medium · Private Equity paper-lbo
A sponsor executes a dividend recap in Year 2, taking a $50 million dividend. The original equity investment was $150 million. In Year 5, the sponsor exits for $300 million in equity proceeds.
How much does this recap improve the sponsor's IRR compared to a 'no recap' scenario where the exit proceeds would have been $360 million (due to lower interest and debt paydown)?
- The recap likely increases IRR despite a slightly lower total MoIC.
- The IRR remains identical because the cash was already 'owned' by the sponsor as equity value.
- The recap significantly reduces IRR because total proceeds are $350 million versus $360 million.
- The MoIC increases by 0.5x, resulting in a 5% IRR boost.
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