Leveraged Buyout (LBO) Primer

A leveraged buyout (“LBO”) is an acquisition of a company (the “Target”) by an investor or group of investors (the “Buyout Investors”), who use debt to fund a significant portion of the purchase price. The assets of the Target are used as collateral, and the cash flow of the Target is used to pay interest and principal on the debt.  Buyout Investors typically borrow between 50-75% of the total purchase price and invest 25-50% of equity to finance the remaining portion of the purchase price. 

Buyout Investors compete against corporations and other Buyout Investors for acquisition opportunities.  Typically corporations have a lower cost of borrowing and much lower cost of equity capital. As a result, Buyout Investors are best positioned to deploy capital when interest rates are low, the lending environment is favorable (higher leverage, less restrictive covenants, etc.), and valuations are moderate.