Private Capital Investing

CHAPTER 9Leveraged Buyout

INTRODUCTION

A leveraged buyout (LBO) is the acquisition of a whole company or a division thereof (the ‘Target’) financed with an above average level of debt (usually secured). Debt is provided by one or more ‘acquisition finance’ houses (usually banks), is repaid by the Target's cash flow (and sometimes also upon the sale of selected Target's assets), and is secured against the Target's assets. Equity is provided by a private equity fund (the ‘Sponsor’), which takes a relatively small equity investment risk; the Sponsor's objective is to realise an adequate return on its equity investment upon exit (typically through a sale or IPO of the Target). Management usually retains a shareholding that is often incentivised.

There are various types of buyout:

• management/leveraged buyout, also referred to as (M)LBO: managers acquire a business they have been managing and voting control after the buyout lies with the management team;
• management buy-in (MBI): the management does not already work for the target company, but is taken on by the Sponsor, and will co-invest alongside;
• leveraged build up/platform buyout/roll on: buyout with the intention of making further synergistic acquisitions;
• sponsored spin out: a new company is owned by the previous owners;
• leveraged recap(italisation): a company borrows money in order to make a cash payout to existing shareholders.

In general narrative terms the elements of a typical LBO can be summarised as follows: the first ...