despite SpaceX's June listing, IPOs made up only 17.3% of US PE exits by value and 3.6% by count in the first half4.

Borrowing to pay investors

Dividend recaps are the quickest way to return cash, and the reporting agrees they have limits. Moody's says sponsors have so far been disciplined. Most recaps have gone to companies that beat their original business plans, with services, consumer products and manufacturing the busiest sectors26. Mallik's warning concerns what comes next. If the exit backlog lasts, sponsors may start borrowing against weaker companies, and loose loan documentation makes that easier than it was ten years ago26.

Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, described the basic trade-off. Investors get some cash, but the company stays in the fund and still needs a buyer. At the same enterprise value, more debt leaves less equity for shareholders when it is finally sold26. She also said tight spreads and a shortage of new loans are what keep lenders interested. Weaker earnings, wider spreads or investor withdrawals could reduce that capacity26.

This is the crux of the matter. Recaps are possible right now because lenders have more money than deals. They will look riskier if lenders lose that cushion.

Lenders have money but few large buyouts

The data on lender demand is striking. Sikich reports that September was the strongest month for M&A-related loan issuance since January 2022. It included 12 acquisition term loans above $1 billion, eight of them for leveraged buyouts21. That recovery happened mostly in the broadly syndicated loan market, not private credit. Direct lending for LBOs totaled about $10.7 billion in the third quarter, below both the prior quarter and the same quarter of 202521. Sikich says the syndicated market has won back several large financings that might have gone to private credit in recent years21.

The result is a squeeze on direct lenders. They have plenty of capital, but there are few large sponsor deals, so they compete hard for good middle-market borrowers. That pushes spreads tighter even while deal volume is weak21. VRC broadly agrees, reporting that direct lending spreads stabilized as banks gradually returned and sponsor M&A improved12. Lenders are still demanding extra pay for software, which prices 50 to 100 basis points wider than the broader market12.

Fundraising has not stopped. Audax Private Debt closed its third direct lending fund at a $5.4 billion hard cap, above its $4 billion target, and says it has $10 billion of investable capital including leverage and related vehicles25. Large managers are also moving into asset-backed lending to find room to deploy. Carlyle agreed on October 16 to buy a roughly $7.7 billion portfolio of unsecured personal loans from Truist and presented the deal as part of banks turning to private capital to manage their balance sheets27. Brookfield's Oaktree closed a $2 billion asset-backed finance fund across the fund and related vehicles25.

This looks like an industry moving away from relying only on buyout financing, partly because there are not enough buyouts.

Private credit has its own exit problem

Limited partners in buyout funds want cash back, and so do the wealthy individuals who bought into semi-liquid credit funds. Morgan Stanley's nearly $7 billion North Haven Private Income Fund limited withdrawals to 5% for a third straight quarter after requests reached 11.4% of shares. Nearly two-thirds of those requests came from investors whose earlier requests had already been cut back5. Bloomberg has also reported KKR exceeding a 5% cap to meet redemptions, and Blue Owl capping two BDCs again after withdrawal requests of 39% and 17%.

The picture across the sector is mixed. VRC's preliminary data shows average redemption requests at 11 of the 14 largest non-traded BDCs dipped from 13.9% in the second quarter to 13.0% in the third, with the median falling from 13.3% to 11.5%12. The Financial Times reported in late September that withdrawals were slowing, though one source said it was too early to call a bottom1. Public BDCs still trade about 10% to 20% below reported NAV, and some trade at discounts of 40% to 50%4.

The strain is also reaching managers. Partners Group, which said earlier this year that net outflows from three affected evergreen strategies could reach $10 billion to $20 billion, has cut or moved dozens of people out of its roughly 200-person private equity team2. It is also splitting its Global Value SICAV evergreen strategy into two portfolios, letting investors choose between long-term compounding and receiving cash from realizations2.

Private credit is also borrowing private equity's methods for creating exits. Blackstone raised about $1 billion for a private credit continuation vehicle, with Allianz Global Investors and StepStone as buyers, letting investors in a 2022-vintage fund leave while Blackstone keeps the loans24. Trade coverage describes credit continuation vehicles as a growing alternative to repeated fund extensions and piecemeal loan sales9. Wealthy individuals are also borrowing against their private equity holdings as payouts slow, joining pension funds in NAV lending22. The common thread is that leverage and secondary sales are being used where the industry would normally rely on realizations.

How bad is the credit stress?

The sharpest disagreement in the coverage is over defaults. Fitch reported a record 6.3% private credit default rate in August, while KBRA put it at 2.5% by count and 2.2% by volume4. One account citing Pimco described a broader BDC-focused "shadow" measure of 19%, while Houlihan Lokey's size-weighted figure was below 1%20. VRC's own shadow default rate is above 10%. It counts borrowers that have recently made, or are about to make, major amendments such as switching cash interest to payment-in-kind (PIK), extending maturities, or swapping debt for equity12. VRC notes that 47% of recent defaults involved maturity extensions, PIK features or missed interest payments rather than conventional payment defaults12.

In my reading, the gap reflects a definitional problem more than any real uncertainty about direction. The headline payment-default numbers look manageable because a growing share of stress is being handled through amendments rather than recorded as default. PitchBook data cited by Forbes shows distressed debt in the largest BDCs, meaning positions marked below 80% of cost, up 64% from a year earlier to $6.8 billion. Software loans and second-lien tranches account for 89% of that increase14.

There is a credible counterpoint. A July Bank for International Settlements analysis found fewer than 1% of BDC software loans were behind on payments. Moody's notes that software maturities do not rise much until 2028 and 202917. VRC says it does not see the problems as systemic, though it expects defaults and liability management to stay high in a higher-for-longer rate environment12.

Risk is also moving into areas regulators watch less closely. South Carolina regulators allege that Atlantic Coast Life's private equity owner moved retirees' annuity money into illiquid private credit beyond agreed limits. The owner, A-CAP, denies this, and no court has ruled8.

The verdict: time bought, not problems solved

This is not a 2008-style collapse, and the coverage does not suggest one. It is a liquidity squeeze on assets bought and loans made in 2021 and 2022, as those holdings approach a 2027–2029 maturity wall4. Dividend recaps, continuation vehicles, NAV loans and redemption gates all do the same job: they give investors some cash while deferring the question of what these assets are really worth.

Whether this works depends on how fast exits recover. Permira's Dipan Patel argues lower valuations and less competition make this a good time for new deals22, and sales such as Sycamore's planned roughly $9 billion disposal of Boots show assets can still be sold22. But as Haldea points out, every recap financed against expected growth rather than actual earnings growth makes the final exit harder26. Signs to watch include third-quarter BDC results in early November, fourth-quarter redemption requests, and whether more lenders' marks are confirmed at par through actual sales18.