Glossary · Deals

What is a dividend recap?

A dividend recapitalization is when a company borrows new debt and uses the money to pay a dividend to its owners, usually a private equity fund.

In practice

Dividend recaps usually follow a few years of growth or debt paydown, when leverage has fallen enough for lenders to lend again, often through a refinancing or an add-on to the existing loan. Credit agreements and bond indentures typically restrict dividends, so lender consent or an available basket is needed. The proceeds count as a distribution to the fund’s LPs, which lifts DPI but not total value.

An example

Round numbers, not a real fund

Say a company owned by a fund borrows $100 million and pays it to the fund as a dividend. The fund gets cash back, and the company carries $100 million more debt.

Why it matters

It returns cash early without selling, and leaves the company with more debt.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

Leveraged buyoutA leveraged buyout, or LBO, buys a company using mostly borrowed money, with the company’s own assets and cash flow backing the debt.
DPIDPI, distributions to paid-in capital, divides the cash a fund has returned to investors by the cash they paid in. A DPI of 1.0x means they have their money back.
PIKPIK, or payment in kind, means interest on a loan is added to its balance instead of being paid in cash.
Secondary buyoutA secondary buyout is when a private equity firm sells a company it owns to another private equity firm.
EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization, a measure of a company’s operating profit. Buyouts are often priced as a multiple of it.

The terms, in the news each morning.

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