Dividend Recapitalization

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Dividend Recapitalization
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Dividend Recapitalization - form of financial leverage, which provides a PE investor to extract capital from a company and decrease its capital at risk without affecting the company's ownership structure. Recapitalizations are typically funded either from cash on hand in the portfolio company (non-leveraged dividend recapitalizations) or by releveraging the balance sheet through assigning new debt securities (leveraged dividend recapitalizations) [1].

The meaning of Recapitalization

Recapitalization - also known as recap or refinancing, in its simplest form, involves a company borrowing money and managing the proceeds to purchase some of the owner's equity ownership or to pay distinctive dividends [2].

Leveraged Recapitalization

A leveraged recapitalization involves releveling the portfolio company, based, for instance, on the company's earnings. The remaining portion of the ownership that exceeds the total firm assessment at that time flows back to the private equity fund that owns the company. In such a transaction the private equity fund pulls out the equity invested without selling the company. Since special dividends generate tax consequences, private equity investors may prefer to share repurchases. However, some companies use a combination of the two, repurchasing some shares and distributing the remainder of the recap as a special dividend [3].

Non-leveraged recapitalizations

Non-leveraged recapitalizations could be funded through excess operating cash flow or the divestment of a business line and are typically more inadequate than those funded through new debt issuance [4].

Advantage of Dividend Recapitalization

A dividend recapitalization could possess several advantages in maximizing returns. The most well-known advantage is to lengthen the holding period of the company while still raising cash to expend for the fund's needs. If the market environment is not the most beneficial for the target company exit, a dividend recapitalization would allow the fund more time to look for the right exit opportunity [5].



  1. C. Zeisberger, M. Prahl, B. White 2017, p.192
  2. E. Talmor, F. Vasvari 2011
  3. E. Talmor, F. Vasvari 2011
  4. C. Zeisberger, M. Prahl, B. White 2017, p.192
  5. P. Pignataro 2017, p. 231

Author: Klaudia Wojtas