{"id":23782,"date":"2021-07-17T21:42:07","date_gmt":"2021-07-18T02:42:07","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=23782"},"modified":"2024-10-18T18:52:20","modified_gmt":"2024-10-18T23:52:20","slug":"dividend-recap","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/dividend-recap\/","title":{"rendered":"The Dividend Recap in an LBO Model: Full Tutorial"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Dividend Recap in an LBO Model: Full Tutorial<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/dividend-recap\/#The_Dividend_Recap_Rationale_and_a_Simple_Example\">The Dividend Recap Rationale and a Simple Example<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/dividend-recap\/#The_Dividend_Recap_in_a_Full_LBO_Model\">The Dividend Recap in a Full LBO Model<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/dividend-recap\/#The_Dividend_Recap_in_the_Returns_Calculation_of_an_LBO_Model\">The Dividend Recap in the Returns Calculation of an LBO Model<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Dividend Recap Definition:<\/strong> In a Dividend Recapitalization (\u201cDividend Recap\u201d), a <a href=\"https:\/\/www.mergersandinquisitions.com\/private-equity\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">private equity firm<\/a> has a portfolio company issue additional Debt to fund a Dividend issuance that boosts the PE firm\u2019s <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/cash-on-cash-return-vs-irr\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">internal rate of return (IRR)<\/a> on the deal.<\/p><\/blockquote>\n<p>A Dividend Recap is similar to a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/commercial-real-estate-loan-refinancing\/\" target=\"_blank\" rel=\"noopener\">commercial real estate loan refinancing<\/a> in the property sector: it\u2019s a way to use additional Debt to <em>amplify<\/em> the returns in a deal.<\/p>\n<p>If a company performs well, a Dividend Recap can boost the PE firm\u2019s IRR anywhere from \u201cmodestly\u201d to \u201csubstantially.\u201d<\/p>\n<p>But if a company performs poorly, or the deal is likely to produce a negative IRR, a Dividend Recap will make the results even worse.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Dividend_Recap_Rationale_and_a_Simple_Example\"><\/span><strong>The Dividend Recap Rationale and a Simple Example<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>There are two types of Dividend Recaps in leveraged buyouts: <strong>unleveraged and leveraged<\/strong>.<\/p>\n<p>In an Unleveraged Dividend Recap, a private equity-owned portfolio company issues a Dividend to the PE firm during the holding period without issuing additional Debt.<\/p>\n<p>The portfolio company might do this if it generates significant <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a> and has low Debt principal repayments.<\/p>\n<p>There isn\u2019t much to say about this type of Dividend Recap because it\u2019s simple to build into models.<\/p>\n<p>The more interesting variation is the <strong>Leveraged Dividend Recap<\/strong>, in which the portfolio company issues additional Debt to fund the Dividend.<\/p>\n<p>If the company performs well, this mechanism can boost the IRR because of the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/time-value-of-money\/\" target=\"_blank\" rel=\"noopener\">time value of money<\/a>.<\/p>\n<p>For example, consider the scenario shown below, in which the PE firm acquires a company, operates it, and sells it in Year 5:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23783 size-full\" title=\"LBO Model with No Dividend Recap\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/01-LBO-No-Dividend-Recap.jpg\" alt=\"LBO Model with No Dividend Recap\" width=\"894\" height=\"557\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/01-LBO-No-Dividend-Recap.jpg 894w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/01-LBO-No-Dividend-Recap-300x187.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/01-LBO-No-Dividend-Recap-768x478.jpg 768w\" sizes=\"(max-width: 894px) 100vw, 894px\" \/><\/p>\n<p>This result is \u201cOK,\u201d but the PE firm could get better results by tweaking its strategy.<\/p>\n<p>We know the company repays significant Debt because the Debt balance decreases from $600 to $240 by the end.<\/p>\n<p>That Debt repayment provides a benefit because it reduces the company\u2019s Interest Expense in the holding period and increases the Exit Equity Proceeds in Year 5.<\/p>\n<p><strong>BUT<\/strong> if the company could distribute its cash flows to the PE firm, or the company could issue more Debt and distribute the proceeds to the PE firm, the benefit could be even greater.<\/p>\n<p>For example, here\u2019s what it looks like if the company <strong>repays no Debt<\/strong> and issues 100% of its available cash flow to the PE firm:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23784 size-full\" title=\"LBO Model with Dividend Distributions\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/02-LBO-Dividend-Distributions.jpg\" alt=\"LBO Model with Dividend Distributions\" width=\"892\" height=\"573\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/02-LBO-Dividend-Distributions.jpg 892w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/02-LBO-Dividend-Distributions-300x193.