Module IV· Cash SweepAdvanced
Question
How does a high cash sweep affect the sponsor's IRR — positive or negative?
Answer
What
The cash sweep has two opposing effects on sponsor IRR. The optimum therefore usually sits at a moderate rate (50–75%), not at 100%.
Pro sweep (drivers of IRR)
- Faster deleveraging → lower interest over time
- Reduced refi risk at exit
Against sweep (costs IRR)
- Excess cash goes to repayment instead of reinvestment (bolt-on, recap dividend)
- Higher equity-at-risk, because no earlier cash-out via a recap is possible
Deep diveShow more details
Example — IRR sensitivity on a 5-year hold
| Sweep | IRR | MOIC | Note |
|---|---|---|---|
| 0% | ~22% | 2.8x | Lenders typically decline |
| 50% | ~24% | 2.5x | Sponsor-friendly standard |
| 75% | ~24.5% | 2.4x | Middle-market standard |
| 100% | ~25% | 2.3x | Cash unproductive |
100% sweep maximizes repayment but locks up cash for bolt-ons. 0% keeps cash, but lenders rarely accept it. 50–75% balances both effects.
Sponsor strategy
At a low entry multiple (buy-and-build with an aggressive add-on plan) lean to 50% sweep, because bolt-ons deliver more IRR than extra repayment. For stable cash-flow targets without an M&A pipeline lean to 75% sweep — excess cash has no productive use.
Pitch tip
Question: "How high should the sweep be?"
Answer: "50–75% with a step-down to 25–50% once senior leverage falls below 3.0x. Higher than 75% and you lose optionality for bolt-ons. Lower than 50% and no lender accepts it"