Glossary
Definition
Leveraged Buyout (LBO)
Acquisition of a company using a significant amount of borrowed money.
A leveraged buyout (LBO) is the acquisition of a company using a large proportion of borrowed money (debt) to meet the acquisition cost. The acquired company's assets are often used as collateral for the loans. LBOs are the primary transaction type for private equity firms. The debt is serviced from the cash flows of the acquired business.
Frequently Asked Questions
Why do PE firms use so much debt in LBOs?
Debt amplifies returns: if a $100M company is acquired with $70M of debt and $30M of equity, and is later sold for $200M, the equity return is approximately 6.7x despite the company only doubling in value. This is financial leverage.