Recapitalization (“Recap”)

What It Means

Recapitalization, also commonly referred to as a “Recap”, refers to the restructuring of a company’s capital structure, namely the company’s ratio of debt and equity.

Why It’s Important

Recaps offer a common and convenient way for Buyers and other equity holders to cash out the value of some or all of their equity without necessarily having to sell the business. Some investors, such as Private Equity firms, may need to convert their investments into realized returns within a certain time period. Often, a Buyer will use debt to fund a portion of an Acquisition and pay down that debt over the ensuing years through the company’s cash flows. As the debt is paid down, the Enterprise Value of the company consolidates into the value of the equity. If an equity holder needs to “cash out”, the company may choose to take on new debt, using the proceeds from the capital raise to buy back equity from the investors who need to exit.

Conversely, a company may also find itself in a position where it is over-leveraged, meaning it has too much debt and can’t support making payments. In those unfortunate circumstances, the company may seek to raise additional equity capital to pay down debt or make debt payments.

Related Terms

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Recapitalization (“Recap”)

What It Means

Why It’s Important

Related Terms

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