Understanding LBO

CFA Level II Alternative Investments
#1

Dear all,

Can someone explain to me the ideas underlying LBO?

Am I right to say the PE firm will borrow money to buy out the target firm in question. For example if the question states that the $100 LBO is financed with 60% debt and 40% equity,can I say that the PE firm borrow $60 and use its own cash of $40 to acquire the target company? I’m confused.

Cheers,

Ernest

#2

The purchase price is $100 with 60%debt and40%. then your comment is correct.

IDEA of LBO is levered returns. Leverage will increae your equity IRR. as long as the cash flows are enough to paydown debt (interest and principal), and you get a nice multiple for the business you are selling.