What is dividend recapitalisation?

This is when a company borrows money to pay a dividend to shareholders. Private equity firms can use dividend recapitalisation to return funds to investors as an alternative to selling their equity stake in the business.

Where have you heard about dividend recapitalisation?

There’s been a huge rise in the number of private investment firms using this method in recent years. However, it tends to be frowned upon by creditors and common shareholders because it reduces the credit quality of a company while only benefiting a select few.

What you need to know about dividend recapitalisation.

A company that has gone through a corporate recapitalisation carries additional debt on its balance sheet – just to pay dividends to shareholders. This can be a big problem if the company takes a turn for the worse. While the existing owners benefit, they’re not responsible for that extra debt if the company turns into a failed investment.

In most cases, however, only healthy companies undergo dividend recaps. Yes, they’re taking on additional debt, but that’s matched by an increase in cashflow. This method has been used successfully by countless private equity groups.

Find out more about dividend recapitalisation.

Read our definitions of private equity and dividend reinvestment plan.