Lincoln’s Capital Advisory Group is uniquely positioned to arrange dividend recap transactions.

Valuations have struggled in the current environment and multiples on invested capital (MOICs) have not yielded what most PE firms underwrote in their investment case. As a result, hold periods for portfolio companies have increased as investment professionals look to make up underperformance by waiting for valuations to improve. At the same time, limited partners (LPs) are growing increasingly impatient with general partners (GPs) because they have come to rely on the annual distributions made by these funds. Dividend recaps have been a useful tool for PE firms to assist with providing their LPs with distributions while at the same time helping themselves hold onto assets for longer to achieve a better outcome upon exit.

In the sales and trading world, traders often will take large positions in a security. Over time, if they have had an outsized paper gain, they are asked to take profits by their in-house risk manager. In the PE realm, most firms do not have a risk manager, forcing investment professionals to take profits given the illiquid nature of these investments.

Dividend recaps can be viewed as a risk mitigation strategy in the same context as a trader winding down a position and taking profits. The dividend recap effectively puts in a floor to the achievable MOIC / internal rate of return (IRR) of a transaction and helps ensure that the PE investor’s downside is mitigated whether a sale occurs on a predetermined timeline or not.

A dividend recap process can also serve as a potential “dry-run” for management teams for an eventual M&A sale process. Typically, management teams at a sponsor-owned portfolio company need to prepare how they answer questions posed by institutional investors, develop a stock set of slides for a confidential information presentation and construct a financial model for an investment process. A dividend recap process will aid in bringing management up the learning curve on all these tasks so they are prepared when they eventually sell the company.

Many PE firms in recent years have bought businesses with only equity to preempt a process or have maximum flexibility when making changes at the portfolio company. Furthermore, as the COVID-19 pandemic hit and the eventual Fed hiking cycle began, many PE owners avoided incurring any debt given the uncertainty in the economy. Fast forward to today, the threat of the pandemic has subsided, and the Fed is likely transitioning to a rate-easing cycle. Given these changes, it may be an opportune time for many of the portfolio companies to “right size” the capital structure by swapping out some of their equity for debt. A dividend recap can support the transition to an appropriate capital structure that would have been in place had these one-time events not occurred.

Recapping with Expertise

Lincoln’s Capital Advisory Group is uniquely positioned to arrange dividend recaps. While senior debt has been the primary capital source to affect these transactions, it can also be executed via structured capital and / or secondary trades with the use of minority

In addition to dividend recaps, refinancings have become quite prevalent as private credit investors are eager to deploy capital and several lenders that have gone through a cycle are looking for an exit.

Lincoln’s capital advisory professionals are well-positioned to design and implement financing alternatives based on your objectives.

Use of Solvency Opinions to Mitigate Risks Inherent in Any Dividend Transaction

Corporate boards that obtain a solvency opinion from a qualified investment bank, such as Lincoln International:

• Enable directors to discharge their duty of care by relying on the advice of experts in solvency analysis
• Establish a line of defense for shareholders and directors in a fraudulent conveyance claim
• Reduce risk and potential liability in a bankruptcy