This month’s big private equity story has been the return of dividend recaps. HCA, Dunkin’ Brands, Burlington Coat Factories, Ascend Learning, Getty Images, Pelican Products, Petco and more.

For the uninitiated, a dividend recap occurs when a private equity firm raises new debt for one of its portfolio companies, and then pockets at least part of the proceeds.

That’s not something that could really be done during the credit crunch, but more than $40 billion worth of dividend recaps have been announced so far in 2010, according to S&P. Around one-quarter of that total involves junk bonds (thank you bubble), with  overall volume now standing much closer to 2006/2007 than to 2008/2009.

In theory, I don’t mind dividend recaps. A private equity firm’s primary responsibility is to its limited partners, and these deals help provide up-front protection in case deals go bad.

Think of it like an afternoon at the blackjack table: You sit down with $100 of chips, and quickly see your stack rise to $140. You then ask your dealer to color up that initial $100, and promise yourself that it won’t return to the circle. Such a move might diminish your future winnings, but it completely eliminates the possibility of financial loss.

What I do mind, however, is when private equity firms try to have it both ways on value creation.

PE firms – and their hired apologists – constantly talk about how private equity firms strengthen their portfolio companies, and how charges of financial engineering are unfair.

Well, dividend recaps not only don’t increase a portfolio company’s value, but they typically diminish it. They remove company cash for the benefit of shareholders who usually control the company’s board of directors (furthering the blackjack analogy – imagine if I was both a player and cashier).

So keep doing your dividend recaps, in order to shield investors from possible losses (and to pull some up-front carry for yourselves). But be honest about why you’re doing it.

And if one of those recapped companies later fails (think Simmons, KB Toys, etc.), don’t pretend it was inevitable. Admit that you profited when the going was good, so that you could cut bait easier if the going got bad.