Leveraged Buyout

What is a Leveraged Buyout (LBO)?

A leveraged buyout (LBO) is the acquisition of a company using a combination of equity and a significant proportion of borrowed capital (leverage). In this structure, private equity firms typically contribute a smaller share of capital and finance the majority of the purchase price with debt, which is often secured against the assets or cash flows of the target company.

The objective of an LBO is to enhance potential returns on equity by using debt to increase gains when the acquired company grows in value or is successfully exited. The acquired business is expected to generate sufficient cash flow to service the debt and, over time, reduce leverage. Key value drivers in LBOs often include operational improvements, strategic growth initiatives, and financial discipline.

While LBOs can generate attractive returns, they also carry increased risk, as high levels of debt can put pressure on the company during periods of underperformance or economic downturns.