How does a dividend recapitalization affect a PE fund's IRR and MOIC?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A dividend recap accelerates returns by distributing debt-funded dividends to equity holders before exit. It increases IRR because it provides an earlier cash return, but it can reduce MOIC if the exit value is lower due to higher leverage. It also increases risk for the portfolio company. In practice, it's used when the company has stable cash flows and the debt market is favorable.
WHAT INTERVIEWERS LISTEN FOR
- ✓Earlier cash return boosts IRR
- ✓Higher leverage may reduce exit MOIC
- ✓Increases company risk
COMMON MISTAKES
- ✗Claiming it always increases both IRR and MOIC
- ✗Ignoring risk implications
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