Dividend recaps
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
8 min read · updated October 14, 2026
Most of the money in an LBO comes back at the end, when the sponsor sells. A dividend recap is the main way to get some of it back sooner, without selling anything. It is a simple trade, and interviewers like it because it tests whether you really understand the difference between IRR and MOIC.
What a dividend recap is
The portfolio company borrows new money and pays it straight out to its owner as a dividend. That is the whole transaction.
"Recap" is short for recapitalization, which just means changing the mix of debt and equity that funds the company. Here the mix tilts toward debt: debt goes up, equity goes down by the same amount, and the business itself is untouched. No new factory, no acquisition, no growth plan. The cash goes in one door and out the other.
On the three statements it is clean:
- Balance sheet. Debt rises by the amount borrowed. Cash rises and then falls by the same amount when the dividend goes out. Shareholders' equity falls by the dividend. A sponsor that has already taken a lot out can end up with negative book equity, which is normal in recapped companies.
- Cash flow statement. Two lines in financing: borrowing in, dividend out. They net to roughly zero.
- Income statement. Nothing on the day. From then on, interest expense is higher, so net income is lower every year.
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Frequently asked
- What is a dividend recap?
- A dividend recap is when a private equity owner has its portfolio company take on new debt and uses the proceeds to pay the owner a dividend. Nothing about the business changes. The company simply ends up with more debt and less equity, and the sponsor gets cash back before it sells.
- How does a dividend recap affect IRR and MOIC?
- It usually raises IRR and slightly lowers MOIC. IRR rises because cash comes back earlier, and IRR rewards early cash heavily. MOIC dips a little because the new debt and its interest come out of the exit proceeds, so total dollars returned fall slightly.
- Why would a sponsor do a dividend recap instead of selling?
- Usually because the business has paid down enough debt to borrow again, credit markets are open, and selling or listing the company right now would mean accepting a worse price. A recap returns capital to investors without giving up ownership, and it locks in part of the gain in case the business stumbles later.
- What are the risks of a dividend recap?
- The company carries more debt and more interest with no new asset to show for it, so it has less room to absorb a downturn. Lenders now sit behind less equity cushion than before. If the company later fails, creditors may argue the dividend left it unable to pay its debts and try to claw the money back.
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