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/02-LBO-Dividend-Distributions-768x493.jpg 768w\" sizes=\"(max-width: 892px) 100vw, 892px\" \/><\/p>\n<p>The IRR increases by ~3%, but this scenario is <strong>not realistic<\/strong> because the lenders in almost all leveraged buyouts require <em>some<\/em> Debt principal repayment.<\/p>\n<p>They want to see that the company is generating healthy cash flows and using them to repay some Debt over time.<\/p>\n<p>Waiting until the exit for <em>any<\/em> repayment creates too much risk, especially if the deal underperforms.<\/p>\n<p>So, a more realistic option is to assume the normal Debt principal repayments in the holding period and <em>additional Debt issuances to fund Dividend distributions<\/em> to the PE firm.<\/p>\n<p>This option is the Leveraged Dividend Recap described above.<\/p>\n<p>Here\u2019s what happens if the company issues $126 million of extra Debt in Year 3, approximately 1x the Year 3 EBITDA, and distributes the proceeds to the PE firm (we ignore fees in this simplified model):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23785 size-full\" title=\"LBO Model with Dividend Recap\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/03-LBO-Dividend-Recap.jpg\" alt=\"LBO Model with Dividend Recap\" width=\"893\" height=\"576\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/03-LBO-Dividend-Recap.jpg 893w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/03-LBO-Dividend-Recap-300x194.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075122\/03-LBO-Dividend-Recap-768x495.jpg 768w\" sizes=\"(max-width: 893px) 100vw, 893px\" \/><\/p>\n<p>The final Debt balance in Year 5 is higher than in the first scenario, but the PE firm also receives a cash distribution earlier in the holding period.<\/p>\n<p>Since money in Year 3 is worth more than money in Year 5, the internal rate of return increases, even though the money-on-money multiple stays the same.<\/p>\n<p>Remember that <strong>leverage<\/strong> is a double-edged sword: it doesn\u2019t \u201cboost returns\u201d but <em>amplifies<\/em> returns.<\/p>\n<p>If a deal performs poorly, more leverage will make it perform even worse, and if it performs well, more leverage will make it even better.<\/p>\n<p>A Leveraged Dividend Recap is a form of additional leverage, so the same principles apply here.<\/p>\n<p>For example, consider a scenario in which this company\u2019s <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/pik-interest\/\" target=\"_blank\" rel=\"noopener\">EBITDA<\/a> <em>declines<\/em> by nearly 20% from Year 1 through Year 5, resulting in a negative IRR:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23786 size-full\" title=\"LBO with a Negative IRR and No Dividend Recap\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/04-LBO-Negative-IRR-No-Recap.jpg\" alt=\"LBO with a Negative IRR and No Dividend Recap\" width=\"894\" height=\"408\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/04-LBO-Negative-IRR-No-Recap.jpg 894w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/04-LBO-Negative-IRR-No-Recap-300x137.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/04-LBO-Negative-IRR-No-Recap-768x350.jpg 768w\" sizes=\"(max-width: 894px) 100vw, 894px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p>If the PE firm executed a Dividend Recap for 1x EBITDA in Year 3, it would make the deal results even worse:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-23787\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/05-LBO-Negative-IRR-Dividend-Recap.jpg\" alt=\"LBO with a Negative IRR and a Dividend Recap\" width=\"889\" height=\"546\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/05-LBO-Negative-IRR-Dividend-Recap.jpg 889w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/05-LBO-Negative-IRR-Dividend-Recap-300x184.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075121\/05-LBO-Negative-IRR-Dividend-Recap-768x472.jpg 768w\" sizes=\"(max-width: 889px) 100vw, 889px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Dividend_Recap_in_a_Full_LBO_Model\"><\/span><strong>The Dividend Recap in a Full LBO Model<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Implementing a Leveraged Dividend Recap in an LBO model takes a moderate amount of work, but it\u2019s not that difficult if you have a properly constructed model with a robust <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/debt-schedule\/\" target=\"_blank\" rel=\"noopener\">Debt Schedule<\/a>.<\/p>\n<p>First, you need to include the additional Debt issuances and add this new funding to the company\u2019s \u201cCash Flow Available Before Revolver\u201d or \u201cCash Flow Available for Debt Repayment\u201d:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23788 size-large\" title=\"Dividend Recap in the Sources of Funds Section in an LBO Debt Schedule\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075120\/06-Dividend-Recap-Cash-Flow-LBO-1024x241.jpg\" alt=\"Dividend Recap in the Sources of Funds Section in an LBO Debt Schedule\" width=\"1024\" height=\"241\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075120\/06-Dividend-Recap-Cash-Flow-LBO-1024x241.