medium · Private Equity accounting-flow
A sponsor wants to maintain a 15% IRR. If they expect a lower exit valuation than originally planned, how does a Year 2 dividend recap help them?
- It boosts the IRR by providing cash early, offsetting the lower terminal value.
- It forces the management team to work much harder to pay off the newly added debt.
- It increases the exit valuation itself through the added leverage effect.
- It reduces the debt outstanding at exit, making the final equity slice larger.
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