Leveraged recapitalization in M&A is used more often to push value, not just to park capital. In 2025, U.S. leveraged-recap activity rose 11% year over year through Q3, and exams by Dealogic show a 43% jump in North America from January to October. It is not a one-off trend; it is a structural feature of how sponsors press for exits and how buyers finance bets in a higher-cost capital environment. I have watched this play out across sectors, from information services to EdTech, with real dollars and real risk shaping every decision.
We must take into consideration that a leveraged recap adds debt to the target’s capital stack to finance a large dividend or share repurchase, often immediately after a deal closes. In practice, that means the sponsor uses debt to pull cash out at the expense of near-term balance sheet strength. Moody’s data for 2025 shows typical debt/EBITDA ranges in the 4.7x to 6.2x band, and Fitch notes that roughly 16.7% of large M&A deals in 2025 included a recap component.
These are not low-leverage plays; they are debt-fueled capital returns that require solid post-close cash flow and careful covenants. For boards and lenders, that means ongoing scrutiny of leverage sustainability (ongoing debt-service capacity under rising rates is scrutinized for long-term viability), stress tests, and compliance with debt-service covenants in a rising-rate backdrop.
Let me give you a concrete case that has been in motion for years: Apollo Global Management’s leveraged recap of The Michaels Companies. Michaels was acquired for about $5B in 2021, and from 2021 through 2025 the refinancing cycle has kept this deal active. The enterprise ultimately paid out roughly $1.1B in dividends to Michaels’ shareholders as part of the recap, with about $800M of equity returned to Apollo investors by September 2025, per SEC filings. The structure illustrates how a sponsor negotiates a post-close debt load that supports large distributions while farmed cash flow remains allocated to service that debt. It is a clear example of exiting finance: use the acquisition to extract value, then rely on ongoing cash generation to service higher debt levels.
In the education space, response patterns look similar but with sector-specific quirks. Veritas Capital led a leveraged recap of Anthology in 2025 to support an EdTech acquisition, with debt added of roughly $2.3B. This was tied to a cross-border angle, as Pearson plc in the UK partnered in this recap, creating a 6.1x leverage ratio in October 2025.
Cross-border recaps introduce regulatory complexities and currency risk, but they are increasingly common in education tech where scale and platform integration drive value. The larger regulatory lens in late 2025 reflected concerns about systemic risk in highly leveraged sectors, and that lens is not going away.
On the data side, information services stood out in 2025 with $12.6B in leveraged recaps year-to-date through October, per PitchBook. That sector also accounted for a notable cross-border move in the Pearson-Anthology deal. Across sectors, the recurring pattern is clear: sponsors push for immediate distributions or strategic bolt-ons funded by new debt, while buyers emphasize cash-flow adequacy to cover higher interest costs. Refinitiv data put the average new leveraged loan rate around 7.2% in Q4 2025, underscoring how financing costs have hardened and how lenders are demanding stronger coverage metrics.
From a risk perspective, the default rate among highly leveraged recap targets was 9.5% trailing 12 months as of November 2025, according to S&P. That is not a warning bell, but it is a signal: if rates stay elevated or growth slows, debt service pressure can erode equity value or threaten covenant compliance.
When you combine that with the fact that 12 recap deals were flagged for regulatory review in Q3-Q4 2025 in the U.S., you see why boards and regulators are scrutinizing these structures more closely. The higher cost of capital in 2025 makes these moves more sensitive to macro shifts, and that sensitivity translates into tighter deal execution risk and more conservative post-close planning.
In practice, what does this mean for deal teams? First, stress-test post-close cash flows under multiple rate and growth scenarios, especially when leverage sits near the 6x EBITDA band. Second, implement clear covenant structures and transparent post-close milestones to demonstrate debt-serviceability. Third, document the strategic rationale: quick value return to sponsors, financing acquisitions, or optimizing capital structure in volatile markets. Across the board, the education sector has shown five deals announced since July 2025, with Anthology’s recallable structure illustrating how EdTech platforms scale through integrated services, content, and data analytics, all supported by debt-funded returns.
As a practitioner, you also notice how cross-border activity shapes risk profiles. The Pearson-Anthology cross-border recap serves as a cautionary tale on currency translation, regulatory alignment, and cross-jurisdiction covenant consistency. You must map regulatory expectations across jurisdictions early and maintain close liaison with rating agencies.
Fitch and Moody’s reinforce that leverage should be paired with predictable earnings visibility and disciplined capital allocation. In late 2025, regulators pressed the point that highly leveraged sectors could propagate risk to the financial system, which means you should expect heightened supervisory scrutiny and potential stress-testing obligations for recap deals.
From a strategic angle, leveraged recaps remain a tool for PE exit strategies and for financing growth bets in a challenging capital market. The data suggest a broader pattern: 21% of all U.S. M&A in 2025 included a recap component, and equity returned to sponsors in recap scenarios topped $1.1B in the Michaels case alone. This reinforces that recap structures are not niche; they are mainstream finance in a volatile environment. If you are evaluating a potential recap, track entry leverage (4.7x-6.2x as a range), the post-close leverage trajectory, and the plan for debt amortization. Benchmark against peers and regulators’ expectations to avoid mispricing risk around-level debt capacity.
What matters most for practitioners is the practical framework: define the value creation thesis, attach a debt structure that supports it, and maintain strict visibility into debt service and covenant compliance. In 2025, debt markets moved to 7.2% average new leveraged loan costs, so the math must assume higher debt service.
The regulatory lens will sharpen; prepare a robust compliance plan and transparent disclosures in SEC filings and investor materials. Real cases illustrate the path: Michaels shows how a large consumer retailer can be grown through a recap, Anthology shows sector-specific leverage, and Pearson links cross-border dynamics with disciplined capital structure.
For readets who want a clear takeaway: leveraged recapitalization is a viable M&A tool, but it requires disciplined execution, rigorous risk management, and close regulatory alignment. The trend is not fading; it is recalibrating around higher rates and heavier scrutiny. If you are looking to expand knowledge, study sector-specific recap patterns, monitor debt markets, and follow real-world cases as they unfold. You will gain a practical sense for how to structure, finance, and govern recap deals in today’s market.
Practical notes and call to action: review term sheets for post-close leverage caps and test scenarios with 5% to 200% rate changes.
Compare target EBITDA stability to the 4.7x-6.2x bands and verify that debt amortization timelines align with cash flow generation. For ongoing learning, explore more terms in the Matactic glossary and sign up for our free M&A course to stay current on deal structures, risk management, and regulatory expectations.
