LBO (Leveraged Buyout)

Category: finance

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

In an LBO, the assets of the company being acquired are often used as collateral for the loans. The acquiring PE firm aims to improve the company’s cash flow, pay down the debt rapidly, and eventually sell the company at a significantly higher valuation to realize a massive ROI on their original equity injection.

Common Examples

• The firm executed a leveraged buyout of the legacy manufacturing company, stripping away inefficient overhead to boost EBITDA margins for the eventual exit.
• LBOs are highly sensitive to interest rate environments, as the cost of the debt service dictates the entire profitability window of the deal.