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075120\/06-Dividend-Recap-Cash-Flow-LBO-300x71.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075120\/06-Dividend-Recap-Cash-Flow-LBO-768x181.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075120\/06-Dividend-Recap-Cash-Flow-LBO.jpg 1095w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>Often, you assume additional Term Loans to fund this Dividend because Term Loans have mandatory and optional principal repayments, meaning that the Term Loan balance tends to <strong>decrease<\/strong> over time.<\/p>\n<p>For example, if the company starts with a 3x Term Loan \/ EBITDA ratio and it repays some of the balance and reaches 2x by Year 3, it may issue Term Loans for another 1x EBITDA.<\/p>\n<p>Yes, its Debt load increases, but it\u2019s not a problem because it\u2019s simply returning to the initial level.<\/p>\n<p>Once you have this set up, you can modify the Mandatory Repayment schedule to include the additional issuance(s) for the Dividend Recap:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23789 size-large\" title=\"Dividend Recap in Mandatory Debt Repayments of an LBO Model\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075119\/07-Dividend-Recap-Mandatory-Debt-Repayments-1024x749.jpg\" alt=\"Dividend Recap in Mandatory Debt Repayments of an LBO Model\" width=\"1024\" height=\"749\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075119\/07-Dividend-Recap-Mandatory-Debt-Repayments-1024x749.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075119\/07-Dividend-Recap-Mandatory-Debt-Repayments-300x219.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075119\/07-Dividend-Recap-Mandatory-Debt-Repayments-768x562.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075119\/07-Dividend-Recap-Mandatory-Debt-Repayments.jpg 1135w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>The Optional Repayment or \u201cCash Flow Sweep\u201d formula should not need to change <em>if you\u2019ve set it up properly<\/em>, i.e., it deducts Mandatory Repayments in the period.<\/p>\n<p>Similarly, you shouldn\u2019t need to change anything in the Interest Calculations as long as they\u2019re based on the\u00a0<em>changing Debt balances<\/em> over time.<\/p>\n<p>On the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a> or \u201cmini-Cash Flow Statement,\u201d you can support the Leveraged Dividend Recap by deducting the Dividend Issuances, net of issuance fees, and adding the proceeds received:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23790 size-large\" title=\"Dividend Recap on the Cash Flow Statement of an LBO Model\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/08-Dividend-Recap-Cash-Flow-Statement-1024x440.jpg\" alt=\"Dividend Recap on the Cash Flow Statement of an LBO Model\" width=\"1024\" height=\"440\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/08-Dividend-Recap-Cash-Flow-Statement-1024x440.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/08-Dividend-Recap-Cash-Flow-Statement-300x129.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/08-Dividend-Recap-Cash-Flow-Statement-768x330.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/08-Dividend-Recap-Cash-Flow-Statement.jpg 1090w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>Finally, on the Income Statement, you should technically change the Amortization of Financing Fees to reflect the additional fees on this Term Loan issuance:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23791 size-large\" title=\"Dividend Recap on the Income Statement\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/09-Dividend-Recap-Income-Statement-1024x708.jpg\" alt=\"Dividend Recap on the Income Statement\" width=\"1024\" height=\"708\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/09-Dividend-Recap-Income-Statement-1024x708.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/09-Dividend-Recap-Income-Statement-300x208.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/09-Dividend-Recap-Income-Statement-768x531.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075118\/09-Dividend-Recap-Income-Statement.jpg 1087w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>But this Amortization line item is small, non-cash, and only makes a tiny impact on the company\u2019s taxes, so we ignore the change here.<\/p>\n<p>If the company had substantial Dividend Recaps in each year of the model, it would be more important to reflect the higher Amortization number.<\/p>\n<p>You can see the impact of this Dividend Recap directly on the Balance Sheet: a higher Debt balance and lower Common Shareholders\u2019 Equity when it takes place:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter size-large wp-image-23792\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075117\/10-Dividend-Recap-Balance-Sheet-1024x700.jpg\" alt=\"Dividend Recap on the Balance Sheet\" width=\"1024\" height=\"700\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075117\/10-Dividend-Recap-Balance-Sheet-1024x700.