The Story: Two Portfolios, Two Playbooks, Two Very Different Mornings in April 2026
On the morning of April 22, 2026, two private equity firms woke up to leverage-driven headlines. One had used debt brilliantly to put billions back in its pocket while keeping its crown jewel. The other watched $5.1 billion in equity evaporate overnight as lenders seized control of a company it had paid $6.4 billion to own just five years earlier.
The first was Brookfield Asset Management, whose portfolio company Clarios International: the Wisconsin-based car battery maker whose products power one in three cars globally, had executed a landmark $4.5 billion dividend recapitalization in early 2025. Brookfield and its co-investor, Canadian pension giant CDPQ, pocketed a generational distribution without surrendering a single share.
The second was Thoma Bravo, whose software firm Medallia: a customer-experience platform taken private for $6.4 billion in 2021, collapsed under roughly $3 billion in debt. When lenders including Blackstone, KKR, Apollo Global, and Antares Capital refused to extend payment-in-kind (PIK) relief, the equity was wiped to zero in a debt-for-equity swap.
Same instrument, leverage, wildly different outcomes. The difference was not luck. It was structure, cash flow, and intent.
The Decision: When Leverage Is a Scalpel vs. a Sledgehammer
Clarios: Discipline First, Liquidity Second
When Brookfield and CDPQ acquired Clarios from Johnson Controls in 2019 for roughly $13 billion, they inherited a cash-generative industrial business with durable, predictable demand. Car batteries are not discretionary. Over the following years, the Brookfield-CDPQ consortium methodically repaid more than $2 billion of Clarios’s existing debt, delevering, not adding risk.
By early 2025, with the credit market reopening and Clarios’s IPO shelved, the owners faced a familiar dilemma: how do you realize value when the exit window is closed? Their answer was surgical. Clarios launched a multi-tranche debt raise consisting of a $2.5 billion dollar-denominated term loan, an €800 million euro term loan, and a $1.2 billion high-yield bond, totaling $4.5 billion in new issuance, all channeled as a special dividend back to shareholders. The transaction pushed gross leverage to approximately 6x EBITDA, a figure analysts flagged as elevated but tolerable for a business with Clarios’s cash flow profile and market position.
The key: Brookfield still owned Clarios. The equity was intact. The upside was preserved. The cash was real and already in LP accounts.
Medallia: Leverage as a Growth Bet, Without the Growth
Thoma Bravo’s thesis on Medallia was different in kind, not just degree. The 2021 take-private was predicated on aggressive recurring revenue growth and near-zero interest rates. The deal leaned on PIK provisions, a structure that allowed Medallia to defer cash interest payments by adding them to the principal balance, to paper over a cash flow gap that was supposed to close as the business scaled.
It never did. By early 2026, Medallia’s annual debt-servicing costs had ballooned to nearly $300 million, significantly outstripping its estimated $200 million in annual earnings. When the PIK relief window expired at end of 2025 and the lender group refused to extend it, the math was irreversible.
The Outcome: Numbers That Tell the Story
| Metric | Clarios (Brookfield) | Medallia (Thoma Bravo) |
|---|---|---|
| Acquisition Price | ~$13B (2019) | $6.4B (2021) |
| Debt Added via Recap/LBO | $4.5B dividend recap (2025), after repaying $2B+ of existing debt | ~$3B total debt load at collapse |
| Annual Debt Service vs. Earnings | Comfortably covered by industrial cash flows | ~$300M service cost vs. ~$200M EBITDA |
| Owner Liquidity Outcome | $4.5B special dividend distributed; equity retained | $5.1B equity wiped to zero |
| Outcome for Lenders | Loan fully placed; credit analysts flagged risk but deal cleared | Debt marked to 74–79 cents on the dollar; debt-for-equity swap executed |
| Equity Status (April 2026) | Intact. Ownership preserved. | Eliminated. Keys handed to creditors. |
The counterfactual on Clarios is worth dwelling on. Had Brookfield sold a partial stake to generate liquidity instead of executing the recap, they would have diluted their upside in a business that still holds dominant market position. Instead, the recap effectively turned a stalled IPO into a full liquidity event, without the exit. Brookfield’s Fund VI, which held Clarios, posted a net IRR of 17% through June 2025, a performance anchored in part by the Clarios distribution.
The Medallia counterfactual is equally instructive. Had Thoma Bravo structured the deal with less PIK reliance and more conservative leverage (or avoided the take-private entirely at a 2021 peak multiple) the $6.4 billion would not have been written to zero. The structure punished them the moment rates stayed elevated longer than the model assumed.
