What is a dividend or leveraged recapitalization or recap? Well, a recap is where the LBO target takes on extra debt partway through its life and pays a dividend out to its shareholders. Why would they do this? Well, paying a dividend to shareholders partway through the LBOs life can increase the overall returns or IRR to shareholders, which makes them happy. But how can it be done? Well, the LBO borrows new debt, pays off the old debt that the LBO had, and the excess is paid as a dividend to the shareholders. The LBO may be able to borrow more debt during its life than at the beginning of its life. Borrowing is based on EBITDA multiples. You can borrow more if your EBITDA is higher and a few years after the LBO starts we may find that EBITDA has gone u., Or maybe the cash flows at the start of the LBO were uncertain leading to lower debt at the start, but that uncertainty has now gone, or banking conditions have improved. All of this is tricky to predict at the start of the LBOs life, so we need to include some scenarios or flexibility into the model to turn the recap on or off, or change its timing. But ultimately, we are borrowing more than before and paying out the excess to shareholders as a dividend. All of this means that the exit cash flow to shareholders is sadly reduced, but the new dividend to cash flow to shareholders more than compensates for that reduction.