What is a dividend recapitalization and why do PE firms use them?

A dividend recapitalization is when a company borrows money to pay its investors a dividend. This happens when the company has paid down significant amounts of debt from the original LBO, there are limited growth opportunities to invest the debt proceeds into, and investors want to enhance their return through a dividend. The bank typically prefers to lend to support growth projects, but will be willing to finance a dividend recap if the company has shown it can pay down the debt. By borrowing money and then paying investors a dividend, the liabilities in the balance sheet will go up and shareholder’s equity will go down.