Here's an example of an income-generating fund of SAR 100M that involves dividend recapitalization:
The Fund Manager is raising SAR 100m via the Stake platform to acquire a property. The fund will initially consist of 100% equity (i.e. SAR 100m).
In the second year, the Fund Manager will raise Shariah-compliant financing of up-to 55% of the property valuation at that time. The net proceeds of this financing will be distributed to unit holders as a ‘special dividend’.
This event is referred to as a dividend recapitalization, and there are multiple benefits to this structure:
Improves Annual Rate of Return: The special dividend allows us to return part of your investment earlier in the fund's lifecycle. This improves your Annual Rate of Return (IRR) because it puts money back in your hands sooner
Reduces risk exposure: By returning part of your initial investment through the special dividend, we effectively reduce your risk exposure in the investment. You get back a large chunk of your original capital while still benefiting from future returns. You can then invest this in multiple other opportunities
Flexibility: Investors value flexibility, liquidity, and steady returns. The special dividend helps achieve all three by delivering significant cash flow early, reducing risk, and leaving investors free to reinvest or use the capital as they see fit
After the dividend recapitalization, the fund will be split between equity and financing, and dividends will be distributed thereafter based on the equity portion.
See an illustrative example below, where we assume we raise financing for 50% of the initial fund size:
I invest SAR 1,000 in the Fund today, and the expected dividend yield is 8% across the 4 year Fund Term.
Throughout Year 1, I receive SAR 80 in dividends, which is distributed monthly
At the beginning of Year 2, the Fund Manager raises Shariah-compliant financing amounting to half the original fund size. Following this, I receive SAR 500 as a ‘special dividend’.
Throughout years 2 to 4, I receive SAR 40 in dividends each year, which equates to an 8% dividend on my new equity amount of SAR 500.
Once the fund closes and is sold I receive back my remaining + any applicable appreciation.