PE Recap vs M&A transaction
I just had an interview for an IBD internship this morning.
The interviewer mentioned the team focuses on Private Equity recaps rather than traditional M&A sellside / buyside advisory. This confused me as I thought a Private Equity recap was just another term for a minority stake M&A sellside / buyside advisory work?
I've tried googling but I'm not fully understanding the difference, could someone explain what a PE recap transaction is in simple terms and how this differs from traditional M&A? And how it differs from a minority stake M&A deal?
I.e. what's the difference between acting as M&A advisor to a company selling a 20% or a 70% stake to a PE fund VS a PE recap? or acting as buyside M&A advisor to a PE fund making a minority investment into a company VS a PE recap?
In a simplistic sense, Recap is when the sponsor uses new debt capital to dividend cash out to owners. Generally done a few years into an investment, either once the business has paid down the initial LBO debt or if the business was overequitized upon initial entry.
M&A = change of ownership (whether majority or minority).
Thank you. This is a dividend recap right?
So do you think he was referring to this? as on google when i type in private equity recaps something else comes up about equity recaps.
StrategyJunkie is talking correctly about a dividend (debt) recap. An Equity recap is more or less the same thing, but instead of adding more debt to a company in a dividend recap, you are adding more equity and retiring debt. Investopedia does a decent job of explaining here: https://www.investopedia.com/terms/r/recapitalization.asp#:~:text=Recap….
The idea of a recapitalization is to change the capital structure (how much debt & equity) a company has on their balance sheet. A dividend recap happens when a company is doing well, and wants to/can add more debt to their balance sheet and the owners use some of that extra debt to pay themselves a dividend. Banks will never lend for a dividend recap unless the company is in a strong financial position and can prove it is going to keep doing well in the future. An equity recap is when a company is in a poor financial position. Usually, a company will have too much debt that they cannot service, so additional equity is needed to change the capital structure to make the debt balance more serviceable.
Recaps often include the same equity investors, so thee is no transfer of ownership. M&A involves a transfer of equity ownership, so that is a very simple way they differ.
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