Dividend Recapitalisation

Adding new debt to a company in order to pay a dividend to its owners, typically a private equity fund.

Example

A fund's portfolio company borrows 40,000,000 and pays it straight out to the fund in year two.

It returns cash early, which raises IRR, while leaving the company more indebted and less able to absorb a bad year.

Leveraged Buyout (LBO) — The purchase of a company financed largely with debt placed on the acquired company, which repays it from its own cash flow.
Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.
Leverage — Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.

The entry multiple is set by auctions, and the fund's value by its own appraisals — Buyouts are priced as a multiple of earnings in competitive sales, and between purchase and exit the fund's value rests on appraisals that move far more smoothly than markets. (11 min)