medium · Investment Banking ma-lbo
A sponsor executes a $600 million LBO with $200 million of equity. In Year 3, the company performs a dividend recapitalization by raising $150 million of new debt to pay a dividend.
If the Year 5 exit equity is $500 million, how does the dividend recap specifically impact the IRR compared to a scenario with no recap?
- The IRR decreases because the company now has higher interest expenses and lower exit equity value.
- The IRR increases because cash is returned to the sponsor earlier in the holding period.
- The IRR stays the same because the leverage at exit is higher, neutralizing the early cash benefit.
- The IRR remains unchanged because the total cash returned to the sponsor is the same.
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