Recapitalization (Recap)
Private Equity glossary · Paper LBOs & Returns Math
Definition
Restructuring of a portfolio company's capital structure — typically issuing new debt to refinance existing debt and distribute residual proceeds (new debt - existing debt - fees) as a dividend to sponsor equity. Recap feasibility requires (i) prior de-leveraging via debt paydown or EBITDA growth, and (ii) credit markets that permit re-leveraging to the target's credit profile. Typical window: Years 2-4 post-close. Dividend recap returns capital mid-hold and de-risks the deal (sponsor money out before exit), without raising total deal MoIC — and in fact often modestly reducing IRR vs. holding because new interest drags EBITDA growth.
Recapitalization (Recap) in plain English
A recapitalization means changing the mix of debt (borrowed money) and equity (owner money) that funds a company. The classic private-equity version, a "dividend recap," works like this: after the company has paid down some of its original loans, the owner takes out a fresh loan against the now-healthier business and pockets the cash as a payout to themselves — pulling their money back out early, before they ever sell the company. It's like refinancing a house you've been paying off and using the new loan to hand yourself a check: you get cash today and lower your personal risk, but the company now owes more again, and those extra interest payments slightly eat into its growth. Cleverly, this returns money to investors mid-way without needing to raise the total profit on the deal.
Also called: Recap
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Practice Recapitalization (Recap)
If the transaction fees for the recap are5M, what is the net dividend paid to the sponsor?
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