medium · Private Equity pe-core
A portfolio company with 60M EBITDA and300M of debt (5.0x leverage) undergoes a dividend recapitalization. The sponsor raises an additional 60M of debt to fund a dividend.
If EBITDA remains flat and the interest rate on all debt is8%, how does this recap affect the Year 5 MoIC and IRR, assuming an exit at the same10.0x multiple?
- It decreases IRR because the company is now riskier, carrying a heavier 6.0x leverage load overall.
- It increases IRR by pulling cash forward but decreases MoIC due to higher interest expense and debt at exit.
- It has no effect on MoIC since enterprise value is independent of the chosen capital structure entirely.
- It increases both MoIC and IRR because the dividend proceeds are essentially 'free' money for the sponsor to pocket.
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