easy · Private Equity & LBOs

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?

1. It boosts the IRR by providing cash early, offsetting the lower terminal value.
2. It forces the management team to work harder to pay off the new debt.
3. It increases the exit valuation through the leverage effect.
4. It reduces the debt at exit, making the equity slice larger.

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