A dividend recapitalisation is a transaction in which a portfolio company, while still owned by its private equity fund, borrows additional debt and distributes the proceeds to the fund as a dividend — returning part of the fund’s investment to its limited partners without selling the company or giving up control.
The mechanism is straightforward: a portfolio company that has paid down debt or grown its cash flow since the original acquisition takes on new term debt, and instead of retaining the proceeds for growth, the board declares a special dividend up to the corporation — the sponsor’s holding vehicle. For a fund, the effect on reporting is direct: the dividend counts as a real cash distribution, moving DPI (the realised half of TVPI) up immediately, while the fund keeps its equity stake and, with it, exposure to whatever upside remains before a full sale. It is a way to bank part of a win early without starting the clock on a full exit process.
A Canadian portfolio company cannot pay that dividend on demand. Where the target is incorporated federally under the Canada Business Corporations Act, s. 42 prohibits the board from declaring or paying a dividend if there are reasonable grounds to believe either that the corporation would be unable to pay its liabilities as they come due after the payment, or that the realisable value of its assets would fall below the total of its liabilities and stated capital once the dividend is paid. In practice this means the recap debt has to be sized against the company’s own post-transaction balance sheet, not just against what a lender is willing to underwrite — the board has to be able to make the solvency finding in good faith, and the fund’s legal and financial advisers typically build the headroom into the closing mechanics before the dividend is declared.
A fund acquired a portfolio company three years ago and has since paid down most of the original acquisition debt while EBITDA grew. The fund arranges for the company to raise a new term loan and, once the board is satisfied the company can still meet its obligations as they fall due and that its asset value comfortably exceeds its liabilities and stated capital, the company pays the loan proceeds up to the fund as a dividend. The fund distributes that cash to its LPs, lifting DPI on the position, while continuing to hold 100% of the equity and pursue further growth ahead of an eventual sale.
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