The ultimate goal of an LBO is to realize high returns—often targeting an of 20% to 30%. Understanding the Leveraged Buyout Model - HBS Online
The Mechanics and Strategy of Leveraged Buyouts (LBOs) A is a specialized financial transaction in which a company is acquired using a significant amount of borrowed funds to meet the cost of acquisition. In a typical LBO, the debt-to-equity ratio is high, with borrowed capital often accounting for 60% to 90% of the purchase price. Core Structural Components
: The cash investment from the PE firm, usually 10%–40% of the deal. The LBO Lifecycle leveraged buyout
: A hybrid of debt and equity that fills the gap between senior debt and equity.
: Secured by assets and paid first; carries the lowest interest rates. The ultimate goal of an LBO is to
The "capital stack" in an LBO is often layered by risk and repayment priority:
: The future cash flows of the acquired business are used to pay down the interest and principal of the debt over time. Core Structural Components : The cash investment from
: The assets of the acquired company (and sometimes the acquirer) serve as collateral for the loans.