Worked example TechCo Inc: $200m equity investment Year 0. Year 4 recap dividend $80m. Year 6 exit equity $400m. Calculate the IRR.
Starting data:
- Year 0: $200m equity investment
- Year 4: $80m recap dividend
- Year 6: $400m exit proceeds
Calculation (Excel `=IRR()` over the cash flow series):
```
Year 0: −$200 Year 4: +$80 Year 6: +$400
IRR ≈ 16.9% MOIC = (80 + 400) / 200 = 2.4x
```
The recap raises the IRR from 15.7% (without recap) to 16.9% — a time-value effect of ~1.2 percentage points with no change in MOIC. This is why sponsors run aggressive recap strategies.
Deep diveShow more details
| Variant | Cash flows | IRR | MOIC |
|---|---|---|---|
| With recap | −200, 0, 0, 0, +80, 0, +400 | 16.9% | 2.4x |
| Without recap | −200, 0, 0, 0, 0, 0, +480 | 15.7% | 2.4x |
The recap pulls cash out earlier. In an IRR calculation, timing matters — $80m in Year 4 is worth considerably more than the same $80m in Year 6 (time value of money). MOIC doesn't see this, because MOIC only counts the total return.
When senior leverage is too high (above ~3x EBITDA), when the senior lender has built restricted-payments clauses into the credit agreement, or when market conditions don't allow a favorable refi. A recap needs headroom on both sides — leverage and liquidity.
Question: "How much of your IRR comes from the recap?"
Answer: "The Year 4 recap dividend raises IRR from 15.7% to 16.9% — so ~1.2 percentage points of time-value effect, because the cash flows back earlier. MOIC stays at 2.4x, but the IRR story gets considerably better"