A dividend recap presents an efficient means of shareholders realising accrued value in an investment while retaining ownership of the Company, allowing for further value creation as EBITDA continues to grow.
A dividend recap takes its name from the (re)payment of capital to investors; it is rarely an actual dividend, but is a proxy for one, whether the capital is paid to shareholders by redeeming loan notes in which they have also invested or by creating a ‘new’ deal to enable capital to be returned by other means, should there be a lack of distributable reserves. Whichever the mechanism, the key is to make a distribution in order to deliver early value to the ultimate investors. It is worth noting that tax advice should be taken for a planned dividend recap as there can be significant benefits when properly effected.
Unsurprisingly, there are a number of critical factors to consider when returning capital to shareholders:
- Boards and shareholders need to balance the capital being returned against the cost of the debt used to make such a distribution
- Similarly, the terms of a debt facility raised to fund a dividend recap carry huge importance. A successful dividend recap should maintain the company’s financial flexibility. This requires well-negotiated finance documents
- Experienced borrowers and lenders both recognise this – a dividend recap is, after all, simply the shareholders taking some value early when prudent forecasts indicate that incremental significant value will be generated on exit following further EBITDA growth and/or debt pay down
- A borrower should not sign up to terms that put that exit at greater risk
As former investors, MDW Capital’s principals understand the importance of maximising value alongside early returns to shareholders/investors. We have completed numerous “recaps” across many different industries and geographies, arranging funding with numerous multiple different types of lender.