A recapitalisation (recap) is one of many potential ways that a private equity firm can exit an investment (see this post for an overview of exit strategies). It involves a business borrowing money to fund a repurchase of equity from an investor that wants to exit. A recap is usually marketed as a way for an owner/manager to continue running the business if they do not want to sell when the private equity firm does.
There are a few points I’d like to make about recaps:
Overall, I’d say that a recap would represent a less than ideal outcome. It may be necessary when a private equity firm must exit, but it would rarely be the ideal plan prior to the initial investment. This is simply for the fact that a recap doesn’t represent the most natural buyer and hence it wouldn’t represent the highest possible price. For this reason, I would say that a recap isn’t a compelling exit strategy and is only a saving grace in unfavourable circumstances.
A leveraged recapitalization (or recap) generally means a change in capital structure. However, in private equity, it mostly refers to exiting an investment by way of replacing the private equity firm’s equity ownership with someone else’s capital, such as a bank’s. A recap is often citied as a way to successfully exit a business.
A private equity firm can only successfully exit through a recap if their equity interest is minor. That’s because a bank will only lend to moderate multiples of say 3 to 4 times earnings. If you own the entire business, then in theory, a bank would only buy you out at 3 to 4 times earnings, which in most cases isn’t a successful exit. But that’s only in theory anyway. In practice, a bank will never lend 100% of capital to a business. As the bank lends more money, the risk increases, and the cost of debt increases to a point where neither the bank nor business would want to continue.
Restructuring a company’s debt and disinterestedness mixture, a lot of about with the aim of authoritative a company’s basic anatomy added stable. Essentially, the action involves the barter of one anatomy of costs for another, such as removing adopted shares from the company’s basic anatomy and replacing them with bonds.
In accumulated finance, a leveraged recapitalisation is a change of the basic anatomy of a company, a barter of disinterestedness for debt