When To Take Dividend Recap?

As someone working in commercial banking we typically get requests for dividend recaps but turn most of them down due the need to stay within leveraged lending guidelines and lower risk appetite. With that being said, for those of you from the PE sponsor point of view:

  • Let's say you borrowed to acquire a portco previously. What are the factors that make you decide when is the right time to do a dividend recap and for how much?
  • How do you balance potential downside for relevering the company if the company takes a turn for the worst?
  • How do you balance the money you receive now with how it will impact equity value upon exit? 

Thanks for the responses. 

Comments (7)

 
Most Helpful
Aug 31, 2020 - 11:44pm

For companies that generate a lot of free cash flow but are tough to exit for some reason or another (tough industry conditions right now, not a lot of growth opportunities) and have been held for too long 6+ years make good recap candidates from the sponsor point of view. It derisks the investment and can lock in a minimum return for a total fund if it is one of the last investments in the fund. Your second question in bullet one and bullet two are related. How much depends on the fund strategy, tolerance for leverage and willingness to get cagey with lenders. If there are not a lot of opportunities to invest excess free cash flow into high generating projects / opportunities then it's better to have that money in our pocket and sooner / locked in.

 

Money received now should not impact money at exit unless there are higher return investment opportunities in the business. Therefore a dividend recap can also increase IRR which ties a little bit back to my comment on deals that are lingering for a bit too long.

 
Oct 8, 2020 - 1:56pm

Not normal PE but for me as more of an operator...

How much no-brainer growth is left in the business? 
How much cash do I need to support that growth?

If a company is growing well but doesn't need much cash to support that growth, then I think a dividend recap makes a lot of sense. Especially if you believe the company will keep growing and you don't need to sell yet.

Also IMO, unless someone makes you a stupid offer, selling a company with decent growth makes very little sense as opposed to leveraging it and pulling cash. Post-exit you're basically stuck redeploying the cash anyways...and it takes time to find good opportunities to deploy.

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