What type of structure does a Leveraged Buyout typically employ?

A Leveraged Buyout (LBO) typically employs a structure that consists primarily of debt financing. In an LBO, a financial sponsor, typically a private equity firm, acquires a company by using a significant amount of borrowed money, or leverage, to meet the purchase cost. This debt is secured against the assets of the company being acquired.

The primary reason for using such a high level of debt in an LBO is to enhance the potential return on equity for the investors by allowing them to use only a fraction of their own capital to finance the acquisition. The idea is that the growth and cash flow generated by the acquired firm can be used to pay down the debt over time, leading to increased profitability and better returns once the company is either resold or taken public.

In this context, equity is typically used minimally compared to the debt, making leverage the defining feature of the financing structure in a leveraged buyout. This dependence on debt allows private equity firms to enhance returns but also introduces financial risk, as the company must manage its debt obligations while working toward profitability.