Hedge funds and Private Equity - PES

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2.4 Extraordinary dividends
In addition to the capital gain on leaving, the target enterprise’s distributions to PE funds
during the investment stage have achieved greater significance. In recent times there have been
spectacular instances of super-dividends. The Danish telecommunications group TDC was taken
over by the investors Blackstone, Apax, Permira, Providence and KKR for the sum of
EUR 12 billion. Just a few months later the target enterprise was prompted to distribute an
unusually high dividend of EUR 5.6 billion to investors.
This was the equivalent of EUR 29 per share. Until then the norm for the group had been 56 per
cent per share 43 . PE funds have thus made it possible to refund one third of their input in an
extremely short period of time.
In the case study of the DT Group it is described how the company, at the time listed usually
declared a dividend at 10 – 15 mill € pr year, while in the following two years after the take
over the company declared a special dividend of 200 mill €.
The rating agency Fitch makes the criticism that many enterprises run into debt in problematic
areas after recapitalisation 44 . In the summer of 2006 the PE investor Terra Firma arranged for the
equity invested in the German motorway services chain Tank & Rast to be repaid to the investor
after only 18 months at one and a half times the amount with the help of a new loan, which had
been imposed on the company.
The high rates of return of PE funds on buyouts are “justified” by the LBO industry because of
the alleged risk they take owing to their capital being committed for longer in a target enterprise,
the future prospects of which cannot be accurately calculated. The funds’ risks, however, have
actually been very low because of recapitalisations (‘recaps’). According to a study by the Swiss
business consultancy Strategic Capital Management (SCM), recapitalisations already provide
30 per cent of all backflows in the global PE sector 45 . Because of recapitalisations, funds’ risks
have shifted to the banks providing the loans. In recent years the banks have for their part switched
over to securitising loans in tradable securities, thereby transferring the risks to other market participants.
Those buying the securities are often hedge funds, in which once again institutional
investors and wealthy individuals have a stake, with the latter two ultimately bearing the risk.
The rating agency Standard & Poor’s (S&P) warns that the level of debt of enterprises run for special
distributions of funds leads to greater risks of credit loss 46 . According to S&P data, the number of
recapitalisations between 2002 and 2005 increased tenfold to more than US$ 40 billion 47 .
Equity capital is turned into borrowed capital through recapitalisation. This increases the risks for
the target enterprises concerned and results in a poorer rating and therefore higher loan costs.
All in all, recapitalisation makes the situation of the enterprises concerned considerably worse.
2.5 Tax revenues
What typically happens when a capital fund buys up a company is that:
1. The indebtedness of the purchased company increases.
2. Extraordinary dividends are paid out, directly linked to the purchase.
43 Die Aktiengesellschaft 16/2006, p. 579
44 Idem
45 Financial Times Deutschland 9.8.2006, p. 19
46 Financial Times Deutschland 14.8.2006, p. 18
47 Handelsblatt 15.8.2006, p. 23