More Advanced Topisc Flashcards
What is a dividend recapitalization (“dividend recap”)?
Dividend recap, company. Takes on new debt solely to pay out dividend to the PE firm which bought it.
Boost IRR as they help PE firm recover some of its initial investment early. No benefit to the company.
Why would a PE firm choose to do a dividend recap of one of its portfolio companies?
Primarily to boost returns, more leverage means higher returns.
With dividend recap, PE firm is recovering some of its equity investment in the company, so lower the equity investment, easier to earn a higher return on a smaller amount of capital.
How would a dividend recap impact the 3 financial statements in an LBO?
No changes to IS, on BS debt goes up and SE goes down, cancel each other out
On CFS, CFO + CFI dont change, but CFF, additional debt raised cancel out dividend paid out to investors so no net change in cash
How would an LBO of a private company be different?
Same mechanics, but purchase price is a lump sum number, rather than a premium to the company’s share price times the number of shares outstanding.
What about a buyout of a company where you only acquire a 30% stake?
Scenario not true leveraged buyout, as the PE firm cant make a company take on debt, unless it controls the company.
So in this case, model it as a simple equity investment for 30% of the company, assume company operates and then is sold.
