I've been wondering about this since another post on the PE forum mentioned dividend recaps.
It's my understanding that sponsors generally look to purchase companies with minimal debt.
I don't know anything about whether or not the level of debt affects whether or not you can IPO a company.
So say you recapitalize a company to take a dividend recap, what do you do with the company then? Do you just hold it longer to pay down more debt? Wouldn't doing that be unattractive because of the longer hold period? And if you don't hold it longer to pay down the additional debt, what else can you do with it? Why would anyone want to buy a company with all that debt?
Thank you very much as always, Making Gravy
Using more leverage (i.e., more debt), enhances equity returns (and losses). Sponsors typically purchase companies with use of leverage based on what is needed to make their returns work. Some companies will require more leverage than others based on the growth profile of the business. Typically, sponsors try to use maximum debt to fund purchases, which therefore requires a lesser mix of equity.
A dividend recap doesn’t generally stymie IPO exit opportunities. It merely allows the equity holders to take a return of capital sooner, without giving up equity ownership and thereby allowing a “second bite of the apple” when a full exit event occurs (e.g., IPO, change of control). For these reasons, a dividend recap transaction doesn’t necessarily mean a prolonged hold.
Typically, a new buyer would buy the company on a cash-free and debt-free basis. So if there’s more debt on the company, more of the purchase consideration would go towards extinguishing debt so as to be debt-free.
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