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075117\/10-Dividend-Recap-Balance-Sheet-300x205.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075117\/10-Dividend-Recap-Balance-Sheet-768x525.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075117\/10-Dividend-Recap-Balance-Sheet.jpg 1087w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Dividend_Recap_in_the_Returns_Calculation_of_an_LBO_Model\"><\/span><strong>The Dividend Recap in the Returns Calculation of an LBO Model<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>There is one final step: you must reflect these Dividends in the returns calculations.<\/p>\n<p>The Excel file and video tutorial here skip this step because they\u2019re excerpts from a 20-part case study in which we calculate the returns in a later segment.<\/p>\n<p>Here\u2019s the finished product:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-23793 size-large\" title=\"Dividend Recap Impact on the Sponsor Returns in an LBO\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075116\/11-Dividend-Recap-Sponsor-Returns-1024x243.jpg\" alt=\"Dividend Recap Impact on the Sponsor Returns in an LBO\" width=\"1024\" height=\"243\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075116\/11-Dividend-Recap-Sponsor-Returns-1024x243.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075116\/11-Dividend-Recap-Sponsor-Returns-300x71.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075116\/11-Dividend-Recap-Sponsor-Returns-768x182.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075116\/11-Dividend-Recap-Sponsor-Returns.jpg 1088w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>As a result of this Leveraged Dividend Recap, the PE firm receives some of the proceeds earlier in the holding period, but it must also repay a higher Debt balance upon exit.<\/p>\n<p>Here\u2019s how the Dividend Recap in this model affects the results:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter size-large wp-image-23794\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075115\/12-Dividend-Recap-LBO-Before-After-1024x531.jpg\" alt=\"Dividend Recap in an LBO: Before and After\" width=\"1024\" height=\"531\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075115\/12-Dividend-Recap-LBO-Before-After-1024x531.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075115\/12-Dividend-Recap-LBO-Before-After-300x156.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075115\/12-Dividend-Recap-LBO-Before-After-768x398.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/07\/19075115\/12-Dividend-Recap-LBO-Before-After.jpg 1093w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>The Dividend Recap boosts the IRR by less than 1% because it\u2019s very low relative to the purchase and exit multiples and the initial amount of Debt.<\/p>\n<p>Dividend Recaps can make \u201cborderline\u201d deals look a bit better (e.g., if the baseline IRR is 18%, a Recap might boost it to 20% or 21%), but they\u2019re usually not enough to turn a &#8220;no&#8221; investment recommendation into a &#8220;yes.&#8221;<\/p>\n<p>For example, if the deal produces a 10% or 15% IRR in the Base Case vs. a 20% target, a single Dividend Recap will not make the deal acceptable.<\/p>\n<p>Dividend Recaps tend to make the biggest difference for <strong>high-growth companies<\/strong> and <strong>high FCF margin companies<\/strong>.<\/p>\n<p>In the first case, the company\u2019s EBITDA and FCF grow substantially, resulting in substantial Debt paydown and the ability to issue more Debt over time.<\/p>\n<p>In the second case, the company\u2019s EBITDA and FCF do not necessarily grow, but since the company can repay Debt quickly, it can easily issue more during the holding period.<\/p>\n<p>You\u2019ll see this strategy frequently in emerging and frontier markets, where many companies are growing quickly but cannot issue much Debt initially (e.g., 2-3x Debt \/ EBITDA rather than 5-6x).<\/p>\n<p>In these deals, multiple Dividend Recaps in the holding period can make a substantial difference in the financial results.<\/p>\n<p><em><strong>This tutorial is a small taste of the knowledge you&#8217;ll gain in our paid courses. <\/strong><\/em><strong>Breaking Into Wall Street<\/strong><em><strong> uses real-life modeling tests and interview case studies to prepare you for investment banking and private equity interviews \u2013 and a leg up once you win your offer and start working. Find out more about our advanced training by via the button below:<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this lesson, you&#8217;ll learn how the Dividend Recap works in a leveraged buyout and how you can implement a Dividend Recap in an LBO model.<\/p>\n","protected":false},"featured_media":29359,"template":"","class_list":["post-23782","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-leveraged-buyouts-and-lbo-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/23782","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29359"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=23782"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}