Dividend Recap
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Dividend recapitalization — the portfolio company raises incremental debt and distributes the proceeds to its equity sponsor as a special dividend. Returns capital to LPs without selling the business, accelerating IRR (cash returned earlier) even though MOIC is unchanged at exit. Requires sufficient debt capacity (leverage headroom above current levels) and a receptive credit market. The downside is increased financial risk on the surviving capital structure — leverage and interest expense rise, reducing the cushion against operational underperformance.
Dividend Recap in plain English
Picture a private equity firm that owns a profitable company and wants some of its money back — but isn't ready to sell yet. In a dividend recap, the company borrows fresh money and immediately hands that cash to its owners as a special payout. It's a bit like refinancing your paid-down house to pull cash out while still living in it: you get money now without moving. The appeal is timing — getting cash back sooner boosts the investors' annual return (IRR) even though the total profit multiple at the eventual sale doesn't change. The danger is that the company now carries more debt and bigger interest payments, leaving a thinner safety cushion if business gets tough.
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