Dividend Recapitalization
Definition
A dividend recapitalization (dividend recap) is when a company — typically sponsor-owned — issues new debt and uses the proceeds to pay a special dividend to its shareholders. The sponsor monetizes part of its investment without selling the company.
For the sponsor, a recap de-risks the position, returns capital early (boosting IRR because cash flows are pulled forward), and can even return more than the original equity check while the sponsor retains full ownership and future upside.
The trade-off is credit risk: leverage goes back up, coverage weakens, and existing creditors dislike value leaking out to equity — which is why credit agreements restrict dividends through restricted payments covenants and builder baskets. Recaps are a feature of strong, open credit markets.
Why interviewers ask
Interviewers ask how a sponsor can generate returns without exiting, or what a dividend recap does to IRR versus MOIC (raises IRR notably; MOIC only to the extent of total proceeds). It also tests whether you see the creditor-versus-equity tension.
Related terms
Interviews don't test definitions — they test recall under pressure.
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