CEOs' Growing Appetite for Leverage and Its Implications for Public Company Recapitalizations

In 2025, public company CEOs are increasingly embracing leveraged recapitalizations as a strategic tool to unlock value, driven by the dual forces of activist investor campaigns and private equity-like tactics. This shift reflects a broader trend in corporate finance, where capital structure optimization is no longer a passive exercise but a proactive battleground for governance, profitability, and market positioning.

The Rise of Leverage in Recapitalizations

Global private equity-backed leveraged buyouts (LBOs) surged to $150.35 billion in the first half of 2025, equivalent to 70% of the full-year 2024 total, with average deal sizes expanding significantly, according to a SP Global analysis. This growth is fueled by record dry powder and the proliferation of private credit, which has enabled firms to deploy capital selectively despite higher interest rates, according to the same SP Global analysis. The healthcare sector, in particular, has become a hotspot, with global buyouts climbing to $62 billion in H1 2025, driven by healthcare IT deals that now account for 31% of total buyout value, according to the same SP Global analysis.

Activist investors are amplifying this trend. For instance, Carl Icahn's Biglari Capital launched a proxy battle at Cracker Barrel Old Country Store (CBRL), urging shareholders to withhold votes for CEO Julie Felss Masino and board member Gilbert Dávila, according to a Reuters report. While proxy advisory firms like ISS supported the re-election of Masino, the campaign underscored how activists leverage governance pressure to force leadership changes and capital structure reforms, according to the Reuters report. Similarly, Safe Harbor Financial's 2025 recapitalization-raising $6.8 million in new capital and eliminating $18.8 million in debt-was directly influenced by activist-driven restructuring efforts, as reported in a Investing.com article.

Private Equity Strategies and Cross-Border Collaborations

Private equity firms are also adopting aggressive tactics to reshape public companies. A notable example is the $2.5 billion Japan-focused fund launched by Orix and Qatar Investment Authority (QIA), which targets privatizations, corporate transfers, and spin-offs, according to an Arab News report. This partnership, with Orix contributing 60% of the capital, highlights how private equity is leveraging international alliances to capitalize on structural shifts in public markets, as noted in the Arab News report. The fund's focus on Japanese firms undergoing succession changes or divestitures illustrates a strategic pivot toward sectors with untapped value potential.

The healthcare sector's surge in private equity activity further exemplifies this trend. A $7.45 billion debt package for Clayton Dubilier & Rice's (CD&R) acquisition of Sanofi's consumer health division-financed by Goldman Sachs and Citigroup-demonstrates the scale and complexity of modern LBOs, according to a Bloomberg report. Such deals often involve intricate debt-to-equity ratios, with private equity firms securing high leverage while retaining meaningful equity stakes in target companies.

Implications for Corporate Governance and Risk

The growing appetite for leverage carries both opportunities and risks. On one hand, it allows companies to repurchase shares, reduce debt burdens, and fund growth initiatives. On the other, it exposes firms to heightened financial volatility, particularly in a high-interest-rate environment. For example, Thames Water's partnership with KKR for a recapitalization-contingent on restructuring its Class A debt-highlights the delicate balance between leveraging debt and maintaining creditworthiness, as reported in an Investing.com article.

Activist investors are also reshaping executive compensation frameworks. At Norfolk Southern, activists pressured the board to replace the CEO after criticizing his $23 million pay package amid poor performance, as detailed in a Candor article. Similarly, Masimo's CEO resigned following revelations of a $600 million guaranteed compensation agreement, as reported in the Candor article. These cases illustrate how activists are using leverage not just to alter capital structures but to realign executive incentives with shareholder interests.

The Legal and Regulatory Landscape

Regulatory scrutiny remains a wildcard. A U.S. federal judge recently rejected the FTC's attempt to block GTCR's acquisition of Surmodics, ruling that a partial divestiture of Biocoat assets addressed competition concerns, according to a Reuters report. This decision signals a judicial preference for market-driven solutions over broad antitrust interventions, potentially easing the path for future private equity-led recapitalizations, as noted in the Reuters report.

Conclusion

As CEOs increasingly turn to leverage to navigate competitive pressures and activist demands, the line between public and private equity strategies continues to blur. While this approach can unlock value and drive innovation, it also requires careful risk management and transparent governance. For investors, the key lies in discerning which leveraged recapitalizations are sustainable and which are precursors to financial distress.