What Does Recap Fee Mean?
A recap fee, or recapitalization fee, is a charge levied by private equity firms in the event of additional transactions within a portfolio company such as dividend recapitalization. This fee is charged regardless of whether additional equity from the fund is deployed because it requires more time and effort on behalf of the private equity firm. This is a one-time fee charged for every event and is nonrecurring like a management fee.
Divestopedia Explains Recap Fee
The rationale behind recap fees is that when private equity firms raise new capital or financing for a dividend recapitalization, valuable time and effort have been spent in executing these transactions.
Recap fees, along with other types of fees such as transaction fees and add-on fees, have been an object of contention between private equity firms and investors or limited partners ("LPs"). The LPs argue that the private equity firms collect a management fee for actively maintaining the investor's funds and the advice or help they give is part of the commitment to maintain the investor's funds in a profitable manner. Private equity firms do not agree with this argument because they think these are special situations that warrant more of their time and effort, so it is only fair that they are adequately compensated for it.