LBOs

A leveraged buyout (LBO) is a financial transaction in which a sponsor acquires a controlling interest in a company primarily with borrowed money. The assets and cash flows of the target are used to secure and repay the debt. The equity stake is supplied by the private equity sponsor and sometimes by management through a management buyout. The aim is to improve operations and structure, then exit the investment after several years for a profit.

Financing typically combines senior and subordinated debt, often provided by banks, institutional lenders, high-yield bonds, and mezzanine financing. The debt is secured against the target's assets and cash flows; the sponsor contributes equity to cover the gap. Post-acquisition, the company may be reorganized, workforce and cost reductions implemented, asset sales considered, and revenue growth pursued to service debt and create value, with an exit through sale or IPO in 3–7 years.

Risks include high leverage increasing bankruptcy risk, sensitivity to interest rates, and economic downturns. Governance may involve tighter oversight by lenders and the sponsor; job cuts and restructuring can occur. Critics note potential misallocation of resources and value being extracted from the acquired business rather than from organic growth.

History and examples: The term traces to the 1980s, with notable deals such as KKR’s buyout of RJR Nabisco in 1989, a watershed in private equity. Later examples include Dell’s 2013 going-private transaction led by Michael Dell and Silver Lake, and multiple large LBOs in consumer and technology sectors, some of which faced restructuring or bankruptcy.