The Walking Debt: Buyout Against the Leverage Wall
Buyout holdings may be caught in a leverage squeeze, potentially limiting the capacity for dividend recapitalizations and curbing incremental borrowing that would pull growth levers such as capex and bolt-on acquisitions. Headroom, or the gap between median leverage (net debt/EBITDA) and an implied leverage cap (based on 2x interest coverage), has shrunk as elevated median coupons have dragged the cap lower.1 This squeeze could place fresh strain on distributions to limited partners and throttle portfolio companies’ expansion, which may pressure exit valuations later.
Shrinking headroomHeadroom in older buyout holding vintages (2010-2019) has been hovering comfortably around 3 turns — meaning, a 3x net-debt-to-EBITDA multiple — above the implied 2x interest-coverage breach threshold, as of Q4 2024 data. That comfort has vanished for younger vintages. Interest-rate hikes since 2022, sometimes combined with elevated entry leverage, have compressed headroom in the 2020-2024 vintages. The 2021 vintage breached the leverage cap within two years; 2020 and 2022 vintages brushed up against it after roughly 3.5 and 1.5 years, respectively. Entry leverage in 2023 and 2024 vintages was lower than in 2020-2022, and late-2024 Federal Reserve cuts provided some relief, yet headroom remained under one turn.
Approaching the breachA closer look at the headroom distribution indicates that by Q4 2024, 58% of buyout holdings sat in the tight, tapped-out or breach zones of their leverage cap.2 About 45% were in the breach zone — more than triple the 2010-2019 median share of 13%. This spike may sharply reduce the pool of holdings capable of undertaking dividend recaps or pursuing growth drivers. Unless sponsors deliver outsized EBITDA growth — or rates fall quickly — buyout holdings may be stuck running on razor-thin headroom.
Data as of Q4 2024. Curves represent headroom or the distance between median leverage and the implied 2x-interest-coverage-based leverage cap, by holding vintage. Leverage-cap and headroom calculations use base rates data (retrieved May 28, 2025) and private-debt cash spreads, net debt and EBITDA data. Source: Federal Reserve Bank of St. Louis’s FRED, MSCI Private Credit Security Terms, MSCI Private Capital Universe
Data as of Q4 2024. Leverage-cap and headroom calculations use base rates data (retrieved May 28, 2025) and private-debt cash spreads, net debt and EBITDA data. Source: Federal Reserve Bank of St. Louis’s FRED, MSCI Private Credit Security Terms, MSCI Private Capital Universe
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1 Leverage cap = 1 / (median coupon x 2), assuming a 2x interest-coverage floor (i.e., EBITDA must cover 2x interest payments, a recognized leverage yardstick in buyout holdings for gauging debt limits). Median coupon = median base rate + median cash spread. Median base rates are based on series LIBOR3M (3-month USD LIBOR), DTB3 (3-month Treasury bill), TEDRATE (LIBOR–T-bill spread) and SOFR90DAYAVG (90-day compounded SOFR) from the Federal Reserve Bank of St. Louis’s FRED.
2 The analysis defines the headroom bands as: breach (headroom < 0 turns), tapped out (headroom = 0-0.5 turns), tight (headroom = 0.5-1 turns) and comfort zone (headroom ≥ 1 turns).
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