How does a recap dividend affect IRR and MOIC?
A recap dividend is an early cash distribution to the sponsor, funded by taking on additional debt. It raises the IRR through the time-value-of-money effect; MOIC stays the same or rises marginally.
Year 0 $100m equity. Year 5 $250m exit. Without recap: MOIC 2.5x, IRR 20.1%. With a $50m recap in Year 3 + $200m exit in Year 5: MOIC stays at 2.5x (total cash $250m), but IRR rises to 22.8% (+2.7 ppt from time value).
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| Condition | Recap likelihood |
|---|---|
| Senior leverage below 3.0x | high |
| Market conditions favorable (low rates) | high |
| Senior lender willing | required |
| Sponsor strategic advantage | usable |
A recap reduces the equity at risk — after the recap the sponsor already has cash back, and the exit proceeds are "free money on top". That makes a recap a risk-management strategy, not just an IRR boost.
- Refi fees ~2–3% of the recap volume
- Tax (~5–15% effective, varies by jurisdiction)
- Legal/banker fees
- Net effect: ~3–5% of the recap cash as friction
A recap raises leverage back up to 5x+ — operating risk increases. A restricted-payments clause in the credit agreement can block the recap — check it pre-DD.
Question: "What does the recap cost in the IRR model?"
Answer: "Recap costs are refi fees, tax, and legal — net roughly 3–5% of the recap cash. But the IRR gain is 2–3 percentage points over the hold period — clearly net positive. On top of that, the equity at risk goes down"