Dividend Recapitalization - Proceeds Received by Fund
Recording the receipt of a special dividend from a portfolio company funded by new third-party debt at the portfolio company level (dividend recapitalization), returning capital to the fund without a full exit.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cash & Cash Equivalents | Asset (+) | 8,000,000.00 | - |
| Investments at Fair Value - Portfolio Co. N (Cost Basis Reduction) | Asset (-) | - | 5,000,000.00 |
| Net Realized Gain - Dividend Recap | Income (+) | - | 3,000,000.00 |
💡 Accountant's Note
A dividend recap allows the fund to receive cash from a portfolio company by having the company borrow debt and pay a special dividend. For the fund, this is accounted for as a return of capital (up to cost basis) with any excess recognized as realized gain. The fund retains its equity stake post-recap. The portfolio company's fair value post-recap is lower due to the new debt on its balance sheet.
Practitioner & Systems Framework
💻 ERP Architecture
Update the cost basis of the investment to reflect the return of capital. The subsequent fair value mark must reflect the portfolio company's post-recap balance sheet (higher leverage = lower equity value, partially offset by cash received). Track the original cost basis for DPI (Distributions to Paid-In) calculation.
⚠️ Audit Flags
Auditors assess the classification of recap proceeds (return of capital vs. dividend income). The post-recap fair value mark is scrutinized to ensure the increased leverage and interest burden are properly reflected. Tax withholding may apply if the portfolio company is structured internationally.
📄 Required Documentation
Portfolio company board resolution declaring special dividend, new credit agreement for the portfolio company debt, wire transfer confirmation, post-recap valuation analysis, cost basis schedule.
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