Dividend Recapitalization

Also known as dividend recap. A financing technique which usually involves a private equity firm causing a company in its portfolio to issue new debt in order to pay shareholders a special dividend. This allows the private equity firm to quickly recoup much of its equity investment without selling its ownership interest in the company. Dividend recaps are legal as long as the company is still solvent after paying the dividend. However, if the company is insolvent, or rendered insolvent by paying the dividend, the transaction may be set aside as a fraudulent conveyance.