The Lessons: Principles That Survive the Cycle
1. Leverage Is Only as Safe as the Cash Flow Beneath It
Clarios makes car batteries. Revenue is sticky, replacement-driven, and non-discretionary. That cash flow profile absorbs leverage. Medallia made customer-experience software in 2021, a sector whose valuations were built on growth assumptions, not durable free cash flow. Debt is indifferent to your narrative. It gets paid from earnings, not TAM projections.
2. PIK Is Not a Bridge: It Is a Cliff You Move Forward
The collapse of the Thoma Bravo thesis was accelerated by the expiration of PIK relief at end-2025. PIK structures allow companies to defer cash interest by piling it onto principal, a strategy that only works if the business grows fast enough to outrun the compounding. When growth slowed and rates held, the math collapsed. Founders and operators should treat any PIK clause in a lending term sheet as a yellow flag about the deal’s underlying assumptions, not a feature.
3. A Dividend Recap Is Liquidity Without a Sale, But Only If Sized Right
The Clarios recap worked because six years of operational discipline preceded it. The Brookfield-CDPQ consortium repaid over $2 billion in debt before layering any back on. That sequencing (delever first, extract second) is the correct order of operations. A recap executed on a company still carrying original acquisition debt, into a sector under pressure, is not the same instrument. Same name, different risk profile entirely.
4. The Exit Market Doesn’t Owe You a Timeline
Stalled exit markets have defined 2024 through 2026. The dividend recap surge (roughly $76 billion in 2024 alone, a 240% jump versus 2023) reflects sponsors adapting to a world where IPOs are delayed and strategic buyers are scarce. Founders and operators who build capital structures that generate liquidity independent of exit timing will consistently outperform those whose plans depend on a favorable M&A window that may never open on schedule.
5. The Alignment Question: Who Gets Paid When Things Go Wrong?
Thoma Bravo and its LPs lost $5.1 billion. The lenders, by contrast, are the new owners of a restructured Medallia, battered but still operating. This is the structural reality of over-leveraged PE: the equity is the first loss. Founders who roll equity into a highly leveraged PE deal should understand that their rollover stake is junior to everything. When leverage is sized for the thesis, not the business, founders are last in line.
A Framework for Your Own Capital Decision
If you are a founder, operator, or family office principal considering a leveraged recapitalization or assessing a PE partner’s capital structure proposal, ask these five questions before you sign:
- Can my business service this debt in a flat or declining revenue year?: Run the downside, not the base case.
- Is my leverage ratio grounded in today’s actual EBITDA, or in projected EBITDA?: Middle market recaps typically close at 3x–5x EBITDA for a reason. Be skeptical of structures that rely on future numbers to justify current debt.
- Am I delevering before extracting, or extracting before delevering?: Clarios’s sequencing was deliberate. Sequence matters.
- Does my lender need PIK provisions to make this deal work?: If the answer is yes, the cash flow gap is real. Ask why it exists and how it closes.
- What is my liquidity plan if the exit window is closed for 3–5 more years?: A dividend recap, a unitranche, or a non-dilutive credit facility may be more durable than waiting for an M&A market that may never arrive on your schedule.
Leverage is not the enemy of equity. Poorly structured, poorly timed, and poorly matched leverage is. The difference between Clarios and Medallia was not the instrument; it was the discipline behind it.
Key Insights
- Cash flow is the foundation of safe leverage. Industrial, recurring, and non-discretionary revenue profiles support leverage. Growth-stage, thesis-dependent, or rate-sensitive businesses do not.
- A dividend recap is one of the most powerful non-dilutive liquidity tools available to founders and owners: it returned $4.5 billion to Clarios investors with zero change of control, but it must be sized against real cash flow, not pro-forma projections.
- PIK provisions are a red flag, not a feature. They defer the math; they do not fix it. When PIK windows expire and cash flow has not grown to fill the gap, equity is destroyed.
- The 2024–2026 exit environment has made leverage-as-liquidity a strategic necessity for sponsors and founders alike. Dividend recap volume hit $76 billion in 2024, a 240% jump from 2023, precisely because conventional exits are delayed.
- Founders with rollover equity in PE-backed deals should understand their capital structure seniority. In a distressed scenario, they are last in line. Demand conservative leverage terms (or negotiate structural protections) before rolling equity into a highly leveraged vehicle.
