medium · Private Equity

If the sponsor executes a dividend recapitalization in Year 3 by borrowing an additional $150M to pay a dividend, which of the following is the most likely impact on the fund's performance metrics?

1. The IRR decreases because the company's leverage ratio increases substantially post-recap, which makes the overall equity investment far riskier.
2. Both the IRR and the MoIC increase significantly, since the sponsor effectively treats the newly borrowed recap debt as 'free' capital at exit.
3. The MoIC increases because the sponsor now has less 'skin in the game' at risk for the remainder of the hold period following the recap dividend payout.
4. The Internal Rate of Return (IRR) increases due to the earlier return of capital, while the Multiple on Invested Capital (MoIC) may slightly decrease.

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