Dividend recap decreasing returns?
Fellas,
Have you ever run into a scenario where a dividend recap decreases IRR? Possible? or is the model completely off the rails?
EXIT EV - Net Debt = equity value to investors
Basically sitting on cash (negative net debt) that increases equity value. Therefore when I toggle div recap net debt turns positive thus decreases the Eq. value available to investors.
My IRR calc takes BOTH the dividend and the now decreased equity value, yielding a worse return..
What is happening here?
Did you check if the difference in the final net debt is greater than the cash amount paid out in the recap, and what is driving that difference?
Are you funding the dividend with cash on hand or by raising new debt?
It is possible for a dividend recap to decrease your IRR if it takes place too close to the exit and you incur high fees and incremental interest expense on the new debt. It will almost always decrease your MOI, so the key variable is timing relative to the exit when it comes to the impact on IRR.
If you are using cash on hand to fund the dividend, and there is no material opportunity cost from the loss of interest income (which shouldn't really be the case given where rates are), than your IRR shouldn't be going down.
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