medium · Private Equity & LBOs

When calculating the Internal Rate of Return (IRR) for an LBO with a dividend recapitalization in Year 3, how does the timing of the dividend affect the result relative to the Multiple of Invested Capital (MOIC)?

1. A dividend recap has no effect on IRR, since it is treated as a return of capital, not a return on capital.
2. The IRR and MOIC always move in lockstep, since distribution timing never affects the annualized rate of return.
3. The IRR decreases because the added interest expense from the recap debt reduces the residual equity value realized at exit.
4. The IRR increases significantly due to the time value of money, even if the total MOIC remains relatively unchanged.

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