Leveraged Recapitalization
Private Equity glossary · Private Equity Fundamentals
Definition
Refinancing that increases portfolio-company leverage to distribute cash to equity holders without selling the asset — distinct from a primary LBO in that the sponsor remains as owner. Typically executed in Years 2-4 post-close once EBITDA growth or debt paydown has created leverage headroom. Mechanically identical to a dividend recap. Modern credit agreements pre-authorize some dividend capacity through restricted-payments baskets; larger leveraged recaps often require amendment or refinancing. De-risks the deal by returning sponsor capital pre-exit at the cost of higher post-recap leverage.
Leveraged Recapitalization in plain English
Imagine you bought a rental house with a mortgage, and a couple years later it's worth more and the loan is smaller. A leveraged recap is when you take out a *new, bigger* loan against that house and pocket the extra cash for yourself — while still keeping and running the house. In private equity, the firm (the 'sponsor') that owns a company does the same thing: it piles more debt onto the company and uses that borrowed money to pay itself a big cash dividend, without selling the business. The upside is the sponsor gets a chunk of its money back early, lowering its risk before the eventual sale; the trade-off is the company now carries more debt, which is heavier to service. It's usually done in years 2-4, once the company has grown enough to safely borrow more (called 'leverage headroom').
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