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  • Home
  • About Alpha Academy
    • Founders
    • Earn CE Credits
  • Key Topics
    • What is Private Equity?
    • Deal Selection
    • Value Creations
    • Leveraged Buyouts
    • Key Exit Factors
  • Contact
  • Alpha Academy Blog

WHAT ARE LEVERAGED BUY OUTS?

Home Key Topics Leveraged Buyouts

What is a Leveraged Buyout?

A leveraged buyout (LBO) is the acquisition of another company using a portion of borrowed money to purchase an asset. Typically, you will see anywhere between 50%-60% of a purchase being debt. This allows the acquisition of a company without the commitment of much capital up front.

Levered vs Unlevered

In Private Equity deals the goal is to try and get a higher return on the equity invested. Typically, when you look at a conservative deal you will end up with a low double digit internal rate of return (IRR) without leverage. PE firms have found that  if you add a reasonable amount on leverage to a purchase you can turn what would have been a 12% IRR into a 20% IRR for investors.

Forms Debt Financing

There are three ways to finance an enterprise:

• Senior Debt: Safest, first money out, least expensive and usually has long term maturity.

• Subordinate Debt/ Mezzanine Debt: Slightly riskier but has potential for higher a higher reward than senior debt.

• Preferred Stock: Similar to taking an equity position, still partake in returns but safer.

General Structure

Private Equity firms buy equity in a company, in part, with money borrowed from lenders and grow that equity value over time. This generates returns. Current shareholders will make up 20% of the capital needed and new investors, or the fund, will make up the additional 80%. Within that investor ownership is where debt comes into play to help fund the buyout.

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Copyright © 2017. All Rights Reserved. The statements above do not constitute an offer to sell any securities, or represent an express or implied opinion on or endorsement of any specific alternative investment opportunity, offering or issuer.

  • Home
  • About Alpha Academy
    • Founders
    • Earn CE Credits
  • Key Topics
    • What is Private Equity?
    • Deal Selection
    • Value Creations
    • Leveraged Buyouts
    • Key Exit Factors
  • Contact
  • Alpha Academy Blog