Question for PE Geniuses
When they want to take cash out of their investment, sometimes they will do a dividend recap. Why wouldn't they use the debt proceeds to buy up treasury stock instead? Wouldn't that delay/decrease the tax effect?
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Dividend recaps are used in in investments where the target firm is completely private. Treasury stocks repurchases usually occur when "public" firms want to repurchase stock for various reasons including reducing share-count/dilution & raising stock prices. A treasury stock purchase doesn't really make sense for a PE firm controlling a company as it reaps little to no value for its LPs (assume they own all the shares to begin with). With a dividend recap a firm can obtain a stream of payments to distribute to its LPs/GPs while earning revenue for the firm.
-I've had a previous 6 month PE internship so take this with a grain of salt.
There is no treasury stock to be bought back. Treasury stock is already stock the company owns...
I'm assuming you are asking why the company doesn't buy back shares outstanding to shareholders. If the company acquired outstanding stock, it would either be considered a long-term or a short-term capital gain. Obviously its a lot less tax efficient if it get taxed at ST rates. Also, purchasing back shares requires a valuation of the company and more paperwork, which costs money. A lot less expenses associated with issuing a dividend check.
misread title, thought it said "GE penises"
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